Emerald Group Publishing Limited
Strategy in the media
Article Type: CEO advisory From: Strategy & Leadership, Volume 42, Issue 6
Forecasting: what works
If knowledge is power, then predictive analytics promises the ultimate knowledge – that of the future. Such knowledge does not come easily, but the increasing density of digital information, deeper automated connections across companies, and increased storage and computing power create new options for enterprise leaders. For the first time in history, the predictive future – the increasing awareness and likelihood of potential future actions and outcomes – is within reach. No wonder, then, that executives have placed predictive analytics at the top of the executive agenda since 2012, according to a recent Accenture survey.
But to know more about potential future actions and outcomes and their probability – and to act on that knowledge – organizations are engaging in new kinds of relationships. We have found that the most forward-looking organizations do these three things:
Look to the outside: … Consider the example of a manufacturer of production equipment that collects sensor-based telemetry about its machines’ operations, the status of their parts, their performance, their resource consumption, and other data. This monitoring turns up an anomaly at a key customer that indicates a failure is imminent … . The manufacturer notifies the customer, which pulls the machine off line and repairs it, saving millions of dollars in lost production and damage to its brand. Business continues as usual and the equipment manufacturer has a very grateful customer … .
Develop open multiple multi-sided relationships: The availability and veracity of the data involved in the predictive future requires creating multiple multi-sided relationships with customers, suppliers, trading partners, and just about anyone else with potentially beneficial information. It is no longer enough to share information one-to-one with partners. Increasing predictive power rests in positioning yourself at the center of multiple information flows … .
Update management and leadership practices: An extended analytics engine fueled by multiple information sources, however, can accomplish little without the ability to act on future predictions … . Managerially, organizations need to revise management practices, including: increasing the use of experiments and pilots to enhance risk-taking based on external and incomplete data; incorporating test-and-learn experiences into decisions and action; enhancing awareness of the differences between causation, correlation, and coincidence; and placing tangible value on avoiding adverse effects and missed opportunities.
Jeanne Harris and Mark McDonald “What the companies that predict the future do differently,” Harvard Business Review blogs, September 25, 2014, http://blogs.hbr.org/2014/09/what-the-companies-that-predict-the-future-do-differently/
Strategy-making: the power of the narrative
Drawing on our in-depth examination of strategy practice, we offer four lessons about the messy business of making strategy.
First, making strategy is not about accurate forecasting. You must consider the multiple interpretations of present concerns and historical trajectories that help to constitute those forecasts … . Articulating projections shapes attention, deliberation, investment and effort.
Second, achieving an innovative future is not about forgetting the past … . We found instead that managers need to engage directly with the past to shape a narrative that connects a particular understanding of history to a new future direction. … In fact, it is the multiplicity and ambiguity of experiences of the past that enable the different interpretations that can generate innovative alternatives.
Third, strategy making is not about getting the “right” narrative. It’s about getting a narrative that is good enough for now, so that the organization can move forward and take action in uncertain times … Our view of strategy making suggests that the narratives that managers construct will shape the direction of future actions, just as those actions, in turn, will lead to further reconfiguring of the company’s strategic narratives over time.
Fourth, breakdowns in the strategy-making process are not failures but rather opportunities for learning and for reconfiguring the strategic narrative … they can also be productive by provoking a search for new interpretations and novel possibilities.
A model of strategy making that focuses on strategic narratives provides insights into a long-standing puzzle about the sources of competitive advantage: Is company performance mainly derived from luck or managerial foresight? Evidence from our field study suggests that both past legacies and future projections shape future outcomes.
Sarah Kaplan and Wanda Orlikowski, “Beyond forecasting: creating new strategic narratives,” Sloan Management Review, Fall 2015.
Why Amazon pursues growth over profits
Amazon’s business is delivering very rapid revenue growth but not accumulating any surplus cash or profits, because every penny of cash is being ploughed back into expanding the business further. But, this is not because any given business runs permanently at a loss – it is because the profits from what is already there are spent on making new businesses. In the past, that was mostly in operations, but in recent years the investment fire hose has again been pointed at capex [capital expenditure] … .
