Quick takes

Citation

Gorrell, C. (2007), "Quick takes", Strategy & Leadership, Vol. 35 No. 2. https://doi.org/10.1108/sl.2007.26135bae.002

Quick takes

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

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

Using a Lean Six Sigma approach to drive innovationGeorge Byrne, Dave Lubowe and Amy Blitz

Simply put, a Lean Sigma approach is not just about doing things better (improving operations), it is a way of doing better things – innovating in products, services, markets and even a company’s underlying business model. The goal is growth, not merely cost cutting, and innovation, not just improvement. For more than five years, industry leaders have used company-wide Lean Six Sigma programs to create an organizational climate in which innovation becomes instinctive, and, consequently, they have surfaced major innovation opportunities that have revitalized their businesses.

The pivotal question is whether your organization is equipped to make radical innovations – and to do so in a sustainable manner. Several questions are offered in this article to assess your level of preparedness.

Through the discipline of Lean Six Sigma, leaders can permanently reorient their organizations’ mindsets, creating the type of environment where innovation flourishes. Several distinguishing characteristics of their approaches set them apart from those with a traditional operational improvement mindset. Successful innovators have:

• •

  An innovation vision based on factual customer and market insights. Lean Six Sigma is highly structured and data-driven. Decisions are based on facts. Leaders craft a compelling vision from a keen understanding of market demands and their own capabilities. Their objectives are explicit and few in number to enable focus.

• •

  Leadership committed to perpetual innovation. CEOs and business unit leaders play active, enthusiastic roles. They are committed to making an indelible organizational change, not just launching another initiative.

• •

  Alignment across the extended enterprise. The strategic innovation vision is used as a unifying force to align disparate business units and influence supplier and customer relationships.

• •

  Organizational capabilities that made innovation habitual. At the outset, a Lean Six Sigma initiative involves an intense period of training, dedicated resources and an initial burst of projects to jumpstart the transformation. Over time, the established mindset and enduring processes help drive continuous innovation throughout the organization.

A case study of Caterpillar illustrates the points of the Lean Sigma Six approach.

The surprising rise and fall of Coors Light in Puerto Rico David J. Allio

Chapter 1 of the saga of Coors Light beer in Puerto Rico was presented in an 2002 issue of Strategy and Leadership. It is the story of how a nimble local or regional player can dethrone even the largest of multi-national or global competitor who has failed to recognize or embrace cultural differences and unique market conditions. It demonstrates how the brand’s adherence to the essential tenets of segmentation and differentiation allowed them to displace the market leader.

But rivals revive and re-attack, and a marketer can lose focus. In this new case study, the downfall of Coors Light is discussed.

Lessons to be learned

Through careful positioning, consistency and relentless implementation, Coors Light was poised to extend its leadership for an indefinite period. But the brand’s marketing succumbed to hubris and then lost its way. Three risk factors were in play:

1. 1.

   Changes in brand management, positioning and consistency.

2. 2.

   A tax increase by the Puerto Rican government with discriminatory provisions favoring the local competitor.

3. 3.

   A change in the competitive landscape (and ultimately a repositioning of the Coors brand).

In short, the brand failed to anticipate changing market dynamics, to nurture their equity and positioning, to maintain relevance to current consumers, and to attract the next generation of beer drinkers.

Advice to managers in any market

Market share is hard to gain, easy to lose. Adherence to the following principles can help gain and protect share:

• •

  Control brand architecture. Even subtle changes can reverberate through a brand, alienating or polarizing key consumer groups.

• •

  Maintain consistency for brand success and longevity. Whether in positioning, packaging, communications, support or approach, consumers embrace consistency like an old friend. When these friends change unexpectedly, and frequently, consumer anxiety increases; trust and familiarity decline, and eventually they seek new friends who exhibit less erratic behavior.

• •

  Implement and maintain a brand knowledge bank recognizing that management turnover will occur, maybe frequently.

• •

  Rely on local partners who have key insight into market dynamics, consumer behavior and cultural sensitivities to enhance positioning and brand relevance. Practice “glocal” marketing: think globally but implement locally.

