Emerald Group Publishing Limited
Article Type: Quick takes From: Strategy & Leadership, Volume 43, Issue 6
Catherine Gorrell is a veteran strategy consultant newly based in Portland, Oregon (firstname.lastname@example.org) 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.
Innovation advantage: insourcing engineering
Dieter Gerdemann, Reuben Chaudhury and Bharat Kapoor
On its surface, outsourcing engineering holds a distinct appeal. A company does not have to maintain a large engineering workforce or expend capital on costly R&D facilities. However, for many companies this seemingly shrewd strategy can threaten their long-term survival. By transferring their intrinsic engineering and innovation knowledge to their external suppliers they ultimately forsake future innovation by eliminating their own creative engineering positions. Outsourced engineering, in effect, turns suppliers into competitors (see Exhibit 1).
The insourcing solution
Rethinking outsourcing strategies begins with acknowledging that:
Insourcing engineering is a strategic investment in developing the core competence and innovative capacity needed to continually push the frontier, which is essential to creating fresh marginal value under all scenarios.
Insourcing engineering not only resurrects the innovation and IP that distinguish sustainably successful market leaders, it also increases the ability to keep ideas and experiments secret until the production stage, prolonging the initial period of competition-free commercialization.
To assess which specific engineering activities should be brought back or kept in-house, examine the strategic value of each activity and your company’s capability level in that area. As illustrated in Exhibit 2, some insource-versus-outsource decisions are straightforward.
Time to reevaluate
For those companies that outsourced some or most of their engineering functions, it’s never too late to reevaluate the decision. A reevaluation can begin with answers to these questions:
How has the company performed since outsourcing its engineering function?
How has market share fared?
How much IP has been created that is exclusively owned by the company?
How much revenue is generated from IP/R&D, directly and through royalties?
Are short-term cost advantages being gained at the expense of long-term viability?
Insourcing engineering is a sound and necessary strategic investment that can deliver excellent returns while keeping costs well within acceptable boundaries. By insourcing engineering and developing internal engineering talent, a company can match or even exceed the near-term cost advantages of outsourcing while giving up none of the strategic capabilities that are so vital to staying competitive over time. Although insourcing is not easy, it beats the alternative of depletion of strategically essential capability.
How to make the whole organization Agile
The emerging marketplace of the 21st Century has made the practices of 20th Century management obsolete. As a result, many leading organizations have developed and implemented a new set of goals, practices and values; collectively referred to as a culture of agility.
Culture of agility
A culture of agility involves rethinking the hierarchical bureaucracy. Today, “predictable” and “reliable” performance isn’t good enough. For true success, the organization has to deliver experiences that add continuous value and delight customers.
A culture of agility requires organizations to draw on the full talents and capacities of those doing the work, whether inside the firm or outside. It means doing work with self-organizing teams, networks and ecosystems of people. It means giving everyone doing the work a clear line of sight to the customer, to whom new value is delivered in an interactive fashion. The customer now plays an active role in the organizational picture.
The principles of a culture of agility are not a random collection of improvements. They fit together as a mutually reinforcing set of management patterns. Once a company embraces a culture of agility, it affects everything in the organization – the way it plans, the way it manages, the way people work. Everything is different. It changes the game fundamentally.
Making the transition to Agile includes five major shifts, as the basis for an organizational culture change.
An Agile mindset
To transition to a culture of agility requires an Agile mindset. Instead of a “controlling” mindset in which there is an implicit distrust of those doing the work, the new management practices embody an “enabling” mindset, with an explicit trust in the talents and capabilities of those doing the work, along with the belief that if the organization provides the right environment, values and goals, those doing the work will usually deliver continuous value and innovation for the ultimate users and customers. The enabling mindset is explicitly customer-focused, with profits seen as the result, not the goal. The Agile mindset is neither top-down nor bottom-up: it is outside-in. The focus is on delivering value to customers. The customer is the boss, not the manager.
The Agile transition
Looking across many Agile implementations, there is evidence of a continuum from an Agile management “mindset” to an “Agile culture.” “Culture” here means that the same goals, attitudes, behaviors and values are shared throughout the whole organization.
