Strategy in the media

Citation

Henry, C. (2007), "Strategy in the media", Strategy & Leadership, Vol. 35 No. 6. https://doi.org/10.1108/sl.2007.26135fac.003

Strategy in the media

Strategy in the media

Craig Henry, Strategy & Leadership’s intrepid media adventurer, collected these sightings of strategic management in the news. A marketing and strategy consultant based in Carlisle, Pennsylvania, he welcomes your contributions and suggestions (Craighenry@aol.com).

Competitive advantage through strategic design

Corporate strategy, according to the classic definition, consists of the actions a company takes to gain competitive advantage. Executives invest enormous energy in product designs and long-range strategic plans, though many of these initiatives become obsolete as markets and competitors adapt, social norms and regulations evolve, and technologies advance. Yet most corporate leaders overlook a golden opportunity to create a durable competitive advantage and generate high returns for less money and with less risk: making organizational design the heart of strategy. It’s time for executives to recognize the strategic need to develop organizational capabilities that help companies thrive no matter what conditions they meet.

… Our research convinces us that in the digital age, there is no better use of a CEO’s time and energy than making organizations work better. Most companies were designed for the industrial age of the past century, when capital was the scarce resource, interaction costs were high, and hierarchical authority and vertically integrated structures were the keys to efficient operation. Today superior performance flows from the ability to fit these structures into the present century’s very different sources of wealth creation. By remaking the organization to mobilize the mind power of the workforce and tap into its underutilized talents, knowledge, relationships, and skills, companies can both help their people to undertake more rewarding, productive work and create sources of significant new wealth at relatively low risk.

Lowell L. Bryan and Claudia I. Joyce, Mobilizing Minds: Creating Wealth from Talent in the 21st Century Organization, (McGraw-Hill, 2007).

Outsourcing risk: “quality fade”

Recent media reports detailing a series of quality problems with Chinese-made exports – pet food tainted with prohibited chemicals, toys covered with lead paint and tires that fall apart at high speed – have understandably alarmed the American public and resulted in a number of international product recalls. But supply chain professionals not directly affected by these recalls remain unusually calm. “Everything will be all right,” said one US importer on a buying mission to China. “As the country continues to develop, the quality of its products will naturally rise.”

It’s the sort of comment that sounds logical, but is not necessarily true. Quality does not always rise over time, as China’s own history shows. At the end of the 19th century, the West rushed to buy China’s beautiful silk products. Demand quickly expanded, and new players moved into the market. As competition intensified, manufacturers began to cut corners on quality, and silk products out of China soon gained a reputation as inferior goods. By the beginning of the 20th century, traders were already looking elsewhere, and Japan, which had been building a reputation for delivering a more consistently high-quality product, became an attractive alternative. By 1930, Japan was exporting twice as much silk as China.

One of the problems facing China is that manufacturers continue to engage in a practice I call “quality fade.” This is the deliberate and secret habit of widening profit margins through a reduction in the quality of materials. Importers usually never notice what’s happening; downward changes are subtle but progressive. The initial production sample is fine, but with each successive production run, a bit more of the necessary inputs are missing.

Paul Midler, “‘Quality Fade’: China’s great business challenge,” Knowledge@Wharton, 25 July 2007, http://knowledge.wharton.upenn.edu/article.cfm?articleid=1776

Brand management in the age of Wal-Mart

The Economist magazine observed that every industry has its golden age. For brand manufacturers it was the middle of the 20th century, when distribution channels were fragmented and the media was consolidated. Powerful brand manufacturers like Coca-Cola, General Mills, Nestlé, Procter & Gamble and Unilever would delight their customers by launching one new product after another.

We are now in a new era where the retailers have power and have used it to transform the competitive brand landscape. With the rise of giant retailers like Aldi, Carrefour, Costco, Gap, Home Depot, IKEA, Staples, Limited Brands, Target, Tesco, Wal-Mart and Zara, there has been a private label revolution over the past two decades. This revolution has important implications for consumers, retailers and manufacturers.

