Quick takes

Citation

Gorrell, C. (2013), "Quick takes", Strategy & Leadership, Vol. 41 No. 3. https://doi.org/10.1108/sl.2013.26141caa.004

Quick takes

Article Type: Quick takes From: Strategy & Leadership, Volume 41, Issue 3

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

Three proven rules: discovering how exceptional companies thinkMichael E. Raynor and Mumtaz Ahmed

The Holy Grail of business is to discover a universal set of rules that capture the secret to the sustained performance of exceptional companies. The authors’ statistical analysis of data on over 25,000 companies from 1966 to 2010, has yielded insight into their decision-making criteria, and from this they have defined and tested a set of rules that applied regardless of the industry or circumstances.

The three rules:

1. 1.

   Better before cheaper.

2. 2.

   Revenue before cost.

3. 3.

   There are no other rules.

These rules are not truisms; the results might well have demonstrated the reverse: that cheaper is to be preferred over better, or that cost reduction drives profitability more than revenue growth. But the research proved otherwise. In short, they are a fact-based description of how commerce really works.

Better before cheaper

There are two dimensions to the value we get from our purchase: price and non-price. Price value is a function of how much we pay for something; the less we pay, the more price value we get. Non-price value is a function of all the other dimensions of value that are not price: durability, functionality, quality, convenience, ease of use, style, brand, etc. How much of each of price and non-price value a company provides relative to its competitors defines its position in competitive space. It is how a company creates value for its customers.

“Better before cheaper” is a useful rule because it can be applied to every decision the companies faces. “Better” (the non-price positions) are systematically more profitable and more sustainable than in-the-middle or price-based positions.

Of course, no company can afford to ignore its relative price position. That is why the rule is “better before cheaper”: being price competitive is relevant, but when it comes to position in a market, exceptional performance is caused most often by greater non-price value rather than by lower price.

Revenue before cost

Superior profitability is driven by higher revenue, which in many cases is earned by incurring higher cost. Exceptional companies realize that non-price value must be earned repeatedly and continuously. Achieving exceptional results can demand the courage to incur higher cost, even to the point of a cost disadvantage.

There are no other rules. Stick with “better before cheaper” and “revenue before cost.” These two rules will guide you to identify the true problems worth solving: devote your resources to tackling the hard problem of creating anew the non-price value your customers will pay for, not the hard problem of how to remain profitable at lower prices.

MasterclassEffectiveness at the top – what makes the difference and why?Brian Leavy

Why do so many successful executives fail when they get to the highest level? Is the top job different in some defining ways? Are there particular qualities needed for success at this level? How much does context and timing matter? This Masterclass reconsiders these perennial questions, drawing on ideas in practice over the last two decades and several recent books.

The top job is unique

Nothing in a leader’s background, not even running a large business within his company, fully prepares him or her to be CEO.

• •

  No longer in a position to exercise their former operational mastery, new corporate leaders must learn to be comfortable managing “organizational context,” where their greatest influence shifts from direct to indirect means.

• •

  Those at the top find that “the moral mandate to lead” must be continuously “earned and maintained.”

• •

  Corporate leaders have work that is uniquely theirs: the CEO is the link between the inside (the organization) and the outside of society, economy, technology, markets and customers.

Finding voice and passion to lead

Authentic leaders find their own personal sense of mission from their life stories then translate it into leading with a higher ambition through framing it in its wider context.

Context matters

In any given period, the three types of top executives – entrepreneurs, managers and leaders – were found to populate and shape the business landscape: each effective at different times in different organizational contexts. The most effective were those best able to read and adapt to changing business conditions, with competencies and outlooks best suited to their own particular time and circumstance.

Regarding the selection of the top leader, institutions, countries or companies normally choose their top executives through a long process of executive filtration. The result is that the candidates are well aligned to business-as-usual requirements, and the institution’s future trajectory is unlikely to vary greatly regardless of who wins the prize. But the truly indispensible leader is the one who in extraordinary circumstances will make choices fundamentally different to the norm, and yet these are likely to be the least filtered leadership options, such as an Abraham Lincoln in 1860 or a Winston Churchill in 1939.

Summary

There is much to discover about the secret of great leadership, but over the last two decades we have learned a lot about why many promising executives may come unstuck when they finally reach the top. These insights should now be of considerable help to aspiring executives and their mentors when working on their future development, and to those responsible for the selection of a CEO most suited to any particular coming challenge.

