Strategy in the news

Citation

Henry, C. (2013), "Strategy in the news", Strategy & Leadership, Vol. 41 No. 5. https://doi.org/10.1108/SL-06-2013-0040

Strategy in the news

Article Type: CEO advisory From: Strategy & Leadership, Volume 41, Issue 5

IT trends that will reshape the business landscape

The dramatic pace at which IT trends have been advancing is transforming them into twenty-first century ... competitive necessities for most if not all companies. Big data and advanced analytics ... need to be deeply embedded across functions and operations, enabling managers to have a better basis for understanding markets and making business decisions. Meanwhile, social technologies are becoming a powerful social matrix - a key piece of organizational infrastructure that links and engages employees, customers, and suppliers as never before ...

The trends:

1. Joining the social matrix.

2. Competing with "big data" and advanced analytics.

3. Deploying the internet of all things.

4. Offering anything as a service.

5. Automating knowledge work.

6. Engaging the next three billion digital citizens.

7. Charting experiences where digital meets physical.

8. "Freeing" your business model through internet-inspired personalization and simplification.

9. Buying and selling as digital commerce leaps ahead.

Transforming government, health care, and education.

Bughin, Michael Chui, and James Manyika, "Ten IT-enabled business trends for the decade ahead," McKinsey Quarterly, May 2013.

Microsoft confronts The Innovator's Dilemma

"Failure" has a different meaning for Microsoft than for other companies. Over 90 percent of the world's PCs run a version of Windows (this column is being written on one of them, albeit a version with a comforting start button rather than a confusing set of tiles). Some 76m PCs were shipped in the first three months of this year. Microsoft has sold 100m copies of Windows 8, which means that it has sold as well as Windows 7 at this stage in the cycle. The company's revenues have nearly tripled under Mr Ballmer, from $25.3 billion in 2001 to $73.7 billion in 2012. This suggests that he will not be leaving any time soon.

Yet it is Microsoft's success that is the cause of its long-term problems. In The Innovator's Dilemma, Clayton Christensen of Harvard Business School argues that companies are often doomed not by their failures but by their triumphs. They may realize that the world is changing. But they are so good at doing what they have always done - making mainframe computers in IBM's case - that they make a hash of embracing the new.

Microsoft knows only too well that the PC market is stagnating as people migrate to hand-held devices. Sales of PCs have shrunk for the past four quarters - they were 13.9 percent lower in the first three months of this year than in the first quarter of last year. But sales of licenses for Windows still provide the firm with about half of its profits. The company's dominant position in operating systems meant that it was slow to enter the internet-search market in the 1990s. It has been equally slow to enter the hand-held market: Windows has less than 5 percent of the global smartphone market, compared with Google Android's 70 percent and Apple's 20 percent. It has less than 8 percent of the tablet market. The longer it dithers on the sidelines, the harder it will be to attract first-rate developers or establish customer loyalty.

This is why Windows 8's poor performance matters. It was an attempt to solve the innovator's dilemma by creating an operating system and a user interface for both PCs and mobiles. Mr Ballmer hoped that consumers would want to move effortlessly from PCs to tablets to smartphones - and that Microsoft would be able to invade the mobile markets while simultaneously reigniting demand for its core PC products. But so far the reverse has happened: Microsoft has reinforced suspicions that it does not understand hand-held devices while simultaneously alienating its core PC users. It is possible that Microsoft will be able to solve this problem with future iterations of Windows 8. But it is looking likely that the two types of device need different operating systems. Microsoft's biggest rival, Apple, has kept the two devices separate. That bodes ill for Mr Ballmer's strategy.

"Microsoft blues," The Economist, 11 May 2013.

Adobe embraces the cloud

Adobe, the leading software company targeting creative professionals, is exiting the shrink-wrap software business in favor of subscription-based software and online "cloud" services. While perhaps painful at first, the business model change will be ultimately beneficial for consumers and Adobe alike, and other software companies are likely to follow, say experts at Wharton.

On May 6, Adobe said it would stop developing its flagship Creative Suite, which includes applications such as Photoshop, in favor of Creative Cloud, a subscription-based service for software and updates. The company had been transitioning from a traditional software business model, which revolves around one-time product licensing, to subscription-based services, but decided to take a big plunge by removing the option for traditional licensing for new versions of the its popular creative tools. The move is an acknowledgement that software is rapidly transitioning toward collaboration, subscriptions and use on multiple platforms such as Apple's iOS, Google's Android, Mac OS and Microsoft's Windows ... .

