Strategy in the news

Citation

Henry, C. (2016), "Strategy in the news", Strategy & Leadership, Vol. 44 No. 1. https://doi.org/10.1108/SL-11-2015-0088

Strategy in the news

Article Type: Literature review From: Strategy & Leadership, Volume 44, Issue 1

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).

On the enduring wisdom of Andy Grove

Over the years, I have come to consider High Output Management [first published in 1995] a true masterpiece, and there are at least three core aspects to its genius… . Andy introduces management with this classic equation:

A manager’s output = the output of his organization + the output of the neighboring organizations under his influence.

On the surface it may seem simple, but he clarifies the essential difference between a manager and an individual contributor. A manager’s skills and knowledge are only valuable if she uses them to get more leverage from her people. So, Ms. Manager, you know more about our product’s viral loop than anyone in the company? That’s worth exactly nothing unless you can effectively transfer that knowledge to the rest of the organization. That’s what being a manager is about. It’s not about how smart you are or how well you know your business; it’s about how that translates to the team’s performance and output… .

The book has an entire section dedicated to an often neglected, but critically important management tool: meetings… . He teaches meetings from first principles, beginning with how to conduct a one-on-one. It seems incredible that the CEO of Intel would take the time to explain how to have a one-on-one.

Why is he doing this? It turns out that the one-on-one is not only a fundamental element in the manager/employee relationship, but perhaps the best source for organizational knowledge that a manager can get. In my experience, managers who don’t have one-on-ones understand very little about what’s happening in their organizations.

Ben Horowitz, “Foreword,” High Output Management by Andy Grove (1955 and 2015)

Hackathons: not just for start-ups

The “Hackathon” has become one of the latest vogue terms in business… .

For large organizations in particular, hackathons can be adapted to greatly accelerate the process of digital transformation. They are less about designing new products and more about “hacking” away at old processes and ways of working. By giving management and others the ability to kick the tires of collaborative design practices, 24-hour hackathons can show that big organizations are capable of delivering breakthrough innovation at start-up speed.

A 24-hour hackathon differs from more established brainstorming sessions in that it is all about results and jump-starting a way of working, not just idea generation. However, done well, it can help shave 25 to 50 percent from the time it takes to bring a service or product to market. The best 24-hour hackathons share several characteristics. They are:

Centered on the customer. A hackathon is focused on a single customer process or journey and supports a clear business target – for example, speed, revenue growth, or a breakthrough customer experience. …

Deeply cross-functional. This is not just for the IT crowd. Hackathons bring together people from across the business to force different ways of working a problem. In addition to IT and top management, whose involvement as participants or as sponsors is critical, hackathon participants can include frontline personnel, brand leaders, user-experience specialists, customer service, sales, graphic designers, and coders. …

Starting from scratch. Successful hackathons deliberately challenge participants to re-imagine an idealized method for addressing a given customer need, such as taking a paper-based, offline account-opening procedure and turning it into a simple, single-step, self-service online process. …

Concrete and focused on output. Sessions start with ideas but end with a working prototype that people can see and touch, such as clickable apps or a 3-D printed product. …

Iterative and continuous. Once teams agree on a basic experience, designers and coders go to work creating a virtual model that the group vets, refines and re-releases in continual cycles until the new process or app meets the desired experience criteria.

Ferry Grijpink, Alan Lau, and Javier Vara, “Demystifying the hackathon,” McKinsey Quarterly, October 2015

Constraints that foster innovation

Our research suggests that one critical barrier to achieving sustainability-oriented innovation (SOI) is the “sustainability tradeoff” view of the world, a mental model that says having a positive social and environmental impact must exist as a tradeoff with more traditional business drivers. Let’s look at Nike as an example of a company that discarded its tradeoff model.

After an extensive search and invention process, Nike … sought to achieve zero waste on the cutting room floor, a standard that far exceeded any they had set in the past. On the performance dimension, they sought to make shoes lighter and more breathable. By committing to achieving both performance and impact, Nike had let go of its either/or approach. The result was Flyknit, a new technology that involved weaving the upper portion of the shoe from a single thread. They had learned what artists have long understood – that constraint generates innovation. For Nike, holding impact and performance constraints simultaneously led them to an entirely new way of producing athletic footwear. … Its sales are projected to surpass $1B in 2016, which for a single shoe is an astounding accomplishment given Nike has an $18.3B total footwear business.