Social business: an opportunity to transform work and create valuePeter J. Korsten, Eric Lesser and James W. Cortada

Today, roughly half the world’s population is online. Companies at the forefront are embedding their external social media tools into core business processes and capabilities. They are using social approaches not only to communicate better with their customers, but also to share knowledge with their suppliers, business partners and, perhaps most important, their employees. In short, they are rapidly progressing to a more substantive transformation in how they work, an approached called social business.

A survey of more than 1,100 businesses and in-depth interviews reveal three major areas where organizations apply social business investments:

• •

  Create valued customer experiences.

• •

  Drive workforce productivity and effectiveness.

• •

  Accelerate innovation.

Create valued customer experiences

As today’s consumers become ever more technology enabled, failure to communicate with them through the media they prefer can create an engagement gap difficult to overcome. Leading organizations are acting on these desires by focusing social resources and attention on three areas: listening and engaging, building communities, and shifting toward sales and support.

Drive workforce productivity and effectiveness

Applying social business strategies and tactics within the organization and its surrounding value chain can play an important role in:

• •

  Increasing the transparency and visibility of knowledge.

• •

  Finding and building expertise.

• •

  Collaborating outside the organization.

Accelerate innovation

Internal communities are using social tools to fuel innovation. They have made it significantly easier to raise the visibility of new ideas, regardless of their source. When collaborative tools are integrated in day-to-day work activities, projects, and processes, ad-hoc communities (internal and external) can rapidly form to work on specific problems and opportunities. Caution: when “sourcing ideas from anyone,” management must first define (policies, practices, social business methods and tools) then teach its employees how to collaborate effectively with individuals outside of the organization’s boundaries.

Actions going forward

More than simply adopting and using social media tools, business has entered a new period of fundamental transformation in the way work is done at all levels of the enterprise and across all organizational boundaries. Three essential actions, with several key questions to focus attention, are offered.

Boeing’s offshoring woes: seven lessons every CEO must learnStephen Denning

Like many US firms, Boeing enthusiastically embraced outsourcing and offshoring as a way of reducing costs and development time. Regrettably, the end result was the exact opposite. “We spent a lot more money in trying to recover than we ever would have spent if we’d tried to keep the key technologies closer to home,” according to Boeing Commercial Airplanes Chief Jim Albaugh. In January 2013, as the Boeing planes are being grounded because of unresolved safety issues, their losses continue to pile up, both financially and in diminished customer good will.

Too often offshoring decisions have been addressed as if they were simple financial matters. The Boeing crisis illustrates how offshoring not only has the potential to increase overall costs, but also raises mission-critical issues that could affect the survival of firms.

Offshoring’s systemic deleterious domino effect

Offshoring can set off a chain reaction. Once most of the manufacturing is lost to foreign suppliers, process-engineering expertise can’t be maintained, since it depends on daily interactions with manufacturing. Without process-engineering capabilities, companies find it increasingly difficult to conduct advanced research on next-generation process technologies. Without the ability to develop such new processes, they find they can no longer develop new products. In the long term, then, an economy that lacks an infrastructure for advanced process engineering and manufacturing will lose its ability to innovate.

Lessons

These issues are a wakeup call not just to Boeing but to every CEO whose firm or whose suppliers have been or will be involved in offshoring. Every CEO must learn the following:

1. 1.

   Use the right metrics to evaluate offshoring and include total costs.

2. 2.

   Review whether earlier outsourcing decisions made sense.

3. 3.

   The engineering is mission-critical.

4. 4.

   Where appropriate, bring some manufacturing back.

5. 5.

   Adequately assess the risk factors of offshoring.

6. 6.

   In outsourcing, explicitly evaluate the loss of intellectual property.

7. 7.

   Replace the goal of maximizing shareholder value with the goal of continuously creating value for customers.

Premise

Pursuit of maximizing shareholder value at Boeing led to offshoring that has caused massive damage to shareholder value. The eventual scale of the damage to Boeing can only be guessed at today. The remedy lies not in pointing fingers at Boeing’s flawed management, but rather in treating the economy-wide mismanagement of offshoring that fostered the problem.

