Quick takes

Citation

Gorrell, C. (2006), "Quick takes", Strategy & Leadership, Vol. 34 No. 4. https://doi.org/10.1108/sl.2006.26134dae.002

Quick takes

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

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

Strategic thinking: ten big ideasRobert J. Allio

What have been the cornerstones of strategic thinking? Judged by their impact, utility, and longevity, there are ten big ideas:

1. 1.

   Long range planning.

2. 2.

   Strategic analysis.

3. 3.

   Quality.

4. 4.

   Portfolio theory.

5. 5.

   Scenario planning.

6. 6.

   Resource allocation models.

7. 7.

   Corporate culture, including mission/vision statements.

8. 8.

   Leadership and HR resource management.

9. 9.

   Metrics, such as IRR, NPV, EVA, 3BL, balanced score card.

10. 10.

    Strategic organization design.

Looking back and ahead

After some pivotal early insights, innovation in strategic thinking lay dormant until a brief blossoming in the 1970s and early 1980s. Since that period, new concepts have been sparse, although many old models have been refined or cleverly repackaged. As a result, for years, corporate planners have based their strategy choices on some combination of three beliefs: the validity of their own intuition, the wisdom of their peers, and the robustness of last’s year’s strategy.

Why has innovation in strategic thinking waned? Perhaps it is to be expected, given the maturity of the field, although entrepreneurs in other fields continue to surprise us with their ability to develop new products and services (and even new business models) eBay, Google, and Apple’s iPod are recent examples.

Strategic tools are more than ever necessary to help executives parse and capitalize on what they can now see within their industry or markets. Pankaj Ghemawat’s research indicates that 90 percent of the profitability difference between above-average and below-average businesses disappears over a ten year period.

Clayton Christensen’s study of disruptive innovation suggests that many firms are unable to reinvent themselves when challenged by competitors outside their industry. And some firms, of course, cannot even withstand challenges from within their industry, as GM’s egregious collapse is demonstrating.

The old tools serve their purpose, but new tools and insights are also needed to help us reach the grail of sustained profitability. The nascent field of game theory offers promise in understanding the role that managerial propensity or aversion to innovation and risk plays in strategy formulation. And new developments in artificial intelligence, cognitive modeling, and networking theory may yet lead to the optimization of strategy decisions.

The top ten ideas are trusty tools, but with the rapid pace of change and global competition that envelops us, creative strategic thinking may become the new core competence for managers, and the ultimate source of competitive differentiation. After all, as Francis Bacon observed in the sixteenth century:

He that will not apply new remedies must expect new evils; for time is the great innovator.

Beyond the core in retailMichael Collins, Marc-André Kamel and Kristine Miller

Analysis by Bain & Company of nearly 300 attempts by more than 60 US retailers to enter adjacent businesses during the period between 1989 and 2004 shows that only 29 percent of the moves contributed to profitable growth. And just 15 percent achieved a positive net present value and added more than 5 percent to revenues and profits.

Odds of one-in-three are not good enough, given the substantial cost of adjacency moves. Three principles that could lift a retailer’s success in doubling the industry’s overall average are:

1. 1.

   First, successful movers enter new businesses that are close to their core, with success rates rising sharply for those moves involving adjacencies with few variants in the companies’ current cost structures, target consumers or capabilities.

2. 2.

   Second, successful adjacency movers concentrate efforts on large profit pools, understanding that markets with larger margins are best.

3. 3.

   Third, they accurately estimate the potential to grow in the market they are entering, ideally targeting markets without an entrenched leader.

When one of these principles was met, the success rate rose to 27 percent. Meeting two resulted in a 53 percent success average, and three a slightly higher rate.

Here are the ways for retail companies can successfully screen their adjacency moves and develop the capabilities to make the right moves repeatedly:

• •

  Understanding your core is key. It comes from analysis about the areas in which you beat the competition, have unusually loyal customers and earn above-average profits relative to your competitors. Key assets in the core could include a unique business model like Dell in computers, a strong brand like American Express in credit cards, or a low-cost position like Tesco in grocery.

• •

  Making sure that adequate money can be made in an adjacent market would seem to be a straightforward matter. But it can be tricky. Unless they are careful, retailers can end up majoring in a minor business.

• •

  A retail market not only has to be big, it should also be open enough so that entrants can gain more than a toehold. Markets with clear and established leaders are difficult to enter without the strongest differentiation in value for customers.