In our example, Flyknit hit the SOI sweet spot and tackled all three constraints simultaneously by creating customer value by increasing comfort and running performance; creating business value by cutting production time and costs, and addressing mainstream customer needs with significant market potential; creating system-wide environmental and social value by reducing landfill waste and reducing the need for labor-intensive, low wage work.

Jason Jay and Sergio Gonzalez, “Sustainability-oriented innovation: a bridge to breakthroughs,” Sloan Management Review, November 2015

Pricing strategy: when psychology trumps economics

Aaron Franklin, proprietor of the Franklin Barbecue in Austin, Texas, has been lauded for his pit master skills, specifically in smoking beef brisket. Bon Appétit anointed his fare the best barbecue in America, and he was awarded Best Chef: Southwest by the James Beard Foundation. Barbecue lovers line up hours in advance of the restaurant’s 11 a.m. opening, and the limited supply of brisket, ribs, chicken, pulled pork, and sausage usually sells out by 2 p.m.

Given the high demand for his cuisine, it’s fair to wonder, “Why doesn’t Mr Franklin raise prices?”

Economists are typically incredulous about sellouts – events such as rock concerts and sporting events, as well as in-demand products like Mr Franklin’s barbecue. Their standard advice: “Raise prices – set the market clearing price where demand equals supply.” But in most cases, I believe this armchair advice can be detrimental to a business… .

What economists often fail to understand is price creates an emotional response within customers that affects their loyalty. Getting a good deal generates euphoria, while high prices provoke feelings of anger over getting ripped off. As an extreme example of that, a pharma company recently raised prices by 5,000% and was met with national outrage… .

When business is strong, it’s often best to resist the urge to boost prices. Think of tempering price increases as a form of “insurance” against a future drop in demand. In Mr Franklin’s case, Bon Appétit may decide another restaurant serves the best barbecue in America (or even in Austin)… .

There are two key issues to consider before boosting prices during a period of strong demand. First, how confident are you that the good times will last? Second, what initiatives should be taken today so if need be, price can be gracefully rolled back? For many businesses, it may make sense to forego a few extra dollars of momentary profit and instead follow what Aaron Franklin practices in both setting prices as well as smoking meat … go low and slow.

Rafi Mohammed, “What America’s best BBQ joint can teach you about pricing,” Harvard Business Review, November 2015

What disruption looks like

Cars bursting into flames are never a good thing. So when a Tesla Model S ran over a metal object in Kent, Wash., in October 2013 and burst into flames, owners, potential customers, investors, and company executives got worried. When the same thing happened a few weeks later in Smyrna, Tenn., federal regulators opened an investigation. We all know what happens next: a massive recall, costly repairs at dealerships nationwide, and a painful financial hit to the carmaker. Yet none of that occurred. The problem was that the Model S could lower its chassis at highway speed to be more aerodynamic, and if debris hit the car’s battery pack in just the wrong way, it could catch fire. So Tesla TSLA −3.92% beamed a software update to the affected cars, raising ground clearance at highway speed by one inch. The problem went away. Just four months after opening their investigation, the regulators closed it.

Using software and the mobile-phone network, Tesla avoided any need for a recall. It doesn’t have any dealerships; customers can configure and order a car online, and they can test-drive cars at company-owned showrooms. Tesla’s advanced electric technology is simpler than gas or diesel technology, so cars can be built with fewer employees and less capital. Combine those factors and here’s what happens: General Motors creates about $1.85 of market value per dollar of physical assets, while Tesla creates about $11. GM creates $240,000 of market value per employee, while Tesla creates $2.9 million. You don’t get differences like that just by being more efficient. Tesla, though in the same business as GM, is a fundamentally different idea.

GM is changing, but for now it’s still a 20th-century corporation. Tesla is a 21st-century corporation, built for sweeping new realities that change the rules of success. The big theme is the arrival of the long-heralded friction-free economy, a new world in which labor, information, and money move easily, cheaply, and almost instantly. Companies are forming starkly new, more fluid relationships with customers, workers, and owners; are rethinking the role of capital (as traditionally defined), finding they can thrive while owning less and less of it; are creating value in new ways as they reinvent R&D and marketing; and are measuring their performance by new metrics because traditional gauges no longer capture what counts.

Not all 21st-century corporations are glamorous Silicon Valley startups. They can be of any age and in any industry (even cars). Nike is a 21st-century corporation, aggressively reinventing manufacturing with 3D printing and cannily using social media for marketing. General Electric is becoming one, if partly as a result of shareholder frustration and outside pressure. Every company needs to be one.

