Strategy in the news

Citation

Henry, C. (2016), "Strategy in the news", Strategy & Leadership, Vol. 44 No. 2. https://doi.org/10.1108/SL-01-2016-0011

Strategy in the news

Article Type: CEO advisory From: Strategy & Leadership, Volume 44, Issue 2

Craig Henry

Craig Henry, Strategy & Leadership's intrepid media explorer, collected these examples of novel strategic management concepts and practices and impending environmental discontinuity from various news media. A marketing and strategy consultant based in Carlisle, Pennsylvania, he welcomes your contributions and suggestions (craig_henry@centurylink.net).

Strategists and business models

The making of a strategist: Andy Grove

Andy Grove … started as a scientist in the lab doing R&D. When he took the next step in his career to help launch and build Intel, he was a true operating manager. He was running a division and then became chief operating officer. Grove’s 1983 book, High Output Management, was all about making middle managers more effective; Grove didn’t become an effective strategist until several years into being CEO. Part of what enabled Grove’s development and transformation was his desire to learn new things – to continually go beyond his current capabilities.

For example, Andy was an engineer who initially knew less than nothing about brands. He was selling an industrial product – semiconductors for computers and other electronic devices – to other industrial companies, and the concept of building a consumer brand was far beyond his experience. But he made a large personal effort to educate himself to understand what a consumer brand was and how consumer pull could work for an industrial products company like Intel.

That whole learning process helped lead to the “Intel Inside” marketing campaign in 1991, which made Intel into one of the most valuable brands in the world… .

Grove figured out that Moore’s Law would lead to massive economies of scale and specialization in the computing industry, and that would probably make it difficult for the vertically integrated companies like IBM and Digital Equipment Corp. to maintain excellence and superiority in all the different segments. Grove reasoned that the computing industry would de-integrate into horizontal layers: Microsoft and some other companies would probably dominate software, but Intel would focus on the microprocessor. Eventually, he exited most other businesses, such as commodity memory products, and decided Intel was not going to build full computers and compete with its partners. Intel was just going to focus on that one layer: microprocessors… .

David B. Yoffie and Michael A. Cusumano, “Mastering strategy”, Sloan Management Review, Winter 2016

Retailing: Bricks, mortar, and mobile apps

Saks’ parent Hudson’s Bay Company bought Gilt Groupe for $250 million, and announced last week that it would integrate Gilt’s infrastructure and data set with Saks Off 5th. Gilt has 9 million users and reportedly completes 50 percent of its transactions via mobile, and the hope is that the integration will improve Saks’ mobile and personalization approach.

The steps that Saks is following resemble those Nordstrom Rack has already taken. Here’s what the two have in common. The retailers’ revenue growth is driven by digital sales and their discount versions, Saks Off 5th and Nordstrom Rack. In the third quarter of 2015, Saks’ digital sales grew by 36 percent year over year. Saks Off 5th same-store sales grew 2.8 percent, while Saks’ regular same-store sales decreased by 3.6 percent. In the same period, 1-year-old Nordstromrack.com grew sales 39 percent and Nordstrom Rack’s net sales increased 12 percent, while regular in-store sales increased by 8.4 percent.

“A large issue for these established, big retailers is that behavior has changed – people don’t just go into a department store only to find that there’s nothing they like,” said Anthony Rodio, executive chairman at Storefront and a former exec at Home Depot and Amazon. “The journey starts online, and they’ll find out how to get it from there.”

Flash-sale sites are used to recruit new shoppers

Gilt’s flash-sales model dried up after the economy bounced back after the recession. Flash sale sites built their business on reselling designers’ excess inventory. Once that excess went away, Gilt and other flash sales became forced to create their own products, like any other retailer. With Saks, Gilt has a new channel for merchandise… .

The digital channel is meant to drive traffic into physical stores

Both Saks Off 5th and Nordstrom Rack locations have opened at an increasing rate. Nordstrom Rack opened 27 stores last year for a total of 194, while Saks Off 5th opened 11, for a total of 91. Each now has more stores than their sibling retailer does.

As Saks Off 5th incorporates Gilt, it’s allowing shoppers to return Off 5th and Gilt purchases in any of its retail stores. Nordstrom Rack has been doing this since 2014, and in that year’s annual report, the company said that 1 million online purchases were returned in a store that year.

