Quick takes

Citation

Gorrell, C. (2010), "Quick takes", Strategy & Leadership, Vol. 38 No. 2. https://doi.org/10.1108/sl.2010.26138bae.001

Quick takes

Article Type: Quick takes From: Strategy & Leadership, Volume 38, Issue 2

Catherine GorrellPresident 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.

How did strategic planning help during the economic crisis?James W. Wilson and Soren Eilertsen

Three hypotheses were tested in a survey of strategic planning practitioners against the background of their companies’ responses to the global financial crisis. They were, “If the company practiced strategic planning, with solid planning processes, then:”

1. 1.

   There was a high level of preparedness for the economic downturn.

2. 2.

   The company responded more proactively to the crisis to take advantage of opportunities, versus primarily responding defensively.

3. 3.

   The company had better financial results.

The findings showed some surprises and many nuances that offer improvement opportunities. Here are the key points of the survey analysis:

• •

  Few saw the magnitude of this economic crisis coming. Why? Across all respondents, the least expected changes were the speed, severity, and duration of the downturn.

• •

  The data suggest that an organization’s trust and confidence in strategic planning as a decision-making discipline is stronger indicator of potential success than the adoption of any particular strategic planning technique or principle.

• •

  Organizations that used strategic planning to make critical decisions were better able to pursue growth opportunities during a crisis.

• •

  Organizations that relied on strategic planning during the crisis are more confident about their prospects for near-term growth.

• •

  Organizations employing a regular strategic planning process and cycle were more prepared for the economic crisis.

• •

  Organizations that involve the entire executive team in strategic planning expect revenue growth over the next 12 months.

• •

  Larger organizations were more likely than small to pursue defensive actions in response to the crisis.

Lessons learned about strategic planning during the crisis

When asked what they would do differently in a future crisis based on their organization’s experience during the most recent strategic planning cycle, the most frequent areas of improvement cited included:

• •

  Strengthen strategic thinking: place more emphasis on scenario planning, trends analysis and client/market listening.

• •

  Institute strategic planning cycle: make the process more regular and important inside the organization.

• •

  Stronger connection to resource allocation: ensure that strategic plans allocate resources and connect to budgets.

• •

  Increase leadership engagement: more visibility and direct involvement in the strategic planning process by senior leaders.

• •

  Improve strategic action: enhance operational execution through better change and performance management as well as overall communications.

Looking ahead

These results suggest that organizations with the most serious commitment to strategic planning, those that actually rely of strategic planning principles and practices for decision-making during a crisis, are in a position to be proactive rather than reactive.

Shared leadership: from rivals to co-CEOsMaria Arnone and Stephen A. Stumpf

When are two leaders better than one? What are the benefits and pitfalls of shared leadership? How can dual leadership be performed successfully? A study of 19 companies with co- leaders provides answers.

Rationale for co-CEOs

A shared leadership structure results from both internal and external demands:

1. 1.

   To retain a high-performer who would otherwise leave.

2. 2.

   To provide the organization with a broader range of leadership styles, skills, and competencies.

3. 3.

   To facilitate a transition, as in making room for a new CEO while the incumbent is eased out.

4. 4.

   To effectively respond to growth through geographic expansion or merger.

Challenges and benefits

Implementing a co-leadership has yielded mixed results. It can be a tough road emotionally and functionally. For example, the co-head structure runs counter to a desire to be the sole leader of the pack, which is what made the leader successful. Yet, although challenging, the top five benefits cited for the co-head structure are: better decisions, stronger business results, more opportunities for business development, more positive work culture and decreased stress.

Implementation recommendations

1. 1.

   Discuss the end-game at the beginning. Without a clear reason for creating dual leadership, the co-heads tended to invest precious energy in second-guessing their partner’s motives.

2. 2.

   Delineate the desired outcomes for each individual as well as the risks of the partnership as integral parts of the initial contract. Without a detailed level of understanding at the outset, time will be lost later negotiating and politicking rather than leading the enterprise.

3. 3.

   Explore the business philosophy within the firm for shared leadership roles, including how the firm measures and rewards cooperation across business units so as to provide the necessary context for resolving issues as they arise.

4. 4.

   Create an explicit understanding and agreement on how each is to serve clients and customers – avoiding conflicting advice and gamesmanship in the service relationship.

5. 5.