On cue, SAP, one of the largest enterprise software companies in the world, announced on Tuesday that it plans to launch a cloud service for its fast-growing HANA analytics software. SAP, like its rival Oracle, has been moving away from a one-time licensing model and both firms have been acquiring cloud and software-as-a-service companies at a quick pace: SAP has acquired SuccessFactors and Ariba, while Oracle has acquired Taleo, RightNow and other cloud companies. In part, Oracle and SAP are buying companies to thwart emerging rivals like Salesforce.com and Workday ... .

According to David Wadhwani, senior vice president and general manager of digital media at Adobe, the move to support the year-old Creative Cloud is about focus and the ability to "put innovation in our members' hands at a much faster pace."

Wadhwani, noted that customers will be able to get enhancements on an ongoing basis, have access to the full range of Adobe's creative tools and interact online with a community of peers. Adobe decided that the potential short-term revenue hit is worth the long-term gains. Switching to a model where customers pay recurring fees over time reduces the revenue received up front, but allows the company to better predict future revenue and earnings.

"Adobe's shift to the cloud: is this the start of a trend?," Knowledge@Wharton, 8 May 2013, http://knowledge.wharton.upenn.edu/article.cfm?articleid=3255

Did Boeing outsource too much of the Dreamliner's design?

Ten years ago, Boeing had a unit of 1,200 engineers in Everett designing electronic controls for all its airplanes, and a plant in Texas where another 1,200 people built the hardware. The company created the unit in the early 1980s because all the systems on a modern jet - including the electrical, hydraulics, engine, fuel, cabin air and flight-control systems - are managed by electronics. "It was a strategic move to control the electronics itself," said Dwight Schaeffer, a former senior manager at Boeing Commercial Electronics (BCE). Yet as Boeing launched the 787 Dreamliner program in 2003, management dispersed all those Everett engineers, outsourced their work, then sold off the Texas plant.

Part of a broad handoff of control to airplane-systems suppliers, the move was intended to cut Boeing's costs. On jets before the 787, BCE integrated components from many different suppliers so they worked together properly. And if suppliers got in trouble, BCE stepped in and got the job done. "Now they don't have that capability," said Jerry Packard, another former BCE manager. "That's all lost."

In contrast to Boeing's well-known move to let "global partners" design and manufacture the 787's wings, tail and fuselage, the way it handed design control to 787 systems partners, including management of subcontractors, received little attention at the time ... .

In the aftermath of a rash of 787 systems problems - in its electrical power-distribution panels and generators as well as its battery system - the dissolution of Boeing Commercial Electronics offers a case study in how Boeing dealt away in-house expertise and relinquished control over systems suppliers ... .

At the start of the 787 program, Boeing's leadership in Chicago insisted on the need to reduce the development cost by bringing in "risk-sharing partners" who would take on - and help pay for - more of the development work. Hans Weber, a leading aviation-engineering consultant, calls this the "fundamental weakness in the 787 program from the start." This was "ultimately a financial invention. It's not done for technical reasons," Weber said.

"Electronics outsourcing weakened Boeing's control over 787's crucial systems," Seattle, Times, 25 May 2013.

When strategic change demands organizational transformation

In this new market, with the huge push to improve quality and reduce overall healthcare costs, Walgreens had a significant opportunity to become a player in the healthcare value chain. As a result, we evolved from simply filling prescriptions for people to becoming a single point of patient care, and a destination for health and daily-living products and services for our customers.

To succeed in this new role, we had to change our business strategy. Instead of relying on a real estate play - location, location, location - we focused on improving the customer experience. As our strategy evolved and our focus changed from opening stores to delivering an exceptional customer experience, we recognized that not only was the command-and-control approach outdated, but it also prevented us from getting the best from our people. We were missing the richness of empowering them to come up with solutions on their own ...

We realized that we could really differentiate ourselves based on the experience we delivered. This represented a fundamental change in how we engaged with our market. We wanted to be more than a simple retail chain - we wanted to be an experience provider.

To execute that strategy, however, we needed to redesign some components of the organization. We had to focus our frontline and field leadership on coaching employees and creating the right customer interactions ....

Our fundamental goal was to build a high-performance culture at every level of our field operations. With that in mind, we decided on a few priorities for the redesign. First, we would make structural changes to free up the leaders' time and better support them. Second, we had to change decision rights so that the right approvals were happening in the right places. Next came incentives; we had to change the way that we motivated and rewarded people, to emphasize employee engagement and customer satisfaction. Finally, we had to put in mechanisms that could change long-established mind-sets and norms - not just changing operational details but putting in place coaching, support networks, and a new performance management model. It was a big undertaking, especially with 240,000 employees.