Amazon has perhaps 1 percent of the US retail market by value. Should it stop entering new categories and markets and instead take profit, and by extension leave those segments and markets for other companies? Or should it keep investing to sweep them into the platform? Jeff Bezos’s view is pretty clear: keep investing, because to take profit out of the business would be to waste the opportunity. He seems very happy to keep seizing new opportunities, creating new businesses, and using every last penny to do it … .
When you buy Amazon stock (the main currency with which Amazon employees are paid, incidentally), you are buying a bet that he can convert a huge portion of all commerce to flow through the Amazon machine. The question to ask isn’t whether Amazon is some profitless Ponzi scheme, but whether you believe Bezos can capture the future. That, and how long are you willing to wait?
Benedict Evans, “Why Amazon has no profits (and why it works),” A16Z, September 25, 2014, http://a16z.com/2014/09/05/why-amazon-has-no-profits-and-why-it-works/
Corporate longevity: misunderstood and undesirable?
Lou Gerstner will always be known as the man who saved IBM after resuscitating, then reinvigorating, the near bankrupt company when he took over as chairman and CEO in 1993. Gerstner’s career, though, spanned 43 years which also included more than a decade at McKinsey, senior positions at American Express, and four years as chairman and CEO of RJR Nabisco … .
The Quarterly: So why do some businesses last much longer than others?
Lou Gerstner: A lot of it has to do with the industry. Many companies that have made it over many years have been in slow-changing industries that haven’t been much affected by the external environment, that are characterized by significant scale economies, or that are heavily regulated … .
In anything other than a protected industry, longevity is the capacity to change, not to stay with what you’ve got. Too many companies build up an internal commitment to their existing businesses, and there’s the problem: it’s very, very difficult to “eat your seed corn,” go into other activities, or radically change something fundamental about what you’ve been doing, like the pricing structure or distribution system. Rather than changing, they find it easier to just keep doing the same things that brought them success. They codify why they’re successful. They write guidebooks. They create teaching manuals. They create whole cultures around sustaining the model. That’s great until the model gets threatened by external change; then, all too often, the adjustment is discontinuous. It requires a wrench, often from an outside force. Andy Grove put it well when he said “only the paranoid survive.”
“Lou Gerstner on corporate reinvention and values,” McKinsey Quarterly, September 2014.
Mission, vision and competitive strategy
[Its] mission is exactly what makes Chipotle so much more than just the taste of its barbacoa. “Food With Integrity” animates every decision the company makes, from the slaughterhouse to the food line at your local outlet to the strategic planning at the Denver headquarters. When CEO Steve Ells, who’s a chef himself, launched Chipotle 21 years ago, he focused on fresh ingredients. That evolved over time into an awareness of all the different forms of exploitation inherent in traditional fast food – of animals, of the environment, and even of customers. Chipotle has distinguished itself from the Burger Kings and McDonald’s of this world by relying on “naturally raised” meat that is antibiotic- and hormone-free, by dropping trans fats from its cooking before doing so was in vogue, and by offering organically certified beans and avocados. “It’s the responsible thing to do,” says Ells. Other chains reheat frozen items in a mechanized system. At Chipotle, Ells points out, “we’re actually cooking. If you walk into the refrigerator, you’ll see fresh onions and peppers and raw meat that isn’t tenderized or treated in any way.”
That mission drives Chipotle’s sales and marketing tactics. Chipotle eschews dollar menus and other standard fast food gimmicks, offering a narrow range of meal options at relatively high prices …. This distinctive approach has fueled Chipotle’s growth. The company now has some 1,700 stores, up from 1,350 two years ago; revenue is $3.6 billion, up more than $1 billion over the same time; and Chipotle’s market cap doubled to a whopping $21 billion.
… If traditional fast-food chains change their practices in reaction to Chipotle’s success, would he see that as a good thing overall, because it broadens the food-with-integrity culture? Or would he view it as a threat? “It’s a joke,” he replies. “You know those guys, right? They can’t change. The culture is just too ingrained. Which bodes very well for Chipotle.”