CaseWhat went wrong at BoeingStephen Denning

The unfolding story of the Boeing Corporation’s new aircraft, the revolutionary 787 Dreamliner, offers a cautionary tale of what to do and what not to do as innovation is aggressively embraced to regain customers.

When faced with a loss of market share to Airbus, Boeing decided, commendably, to develop a radically new aircraft that would generate revenues by creating new value for customers. Taking this path was the right one. The opposite – focusing on reducing costs, lowering the selling price of existing aircraft, and letting competitors win the innovation contest – would have mortally wounded the corporation over the long-term.

Risk management?

By definition, innovations are infused with unknown risks. In general, when adopting new innovative practices, technology, communications, and outsourcing models, it is best to aggressively account for the risks individually and collectively. When this is not adequately addressed, as Boeing’s experience shows, the risks can be many and large, including:

1. 1.

   The coordination risk.

2. 2.

   The innovation risk.

3. 3.

   The outsourcing risk.

4. 4.

   The risk of tier outsourcing.

5. 5.

   The risk of partially implementing the Toyota outsourcing model.

6. 6.

   The offshoring risk.

7. 7.

   The risk of communicating only by computer.

8. 8.

   The labor-relations risk.

9. 9.

   The project-management-skills risk

10. 10.

    The disengaged C-suite risk

Action recommendations for Boeing

Among the lessons going forward, Boeing should:

• •

  Deploy knowledgeable, competent and committed management at all levels, especially the C-suite and project management.

• •

  Recognize that innovation and outsourcing increase costs, coordination and risks.

• •

  Treat outsourcing and offshoring as regrettable necessities, rather than advantages to be pursued.

• •

  Complete engineering before making final make-buy decisions.

• •

  Plan for the increased costs of outsourcing in advance.

• •

  Where offshoring is envisaged, take steps to deal with cultural and linguistic differences.

• •

  Explicitly plan for active involvement in the outsourced manufacturing to ensure quality and coordination.

• •

  Take specific steps to mitigate risk by planning in advance for increased involvement.

• •

  Develop long-terms relationships of trust and integrity with key suppliers.

• •

  Pursue tiered outsourcing only in cases where such relationships of trust and integrity have been developed.

• •

  Proactively involve labor in outsourcing and offshoring decisions.

• •

  Favor face-to-face communications over computerized communication tools.

The outcome for Boeing is not known. But as a case study, Boeing’s experience offers many lessons to other companies for much wiser decisions regarding innovation implementation practices.

A continuous-learning process that updates and enhances planning scenariosGerald Harris

Companies, especially those that have a long time horizon, can improve their scenario planning projects with the addition of a scenario-learning component. A learning-forward tool such as the one described in the case study assists in refining and revising the initial scenarios and facilitates continuous learning and dialogue within the company. This benefit suggests that on-going “scenario-learning” is, in fact, valuable in any type of scenario planning project.

Scenario learning

What is it? After participating in a scenario analysis and developing strategies designed to be successful in distinctly different futures, managers become more sensitized to potential shifts in their current markets and ways to better respond as the future unfolds. This experience is commonly referred to as scenario learning.

When to use it? Because the period after the scenarios have been sketched out but before the company leadership reaches the strategy-development or investment-decision stage can be years long, a continuous learning process can help planners and senior decision-makers identify and track the unfolding events that are most relevant to the challenges and big issues facing their organization. One such learning tool is the EPS (Event, Pattern, Structure) system.

Case study

The investment window or marketing cycle of an organization can mean that its scenarios unfold over decades. An example of this long-term outlook is the planning done by the Western Electric Coordinating Council project. Their three-year scenario-planning project focused on a 20-year time period required to develop electricity transmission facilities and the investment cycle within the electric-power industry. It their case, it was imperative that the scenario-based approach allowed for recognition of the powerful underlying drivers of change in the power business, such as technological advances, social attitudinal changes and legislation. The case study illustrates project phases and steps and the value of EPS.

Conclusion

A learning agenda to augment the scenario planning process helps managers to track trends over their long-term horizon. In addition, very often during the scenario-planning process, participants will stumble upon areas that are important but that the leaders of the company simply know little about. Capturing these issues as they arise during scenario-planning and adding them to the EPS system can be the basis of a rewarding long-term learning process for an organization.

Catherine GorrellPresident of Formac, Inc. a Dallas-based strategy consulting organization (formacplus@gmail.com) and a contributing editor of Strategy & Leadership.