Finally, retail adjacency moves are not some kind of other-world territory where every player can be above average. Retailers that repeated a certain type of adjacency won 23 percent of the time, while novices managed only 5 percent. In other words, practice makes perfect.

Moreover, by committing to a single type of adjacency expansion as a tool for growth, repeaters move down a learning curve, gaining the ability (like a superior gamesman) to map winning moves far ahead.

The emerging threat of Asia’s corporate tigersSandeep Malik, Vishrut Jain and Judith Cruickshank

Every businessperson has repeatedly heard myriad reports and newscasts about the huge market opportunity in Asia. But western business managers will be caught flat-footed if they do not update their notions of what the Asia companies are doing to become more competitive and the rate at which they are evolving. Nine conventional notions are presented in this article that are critical for business leaders to change, then update their competitive posture.

Emerging realities show these notions must be jettisoned:

• •

  Asian companies were once focused on low-cost manufacturing, so western companies assumed they could indefinitely retain control of high value-added activities such as innovation and branding. Not true now. Look at Samsung. Furthermore, local and regional brands are becoming more powerful each year.

• •

  Much of the cost advantages of Asian companies have been attributed to cheap labor and capital, driven by government patronage and market distortions. But since the financial crisis of the 1990s, Asian companies have dramatically improved their total productivity.

• •

  Asian companies are too small to compete on a global scale. In fact, Asian companies are poised to catch up quickly as they get better at both organic and acquisitive growth. Think of the purchase of IBM’s PC business.

• •

  Conventional wisdom has been that large Asian companies that started as family-run or government-owned enterprises will continue to be hobbled by governance riddled with conflicts. But in fact many have addressed this problem.

• •

  It is conventional wisdom that, unlike their western counterparts, most Asian companies are not organized around core competencies. In fact more are reorganizing.

• •

  In the past, Asian companies have not excelled at attracting and developing managers, so the best Asian talent tended to gravitate to western companies. Now the flow is turning the other way.

• •

  Conventional wisdom posits that because Asian companies have long focused on group rather than personal performance, they will be unable to develop competitive performance cultures. But individual reward systems are becoming widespread.

• •

  Once upon a time Asian companies were poor at leveraging information and IT to improve decision-making. But they have taken steps to become more nimble in responding to strategic challenges.

• •

  Conventional wisdom posits that because Asian companies have long focused on group rather than personal performance, they will be unable to develop competitive performance cultures. Asian company cultures are changing with the times.

What should western companies do?

• •

  Redouble efforts to understand their Asian customers’ needs at least as well as local competitors do.

• •

  Study the leading Asian players in their industry. Make them a part of the competitor screening process.

• •

  Sharpen their focus on higher value-added activities by jettisoning commodity businesses and consider Asian companies as potential buyers or joint venture partners.

Building and protecting corporate reputationPeter J. Firestein

A risk to reputation is a threat to the survival of the business. There are numerous examples to illustrate this. Think of Merck pharmaceutical and the medicine Vioxx. Yet reputation is one of the great paradoxes of corporate life. While no one questions its importance, senior executives seldom focus on it in the same way they address the more concrete aspects of their businesses.

First step: acknowledge that the days of the fortress mindset of corporations are over. We have entered an era where scrutiny and judgment by the press, society, shareholders, regulators, and other stakeholders (such as Greenpeace) is intense. Consumers are beginning to judge companies as they judge politicians: For their values.

Second step: recognize that reputational risk is embedded in the DNA of the company. The reputational collapses in the four examples of Merck, Marsh, Anderson and Monsanto share a single striking feature: they were not limited to a small group of corporate manipulators, or a cabal, operating behind closed doors. Each was the result of a broad consensus within the company to engage in misconduct. There was enterprise involvement. Moreover, each constituted a kind of behavior that few of the individuals involved would have tolerated in their personal lives. But something happened when they all came together and their competitive juices began to flow.

Competition, of course, is essential, but the fact that it is the prime driver of business also creates the need for leaders to develop a finely tuned moral ear – not out of altruism, but in the interest of their own survival. A company’s ability to maintain a sense of acceptable conduct in the heat of the competitive market place is attainable only through true engagement with its constituencies. Constant feedback from outside is the best protection against management’s own excesses. And the first step in creating such engagement is active institutional listening.