The consumer wins

An overlooked story in the private label revolution has been the impact on consumer welfare. The mega retailers have used their negotiating power to push brand manufacturers to reduce their prices. Rather than pocket all these negotiating gains, retailers have ploughed a large part of them into price cuts for the consumer. There is little doubt that consumers have benefited from the price pressure global retailers like Costco, H&M, Lidl and Metro have put on other retailers as well as brand manufacturers. A McKinsey study estimated that, over the second half of the 1990s, Wal-Mart accounted for 12 percent of the productivity gains in the US economy.

The private label revolution can also claim credit for increased quality, product choice and price-value combinations available to consumers. The only way for manufacturer brands to compete against private labels is by launching innovative products and constantly improving quality. In the attempt to beat private labels, brand manufacturers have had to invest more time and money in doing so than they otherwise would have. Today, there are more products – and of better quality – because of the private label revolution …

As private label share grows, the competitive landscape requires a new approach by manufacturer brands. Growth in the developed markets will be hard and depends primarily on the ability to launch successful new innovative products and concepts. Given the resources needed to support ambitious new product programs, only brands with adequate size and share can be supported. The rationale to keep weak brands, those without top market share positions, is hard to see in most categories.

Nirmalya Kumar and Jan-Benedict E.M. Steenkamp. Private Label Strategy (Harvard Business School Publishing, 2007).

A new productivity paradox

I fear for the future of American business not because of US trade imbalances or budget deficits but because of the productivity of its corporations. America’s highly touted productivity may be destroying its legendary enterprise and many of its powerful enterprises.

Many of the claimed productivity gains in recent years have amounted to productivity losses. To appreciate this, imagine what would happen if you fired everyone in your company and shipped from stock: working hours would disappear while output would continue. That would be extremely productive, and you’d make a lot of money in the bargain. Until, of course, you ran out of stock.

In my opinion, many American companies are running out of stock. They’re trading away their future health for short-term results. No CEO fires everyone, of course. But thanks to corporate subservience to shareholder value, which means driving up the price of a company’s shares as quickly as possible, CEOs have been finding all kinds of other ways to cash in the goodwill that accountants and economists have trouble measuring.

Trashing the brand is one easy way. Cutting R&D is another. Then there is managing by the numbers: The CEO decrees the desired results, and everyone else has to run around meeting them no matter what the consequences.

Most popular of all, of course, and closest to shipping from stock, has been “downsizing,” a euphemism for firing operating workers and middle managers left and right to cut costs. At the drop of the share price, even as the company remains profitable, out the door they go: bones thrown to the hungry dogs of the financial community.

How could so many people suddenly have become redundant? Were American enterprises that bloated? Or have irresponsible leaders, unable to create real value, simply dumped their failures on the workers and managers, both those who were fired and worse those who remained? Considering the resulting burnout of these employees, the answer seems obvious.

Henry Mintzberg, “Productivity is killing American enterprise”, Harvard Business Review, July-August, 2007.

Calculating marketing ROI in service industries

How can a company with multiple marketing initiatives see a 500 percent return from one and a 25 percent loss from another and not know which is the winner?

In financial services, this problem is surprisingly common. Unlike other industries, such as consumer-packaged goods (CPG), most of the financial-services (FS) industry has not devised the capabilities necessary to fully interpret the vast amount of data it collects. Thus, FS companies frequently cannot analyze the return on investment (ROI) of their marketing spend. The industry lays out more than $10 billion annually for marketing. Its ad spending alone is approximately $8.5 billion, putting it fourth among all industries (behind automotive, retail, and telecom/Internet), according to Advertising Age – and that means a lot of money is going to waste.

Financial services are not the only industry in this bind. Health care, utilities, telecommunications, and the airlines are also heavily invested in marketing and unsure of the payback. This, in turn, leaves company executives in the dark about two critical aspects of their business: the effectiveness of their promotional efforts and the performance of their marketing chiefs.

The paradox for all of these industries, but especially financial services, is that these companies have access to a huge amount of consumer data, but lack the tools that most consumer goods companies use to gain an in-depth understanding of consumer behavior – coupons, point-of-sale data, discounting, and other types of trade expenditures. Further, CPG companies do not contend with certain complexities that affect the FS industry, such as interest rates, market psychology, or variations in customer profitability due to product mix.

Joni Bessler, Steven Treppo, and Ashok Notaney, “Services in search of true marketing ROI,” Strategy + Business, Summer 2007.