This policy is a “Trojan horse” to drive in-store traffic, according to David Randolph, senior vp of retail and e-commerce at 360i. “If you return something, you’re more likely to walk around, shop and buy something else.”

Hilary Milnes, “ Saks Off 5th is using Gilt Groupe to battle Nordstrom”, Digiday, 13 January 2016, http://digiday.com/brands/saks-off-5th-plans-use-gilt-groupe/

Technology and disruption

The Internet of Things: Prepare for a data tsunami

The Internet of Things will bring huge changes to the way markets and businesses work – and it could get messy… .

First, the cost and physical size of sensor technology have dropped such that they can be incorporated into most items. Second, widespread communications infrastructure is in place to allow these distributed components to coordinate. Third, once again, savvy innovators are showing the rest of us the possibilities from the data they collect… .

Many business processes continue to be “pull” oriented. Information is gathered, then analyzed, then decisions are made. This works when change is slow. But with the IoT transition, data will stream in constantly, defying routine reporting and normal working hours. Flooding data from IoT devices will give opportunities for quick reaction, but only if organizations can develop the capacity needed to take advantage of it. Few mainstream large companies are ready for this, much less small- to medium-sized companies that lack the resources of their larger corporate brethren.

Sam Ransbotham, “Ready or Not, Here IoT Comes”, Big Idea: Data and Analytics Blog, 22 December 2016, http://sloanreview.mit.edu/article/ready-or-not-here-iot-comes/

Rethinking the “product” with the Internet of Things

The Internet of Things (IOT) will have a dramatic impact on product and service innovation… . Stephen Hoover, CEO of the Xerox Palo Alto Research Center (PARC) puts it this way, “I can instrument and understand what my customers are doing with my products across the world. I can understand if those devices starting to fail. I can understand the environment they’re in and adapt their behavior to be responsive to the local environment.”

Companies will need to fundamentally rethink their products and the user experience. Manufacturers have the opportunity to bypass traditional distribution channels and forge personal relationships with their end-users by offering web based services. Where previously products wore out and were replaced by new versions the IOT offers the promise of products which get better with updates and new releases… .

When Tesla discovered that its cars had a problem with uphill starts it released a software patch to fix the problem. Similarly when they wanted to add a “crawl” feature which lets drivers use slow cruise control in heavy traffic, the company broadcast a software release that delivered the new feature to all existing Tesla cars.

Companies will need to think innovatively about customer needs. CEOs must ask, “In the IOT what is our new value proposition?” Firms will have to hire software engineers to design and deliver service solutions based on usage data. They will need data analysts to review all the data they gather from their devices. In other words every company will have to become a service provider and a software company – or perish.

Paul Sloane “Today every company must be a service provider and a software company”, Innovation Excellence, 12 January 2016, http://www.innovationexcellence.com/blog/2016/01/12/today-every-company-must-be-a-service-provider-and-a-software-company/#sthash.XDGa9zUX.dpuf

The Fourth Industrial Revolution and global demand for labor

Disruptive labor market changes, including the rise of robots and artificial intelligence, will result in a net loss of 5.1 million jobs over the next five years in 15 leading countries, according to an analysis … by the World Economic Forum (WEF) … assumes a total loss of 7.1 million jobs, offset by a gain of 2 million new positions. The 15 economies covered by the survey account for approximately 65 percent of the world’s total workforce.

The assessment highlights the challenges posed by modern technologies that are automating and making redundant multiple human tasks, from manufacturing to healthcare.

With the International Labor Organization, part of the United Nations, already forecasting an increase in global unemployment of 11 million by 2020, the size of the additional job losses is sobering.

Two-thirds of the projected losses are expected to fall in the office and administrative sectors as smart machines take over more routine tasks, according to latest findings, which are based on a global survey of personnel and strategy executives.

The WEF has made “the fourth industrial revolution” - a topic covering robotics, nanotechnology, 3D printing and biotechnology - the official theme of this year’s Davos meeting…

The “Future of Jobs” report concluded that jobs would be displaced in every industry, although the impact would vary considerably, with the biggest negative losses likely to be in healthcare, reflecting the rise of telemedicine, followed by energy and financial services.

