Strategy in the media

Citation

Henry, C. (2010), "Strategy in the media", Strategy & Leadership, Vol. 38 No. 4. https://doi.org/10.1108/sl.2010.26138dab.001

Strategy in the media

Article Type: CEO advisory From: Strategy & Leadership, Volume 38, Issue 4

Craig HenryStrategy & Leadership’s intrepid media explorer, 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).

C.K. Prahalad (1941-2010)

C.K. Prahalad, the Paul and Ruth McCracken Distinguished University Professor of Strategy at the University of Michigan’s Stephen M. Ross School of Business, passed away in San Diego on April 16 at the age of 68…

www.bus.umich.edu/NewsRoom/ArticleDisplay.asp?news_id=19158

Remembering C.K. Prahalad

I met C.K. for the final time just last month, in Boston. We sat at a restaurant in the Westin Copley Hotel, eating sandwiches and discussing our latest passions. C.K. had recently co-written an important piece for HBR on how sustainability has become the most important driver of business innovation. He had several projects in the pipeline including what turned out to be his final column for HBR, an explanation of why companies so often fail to deal with their most obvious challenges, which we’ll publish in our June issue.

C.K. also expressed enthusiasm about a book he was co-writing for HBR Press with HBR editor at large Anand Raman, on how some of the best management ideas these days are coming from India and the other emerging markets, and are reshaping management theory.

I asked how he could be so prolific, writing intelligently about so many subjects. His secret, he said, was to collaborate whenever possible with a strong partner. “I work hard and I work quickly,” he said. “But once I’m done with a project, I like to move on to a new one, and leave it to my collaborators to deal with the legacy of the last one.”

Adi Ignatius, “C.K. Prahalad,” HBR Editors blog, April 17, 2010, http://blogs.hbr.org/hbr/hbreditors/2010/04/ck_prahalad.html

C.K.’s remarkable ideas

C.K. Prahalad’s death brings a premature end to what was a remarkable and highly productive career. Over the last three decades C.K. launched radical new ideas which would soon become conventional wisdom.

With Yves Doz, in 1987, he produced one of the first successful analyses of the way multinational companies operate in the modern era (in The Multinational Mission).

With his former pupil Gary Hamel, in the early 1990s, he developed the now unexceptional concept of “core competencies” (in Competing for the Future, 1994). With Venkat Ramaswamy, in 2004, he explained how the new world of interconnected business was transforming the way companies had to deal with their customers, a process they called “co-creation” (in The Future of Competition).

And perhaps most significantly of all, also in 2004, he published The Fortune at the Bottom of the Pyramid, a book that challenged global business to consider serving the billions of people earning only a few dollars a day. In fast-developing markets all around the world, CK’s doctrine now holds sway. More than any other figure, he has provided a manifesto for how global business might prosper.

Stefan Stern “ Manifesto writer for business survival,” Financial Times, April 18, 2010.

The secret of low-cost winners

A lot of companies in a lot of places these days have been struggling to cut costs. Most of them are discovering the hard way that they have for too long put up with too much redundant and wasteful activity. For many, the problem is only starting, largely because thus far they are simply “mandating” cost reductions either across the board or to meet hastily set one-time targets. For these companies, cost cuts are likely to be no more enduring than a one-time haircut.

A few special companies, however, have taken the recessionary squeeze pretty much in stride. These are companies who, like Southwest Airlines, FedEx, and Emerson Electric, have historically been the role models for low cost operation. They seem to always have a cost advantage, and as a result they get through tough times almost as easily as they capitalize on good times. It’s not that they don’t tighten their belts when the economy dries up a bit; rather it is that they seem to know where and how to tighten in ways that do not inhibit their long-term capability to compete and grow.

What’s in their secret sauce?

In a nutshell, it is a culture that is “proud to be cheap” in good times and bad. Their people cut erasers in half, turn off the lights when they leave the building, bring their lunch to work, fly in the back of the bus, and stay in Day’s Inns. More important, they are always on the alert for ways do things on the job more cheaply, without compromising quality and service standards. Nothing is wasted, nothing is redundant, and nothing is overlooked when it comes to doing it on the cheap …

We think that “proud to be cheap” captures the mind-set of people in all parts of these enterprises. Moreover, their leaders seem to instinctively recognize that if you are motivating instead of mandating low cost rigor, you will capture the emotional as well as the rational side of human behavior. Anyone who has ever flown on SWA knows how much fun employees have – and how infectious it is to their customers, who’d rather eat peanuts on SWA than a meal on some other airlines.