How safe is the USA’s technological edge?

Does the United States still lead in tech? …

On the positive side, this is the country where some of the most important breakthrough products are still being created. The iPhone came out of Cupertino. As the packages say: “Designed by Apple in California.” And here some of the most revolutionary new Internet businesses are still being incubated – including Facebook of Palo Alto, Second Life (created by San Francisco’s Linden Lab), and Salesforce.com, also of San Francisco. Each is pointing the way to whole new ways of doing things online.

But the equally-disruptive Skype came out of Europe, and Joost, launched by the same visionaries, seems a truly international company. Nokia of Finland continues to be the world’s largest cellphone-maker by revenues, and Samsung of Korea is close behind. SAP, of Germany, of course, still dominates the enterprise software business that Salesforce.com is unsettling …

But while Silicon Valley retains its unrivaled vitality, the rest of the world is now paying close attention and is never far behind. Every innovation is mimicked elsewhere. For instance, there is a German clone of Facebook, called StudiVZ.

My own best guess is that the next great hotbed for tech innovation will be China. It is steadily tightening the rules for software intellectual property protection. And a raft of amazingly fast-growing Internet businesses have already arisen, including portals Sina.net and Sohu, search engn8ine Baidu, game company Shanda, auctioneer Alibaba, and communications and gaming pioneer Tencent. Some number their customers in the hundreds of millions.

… the numbers are starting to favor China, which will eventually have the world’s largest domestic market in all parts of tech. It is already the world’s second-largest PC market, with 120 million installed PCs, and another 21 million expected to be sold this year, according to Microsoft. And in China there are an astonishing 460 million cellphone subscribers, by far the biggest such market anywhere. Tech innovation in China will garner customers and become fine-tuned, then begin penetrating markets elsewhere.

David Kirkpatrick,“The United States of technology?” Fortune, 6 July 2007.

Why the US lags in broadband

As the Internet has evolved – in particular, as dial-up has given way to broadband connections using DSL, cable and other high-speed links – it’s the United States that has fallen behind.

The numbers are startling. As recently as 2001, the percentage of the population with high-speed access in Japan and Germany was only half that in the United States. In France it was less than a quarter. By the end of 2006, however, all three countries had more broadband subscribers per 100 people than we did.

Even more striking is the fact that our “high speed” connections are painfully slow by other countries’ standards. According to the Information Technology and Innovation Foundation, French broadband connections are, on average, more than three times as fast as ours. Japanese connections are a dozen times faster. Oh, and access is much cheaper in both countries than it is here.

As a result, we’re lagging in new applications of the Internet that depend on high speed. France leads the world in the number of subscribers to Internet TV; the United States isn’t even in the top 10. What happened to America’s Internet lead? Bad policy. Specifically, the United States made the same mistake in Internet policy that California made in energy policy: it forgot – or was persuaded by special interests to ignore – the reality that sometimes you can’t have effective market competition without effective regulation.

Paul Krugman, “The French connections,” The New York Times, 23 July 2007.

Making acquisitions pay

To learn what works in M&A, McKinsey interviewed executives at some of the most acquisitive US companies and compared their different approaches to acquisitions with their performance in the capital markets. We found that companies whose deals reaped long-term rewards use M&A to support strategy, not as a strategy in itself. They seek acquisitions to supplement their capabilities, but since they know how hard it is to import a business’s superior know-how, they also pursue targets that would benefit from their capabilities and expand their scale.

Acquirers rewarded by the capital markets are realistic in other ways too: asked to explain why companies pursue acquisitions, their executives mentioned fewer reasons than those at unrewarded acquirers did, and none of their executives said that acquisitions should be made defensively, to block competitors. And some surprising lessons emerged – for instance, world-class M&A teams with lawyers and former investment bankers are not a differentiator of performance, but the tenure of a team’s members at their companies is.

“Why acquisitions succeed (and fail),” The McKinsey Quarterly, July 2007.