At the same time, however, there will be a growing demand for certain skilled workers, including data analysts and specialist sales representatives. “Robots, new working ways to cost five million jobs by 2020”, Davos study says, Reuters, 18 January 2016, http://www.reuters.com/article/us-davos-meeting-employment-idUSKCN0UW0NV

Big Data, visual imagery and brain science

While the explosion of data and information has been a topic of considerable interest in recent years, another phenomenon has received comparably less attention: The explosion of visual content. To put this growth in perspective, it is estimated that 3.8 trillion photos were taken in all of human history until mid-2011, but 1 trillion photos were taken in 2015 alone. And that’s without counting the number of people making, viewing, or sharing videos [YouTube alone boasts over a billion users worldwide], Vines [40 million users], and gifs… .

The old saying claims that a picture is worth a thousand words, but video ups the ante. According to Forrester Research, one minute of video is worth 1.8 million words.

Many of the successful recent entrants into the social media space, such as Instagram, Pinterest, Snapchat, Vine, Periscope, and Meerkat, emphasize visual media. Platforms that did not originate as chiefly visual – Facebook, LinkedIn, and Twitter – are transitioning focus to emphasize the prominence and importance of visual content. Facebook now claims to be the largest video-sharing site in the world… .

The reasons for the explosion and impact of this visual content are also tied to the biological mechanisms for how humans consume information. Sight is our strongest sense: 90% of information transmitted to the brain is visual… . Some suggest that 80%-85% of our perception, learning, cognition, and other mental activities are mediated through vision.

Visuals are significant drivers in inciting emotion, instigating action, and achieving memory retention. One interesting experiment showed that when someone hears a piece of information, they will remember only 10% of it three days later. Adding a picture to that information increases retention to 65%… .

For these reasons, data visualization tools and infographics have escalated in usage because of their superior ability to explain and portray relationships, trends, and results. In just 2 years, Google searches for infographics have risen 800%. In 2014, the usage of infographics in marketing rose from 9% to 52%, underlined by the fact that publishers who market with infographics achieve 12% more traffic growth.

Gerald C. Kane and Alexandra Pear, “The rise of visual content online”, Improvisations, 4 January 2016, http://sloanreview.mit.edu/article/the-rise-of-visual-content-online/

Industry focus

Disruption Watch: Global auto industry

Digitization, increasing automation, and new business models have revolutionized other industries, and automotive will be no exception. These forces are giving rise to four disruptive technology-driven trends in the automotive sector: diverse mobility, autonomous driving, electrification, and connectivity.

Most industry players and experts agree that the four trends will reinforce and accelerate one another, and that the automotive industry is ripe for disruption. Given the widespread understanding that game-changing disruption is already on the horizon, there is still no integrated perspective on how the industry will look in 10 to 15 years as a result of these trends. To that end, our eight key perspectives on the “2030 automotive revolution” are aimed at providing scenarios concerning what kind of changes are coming and how they will affect traditional vehicle manufacturers and suppliers, potential new players, regulators, consumers, markets, and the automotive value chain… .

New mobility services may result in a decline of private-vehicle sales, but this decline is likely to be offset by increased sales in shared vehicles that need to be replaced more often due to higher utilization and related wear and tear… .

Changing consumer preferences, tightening regulation, and technological breakthroughs add up to a fundamental shift in individual mobility behavior. Individuals increasingly use multiple modes of transportation to complete their journey; goods and services are delivered to rather than fetched by consumers. As a result, the traditional business model of car sales will be complemented by a range of diverse, on-demand mobility solutions, especially in dense urban environments that proactively discourage private-car use… .

We already see early signs that the importance of private-car ownership is declining: in the United States, for example, the share of young people (16 to 24 years) who hold a driver’s license dropped from 76 percent in 2000 to 71 percent in 2013, while there has been over 30 percent annual growth in car-sharing members in North America and Germany over the last five years…

A paradigm shift to mobility as a service, along with new entrants, will inevitably force traditional car manufacturers to compete on multiple fronts. Mobility providers (Uber, for example), tech giants (such as Apple, Google), and specialty OEMs (Tesla, for instance) increase the complexity of the competitive landscape.