Geoff Colvin, “Why every aspect of your business is about to change,” Fortune, 22 October 2015

Wargaming: how not to do it

For over a decade, those of us who teach wargaming and red teaming have used Millennium Challenge ‘02 (MC ‘02) as a poster child for how not to design or run a wargame. … The game was conducted by the now-defunct Joint Forces Command (JFCOM) and the credibility of the command never recovered …

The game was an attempt to test three JFCOM concepts: effects-based operations, rapid decisive operations, and standing Joint Force headquarters. All three were tested in smaller venues and had such significant issues associated with them that independent analysts recommended they be scrapped altogether. JFCOM’s response was to get rid of the independent analysts and have its own give them better answers. That should have been the first clue for the organization’s senior leadership that they had a serious problem, but the flag officer leadership of JFCOM had no experience in either gaming or experimentation. Consequently, they didn’t know what they didn’t know.

We offer our observations meant to give those who try to design such events in the future, and those who sponsor such efforts, some cautionary advice. There are six rules in wargame design. JFCOM batted a thousand in violating all of them:

1. Never try to mix a seminar wargame, an experiment, and a real world exercise. You will end up with too many variables to analyze any single one properly… .

2. Never allow the people whose concept is being tested to run a game. In MC ‘02, the JFCOM concepts personnel oversaw the white, red, and blue cells. There was no firewall between the concept developers and the game directors. If the red team did something to embarrass the concept, the results could be overruled.

3. Never allow concept writers to run the analysis. This is akin to allowing students to grade their own tests, and that is what happened in MC ‘02. No independent analysis was ever released by the command.

4. Never claim that a single wargame has validated anything. Wargames will identify issues, and a series of them may fully discredit a truly bad concept. The Germans were still wargaming what became known as blitzkrieg to refine it even after they executed the concept in Poland. The result was an overhaul of their war plans for what became the successful invasion of France. The Naval War College tested the concepts that eventually won the Second World War against Japan in innumerable wargames. The word “validation” should not be used until after the war is won… .

5. A major wargame should be part of a program that lasts at least one year. No one-to-two-week game can adequately address all the objectives normally associated with concept development and experimentation. Elements of these objectives, as well as game design, methodology, and administration, should be put to the test in what are called “shaping events.”… .

6. Beware empowering defense contractors who work for concept developers and game designers, and “good idea fairies.” The former have a vested interest in pleasing their sponsors and the latter attempt to jump on the bandwagon as a program progresses and begins to garner increasing senior interest and press.

Gary Anderson and Dave Dilegge, “Six rules for wargaming,” War on the Rocks, 11 November 2015, http://warontherocks.com/2015/11/six-rules-for-wargaming-the-lessons-of-millennium-challenge-02/

Education: the disruption that failed

Not too long ago, for-profit colleges looked like the future of education. Targeting so-called “nontraditional students” – who are typically older, often have jobs, and don’t necessarily go to school full time – they advertised aggressively to attract business, claiming to impart marketable skills that would lead to good jobs. They invested heavily in online learning, which enabled them to operate nationwide and to keep costs down. The University of Phoenix, for instance, enrolled hundreds of thousands of students across the country, earning billions of dollars a year. Between 1990 and 2010, the percentage of bachelors’ degrees that came from for-profit schools septupled.

Today, the for-profit-education bubble is deflating. Regulators have been cracking down on the industry’s misdeeds – most notably, lying about job-placement rates. In May, Corinthian Colleges, once the second-largest for-profit chain in the country, went bankrupt. Enrollment at the University of Phoenix has fallen by more than half since 2010; a few weeks ago, the Department of Defense said that it wouldn’t fund troops who enrolled there. Other institutions have experienced similar declines.

The fundamental problem is that these schools made promises they couldn’t keep. For-profit colleges are far more expensive than community colleges, their closest peers, but, according to a 2013 study by three Harvard professors, their graduates have lower earnings and are actually more likely to end up unemployed. To make matters worse, these students are usually in a lot of debt. Ninety-six per cent of them take out loans, and they owe an average of more than forty thousand dollars. According to a study by the economists Adam Looney and Constantine Yannelis, students at for-profit schools are roughly three times as likely to default as students at traditional colleges. And the ones who don’t default often use deferments to stay afloat: according to the Department of Education, seventy-one per cent of the alumni of American National University hadn’t repaid a dime, even after being out of school for five years.