Discovering new business models for knowledge intensive organizations Norman T. Sheehan and Charles B. Stabell

Is your firm a “knowledge intensive” type of business? Examples are consulting firms, pharmaceutical research units, oil and mineral exploration companies, medical practices, executive talent search firms, law partnerships, design shops, advertising agencies, architecture firms and venture capitalists.

If so, then you know that knowledge intensive organizations create and appropriate value in unique ways and that their complex and multifaceted competitive landscape is very dissimilar to that of industrial firms. For knowledge firms, this article offers an effective, specialized method of mapping competition in order to identify the best opportunities to devise new business models and to direct growth initiatives.

Basic premises

There are three unique types of knowledge intensive organizations and four competitive characteristics.

The three types of knowledge intensive firms are:

1. 1.

   Diagnosis shops. Diagnosis shops create value by defining problems and suggesting remedies. A prototypical example of a diagnosis shop is a general medical practitioner who examines patients, generates alternatives as to what may be ailing them, and prescribes and delivers treatment. Other examples include law firms, audit firms, and building inspection services.

2. 2.

   Search shops. Search shops create value by searching for and defining opportunities. Examples include mineral exploration units, pharmaceutical and biotech drug discovery units, executive recruiting firms, talent agencies, and venture capital firms.

3. 3.

   Design shops. Design shops create value by formulating innovative concepts or product prototypes. Examples are architecture firms, product designers like IDEO, advertising firms, engineering services firms, graphic design firms, software engineering firms, and interior design firms.

Generating innovative business models

The process of developing new business models to improve the competitive positions of knowledge intensive organizations involves three steps:

1. 1.

   Use four positioning characteristics – key value creating activity, fee structure, reputational capital, and governance – to identify which of three basic types of knowledge shops your firm most resembles.

2. 2.

   Map the firm and its rivals within the competitive space using the four positioning characteristics. This will pinpoint where your firm is relative to its rivals.

3. 3.

   Evaluate how best to improve your firm’s competitive positioning by altering one or more of the four positioning characteristics. A full menu of competitive positioning options is discussed.

Generating new business models in this manner should allow managers to enter existing, profitable niches or establish new, potentially profitable niches.

A new competitive analysis tool: the relative profitability and growth matrix Joseph Calandro, Jr and Scott Lane

One of the most versatile tools for summarizing and communicating strategic information is the 2 × 2 matrix, which graphs two variables and defines the four outputs derived from them. Properly used, it provides a visual focus on a core set of variables, thus modeling a complex situation “as a set of dueling interests.” It can also offer insights into resource allocation alternatives (such as competing in segments with strong levels of profitability but lower levels of growth versus segments with very strong growth but lower levels of profitability, etc.) and help to initiate more detailed levels of analyses.

After testing numerous axis variables, the variables of “relative profit” and “relative growth” were chosen. Profitability and growth are widely acknowledged drivers of a company’s ‘value’. Relative profitability and relative growth are simply the differences between a firm’s profitability and growth measures and the profitability and growth measures of its industry. In practice, the relative profitability and growth matrix offers a graphic assessment of a company relative to its industry. But like all 2 × 2 matrices, it is a screening tool that should be used to facilitate further forms of analysis.

This matrix identifies four groupings for companies:

1. 1.

   Franchise. These firms are both more profitable and growing faster than their industry.

2. 2.

   Harvest. Firms of this type are more profitable than their industry but are growing at a slower rate than it is.

3. 3.

   Unprofitable growth. These are firms that are less profitable than their industry but are nevertheless growing faster than it is.

4. 4.

   Under-performer. Such firms are both less profitable than their industry and are growing slower than it is.

Two analytical examples are offered in this article to provide sample insights derived from using the matrix. From the insurance industry, the comparison of the industry to Progressive, HCC and Mercer companies demonstrated the utility of a relative profitability and growth matrix with respect to firm-specific competitive analysis. From the banking industry, thirteen banks were analyzed with the matrix tool. For example, the banks in the harvest quadrant could consider plans to segment/micro-segment their customer bases and to craft growth strategies for each targeted segment/micro-segment.

In summary, consider using the relative profitability and growth 2 × 2 matrix to assess a firm’s profitability and growth relative to its industry and, by so doing, identify and classify performance in a succinct format that facilitates further analysis and subsequent communication of the findings.

