Quick takes

Citation

Gorrell, C. (2006), "Quick takes", Strategy & Leadership, Vol. 34 No. 2. https://doi.org/10.1108/sl.2006.26134bae.002

Quick takes

These brief summaries highlight the key points and action steps in the feature articles in this issue of Strategy & Leadership.

4The practice of co-creating unique value: an interview with C.K. PrahaladBrian Leavy and Deependra Moitra

In his visionary book, The Future of Competition, C.K. Prahalad presents the new perspective of co-creating value with consumers. This interview offers new insights into his theory and the practice of his premises.

The new customer-centric emphasis

For over 100 years the dominant though unspoken assumption is that firms create value. The focus of all innovation traditionally has been on products and services that the firm offers. So the dominant model has been a “firm and product centric” view of value. Now, post-internet, something quite profound is taking place in the industrial infrastructure. Based on the discontinuous changes brought about by digitalization, ubiquitous connectivity, and convergence of technologies and industry boundaries, this model is open to challenge. The key drivers of this change are the connected consumer and “thematic consumer communities.” Communities today do not have to be “location bound.” People who share a common interest can form communities–chat rooms, wikis, NoteSharer teams, blogs, and even old fashioned teleconferences. The evidence of a sea change in the institution of business is there for us to see.

Traditional ways of gaining advantage will not go away. We still need top focus on cost, quality, and speed. But now they have become “table stakes.” That means all firms will have to be cost conscious, offer high quality, and respond rapidly just to stay in the game. What co-creation changes is the nature of innovation. Instead of assuming that we can innovate unilaterally, as a firm, now firms depend on the consumers to be involved. They shift from product innovations to experience innovations. The good news about such co-creation ventures is that infinite variety is possible when a business offers a platform that allows people to create their own experience. The variety is only limited by the imagination, involvement and expertise of the individuals. Examples of such platforms are Starbucks and the iPOD.

Valuable insights

Other topics discussed are the differences between experience environments and experience networks; the impact this new world of experience innovation has on management, organizations, and corporate governance; and the opportunities and perils of the co-creation-of-value approach.

Attention required

Co-creation theory asks a basic question. What if: Consumer ≥ the Firm? This question could undoubtedly change the world of business. This means that focus will need to be put on experience not on products as the basis of value, and on the convergence of the traditional roles of the firm and the consumer.

Leading firms will move from the traditional view of resource allocation as the role of top management to resource leverage (alliances and partners) and resource access (experience network including consumers).

10The customer-led bank: converting customers from defectors into fansCornel Wisskirchen, Dirk Vater, Tim Wright, Philippe De Backer and Christine Detrick

Long-term growth and profitability hinge on the ability to attract and retain loyal customers. In the banking business, that recognition is being spurred by a potent combination of increasing competition based on scale, regulatory scrutiny and consumers’ greater awareness of the range of new options at their disposal.

Back story

Banks have worked to improve their competitiveness – as measured by the efficiency of their operations – by using every cost-cutting weapon in their arsenals. But essential as their efficiency gains have been, the relentless struggle to keep pace with competitive pressures has done little to ignite new top-line growth. Stripped-down services that alienate longstanding customers are increasing defections among the very group that banking leaders now recognize they need to keep loyal to fire up growth. And the cost of losing – and having to replace – a long-tenured customer is staggering.

The Bain benchmarking survey of the bankers and their customers showed that customers’ willingness to recommend their bank to friends or family – as measured by the Net Promoter Score, the best indicator of customer equity – is among the lowest of any industry.

The approaches the most successful banks use

The rewards for good execution on behalf of customers are high. Compared with their less customer-centric peers, the high performers’ excess returns on equity were 50 percent higher than for the rest of the survey sample.

True customer-led banks drive up their numbers by developing customer-management systems that seamlessly permeate all levels of their organizations. They approach three customer elements simultaneously, with each of these reinforcing the others:

1. 1.

   They design the right propositions for the right customers, (identifying target segments and crafting propositions and experiences to delight them). Six imperatives are cited as crucial to winning customer relationships.

2. 2.

   They deliver these propositions by focusing the entire company on them, with an early and continuing emphasis on cross-functional collaboration.

3. 3.

   They continually develop their capabilities to delight customers again and again, supported by closed feedback loops that establish direct accountability for the ongoing improvement.