Jon R. Katzenbach and Zia Khan, “Proud to be cheap: the ‘secret sauce’ of low-cost winners,” Conversation Starter, April 19, 2010, http://blogs.hbr.org/cs/2010/04/proud_to_be_cheap_the_secret_s.html

After the crash-wrenching structural change

Each year Booz & Company’s industry teams write perspectives for their clients, reflecting on the previous year and considering what may come in the year ahead – and how to respond to it. Not surprisingly, the perspectives for 2010 (12 in all) were dominated by gloomy pronouncements of the damage left by the global recession: The US$2 trillion chemicals industry is attempting to “rebound from its worst year ever”; in financial services, more than 120 banks failed and a “doomsday scenario was [narrowly] averted”; in technology, Microsoft suffered its first revenue decline ever in 2009, while semiconductor sales fell 11 percent; the engineered products and services (EPS) team wrote that “Wall Street cast doubt on the future of many US companies as their valuations plummeted.” (Only six of the 30 companies that make up the Dow Jones Industrial Average still come from the EPS sector.)

But in addition to the long shadow cast by the economic crisis, this year’s industry outlooks also contain a collective note of warning that deserves even more attention: A handful of underlying structural changes – in demographics and consumer economics, globalization, and sustainability – are having a more irrevocable, dislocating effect on virtually every industry than the financial meltdown ever could. Worse yet, although most companies recognize that they must transform to survive and succeed in the future, they are ill equipped to do so. Many lack the capabilities they will need; most are not properly structured to respond to these changes as they unfold.

The impact of these trends varies by industry. Oil and gas is more affected than retail banking by sustainability; globalization is reshaping chemicals more than, say, utilities. Yet no company will fully escape the reach of these trends …

Virtually all companies need to aggressively formulate and execute strategic responses to the overarching forces that are influencing their industry. The process begins with a dispassionate, focused analysis of existing assets and capabilities, and an assessment of their “fit” in a rapidly changing global landscape. Through that analysis, the path forward will become clear. It will mean holding and further developing the best assets, selling off or shutting down those that will never deliver strong performance, and inorganically filling gaps as needed. For business-to-business and business-to-consumer companies alike, it will also mean sharpening capabilities along the value chain – from sourcing through customer delivery and service – to identify and capture available growth opportunities while controlling costs at every turn.

Karen Henrie, “Six industries in search of survival,” Strategy+Business, March 2010.

Are productivity gains illusory?

For a quarter-century, American economic policy has assumed that the keys to durable national prosperity are deregulation, free trade and a swift transition to a post-industrial, services-dominated future.

Such policies, advocates say, drive innovation, which leads to enormous labor productivity and wage gains – more than enough, supposedly, to make up for the labor disruptions that accompany free trade and de-industrialization.

In reality, though, wage gains for the average worker have lagged behind productivity since the early 1980s, a situation that free-traders usually attribute to workers failing to retrain themselves after seeing their jobs outsourced.

But what if wages lag because productivity itself is being grossly overstated, especially in the nation’s manufacturing sector? Then, suddenly, a cornerstone of American economic policy would begin to crumble.

Productivity measures how many worker hours are needed for a given unit of output during a given time period; when hours fall relative to output, labor productivity increases. In 2009, the data show, Americans needed 40 percent fewer hours to produce the same unit of output as in 1980.

But there’s a problem: labor productivity figures, which are calculated by the Labor Department, count only worker hours in America, even though American-owned factories and labs have been steadily transplanted overseas, and foreign workers have contributed significantly to the final products counted in productivity measures.

The result is an apparent drop in the number of worker hours required to produce goods – and thus increased productivity. But actually, the total number of worker hours does not necessarily change.

This oversight is no secret: as Labor Department officials acknowledged at a 2004 conference, their statistical methods deem any reduction in the work that goes into creating a specific unit of output, whatever the cause, to be a productivity gain.

This continuing mismeasurement leads economists and all those who rely on them to assume that recorded productivity gains always signify greater efficiency, rather than simple offshoring-generated cost cuts – leaving the rest of us scratching our heads over stagnating wages.

Of course, just because productivity is mismeasured doesn’t mean that genuine innovations can’t improve living standards. It does mean, however, that Americans are flying blind when it comes to their economy’s strengths and weaknesses, and consequently drawing the wrong policy lessons.

Above all, if offshoring has been driving much of our supposed productivity gains, then the case for complete free trade begins to erode. If often such policies simply increase corporate profits at the expense of American workers, with no gains in true productivity, then they don’t necessarily strengthen the national economy.