There are four different stages in a company’s journey towards creating a culture of agility.
1. Initial steps
2. Insulating the team
3. Leading culture change from the middle
4. Top down culture change
Tools like Agile/Scrum and the detailed case of the innovative company, Salesforce, are offered to promote practitioners’ development of a context-specific implementation approach.
The six dilemmas of strategy execution
At the fulcrum of strategy execution efforts is the leader who faces the Herculean task of advancing the organization towards the strategic “Promised Land,” while at the same time, maintaining day-to-day performance integrity. Where to allocate scarce resources is an ongoing dilemma.
On a daily basis, leaders are confronted with competing demands for their attention that continually challenge them to answer “what to do, how to prioritize, which path to take.”
The choices they face are part and parcel of the strategy implementation process. They present consequential dilemmas that need to be understood and addressed, and when they are, rewards and success are likely to follow. Conversely, ignoring and under managing execution dilemmas is a sure recipe for trouble.
Six key dilemmas
While execution projects are each unique, the dilemmas they face are not. There is a recurring and universal set of competing forces that strategy implementers must manage, and their ability to marshal resources and hearts while maintaining the current business depends very much on how six key dilemmas are handled:
Time & Resources.
Three different kinds of strategy execution dilemmas
Strategy execution dilemmas fall into three categories: Primary, Secondary and Leadership (see Exhibit 1).
The two “primary dilemmas” for all strategy execution projects are:
1. Integration–transitioning to a better state.
2. Time & Resources–efficiently deploying talent, dollars and facilities to accomplish everything that needs to be done.
The “primary dilemmas” constitute the “what” that must be achieved to succeed. The challenge they represent is existential; surmount these dilemmas or fail. It is the tension and stress of these two dilemmas that causes the other four to exist at all!
The three “secondary dilemmas”–Confidence, Morale and Change–arise in the pursuit of the objectives associated with the “primary dilemmas”:
1. Healthy morale is necessary for staff to work productively and to choose to make the new strategy succeed.
2. Confidence is required for the crossover from the old way of operating to the new strategic state.
3. Change: Progress without chaos. What is the ideal speed for implementing new strategy? Take too long, and things start to fall apart: momentum slips; people become impatient and lose faith; commitment is questioned and staff starts second-guessing decisions. Move too quickly, and new programs and processes are launched before people are ready.
Leaders managing the dilemmas
1. Leadership: When corporate and staff needs appear to be at odds, as often happens during strategy execution, it creates a non-trivial leadership conflict. Invariably, leaders need to make tough calls; not all decisions will be popular, and not all information can be shared.
Converting dilemmas of strategy execution into positive forces for integration and learning tends to be a five-step process: detection, acceptance, diagnosis, design and action.
How to discover and assess opportunities for business model innovation
When customers’ needs change, new technologies emerge and markets evolve; and business model innovation may be the sole determinant of a company’s survival.
Business model innovation defined
Think of a business model as the combination of two interdependent kinds of decisions that have shaped your business since its beginning:
What products or services you’ll provide to whom.
How you will deliver that offering.
These decisions range from the design of your offerings, to the choice of revenue model, to the skills and experience of people you hire, to the processes you put in place and to the technologies you build. Your offerings both define and are defined by your capabilities.
Typically, most innovations are incremental and involve major changes to either your product or your processes, but not to both. In contrast, business model innovation requires substantive, simultaneous changes to both product and processes. Understood in this way, it’s not a distinct type of innovation separate from product or process innovations, but instead it poses the formidable challenge of changing both at the same time.
Business model innovation in action: three choices
Counter intuitively the best way to arrive at business model innovation is not to pursue it directly. A new business model should not be the initial goal but the by-product of a process that focuses on maximizing the long-term value you provide to your customers. This process should be unconstrained by the current boundaries of your organization’s capabilities and able to respond to the changes in your environment. Developing a new business model involves aligning three decisions:
What your customers want.
What you can deliver.
How you can make money delivering it.