Paul Gao, Hans-Werner Kaas, Detlev Mohr, and Dominik Wee, “Disruptive trends that will transform the auto industry”, McKinsey Insight, January 2016, http://www.mckinsey.com/insights/high_tech_telecoms_internet/disruptive_trends_that_will_transform_the_auto_industry

Global finance and the urban future

A central question our civilization must address is how we can avoid becoming a planet of informal slums.

Every year, hundreds of millions of people across the globe move from rural to urban environments in search of opportunity. In a perfect world, governments would have the cash and the consensus to fund and coordinate the construction of the infrastructure required to sustainably accommodate a rapidly urbanizing world. But few governments appear to have the money or the political will to foot the up-front costs to prevent or fight fragmentation… .

There are a variety of reasons why infrastructure investments in developing cities so often frighten investors. These range from uncertain revenues to disagreements over guarantees to concerns about political risk. … But to tackle sprawl, multisector coordination is required: roads, rail, land-use, zoning, power, water, and sanitation must work together. In traditional financing models, it’s just not possible for investors to see their way to a financial return based on some abstract added value of the integrated whole…

This is where a new financial product, social impact bonds (also known as pay-for-success contracts), can play a role. These financial products create a risk-bearing financial arrangement between public, private, and nonprofit organizations… .

Social impact bonds were conceived to tackle social problems that can be objectively measured, such as recidivism. That makes them a great candidate for sustainable urban development, an environment rich with reliable and objective data. For example, bonds could be designed so that real estate developers and infrastructure promoters are paid bonuses based on various measures of coordinated progress achieved beyond the minimum expectation; multisector outcomes might include less time in commuting, or reductions in the rate of urban pollution per unit of GDP.

John D. Macomber, “The future of cities depends on innovative financing”, HBR Blogs, 11 January 2016, https://hbr.org/2016/01/the-future-of-cities-depends-on-innovative-financing

Pharma’s outdated production models

The pharmaceuticals industry – with its major investments in research, reliance on complex chemistry, and sophisticated understanding of human biology – is generally regarded as a technologically advanced sector. When it comes to manufacturing, however, pharma is stuck in the past. The current methods of making drugs, which are labor intensive and inefficient, are based on batch processes that have been in place in this sector since the mid-20th century. Worse still, the traditional manufacturing techniques make pharmaceuticals prone to contamination… .

Continuous manufacturing technology breaks completely with this old methodology. It combines the segmented steps of batch manufacturing into one cohesive process, with more streamlined product flows and faster production times. Factories using this technology are designed for flexibility and for rapid, high-quality throughput, with more open floor plans and smaller footprints, and lower building and capital costs… .

GlaxoSmithKline plans to open a plant in Singapore in 2016 that will deploy a continuous manufacturing system, and leaders expect to cut both costs and carbon footprint by half, compared with those for a traditional manufacturing plant.

Novartis, a pioneer in such efforts, has partnered with the MIT Center for Continuous Manufacturing, and is investing US$65 million in a joint 10-year research project. The two parties have already concluded that continuous manufacturing will benefit patients, healthcare providers, and the pharmaceuticals industry. This project has demonstrated, for example, that continuous manufacturing can accelerate the introduction of new drugs through efficient production.

Marcus Ehrhardt, “Is Pharma ready for the future?”, Strategy+Business, 30 November 2015, http://www.strategy-business.com/article/00363?gko=746a4

Banks struggle with the digital future

A study by Bain & Company and SAP entitled, “Retail Banks Wake Up to Digital Lending,” found that the majority of banking organizations have only digitized a small portion of the overall lending process. For instance, banks can handle only 7% of products digitally from end to end. By not responding to fintech challenges in lending, more than one-third of retail bank revenues are at risk… .

According to the Bain study, “The fintechs are creating new models to make lending decisions, source capital and service loans. Often, they can offset at least some of the scale benefits of large banks with simpler digitalized processes.”

To avoid losing market share and related revenues (and potentially entire relationships), banks and credit unions need to invest in digital lending.…

To complicate matters, the chain of process steps, from inquiry to collecting customer details to codifying collateral to funding a loan, often functions through separate organizational departments. Some banks even make customers use separate mobile apps for their primary banking accounts and credit cards….