Alan Tonelson and Kevin L. Kearns, “Trading away productivity,” The New York Times, March 5, 2010.

The process for decision making matters to the bottom line

Once heretical, behavioral economics is now mainstream. Money managers employ its insights about the limits of rationality in understanding investor behavior and exploiting stock-pricing anomalies. Policy makers use behavioral principles to boost participation in retirement-savings plans. Marketers now understand why some promotions entice consumers and others don’t.

Yet very few corporate strategists making important decisions consciously take into account the cognitive biases – systematic tendencies to deviate from rational calculations – revealed by behavioral economics. It’s easy to see why: unlike in fields such as finance and marketing, where executives can use psychology to make the most of the biases residing in others, in strategic decision making leaders need to recognize their own biases. So despite growing awareness of behavioral economics and numerous efforts by management writers, including ourselves, to make the case for its application, most executives have a justifiably difficult time knowing how to harness its power.

This is not to say that executives think their strategic decisions are perfect. In a recent McKinsey Quarterly survey of 2,207 executives, only 28 percent said that the quality of strategic decisions in their companies was generally good, 60 percent thought that bad decisions were about as frequent as good ones, and the remaining 12 percent thought good decisions were altogether infrequent. Our candid conversations with senior executives behind closed doors reveal a similar unease with the quality of decision making and confirm the significant body of research indicating that cognitive biases affect the most important strategic decisions made by the smartest managers in the best companies. Mergers routinely fail to deliver the expected synergies. Strategic plans often ignore competitive responses. And large investment projects are over budget and over time – over and over again …

Our research indicates that, contrary to what one might assume, good analysis in the hands of managers who have good judgment won’t naturally yield good decisions. The third ingredient – the process – is also crucial …

Dan Lovallo and Olivier Sibony, “The case for behavioral strategy,” McKinsey Quarterly, March 2010.

Only “ruthless realism” can overcome strategic denial

The A&P had for most of its history been the low-price-grocery leader. But this is a position you can only hold if your costs are lower than your competitors. Through its steady disinvestment in its stores, through its high-priced union contracts, through its ill-advised store-site-location practices, and through a dozen other avoidable errors the A&P lost that position. This fact it learned the hard way in 1972 when it launched a price war.

The hostilities were conducted under the banner of WEO, which was supposed to stand for “Where Economy Originates.” This ugly, clumsy slogan, which sounded like “we owe,” heralded a catastrophic year for the company. Sales increased but losses skyrocketed. A&P lost the price war it started, proving only that it could give away the store.

The most puzzling aspect of the price war is why A&P initiated it. During 1971, published figures – please note that everyone knew this; none of it was secret-indicated that the A&P’s stores were inferior to those of the four other leading chains. Sales per employee, for example, were almost 45 percent lower than at Jewel. Sales per store were almost 60 percent lower than at Food Fair …

My own view is that the closest we will get to an answer is: “They just didn’t believe these things were happening.” That statement, made by a former A&P executive in 1973, captures the essence of denial …

This answer raises another question. Why didn’t they “believe these things were happening”? Because, I think, they saw everything through the lens of their history of market leadership. They felt that because they had been leaders for so long, every problem was an outlier, a blip on the screen, not a harbinger of things to come.

Richard S. Tedlow, Denial: Why Business Leaders Fail to Look Facts in the Face – And What to Do About It (New York: Portfolio, 2010).

Adapting to climate change

About a decade ago, Miguel Torres planted 104 hectares of pinot noir grapes in the Spanish Pyrenees, 3,300 feet above sea level. It’s cold up there and not much good for grapes – at least not these days. But Torres, the head of one of Spain’s foremost wine families, knows that the climate is changing.

His company’s scientists reckon that the Rioja wine region could be nonviable within 40 to 70 years, as temperatures increase and Europe’s wine belt moves north by up to 25 miles per decade. Other winemakers are talking about growing grapes as far north as Scandinavia and southern England.