Six-sigma and innovation

Not too many years ago, the temple of management was General Electric. Former CEO Jack Welch was the high priest, and his disciples spread the word to executive suites throughout the land. One of his most highly regarded followers, James McNerney, was quickly snatched up by 3M after falling short in the closely watched race to succeed Welch. 3M’s board considered McNerney a huge prize, and the company’s stock jumped nearly 20 per cent in the days after December 5, 2000, when his selection as CEO was announced …

McNerney was the first outsider to lead the insular St Paul, Minn. company in its 100-year history. He had barely stepped off the plane before he announced he would change the DNA of the place. His playbook was vintage GE. McNerney axed 8,000 workers (about 11 per cent of the workforce), intensified the performance-review process, and tightened the purse strings at a company that had become a profligate spender. He also imported GE’s vaunted Six Sigma program – a series of management techniques designed to decrease production defects and increase efficiency. Thousands of staffers became trained as Six Sigma “black belts.” The plan appeared to work: McNerney jolted 3M’s moribund stock back to life and won accolades for bringing discipline to an organization that had become unwieldy, erratic, and sluggish.

… Now his successors face a challenging question: whether the relentless emphasis on efficiency had made 3M a less creative company. That’s a vitally important issue for a company whose very identity is built on innovation … It has been a long time since the debut of 3M’s last game-changing technology: the multilayered optical films that coat liquid-crystal display screens. At the company that has always prided itself on drawing at least one-third of sales from products released in the past five years, today that fraction has slipped to only one-quarter.

“At 3M, a struggle between efficiency and creativity,” BusinessWeek, 11 June 2007.

Microsoft confronts internal transitions and external disruptions

But as [Bill Gates] cedes Microsoft’s technology leadership to Mr. Mundie and Mr. Ozzie, the company is struggling with a radical transition in the computer industry …

During the transition, Mr Gates has also stayed closely involved in shaping Microsoft’s strategy in the search market where it has been assiduously attempting to catch Google and Yahoo.

“We made all the structural changes we were going to make, and we rode in tandem last year,” said Mr Mundie. “In the last few months Bill has transitioned to what I start to think of as special project mode.”

If he is stepping away from Microsoft, Mr Gates has shed none of his trademark combativeness. He rejected the Silicon Valley view that Microsoft has begun to exhibit the same sclerotic signs of middle age that IBM did when it dominated the computer industry, but failed to respond effectively to the challenge of the personal computer.

IBM is no longer at the center of the computer industry, he asserted, for two reasons. First, the industry is now centered on personal computing. “As much as IBM created the IBM PC, it was never their culture, their excellence,” he said. “Their skill sets were never about personal computing.”

Second, the center of gravity in the computer industry has dramatically shifted toward software, he said. “Why do you like your iPod, your iPhone, your Xbox 360, your Google Search?” he said. “The real magic sauce is not the parts that we buy for the Xbox, or the parts that Apple buys for iPhones, it’s the software that goes into it.”

“Microsoft’s Gates plans leave amid great change”, The New York Times, 30 July 2007.

Ebaying the advertising industry

Yes, it’s been a dizzying – and thrilling – past couple of years as new disruptive business models rise to the surface across every industry imaginable like digital froth bubbling over a cappuccino. Just last week I came across another one – this time for the ad industry – that I thought was cool, and worth sharing: OpenAd.net, a sort of eBay for advertising, marketing, and design ideas. How it works: any company looking for a creative idea posts a brief, a timeframe for turnaround, and how much they’re willing to pay. OpenAd’s global network of 8,000 creatives spanning 122 countries can compete for the business – and may the best ideas win.

The companies posting briefs can be anyone from a corporate behemoth like Coke, to a mom-and-pop shop NYC bodega; equally, the creatives competing can be a freelance art director in Ghana, or a creative team at Crispin Porter+Bogusky (assuming Alex okays it). Companies can access the best creative ideas from any corner of the earth, while creatives can win business for brands that otherwise wouldn’t let them past parking lot security. For instance, P&G posted a brief for a Gillette Fusion campaign in the US and Puerto Rico, and Indian agency Live 1 Entertainment won the business, licensing their idea to P&G for some $4,000. Talk about the borderless wild west.

Interestingly enough, OpenAd is hubbed in Slovenia: its cofounders are Katarina Skoberne, an English-French-Italian-German-Slovenian speaking former ad agency entrepreneur and TV-host (not to mention, she has a degree in electrical engineering), and Vital Verlic, a creative, who rolled out the site in 2003.