The traditional lending industry has been hit the hardest by new startup fintechs since this area had been ignored by many traditional banking organizations as digitization of transactional services took place. P2P lending and alternative financing fintech firms filed the “opportunity gap” by launching products that not only helped borrowers but also helped lower operating costs through the use of new technology… .

Banking has already made excellent progress in digitizing basic transactions and workflows. The real payoff, however, is when the more complex and costly processes can be automated, and when the culture of the organization changes to recognize the benefits (and requirements) of becoming a digital bank.

Jim Marcus, “One-third of retail banking revenues at risk”, The Financial Brand, 13 January 2016, http://thefinancialbrand.com/56704/digital-lending-fintech-products/

The economy – two history lessons

The ultimate stochastic external event

Two hundred years ago, the greatest eruption in Earth’s recorded history took place. Mount Tambora – located on Sumbawa Island in the East Indies – blew itself up with apocalyptic force in April 1815.

After perhaps 1,000 years’ dormancy, the devastating evacuation and collapse required only a few days. It was the concentrated energy of this event that was to have the greatest human impact. By shooting its contents into the stratosphere with biblical force, Tambora ensured its volcanic gases reached sufficient height to disable the seasonal rhythms of the global climate system, throwing human communities worldwide into chaos. The sun-dimming stratospheric aerosols produced by Tambora’s eruption in 1815 spawned the most devastating, sustained period of extreme weather seen on our planet in perhaps thousands of years.

Within weeks, Tambora’s stratospheric ash cloud circled the planet at the equator, from where it embarked on a slow-moving sabotage of the global climate system at all latitudes… .

For three years following Tambora’s explosion, to be alive, almost anywhere in the world, meant to be hungry… . Across the globe, harvests perished in frost and drought or were washed away by flooding rains. …

Tambora’s influence on human history does not derive from extreme weather events considered in isolation but in the myriad environmental impacts of a climate system gone haywire. As a result of the prolonged poor weather, crop yields across the British Isles and Western Europe plummeted by 75 percent and more in 1816-17.

Gillen D’arcy Wood, “The volcano that shrouded the earth and gave birth to a monster”, Nautilus, 31 December 2015

History and the outlook for the American Dream

Take a look back at some of the most popular TV programs of the mid-1960s – “The Dick Van Dyke Show,” “Bewitched,” even “The Beverly Hillbillies” – and what do you see?

Like today, middle-class Americans typically had washing machines and air-conditioning, telephones and cars. The Internet and video games were not yet invented. But life, over all, did not look that different.

There were TVs and radios in most homes. Millions of people worked in downtown offices and lived in suburbs, connected by multilane highways. Americans’ average life expectancy at birth was 70, only eight years less than it is today.

But flash back 50 years earlier. Then, less than half the population lived in cities. Though Ford Model T’s were starting to roll off the assembly line, Americans typically moved around on horse-drawn buggies on dirt or cobblestone roads. Refrigerators or TVs? Most homes weren’t even wired for electricity. And average life expectancy was only 53.

Americans like to think they live in an era of rapid and unprecedented change, but this kind of comparison – pitting the momentous changes of the mid-20th century against the seemingly more modest progress of our present era – raises a critical question about the nation’s future prosperity.

What does this portend for our well-being over the next half century? Has technological progress slowed for good?

The idea that America’s best days are behind us sits in sharp tension with the high-tech optimism radiating from the offices of the technology start-ups and venture capital firms of Silicon Valley. But it lies at the heart of the current political unrest. And it is about to elbow its way forcefully into the national conversation

Robert J. Gordon, a professor of economics at Northwestern University who has patiently developed the proposition in a series of research papers over the last few years, has bundled his arguments into an ambitious new book, “The Rise and Fall of American Growth” (Princeton University Press).

The hefty tome, minutely detailed yet dauntingly broad in scope, offers…a dispiriting forecast for American prosperity in the decades to come. “This book,” he writes in the introduction, “ends by doubting that the standard of living of today’s youths will double that of their parents, unlike the standard of living of each previous generation of Americans back to the late 19th century.”

Innovation will trundle along at the same pace of the last 40 years, Professor Gordon predicts. Despite the burst of progress of the Internet era, total factor productivity – which captures innovation’s contribution to growth – rose over that period at about one-third the pace of the previous five decades.

Eduardo Porter, “America’s best days may be behind it”, New York Times, 19 January 2016