Torres’ Pyrenees vineyards are a hedge, and may not be necessary. But if climate change redraws the map of Europe’s wine world, he will be prepared. And his company will be one of a very few taking steps to adapt to the future effects of climate change …

Most companies seem to focus solely on mitigating changes to the climate: reducing carbon emissions, improving environmental sustainability, and striving to be enlightened stewards of the planet. Adaptation is the opposite, more-pessimistic approach: It is about ensuring survival in the exceedingly likely event that climate change continues …

There are, to be sure, a few examples of corporations that are treating climate change as an ominous reality, or even as an opportunity. The biggest funders of Brazilian agricultural projects, state-owned banks BNDES and Banco do Brasil, are looking carefully at whether it makes sense to support projects which might not be viable in 20 or 30 years’ time. Agribusiness giants like Cargill and Monsanto are developing hardier crops, global shipping firms are planning for an ice-free Arctic passage, and power company TransAlta has scrapped potential new plants in the American West because it couldn’t ensure that water rights would be available for the next 40 years.

But those are at the margins. In the mainstream business world, climate change adaptation strategies are scant. The reasons for inaction are sometimes simple, but also counterintuitively complex.

Start with the superficial: Adaptation strategies have essentially zero PR value. They have nothing to do with saving the planet. Instead, they’re all about trying to thrive if and when the planet starts to fall apart. That’s not something any savvy company wants to trumpet to the world.

Then there is the mismatch of time horizons. Climate change takes place over decades, and corporate timescales generally max out in the five-to-seven-year range. Businesses typically won’t spend significant money planning beyond that period, especially because the effects on business models and future profitability are so difficult to predict.

Felix Salmon, “ Skipping the risk mismanagement,” Reuters, April 19, 2010, http://blogs.reuters.com/felix-salmon/2010/04/19/skipping-the-risk-mismanagement/

Understanding the building-blocks of smart wikis

Google. Wikipedia. Threadless. All are exemplars of collective intelligence in action. Two of them are famous. The third is getting there.

Each of the three helps demonstrate how large, loosely organized groups of people can work together electronically in surprisingly effective ways – sometimes even without knowing that they are working together, as in the case of Google. Google takes the judgments made by millions of people as they create links to web pages and harnesses that collective knowledge of the entire web to produce amazingly intelligent answers to the questions we type into the Google search bar …

To take advantage of the new possibilities that the inspiring examples represent, it’s necessary to go beyond just seeing them as a fuzzy collection of “cool” ideas. To unlock the potential of collective intelligence, managers instead need a deeper understanding of how these systems work. They need not magic, but the science from which the magic comes.

In our work at MIT’s Center for Collective Intelligence, we have gathered nearly 250 examples of web-enabled collective intelligence. At first glance, what strikes one most about this collection of examples is its diversity, with the systems exhibiting a wildly varying array of purposes and methods …

After examining these examples in depth, we identified a relatively small set of building blocks that are combined and recombined in various ways in different collective intelligence systems. To classify these building-blocks, we use four questions:

• •

  What is being done? Create or decide?

• •

  Who is doing it? Hierarchy or crowd?

• •

  Why are they doing it? Money, love, or glory?

• •

  How is it being done? Collection, collaboration, individual decision or group decision?

Thomas W. Malone, Robert Laubacher and Chrysanthos Dellarocas, “The collective intelligence genome,” Sloan Management Review, March 2010.

Middle market woes

While the high and low ends are thriving, the middle of the market is in trouble. Previously, successful companies tended to gravitate toward what historians of retail have called the Big Middle, because that’s where most of the customers were. These days, the Big Middle is looking more like “the mushy middle” (in the formulation of the consultants Al and Laura Ries). The companies there – Sony, Dell, General Motors, and the like – find themselves squeezed from both sides (just as, in a way, middle-class workers do in a time of growing income inequality). The products made by midrange companies are neither exceptional enough to justify premium prices nor cheap enough to win over value-conscious consumers. Furthermore, the squeeze is getting tighter every day. Thanks to economies of scale, products that start out mediocre often get better without getting much more expensive – the newest Flip, for instance, shoots in high-def and has four times as much memory as the original – so consumers can trade down without a significant drop in quality. Conversely, economies of scale also allow makers of high-end products to reduce prices without skimping on quality. A top-of-the-line iPod now features video and four times as much storage as it did six years ago, but costs a hundred and fifty dollars less. At the same time, the global market has become so huge that you can occupy a high-end niche and still sell a lot of units. Apple has just 2.2 per cent of the world cell-phone market, but that means it sold twenty-five million iPhones last year.

The boom in information for consumers has also severely weakened middle-market firms. In the past, these companies were able to charge a premium price because their brands were taken as signals of reasonable quality and reliability. Today, consumers don’t need to rely on shorthand: they have Consumer Reports and J.D. Power, CNET and Amazon’s user ratings, and so on, which have made it easier to gauge differences in quality accurately. The result is that brands matter less: a recent Nielsen survey found that more than sixty per cent of consumers think that stores’ generic products are equal in quality to brand-name ones. In effect, the more information people have, the tighter the relationship between quality and price: if you can deliver a product or service that is qualitatively better, you can charge top dollar. But if you can’t deliver the quality you can’t get the price. (Even Apple, after all, couldn’t make Apple TV a hit.)