   Enhance communication through various group reporting structures, being sure to include discussions by functional area, product, project, and geography to ensure that issues with longer-term implications and less urgency are not neglected.

Takeaway

Co-heads have been used to lead successfully in dozens of world-class businesses. While the structure can be a lasting one, adopting co-head roles is best thought of as an interim strategy that requires careful consideration of corporate context and competitive environment and the risk factors involving the personal dynamics of shared leadership.

Competing through co-creation: innovation at two companiesVenkat Ramaswamy

The advent of the Web and ubiquitous connectivity in the hands of millions of citizens has fostered new social interactions and unleashed a democratic and decentralized force of participation in the company and in society, beyond institutional boundaries.

The single most important shift leaders must make is to recognize the centrality of individuals. Whether in their roles as customers, employees and stakeholders, individuals are increasingly informed, connected, networked and empowered. In short, individuals and their interactions and human experiences have become the new locus and basis of value creation.

The “so what” and “how” for business leaders

Society is moving towards an individual- and experience-based view of co-creative engagement among individuals and institutions – outside and inside enterprises. It’s a change in the business environment that has profound implications.

A few innovative firms are learning new ways of collective engagement and value co-creation. The French telecom company Orange has gained significant competitive advantage using the co-creative enterprise business concept to generate sustainable growth. More specifically, Orange’s focus is on co-creating experience environments with their customers and the industry mavens.

But to sustain co-creation, leaders need to guide the building of co-creative management capabilities inside their organizations. This entails designing co-creative decision- making and management capabilities. Perhaps one of the best examples of an enterprise that is undergoing such an organizational makeover is Cisco Systems, Inc.

Cisco’s CEO John Chambers understands that networks are about people enabled by technology, not the other way around. Cisco’s governance design supports continual interaction. Going further, it is attempting to extend its co-creative governance frameworks through collaborative interactions with its customers and partners.

Masterclass: how innovation in “product language” can overturn markets – the power of emotion-focused designBrian Leavy

The locus of innovation is shifting from creative product and process design to the notion that value innovation involves a breakthrough in the value-to-cost ratio, which may or may not involve a breakthrough in technology.

Three prominent variations of value innovation show different routes to breakthroughs:

• •

  Disruptive innovation focuses on the potential below the base of the current market pyramid to create a whole new growth segment by making current offerings simpler, more affordable and easier to use.

• •

  Blue ocean strategy looks to create new aggregations of demand through realigning traditional market boundaries.

• •

  Co-creation of value seeks to generate whole new levels of personalization at lower cost, through harnessing recent unprecedented advances in producer-consumer connectivity.

Roberto Verganti’s “design-driven innovation concept offers a further variation on the value innovation – value breakthrough based on the radical innovation of product meanings. The term denotes “an innovation in which the novelty of a message and of a design language prevails over the novelty of functionality and technology.”

According to Verganti, three types of knowledge are essential for innovation:

• •

  User needs,

• •

  Technological opportunities, and

• •

  Product languages –the “signs and symbols that will deliver a particular product message, as well as the semantic context (or socio-cultural models) through which the user will give meaning to these signs.”

Innovation theory and practice has tended to focus on two strategies, “technology-push” and “market-pull” by user needs. Design-driven innovation offers a third strategy, one that “balances” the three types of knowledge in a very different way. Innovation is the product message and meaning.

A real world example is Swatch (the watch company). It has introduced emotion-inspiring new product messages into the marketplace and created huge new market opportunities as a result.

We are not just offering people a style. We are offering them a message. This is an absolutely critical point. There are many elements that make up the Swatch message. High quality. Low cost. Provocative. Joy of life. But the most important is the hardest to copy. Ultimately we are offering them our personal culture (Nicholas Hayek, Chairman of the Swatch Group).

Design-driven innovation represents another powerful development, to be shared with every innovation team.

Design thinking: achieving insights via the “knowledge funnel”Roger Martin

Over the past decade, a few leading companies have adopted “design thinking” as a practical means of developing new business models. The basis for this approach is a radical understanding of innovation: the “knowledge funnel” concept. The author takes the reader step-by-step through the design of business via the knowledge funnel – from mystery to heuristic to algorithm–and then the utilization of the resulting efficiency to tackle the next mystery and the next and the next.