Mark Wagner and Wayne Orvis, "Changing structures and behaviors at Walgreens," Strategy+Business, May 2013.

Back to the future: LEGO and scenario planning

While LEGO has sold toys in Asia for three decades, there is serious potential to improve market share and maybe even outgrow North America and Western Europe, which together accounted for 72 percent of all LEGO sales in 2011.

"LEGO is a huge success story in Western Europe and America," Mikes says. "The question is will they be able to repeat this success story in Asia?"

... LEGO's ambition has at times exceeded its reach. By 2004, the company's over-diversification into theme parks, book publishing, and specialized toys sparked a colossal tumble. A recapitalization of the company led to a fairy-tale rebound as the group returned to selling its core building sets. LEGO earned $1.0 billion as sales approached $3.5 billion in 2011, and in 2012, it overtook Hasbro as the world's second-largest toy manufacturer.

To sharpen its "Stepping Up in Asia" strategy, LEGO executives employed scenario planning as a key tool to weigh potential outcomes ... Mikes emphasizes that it is critical to understand what scenario planning can and cannot do. While scenario planning cannot forecast the future, the outcomes from its exercises help managers assign task forces around the necessary actions implied by the scenarios and create early warning indicators that can highlight the emergence of one scenario or another, giving the company a head start on the competition ...The company's recent history, she adds, makes it particularly cautious today.

"LEGO was burned very badly in the past," Mikes says. "They are humble enough to be wary of becoming complacent, as many successful companies do."

Kim Girard "Can LEGO snap together a future in Asia?," Working Knowledge, 28 May 2013, http://hbswk.hbs.edu/item/7144.html

Non-price competition as the key to success

Miracle workers do not compete on price. In our sample, eight of the nine top-performing companies were focused on non-price dimensions of value. They systematically chose to find ways to distance themselves from the competition with product or service performance rather than seek to draw customers closer with lower price.

Take, for example, Linear Technology, a semiconductor company that began life as a second-source supplier to the US Department of Defense. Contracts were characterized by narrowly-specified performance criteria, limiting the scope for non-price differentiation and emphasizing price leadership ... .

Micropac Industries, a Long Runner in this industry, had mastered this dynamic and met the DoD's exacting standards. But it had done so in a way that kept its costs down, enabling it to be price competitive, yet still enjoy worthwhile levels of profitability. Long Runner status, after all, is nothing to sneeze at.

Linear was profitable enough, but it lived in Micropac's performance shadow. It was not until the early 1990s that Linear was able to find its recipe for top-tier profitability, by shifting to consumer markets. Rather than continue to navigate between the Scylla of demanding performance and the Charybdis of price constraints, the company chose to tackle a different challenge: to provide nearly-bespoke technology for a large number of relatively small accounts. By the mid-1990s, no single customer accounted for more than 10 percent of sales and Linear was focused on high-performance, mission-critical integrated circuits that typically did not account for a high proportion of its customers' total cost. This combination of attributes allowed Linear to charge relatively higher prices and so capture much of the value it created.

Michael E. Raynor and Mumtaz Ahmed, "Three rules for exceptional performance," Ivey Business Journal, May/June 2013.

The psychology behind J.C. Penney's stumble

When the board of J.C. Penney ousted its chief executive, Ron Johnson - news that broke last Monday - you might say it was, in some small way, because he did not understand Tracie Fobes.

Ms Fobes, who lives in Raymore, MO, plans meals around discounts offered at the grocery store and always checks coupon apps on her cellphone before buying clothes. When, a little over a year ago, J.C. Penney stopped promoting sales and offering coupons and instead made a big deal about its "everyday" low prices, Ms Fobes stopped shopping there. It was not that she thought the prices were bad, she said. She just was not having any fun.

"It may be a decent deal to buy that item for $5," said Ms Fobes, who runs Penny Pinchin' Mom, a blog about couponing strategies. "But for someone like me, who's always looking for a sale or a coupon - seeing that something is marked down 20 percent off, then being able to hand over the coupon to save, it just entices me," she said. "It's a rush."

... But most shoppers, coupon collectors or not, want the thrill of getting a great deal, even if it is an illusion. In recent months, Penney recognized that human trait and backtracked on its pricing policy, offering coupons and running weekly sales again. And it started marking up items to immediately mark them down for the appearance of a discount ...