James Surowiecki, “Soft in the middle,” New Yorker, March 29, 2010.

Technology threatens the airlines

One of the next candidates for rapid disruption is the airline industry. Everyone knows that airlines are under siege these days – from fluctuating fuel prices, security concerns, and an economic downturn that has reduced business travel. But what we (and industry executives) may not realize is that the biggest threat to the airlines is a disruptive set of solutions that will dramatically reduce the need for air travel altogether.

The “solutions” I’m referring to are virtual meetings – including teleconferences; web-based meetings attended on personal computers and handheld devices; and videoconferences. The problem that these solutions solve is how to get people together in real time in a way that they can interact naturally, build relationships, solve problems, and share information – without having to travel.

I recently had an opportunity to utilize high-end videoconference technology as part of a workshop I conducted for forty managers who were in five different locations in North America and one location in India. On two consecutive days, we held four-hour sessions with all the participants – with a mix of lectures, discussion, breakout groups, and report-outs. Much to my amazement, the technology supported extremely robust interactions with people chiming in from all of the locations. There were no delays, pauses, or interruptions; and everyone could view the slides and, at the same time, see anyone who was speaking. In addition, the high definition screens were so clear that you could read the ingredients on the soda cans on the tables at the other sites. After a few minutes, it was easy to forget that we were in multiple locations around the world …

As these technologies and solutions become more robust, less expensive, and more ubiquitous, they truly will shrink the world so that everyone can participate easily in what Cisco calls the “human network.” It’s a nightmare scenario for the airlines and their suppliers – even though they may not yet realize it as they continue to buy bigger planes and plan larger airports. But for the rest of us, it might just make the global world an easier place to do business.

“Rapid Ddisruption’s Next Victim,” HBS Conversation Starter, April 13, 2010, http://blogs.hbr.org/ashkenas/2010/04/rapid-disruptions-next-victim.html

Using scenarios to anticipate revolutionary change

Thomas Barnett in his book The Pentagon’s New Map describes a brief that he gave senior US Naval commanders shortly following the demise of the Soviet Union, on the best policy to adopt towards what had become the Russian Navy. The prevailing wisdom at the time was that the fledgling Russian Navy was every bit as much a threat as was its predecessor and that the policy should be to continue to stonewall them on arms control. Barnett saw the possibility of different scenarios emerging. His analysis concluded that wider economic pressures could well ensure that the Russian fleet would wither away by the end of the 20th Century. His story contains lessons for strategists trying to effect change in any kind of organization.

Barnett’s approach to his research and scenario-building was unorthodox. More like a businessman than a military analyst, he focused on a wide range of issues including the composite age of the fleet and the cost of maintaining the ships and what new ships and submarines could be built amidst the reality of a collapsing economy and radically slashed defense budgets.

The recommendation in his brief to what he calls the “die-hard Cold [War] Warriors” in the room was that the US Navy should abandon arms control and instead ramp up cooperation with the Russian Navy as a potential ally. He was not well received. Several of the admirals questioned his sanity …

He had identified the underlying vectors accurately and they were inexorable. The decline of the Russian Navy through the 1990s ended up being every bit as profound as had been assumed under Barnett’s most optimistic scenario…

Three important lessons, though, for strategists in general:

1. 1.

   When developing scenarios, especially under conditions of rapid and profound change like today, do use a wide range of sources from different disciplines. Extrapolating conventional wisdom from the immediate environment (e.g. law firms looking only at the issues emanating from/within the legal profession) leads often to flawed assumptions that may be dangerously so.

2. 2.

   Once you have developed confidence in your conclusions, stick with them unless compelling evidence to the contrary emerges. The disagreement of powerful people with what you have to say may be intimidating but it does not constitute such evidence.

3. 3.

   If you need to communicate difficult messages that imply fundamental, long-term change, then focus on the layer of leadership just below the top. These leaders are often more open to new ideas, may have a different perspective on reality and, in a couple of years, will be running the show.

Rob Millard, “The Russian Navy and law firm strategy,” Adventure of Strategy, April 14, 2010, www.robmillard.com/archives/off-the-wall-insights-the-russian-navy-and-law-firm-strategy.html