Going forward

If the qualities that set customer-led banks apart are easy to recognize, duplicating their achievement is elusive and difficult. Converting customers into loyalists and, even better, making them recruiters of still more customers requires a disciplined, multiyear initiative. Putting customer loyalty at the heart of their growth efforts requires banks to strengthen atrophied capabilities and master new disciplines.

21Gaining a 3-D insight to drive profitable growthRon Langford and Kraig Schulz

Does your company rely on cost-effective differentiation of products and services as a key driver of its strategy?

More specifically, do you need improved ability to get fact-based answers to these questions:

• •

  What customers and customer segments should we focus on?

• •

  What new products should we launch, and to which customers and customer segments should they be introduced?

• •

  How can we most profitably differentiate our offer from those of competitors?

• •

  Where and how can we get the biggest bang from our growth investments (e.g., marketing initiatives)?

What is the 3-D methodology?

The three-dimensions of customer insight are customer attitudes, behaviors and economics. When information on each of these is carefully integrated, insights are exponentially increased about where and how to grow profitably.

To get the most out of this technique, companies need to:

1. 1.

   Gain more insightful appreciation for customer behavior.Do not focus on current attitudes (which reflect rather than guide customer behavior), but instead on how and why customers switch between rival brands and products.Switching-metrics information leads to an in-depth understanding of which customers switch, which are most likely to switch to your offer, which won’t and why. With this deeper knowledge of customers’ latent preferences, management can better predict how a category as a whole is likely to respond to new products or attributes, extensions and contractions of product lines, and new marketing campaigns – all fundamental variables in determining how and where to grow profitably

2. 2.

   Use this to gain a better understanding of customer economics.Knowing the preferences that lead customers to switch yields invaluable information about the demand and supply sides of customer economics – the value to the company of customers and segments, and the value that customers and segments attach to each product attribute (physical or otherwise).

3. 3.

   Link customer attitudes to behaviors.Information on switching behavior is the linchpin of a 3-D customer insight approach, and attitudinal information must be aligned with it. Once managers determine which customers are the most attractive based on their behaviors and economics, they need to know what motivates these customers so they can effectively and efficiently reach them – and provoke the right customers to act in a more favorable way.

A case study presents the steps for using the “3-D Customer Insight” approach.

28How technology-driven business strategy can spur innovation and growthSaul J. Berman and Jeff Hagan

The concept and principles of a market insightful technology-driven strategy can help companies across a wide variety of sectors to improve their innovation record. It starts with the recognition that innovation is now critical to sustained growth, and increasingly happens at the intersection of market insight and technological know-how. Invention is not the same as innovation. Technological capabilities are of little value without the market insight that determines their application. And market insights left unexploited by technology create vulnerabilities that can be attacked by opportunistic competitors or new entrants. Companies that are quick to recognize the potential in the approach called “technology-driven strategy” and learn to master its principles can set the pace of innovation in their industries and drive the competitive agenda.

Six common principles that innovative companies follow in their approach business strategy development are:

1. 1.

   Considering technology a core input.

2. 2.

   Revisiting strategy and technology context regularly.

3. 3.

   Uniquely managing emerging businesses opportunities.

4. 4.

   Planning for disruptions.

5. 5.

   Managing for today’s and tomorrow’s context.

6. 6.

   Focusing technology on the customer’s priorities.

Technology-driven business strategy is fundamentally different than traditional strategy development. In most strategic planning efforts, the emphasis is on analyzing what is known about the competition, suppliers and targeted buyers. But, under a market/technology-driven approach, the focus shifts to include exploration of new, uncharted areas – products and services that have no precedents, emerging market segments that no one else sees, new operational capabilities that change the nature of competition – actions that all support innovation. Instead of being an implementation issue, technology becomes a catalyst at the very initial stages of strategic planning, merging with market insights to produce truly innovative ideas.

Because of its inherent parallelism and the focus on merging market insights with technological know-how, technology-driven business strategy can offer some distinct advantages:

• •

  Faster time-to-market and reduced risk of technology obsolescence.

• •

  Early warning of potential business disruption – and the means to intentionally disrupt competitors.

• •

  Mitigation of the bureaucracy of strategic planning processes that too often thwart innovation, particularly at large companies.

• •

  Supports the increasing speed and complexity of business, which can become unmanageable with a traditional annual planning cycle.