Robert Safian, “Generation Flux’s secret weapon,” Fast Company November 2014.
The value of relationships in supply chain management
Firms today often face the hold-up problem. Perhaps the most common scenario is a firm that invests in a supplier, paying for new equipment or even a plant that will be used to manufacture a new product. After the investment has been made, the firm faces the risk of being held up by the supplier’s management or its striking workers, who may demand higher fees and wages.
… Using a game-theory model, Halac studied how these forces play out in ongoing relationships … Once the firm and supplier are working together, the firm’s promises of future rewards are deemed credible by the suppliers because the relationship would break down if the firm reneged.
A firm that relies on relational contracts might find it optimal to share information about its profits, Halac’s model shows. That might seem counterintuitive, since a firm might want to hide its profits to reduce the risk that its suppliers will make greater demands. However, if a supplier can see that it is valuable to the firm, it is more likely to believe that the firm will honor its promises of future reward. “If the relationship is valuable, the firm can’t just go out and find a different supplier or hire different workers to do the same work,” Halac says. “The supplier and its workers will see that, and want to try to earn those bonuses, because they believe the firm will honor its commitments.”
“Dealing with the hold-up problem,” Ideas@Work, September 25, 2014, http://www8.gsb.columbia.edu/ideas-at-work/publication/1688/dealing-with-the-hold-up-problem
Managing complexity to drive growth
Successful companies are building capability sets that are custom tailored to their strategies, customers, and business requirements. Each one is different, but they share some basic characteristics. Capabilities for winning with complexity aren’t based on traditional siloed corporate structures. They’re cross-functional, spanning both internal functions and outside partners. They align key operational elements such as organizational roles, information flows, decision rights, metrics, and motivators. And they facilitate segmentation of operations based on the needs of different product lines, customer groups, and other market imperatives. Companies with the right capabilities act in different, even contradictory ways in the various areas of their businesses, even when they’re coherent. They’re agile enough to deliver exceptional products and services for customers in high-priced premium markets, while simultaneously operating with ruthless efficiency in commoditized markets where margins are slim and price competition intense … . Complexity requires comprehensive, integrated management of business lines and product portfolios through techniques such as open-source innovation, modular design and platforming, design-to-value, rapid prototyping, and mass customization. Rigorous structured processes based on market intelligence, value drivers, and production/supply economics help companies make the right choices about new products and other portfolio strategies.
Rich Kauffeld, Arvind Kaushal, and KB Clausen, “Winning with complexity operations capabilities that drive profitable growth,” Strategy&, August 2014 (formerly Booz and Company).
Understanding transformative innovations
New technologies tend to come into the world in a very primitive condition, often designed for very specific problems. The steam engine was used as a nifty way to pump water out of mines long before it found its calling powering locomotives. Marconi sold radio as a means of ship-to-shore communications … Bell labs was so underwhelmed by the commercial potential of the laser when it was invented in the ‘60s that it initially put off patenting it. Even the Internet was initially conceived as a way for scientists and academics to share research … .
[Google’s CEO Eric] Schmidt gives his favorite example of building upon a solution developed for a narrow problem. “When Google search started to ramp up, some of our most popular queries were related to adult-oriented topics. Porn filters at the time were notoriously ineffective, so we put a small team of engineers on the problem of algorithmically capturing Supreme Court Justice Potter Stewart’s definition of porn, “I know it when I see it.” … Soon we had a filter called SafeSearch that was far more effective in blocking inappropriate images than anything else on the web – a solution (SafeSearch) to a narrow problem (filtering adult content).”
“But why stop there? Over the next couple of years we took the technology that had been developed to address the porn problem and used it to serve broader purposes. We improved our ability to rate the relevance of images (any images, not just porn) to search queries by using the millions of content-based models (the models of how users react to different images) that we had developed for SafeSearch … you can thank the adult entertainment industry for helping launch the technology that is bringing them to you.”