“Another Ad AGENCY Disruptor?,” Fast Company Blog, 31 July 2007, http://blog.fastcompany.com/ archives/2007/07/31/another& lowbar;adagencydisruptor.html

Artists and strategists

One of the main commonalities between excellence in art and excellence in strategy, Bill and I then agreed, lies in the degree to which the artist or the observer pays attention in observing his or her subject. This is essential to understanding what is really going on, so that strategy can align as closely as possible with the firm’s reality. Our previous experience, our personal biases, even our linguistic limitations, tend to hinder the degree to which we can accurately perceive reality. We are all prisoners of our paradigms, which is why it sometimes takes somebody from a completely different background to find the optimal solution to a difficult strategic problem especially where a new and original solution is indicated.

Just as less-than-exceptional artists might perceive a piece of paper that they want to illustrate as “white,” without appreciating the specific color or tone and the impact of light and shadow, so less-than-exceptional strategists might view complex interactions and influences in a firm as simple and use blunt instruments to try to “fix” them.

I am reminded of a quotation attributed to Albert Einstein, that for every problem there is a solution that is simple, neat, and wrong. For instance: the way to retain associates is simply to pay them more; installing more advanced technology will make people share knowledge more efficiently; improving the firm’s abilities in one or two areas will automatically dilute areas of weakness. Poor strategists default to the first simple and neat solution that emerges. Superlative strategists ensure that they understand the underlying forces and principles at play before they volunteer a diagnosis and thence an effective and sustainable solution.

Rob Millard, “Strategy as Art,” The Adventure of Strategy, 7 July 2007, www.robmillard.com/archives/off-the-wall-insights-strategy-as-art.html

Can innovation become truly democratic?

User-generated content – from Wikipedia to YouTube to open-source software – is generating waves of excitement. But the opening of innovation to wider numbers of people obscures another trend: many of the most popular new products, like the iPod, are dominated by a top-down, elite innovation model that doesn’t allow for customization.

“New technologies are becoming so complex that many are beyond the possibility of democracy playing a role in their development,” said Thomas P. Hughes, a science and technology professor at the University of Pennsylvania.

Consider: electronic implants into human bodies; gene-splicing as common as cosmetic surgery; computer networks mining vast databases to discern consumer preferences. All of these innovations are the result of corporate or government initiatives overseen by elites. “The process of innovation leaves out a huge proportion of the population,” said Daniel Sarewitz, director of the Consortium for Science, Policy and Outcomes at Arizona State University.

To be sure, experts like Eric von Hippel, a management professor at the Massachusetts Institute of Technology argue that the proliferation of “user-generated” designs signals the “democratizing” of innovation. Armed with inexpensive digital tools and networks, ordinary people, he says, can band together to push their own innovations. They also can hijack existing technologies, taking them in directions only dimly envisioned by the original creators.

One example is an electronic community called Instructables whose participants share methods for customizing standard products in unpredictable ways. The chief of Instructables, Eric J. Wilhelm, who earned his doctorate at MIT, where he was inspired by Mr von Hippel, has posted a clever means of turning a white Asics Gel-Foundation 7 running shoe into a purple model. (The $90 official version comes only in a white-black-and-blue combination.)

G. Pascal Zachary, “In a highly complex world, innovation from the top down,” The New York Times, 29 July 2007.

Efficiency, exploration, and innovation

The terms exploitation and exploration harken back to the oil companies who used to have (and had to have) two separate divisions. One division was responsible for exploiting existing fields, in which productivity was measured in barrels/day and $/barrel, and improvements could be proposed and tested with relative confidence. The skills of exploiting were disciplined management, analysis, and the routinization of work.

But wells inevitably dry up and market demands grow, so oil companies also needed a division that continuously explored for new oil fields. The skills of exploring for oil were independence, risk taking, intuition, and an ability to live out of a suitcase.

This tension was immortalized in the organizational literature by James March, one of the founding fathers of the field, in a brief 1991 article entitled “Exploration and exploitation in organizational learning.”