But here's the thing: customers weren't actually paying less. The chain just kept raising the prices that customers saw on the racks, and then discounted those prices during promotions. Why keep playing a game that is expensive and troublesome for the seller and a mirage for the consumer?

J.C. Penney was not the first retailer to be astonished by the brilliance of this realization. In 2006, Macy's had a similar idea after acquiring the coupon-happy May department stores. It decided to "retrain" those customers, as its chief financial officer put it at the time, by drastically cutting coupons. By 2007, it had abandoned that strategy. Its chief executive acknowledged that pulling back on coupons was Macy's biggest mistake in its acquisition ... .

The problem, economists and marketing experts say, is that consumers are conditioned to wait for deals and sales, partly because they do not have a good sense of how much an item should be worth to them and need cues to figure that out.

"Sometimes, we want prices to fool us," The New York Times, 13 April 2013.

Marketing in the digital future

Digital marketing is evolving as fast as any other medium on our tablets, smartphones, Google Glass and beyond. To learn about what the future may bring to this marketing genre, we reached out to Gerd Leonhard, someone whom The Wall Street Journal calls "one of the leading media-futurists in the world."

Here are some of Leonhard's predictions for what's coming:

1. By 2020, most interruptive marketing will be gone. Instead, marketing will be personalized, customized, and adapted to what I have expressed as my wishes or opt-ins - which essentially means that advertising becomes content. Data will be essential, and as users, we'll be paying with our data - bartering a bit of our personal information in return for the use of platforms and services ...

2. The idea of having a separate marketing department is going to vanish. In the future, the "reason to buy" will be socially motivated. If a product is great and everybody loves it, it will sell ...

3. Location-based services will be immensely valuable and useful, but not until we have some kind of a privacy bank - some authorized authority or entity that will keep the public safe, and that has a neutral objective. Because clearly, I'm not going to offer up my location if I don't feel safe.

4. Companies are going to try to predict how people feel about their brand, and then adjust in real time by changing features, and starting new conversations with customers in real time. All of the companies of the future will have one big job: to make sure that the customer feels cherished and safeguarded ...

5. Companies can collect all the data they want, but data alone will never be enough. You still need to reach consumers on an emotional level ...

Dana Rousmaniere, "A futurist looks at the future of marketing," Harvard Business Review Blog, 24 May 2013,blogs.hbr.org/hbr/hbreditors/2013/05/a_futurist_looks_at_the_future.html

Have we fixed what broke in 2008?

Darrell Duffie, the Dean Witter Distinguished Professor of Finance at Stanford Graduate School of Business ... had analyzed many pillars of the system: credit risk, securitization, "dark markets," and financial derivatives, to name just a few. Yet the financial crisis showed how little he and other academics had looked at the system as a whole.

"We academics hadn't connected the dots very well," he said recently. "You really needed to step way, way back and think broadly. You need to understand how everything connects together, but that in itself is far from sufficient. You need to understand the underlying forces ..."

Much of Duffie's current focus is on financial "utilities": overnight repo markets, central clearing systems, and exchanges and swap facilities for financial derivatives.

Like water systems and electrical grids, financial utilities operate in the background and attract little attention. But like electrical grids, they can unleash havoc if they break down.

Exhibit A on a Duffie tour of the plumbing is the $2 trillion-per-month tri-party repo market, a huge source of short-term funding that attracted almost no public attention before the 2008 crisis ... .

To institutional investors such as money-market funds, repo loans seemed ultrasafe before the crisis because they lasted for only a day. But the daily "unwinding" and "rewinding" became so routine that the giant Wall Street firms effectively used them to finance long-term needs. Repo transactions peaked at about $2.8 trillion per month before the crisis. When the market froze in 2008, the Fed - and taxpayers - became Wall Street's lenders of last resort.

The repo market has since revived, but Duffie argues that it still poses big dangers ... The really bad news, according to both Duffie and Fed officials, is that some of these risks are increasing. Indeed, Fed officials recently echoed Duffie's warnings that repo markets may be more prone to "runs" today because the Dodd-Frank financial reform law of 2010 makes it much more difficult for the Fed to provide backup credit if a new crisis arises. Institutional investors, knowing this, may move faster than ever to pull their money out.

"Darrell Duffie: big risks remain in the Financial system," Stanford GSB NEWS, 13 May 2013, www.gsb.stanford.edu/news/headlines/darrell-duffie-big-risks-remain-financial-system

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 (Craighenry@aol.com).