To understand how the knowledge funnel works, the author re-examines how a burger joint became the McDonald’s global brand. The business was first established in 1940 by the McDonald brothers in San Bernardino, California as a drive-in hamburger restaurant. After a decade of experimentation with a variety of menus and formats, the owners sold the business to Ray Kroc. He perfected and simplified the McDonald’s system. In every phase of operations, judgment was removed, possibilities were removed, and variety was removed.

The path taken by the McDonald’s and Kroc illustrates three steps of the knowledge funnel process:

1. 1.

   Pinpointing a market opportunity (Selecting a particular “mystery” to be solved – What might the impact of post-war mobility be on American eating habits?).

2. 2.

   Devising an offering for that market (An initial heuristic or “rule-of- thumb” – Americans want a quick, convenient, tasty meal).

3. 3.

   Codifying its operations (Converting heuristic to algorithm – Kroc systematized McDonald’s).

It’s a model for how businesses of all sorts can advance knowledge and capture value, and is basically the same route followed by successful business innovators in every domain. The author contends that increasing the velocity of movement through the knowledge funnel will be the most significant way to achieve competitive advantage in the twenty-first century.

Disney’s Marvel acquisition: a strategic financial analysisJoseph Calandro Jr

Disney recently acquired Marvel Entertainment, Inc. for $4 billion, which was approximately 29 percent greater than Marvel’s market value at the time. This represented a 20.2 percent compounded return for the Marvel management. Clearly, Disney’s acquisition was a stunning success for Marvel’s top shareholder, but did Disney pay too much? A detailed analysis using a somewhat obscure valuation system provides a surprising answer. The case offers executives many lessons because it involves an acquisition that is both a tempting prize and something of a puzzle to evaluate:

• •

  The purchase of Marvel was attractive because it was seemingly a strategic fit for Disney and was also offered at what appeared to be a reasonable price.

• •

  Assessing such opportunities in the manner presented here facilitates greater levels of insight into key deal assumptions, value drivers, risks, and post acquisition strategies.

Standard methods make problematic assumptions

Acquisitions are generally priced using one of three popular approaches:

1. 1.

   Discounted cash flow – assumes that reasonable estimates of future cash flows can be made in the present.

2. 2.

   Multiple-based valuation – derives a price based on some financial variable such as revenue or book value and assumes that one compound of one variable accurately represents a firm’s value.

3. 3.

   Comparables – assume that the value of similar firms serves as a reasonable proxy for the value of a firm at interest, and also that the proxy firms were valued appropriately.

Each of these approaches also tends to be divorced from strategy. For example, rarely are specific risks linked to a valuation. Instead, they tend to be embedded in a discount rate estimate. As another example, growth tends to be modeled on very broad assumptions that rarely tie back to specific strategic plans and performance measures. Drawbacks such as these could contribute to the failure of many past deals.

Why Graham and Dodd?

As an alternative approach, the modern Graham and Dodd method, which is employed by outstandingly successful investors like Warren Buffett, considers valuation differently. It addresses key assumptions upfront in the valuation. This is significant because many valuation assumptions are strategic in nature and therefore require strategic input to address properly. The Graham and Dodd approach integrates strategic and financial analyses and inputs in one overall, cross-discipline framework. This perhaps explains why it has been so successful in practice, and why it is an ideal method for corporate M&A.

The bottom line

Based on a Graham and Dodd analysis, Disney’s $4 billion was too much to pay for Marvel.

Narrative vs PowerPoint: for leaders, it may not be a matter of factMichael Carriger

Many companies hold an annual meeting to tell their employees about the corporate strategy, the successes of the previous year and corporate objectives. And the presentation typically relies on a PowerPoint presentation to deliver the message.

One company surveyed employees several months after such a presentation, and found that they held a wide range of views of what corporate strategy the firm was pursuing.

To address this problem, there is a case to be made that corporations need replace their PowerPoint presentations (as their primary means of communicating company strategy) with a comprehensive program that includes a memorable narrative or story to make strategy persuasive and memorable – one that will capture hearts and minds as well as drive strategy. A case study of a defense contractor’s internal communications program to explain corporate strategy is offered to illustrate this premise.

Conclusion

The use of a carefully crafted narrative along with other associated communications programs may facilitate one of the most difficult challenges facing leaders: the dissemination of a well-defined strategy throughout the organization. A clearer and more consistent understanding of it by the employees will lead to more effective execution of the corporate strategy.