There are profound differences, however, between searching for oil and developing a firm’s next new products or strategies. One of the biggest differences is that, when oil is discovered, there is little doubt that it’s oil, that the organization is capable of exploiting it, and that it will contribute to the bottom line in some way at some time. This is more akin to discovering a warehouse of widgets just like the ones you’re already selling. Regardless of whether you drill six wells or 6,000, if one of them is a gusher nobody debates whether this will cannibalize existing markets, not work at all, distract from our current focus resources, etc …

I can’t recall a single innovative new product that was obviously and unambiguously valued in it early days by the organization. So there is more to innovation than simply exploring for new ideas.

What is missing is a very significant step that lies between innovation and operations (between exploration and exploitation): execution. At least, that’s what I would call it. It’s the process of converting an idea, even a prototype, into a set of resources, procedures, metrics, and marching orders that can enable an organization to effectively replicate, scale, and manage the new venture.

I move around in the worlds of design and innovation and have met a lot of wildly creative people. Having good ideas is actually pretty easy for them. I also work with a lot of smart people in operations, and knowing how to ferret out problems, reduce variability, and manage others to task comes pretty easily to them. The challenge is in how these people work together. Good ideas only help the company to the extent they can be routinized – exploiting the exploration.

The big challenge in managing innovation lies, I would suggest, not in building up two very strong skills in innovation and in operations, but rather in building the bridge between them–of developing the people and processes that facilitate the routinization of novelty. Of turning good ideas into practical processes that the larger organization can value, adopt, implement, and manage.

Andrew Harga, “Creative efficiency or efficient creativity?” The Harga-blog, 16 July 2007, www.andrewhargadon.com/blog/?p=111

Tipping point management

In the high brow stratosphere of marketing theory, one day it’s all about the niche (“long tail”), the next it’s all about the mass (“big seed”). Between Gladwell and Watts (who in 2003 penned the book, Six Degrees: The Science of a Connected Age, to much less fanfare), and Fast Company’s very own Made to Stick columnists, Dan and Chip Heath, it seems an entire academic generation has emerged around the study of: how to get our ideas, products and brands to stick. You could argue it’s the obsession of 21st century marketers.

Creamer goes on to interview a couple marketers who have discovered that Gladwell’s “tipping point” theory (which, as I wrote about in my January 2005 profile on Gladwell, has become fully operationalized at companies like Pepsi and Coke’s VitaminWater), is a hell of a lot more difficult to recreate, than it is to admire from a far. (Please, why is anyone surprised by this? Didn’t you learn by second grade that doing is always harder than pontificating?).

… Creating a tipping point phenomenon is not just some algorithm on Google or a magic widget you can click – it requires tireless hard work and attention, relentless strategy and creativity, and a deep respect for your audience so you can give them want they want, or better yet, what they don’t even know they want.

“Marketing: the anti-Gladwell” Fast Company Blog, 17 July 2007, http://blog.fastcompany.com/archives/2007/07/17/marketing_the_antigladwell.html

The importance of “dead evidence”

During World War II, statistician Abraham Wald tried to determine where to add extra armor to airplanes. Based on the patterns of bullet holes in returning airplanes, he suggested that the parts not hit should be protected with extra armor. Why?

Wald was looking at what is sometimes called “dead evidence.” He reasoned like this … if these planes are returning, we know that if they are hit in the spots they have been hit, they can still fly. The planes that did not return must have been hit in different places. So put the extra armor wherever the returning planes were not hit.

I think most people would have a natural inclination to put the armor where the returning planes had been hit. The real answer is simple, but counterintuitive. It’s called “dead evidence” because it is what people ignore when they make these judgments. For instance, you may see a story on TV about how to survive a plane crash. The producers will interview 10 plane crash survivors, and figure out what they did in common, then recommend that you do that too. What they don’t think about is how many people did those same things, but still died in the crash. The dead can’t be interviewed, so we will never know. How can you use this in your business? Think about the dead evidence. Don’t look just at winners, look at losers to see if they did the same things as the winners. Don’t just look at what the top companies in your industry are doing, look at what all kinds of different companies are doing. Sometimes you can learn more by looking at failures than at successes.

“What bullet holes in airplanes can teach you about making better business decisions”, BusinessPundit, 5 July 2007, www.businesspundit.com/50226711/what_bullet_holes_in_airplanes_can_teach_you_about_making_better_business_decisions.php