Where is your strategy development approach taking you?

35Profiting from evidence-based managementJeffrey Pfeffer and Robert I. Sutton

In some companies there’s a serious problem at the heart of the strategy-making mindset. To make an assessment, look at your company’s actions. Are the leaders more interested in copying others, doing what they’ve always done, and making decisions based on beliefs in what ought to work rather than on what actually works? If so, red flags should be raised. Competitive innovation will never succeed in such an environment. For corrective action, implement evidence-based management.

Evidence-based management focuses on finding and following the best data and logic to make decisions. It is a perspective for thinking about what you and your company know and what you don’t know, what is working and isn’t, and what to try next. Most importantly, it is a way to sustain the right mind-set – to keep facing the hard facts, avoid falling prey to dangerous half-truths, and spot and reject total nonsense.

Nine implementation principles

1. 1.

   Treat your organization as an unfinished prototype. A manager’s job is to act on the best available evidence and to keep updating. Evidence-based management means acting on what you know at a moment in time, based on the best available data you have, even as you try to create the conditions for learning more – which means seeing the truth as a moving target – seeing both your organization and your knowledge about how to manage it as unfinished but useful prototypes.

2. 2.

   No brag, just facts. This is an antidote for assertions made with complete disregard for whether they correspond to facts.

3. 3.

   Master the obvious and mundane. Managers too often presume they are already doing all they can to make good decisions.

4. 4.

   See yourself and your organization as outsiders do.

5. 5.

   Power, prestige, and performance make you stubborn, stupid, and resistant to valid evidence.

6. 6.

   Evidence-based management is not just for senior executives. Everyone should be responsible to gather and act on quantitative and qualitative data and to help everyone else learn what they know.

7. 7.

   Like everything else, you still need to sell it. Use evidence about what sells best to sell the best evidence.

8. 8.

   If all else fails, slow the spread of bad practices.

9. 9.

   Forgive and remember. There is no innovation without failure. Therefore handle failures to harvest the lessons.

When managers treat employees as if a big part of their job is to invent, find, test, and implement the best ideas, then managers make fewer mistakes, organizations learn more, and more innovation happens. When companies use more of each employee’s intelligence and talents, they make more money. Evidence-based management is the mindset to use to make this happen.

43Measuring the value of human capital investments: the SAP caseSusan Cantrell, James M. Benton, Terry Laudal, and Robert J. Thomas

Managing human capital is – by universal agreement – critical to business success. But does your organization have a framework tool to measure investments in people?

Measure and manage

The inability of human resources executives to point to data that synchs up with business results has hampered their ability to overcome skepticism about the value of “people programs.” After all, if there are no persuasive measurements for such programs, then how effectively can they be managed? The framework outlined in this article provides a tool that enables company leaders to make clear-eyed assessments of the payoff from human capital investments. It helps organizations diagnose their strengths and weaknesses in key human capital practices, to set investment priorities and track performance, and to establish an empirical link between human capital investments, business practices, and overall business performance.

Application example

A step-by-step case study presents SAP’s improvements using an HR framework/scorecard tool that offers four tiers of assessment and measurement. SAP’s executives needed to evaluate a broad range of human capital processes and capabilities, and, most importantly, to set investment priorities according to their expected business impact. Now armed with empirical data, SAP executives can do just that.

The framework SAP used starts with an assessment of human capital processes such as learning or career development (tier 4). These are the activities an executive can pursue to drive improved performance in human capital capabilities, like employee engagement or workforce performance (tier 3). Improved human capital capabilities, in turn, may drive improvement in key performance drivers like innovation, customer satisfaction, or quality (tier 2). Finally, key performance drivers are those targets an executive might hope to improve to produce better business results such as total return to shareholders or revenue growth (tier 1).

The bottom line

Just how much of a difference does investing in people processes and programs make? Fact: organizations with more mature human capital processes have superior financial performance. As an organization moves from one benchmarking quartile to the next in these processes within the framework scoring, its capital efficiency – or the ratio of total annual sales to the capital invested in the operations of the business by shareholders and creditors – improves from 10 to 15 percent.

Catherine GorrellCatherine Gorrell is president of Formac, Inc., a Dallas-based strategy consulting organization (mcgorrell@sbcglobal.net) and a contributing editor of Strategy & Leadership.