For top insurance companies, customer focus and merger mastery produce superior results Nick Palmer, Scott Tanner, Christine Detrick and Ingo Wagner

What truly propels property and casualty industry leaders to reach their peak performance? Surprisingly, none of the many industry yardsticks – including earnings growth or the bellwether combined ratio (the percentage of total premium income spent on policyholder claims and operating expenses) – consistently demonstrated statistically significant links to shareholder returns. The answer: high-performance property and casualty insurers deliver revenue that increases at a brisk, steady pace. On average, each additional percentage point of revenue growth generates an equivalent increase in the total shareholder return premium, or the amount by which shareholder return produced by the company beat its national index average.

But growth also has its limits. Companies that post flashier, but more erratic, growth rates exceeding 25 percent per year, on average, produce smaller incremental return premiums. Beyond that threshold, each additional percentage-point increase in top line growth has a less predictable, and considerably smaller, impact on total shareholder return.

Successful paths to steady growth

1. 1.

   Cultivate organic growth. Identify the most valuable customers and invest to increase sales to them; recruit new clients through referrals; and lift retention rates. Mastering a company-wide customer focus is crucial. Customer-led insurers systematically track how well they meet or exceed their commitments across their entire customer base. They focus on knitting stronger bonds with current policyholders and recruiting new ones. The three “Ds” (design, deliver, develop) approach is explained.

2. 2.

   Avoid large mergers. Insurers that rely on mergers and acquisitions to boost revenues make regular, modest-sized deals to add real value, and they integrate their new acquisitions quickly and seamlessly. Smart acquirers actively scout M&A opportunities across all phases of the insurance cycle and typically focus on doing many mid-sized targeted deals that complement the core business. In contrast, insurers with strong but volatile revenue growth rates made far fewer, but much larger acquisitions, and typically generated significantly lower average returns.

3. 3.

   Weave organic growth and acquisitions into a virtuous cycle of revenue expansion, pursuing deals that reinforce their ability to deliver customer value.

Why is synergy so difficult in mergers of related businesses?Sayan Chatterjee

The claim that synergy will result from a deal is frequently used by management to justify a merger. Yet the facts show that prospective “synergy” is frequently associated with merger failure: it exacerbates overpayment and integration problems. Numerous cases are cited in this article.

Definition of synergy

Synergy arises when the combination of disparate parts within the same organization can lead to more revenues and/or efficiency than the individual parts could deliver as stand alone units.

This sounds so logical. Yet, synergy is difficult to achieve by merely adding new technology or talented employees when the process by which the interconnected activities (processes that increase efficiency or value to customers) is complex. In almost all cases, these complex business operations were developed internally and often over a long period of time. There have been many mergers, such as AOL/Time-Warner, that have tried to create these complex interactions post-merger, with no success. Among these, the ones that get the most attention are synergistic mergers of equals. They are often a bet-the-company initiative. While these mergers can sometimes lead to spectacular successes, such as Kraft-General Foods and Novartis, the odds are heavily stacked against a merger of equals or large complex mergers in general. They are just too difficult to integrate.

How to reduce valuation risks

Managers should expect synergistic mergers to be difficult and success elusive. Here is a checklist to avoid some major pitfalls:

1. 1.

   Avoid high-pressure deals.

2. 2.

   Favor same industry mergers.

3. 3.

   Synergies in cost reductions are easier than revenue increase.

4. 4.

   Clarify the source of revenue increase: it is very difficult to come to a definitive conclusion in advance about the potential for revenue increase, especially for related (as opposed to financial or unrelated) mergers. This makes it highly risky to establish revenue increase as the primary justification for such mergers.

5. 5.

   Do not make a bad situation worse: if you realize that it is too difficult to achieve synergy and the premium will not be recovered, do not to try to squeeze the acquisition to produce a quick profit. Trying to force the issue may well lead to the target firm losing ground to its competitors.

6. 6.

   Never attempt a synergistic hostile takeover.

7. 7.

   Be extremely circumspect when contemplating one-off mergers or acquisitions. Because they are unique, a repeatable acquisition process can not be used. Thus, synergistic mergers or acquisitions are more likely to be excessively costly and to experience integration problems.