Dependence on student loans was not incidental to the for-profit boom – it was the business model. The schools may have been meeting a genuine market need, but, in most cases, their profits came not from building a better mousetrap but from gaming the taxpayer-funded financial-aid system. Since the schools weren’t lending money themselves, they didn’t have to worry about whether it would be paid back. So they had every incentive to encourage students to take out as much financial aid as possible, often by giving them a distorted picture of what they could expect in the future. Corinthians, for instance, was found to have lied about job-placement rates nearly a thousand times. And a 2010 undercover government investigation of fifteen for-profit colleges found that all fifteen “made deceptive or otherwise questionable statements.”

James Surowiecki, “The rise and fall of for-profit schools,” New Yorker, 2 November 2015

Serving the new global middle class

The past two decades have seen a growth in wealth and prosperity for huge numbers of previously very low-income consumers in Asia, Latin America, and Africa. Serving the next billion is a tantalizing prospect, but reaching them profitably is anything but straightforward. Companies need new approaches and new ways of thinking about categories, cultures, and commonalities. Reaching the newly minted middle-class will require new methods and innovation.

A billion more people will be born between now and 2025, with almost all global population growth occurring in emerging markets. Combined with faster than average GDP growth in these emerging economies, the explosion in population will result in 3.2 billion “middle class” individuals in 2020, up from 1.8 billion in 2009. These newly-minted middle class consumers will constitute the single biggest opportunity for almost all global companies.

However, as businesses turn their attention to these new consumers, they’re also finding that the past strategies of exporting affordable, scaled-down versions of successful products or services often do not work. The new middle class consumers are overall poorer, live in different conditions, are less familiar to global companies, and may need different products and services than their middle class counterparts in other nations… .

Many firms will need to relearn – or learn for the first time – how to compete in unfamiliar emergent categories. Western managers too often regard emerging-market consumers as merely “late adopters” of products and trends that have largely played out, neglecting in many cases to invest sufficiently in market development. In contrast, Nestlé developed a new, customized seasonings brand fortified with micronutrients missing in many emerging economies’ diets (iron, vitamin A, iodine, and zinc), and promoted it with a “Cooking Caravan” program that traveled throughout Cameroon, Côte d’Ivoire, and Nigeria, raising awareness of the importance of balanced diets, micronutrients, and culinary hygiene. Sony introduced smaller versions of its BRAVIA® TVs to tier II and tier III markets in India to provide affordable entry offers for middle-class consumers who lack the purchasing power of their counterparts in Mumbai and Delhi …

Eamonn Kelly and Glenn Goldman, “Emerging markets: how to reach the new middle class,” Deloitte Digital, 2 October 2015, http://cmo.deloitte.com/emerging-markets-how-to-reach-the-new-middle-class/?id=us:2sm:3li:4cmo:5awa:6abt:20151007123000

Digital disrupters create perfect storm for newspapers

The summer of 2015 will be remembered as the moment a perfect storm hit national newspapers.

The print advertising market, which still remains the lifeblood of income for most publishers on the path to digital sustainability, has been down unprecedented levels of as much as 30 percent in some weeks over the past six months… .

As if the scale of this threat were not enough to set off alarm bells in commercial departments across the industry, the issue has been exacerbated by an equally alarming slow-down in the rate of growth of the digital ad revenues that publishers have been relying on to replace print revenue declines. An example is the world’s biggest newspaper website, Mail Online. With well over 200 million monthly users it should be an attractive buy for advertisers, yet it saw growth slow to single digits over the summer… .

David Pemsel, the chief executive of Guardian Media Group, is one of a number of senior industry executives who point the finger at Google and Facebook. Pemsel, echoing Daily Mirror publisher Trinity Mirror, sounds a warning over the commercial outlook for this year, noting that the internet giants are hoovering up digital ad spend at a “far faster rate than previously seen”.

“There are numbers out there to say that year-on-year digital increase is around 30 percent, 29 percent of that went to the [internet] platforms, and 1 percent of that was shared amongst everybody else,” he says. “Facebook … has become a proxy for mobile, and at the same time slowly over time managed to sort out its video strategy as well, which in summary means you’ve got the perfect storm.” Research by eMarketer has estimated that Google and Facebook will this year take half of the total UK digital display advertising market, well over £1bn.

Mark Sweney, “Newspapers face up to the ad crunch in print and digital,” Guardian, 18 October 2015