Third step: learn from the “best practice” leaders. They are working to create a structure to implement a culture that supports a desired reputation. BP is notable for having embedded reputation risk management in its global enterprise. Its business plan is designed to create a record of responsibility well before it is challenged

Solutions to reputational challenges start with a new management mindset. As Nike and BP proved, companies must engage the world that surrounds them rather than try to manipulate it through contrived communications. They must do this in a carefully structured, intentional way.

Making the case for the added-value chainWayne McPhee and David Wheeler

This article proposes an update to Michael Porter’s value-chain model.

Every day, corporate leaders are faced with the problem of defining which activities their firm should invest in. The purpose of the Porter’s value-chain model is to assist companies to evaluate and select the optimum set of activities and methods of performing them to create the most value for the firm.

Enhancements

1. 1.

   The added-value chain proposes adding an expanded set of activities to the original value-chain concept. It thus incorporates the strengths of Porter’s value chain with current thinking on business strategy to help address the modern challenges and current realities facing the firm. The expanded activity set ensures that no potential strategic activity is forgotten and no opportunity for enhancing value is over-looked.

   Added are three new primary activities and one new support activity to the set of activities originally included in Porter’s value chain:

2. 2.
   • •

     Supply chain management. Activities involving the interaction of a firm with its suppliers such as product quality, R&D, product-development partnerships, and sharing of production knowledge.

   • •

     Product use. Activities related to how the customer uses the product, including managing customer networks, product testing and development, and outsourcing.

   • •

     End of primary use. Activities related to the management of the product after the customer is finished with it such as leasing management, product take-back, management of secondary markets, and recycling.

   • •

     External networks. Activities related to the management and interaction of external networks that may include other firms, educational institutions, communities, governments, civic organizations and groups of customers, which provide an opportunity to co-create unique value.

3. 3.

   The added-value chain converts the definition of “value” from profit margin alone to the sum of net margin plus brand equity and other intangible assets. Adding brand equity and other factors to the value equation gives a firm the ability to evaluate how strategic choices can affect both “hard” and “soft” assets of the firm, and thus assess future competitiveness.

4. 4.

   The model brings a new approach to the value chain by emphasizing that managers move from a firm-centric perspective to a view of the firm as part of a broader community.

The goal of the added-value chain is to assist strategists and managers to develop and communicate new activities that will allow the firm to remain successful in today’s business environment.

Building an innovative organization: consistent business and technology integrationMarc Chapman

The IBM 2006 CEO study took a comprehensive, global look at a topic important to leaders worldwide: innovation. Two out of every three CEOs interviewed expect fundamental changes for their organizations over the next two years. Surprisingly undaunted by this challenge, they see innovation as a means to seize opportunities.

The study’s findings covered three major areas:

1. 1.

   The value of external collaboration. CEO said that two of the three most significant sources of innovation ideas now lie outside of the company.

2. 2.

   The importance of business model innovation. Approximately one-third of CEOs’ innovation emphasis is now targeted at business model innovation – innovation in the structure and/or financial model of the business.

3. 3.

   The need for consistent business and technology integration. Business and technology integration were deemed as integral to innovation, as one CEO put it, “as water is for sea traffic.”

These are some of the findings connecting innovation and financial impact:

• •

  The strongest financial performers create a collegial culture and reward individual contributions; those rewarding individuals achieved 2 percent higher operating margins on average and grew revenue nearly 3 percent faster than those that did not.

• •

  Companies that have grown their operating margins faster than their competitors were putting twice as much emphasis on business model innovation as under performers.

• •

  The study also found a strong link between collaboration and financial performance. Companies with higher revenue growth report using external sources (such as partners and customers) significantly more than slower growers do. Out performers used external sources 30 percent more than under-performers.

• •

  Business model innovation had a much stronger correlation with operating margin growth than the other two types of innovation (operational and product/service/market).

• •

  Looking across the top actions business model innovators were taking, the survey found that companies innovating through strategic partnerships enjoyed the highest operating margin growth.

• •

  Companies that are using business model innovation enjoyed significant operating margin growth, while those using products/services/markets and operational innovation have sustained their margins over time.

• •

  Extensive collaborators outperformed the competition in terms of both revenue growth and average operating margin. When analyzing historical operating margin results over a five-year period, for example, over half of the extensive collaborators outperformed their closest competitors.