Avoid early overinvestment in detailed product development, organizational design or financials. Instead, the innovation team should rank order the largest sources of the project’s uncertainties and focus on identifying any fatal flaws before much time and money are spent. Each attempt by the team to understand and assess these issues will generate new questions that can be answered with rapid experimentation.
Interview: Bill George: the era of self-serving leadership is over but global markets pose the next authenticity challenge for leaders
How do we find and develop great new leaders? Few have pursued this question more persistently in recent years than Bill George, Professor of Management Practice at Harvard Business School, former CEO of Medtronic and currently on the boards of Goldman Sachs and the Mayo Clinic.
According to him, the road to becoming an authentic leader starts with a commitment to discover your own “True North,” the core to your deepest values and sense of identity and the primary wellspring of a leader’s ability to engender trust. This is increasingly central to being able to create the kind of entrepreneurial organizational cultures that can empower others to lead, not just simply inspire them to follow.
In this interview, four themes are discussed.
How to become an authentic leader - three essential steps.
Linking personal development process to effective leadership in practice.
Dramatic changes have taken place in the past decade resulting in a concomitant need for new leadership. Four major trends driving these changes are:
1. A demand for leaders and companies to serve global society, not just the interests of short-term shareholders.
2. Emergence of global markets and global labor markets requiring diverse corporate leaders who are effective at operating anywhere in the world and building diverse teams at the top.
3. Technology and social media are causing much greater levels of transparency and openness.
4. The influence of millennials who want to make an immediate impact and are more than willing to change jobs to find opportunities that enable them to contribute immediately.
Authentic leaders are ethical leaders who are responsible to all their constituencies.
For a rising executive, the “greatest challenge” in the journey to authentic leadership is the “transformation from I to We.” It’s critical for peak company performance; employees want to work for leaders who are committed to serving their organizations, their customers, employees and investors.
Leaders of the future must learn how to forge a new relationship between business and society. Those on the forefront today see themselves as “stakeholders in society,” where they are contributing to each society in which they do business through the mainstream of their efforts.
Field interviews The myth of customer loyalty: why information and scale are more important during downturns
Murali Kailasam and Winai Wongsurawat
According to conventional wisdom, in tough times satisfied customers are less likely to damage a long-standing relationship by demanding cost cuts or taking on the risk of switching to unknown suppliers. But field interviews with Indian IT-ITES industry (Information Technology – Information Technology Enabled Services) executives during the recent recession revealed the weakness of this customer loyalty strategy and discovered some useful alternative tactics.
The contra-wisdom evidence
The field research suggests that being in a long-term relationship with customers does not promote respect for how well the supplier is tightly managing their project’s costs. Instead, when business went bad in the recession, “loyal” customers often asked their trusty venders to supply additional services at the same or lower prices. When vendors pushed back to reduce the project scope or attempted to negotiate for additional charges, clients became agitated and resistant.
1. Secure an information advantage. Service providers that successfully navigated the rough recessionary waters relied not on loyalty but their superior information advantage. When the recession hit, these companies initiated efforts to improve communication and co-ordination with clients. The interaction frequency of peer-to-peer communication increased at all levels as providers sought to understand their clients’ pain points.
Key: Getting early access to such information was vital to adapting to their clients’ changing needs as they explored new markets in lean times. This information advantage can also enable providers to make better decisions about their own investments when budgets are tight.
2. Use scale and diversity to promote flexibility and improved service quality. Firms with diversified portfolios are able to reorganize resources efficiently, ramping up services in sectors less affected by the downturn – such as healthcare and telecom–using the slack redirected from hard-hit sectors like banking and financial services.
3. Create loyalty to a “good deal.” When outsiders see companies sticking with their longtime vendors through good times and bad, they typically chalk it up to loyalty. But, the observed behavior may be better explained by the vendor’s capabilities – such as an information advantage, diverse competencies or scale–that enable it to offer the client a superior deal even in a painful business downturn.
The key lesson for service companies aspiring to build long-term business is to know your customers and strive to develop both scale and scope.