Shane Parrish, “Google and combinatorial innovation,” Farnham Street, October 13, 2014, http://www.farnamstreetblog.com/2014/10/google-and-combinatorial-innovation/
Resilience and de-centralization
The worldwide “Great Recession,” which got into full swing in 2008 after Lehman’s collapse, sparked heated debate over which organizational structures are best in helping companies weather severe economic crises. Should several local managers have the ability to make important decisions, or should just a few top executives make the aggressive and challenging choices, over layoffs and cost-cutting, that often accompany bad economic times?
The answer, according to Nicholas Bloom, who teaches at Stanford Graduate School of Business, is the one that provides more autonomy to its managers. “Decentralization helps firms perform better, particularly in bad times,” says Bloom, coauthor of “Never Waste a Good Crisis? Growth and Decentralization in the Great Recession” … .
These findings, Bloom says, sharply contrast with the longstanding notion that centralized firms perform more strongly during recessions because they allow C-suite executives to make the tough and unpleasant decisions about plant closures, layoffs, and other types of aggressive cost-cutting, assumed to be the primary survival strategy in a downturn … .
The key takeaway? “When conditions get tough,” Bloom says, “it’s a good time to push power down to the people on the ground who really know what’s going down.”
Louise Lee, “Nicholas Bloom: decentralized firms are more recession-proof,” Stanford Insight, October 6, 2014, http://www.gsb.stanford.edu/insights/nicholas-bloom-decentralized-firms-are-more-recession-proof
Why the public sector struggles to innovate
I recently met the CEO of a dynamic small company in a technology sector. He had some great ideas and was actively working with a large company on an open innovation initiative. He also had a radical proposal which would improve services and reduce costs for his local City Council. However, he was disinclined to submit it. ‘If I suggest this idea, I know what will happen,’ he told me. ‘They will ask exactly how it works. They will then say that is a great idea but that they have to put it out to tender with several companies and go through their standard procurement process in order to select a supplier. We will be invited to bid.’ The CEO thinks that the tendering process is complicated and long-winded. He fears that a larger or cheaper provider will benefit from his radical idea so he does not offer it.
Large companies do not operate this way. Alongside their standard procurement methods they have active open innovation policies which encourage small companies to submit relevant proposals. If accepted they will work closely and exclusively with the small company in order to bring a new product to market … .
Local and central government bodies should copy some of the large company trendsetters in open innovation. They should specify the results that they want rather than how exactly procured services should work. They should have a separate budget for truly innovative ideas. They need a specific officer charged with driving open innovation. They need to find ways to encourage innovative small companies to bring them ideas and to collaborate on their development. This can include an exclusive agreement for a limited period.
Open innovation is providing a wealth of innovations. It blossomed in the fast moving consumer goods sector with the likes of Proctor & Gamble and Unilever. Now it has spread to many other commercial fields. It is time that it was adopted with enthusiasm by the public sector.
Paul Sloane, “Do procurement policies inhibit innovation in the public sector?,” British Quality Foundation blog, October 15, http://www.bqf.org.uk/innovation/2014/10/15/do-procurement-policies-inhibit-innovation-in-the-public-sector/
Breaking down internal barriers to innovation
At one point in my career, I was the commercial head of a large portfolio of oral care brands, competing in a hyper-competitive market … .
Crushing Cost Cutting. Several months after joining the team, a Marketing Director came into a meeting and as he placed a carton on the table he said, “Have you seen this?” It was a toothpaste carton that looked like it was a reject from the manufacturing line. … The carton’s flimsiness was the result of a decision made in operations to reduce costs … . The change to the structure and printing of that carton made a very big difference to the perception of the brand, albeit no difference to the function of a carton for a tube of toothpaste. It took months to convert back to the original carton.
Protect the Idea. I was startled that the commercial team had not been made aware of, or participated in, such a significant product decision. But the decision-making web in a large corporation is the nemesis of the innovator, and to bring remarkable innovation through to the marketplace one has to be masterful at ushering, pushing and pulling innovation through the complex system of business decisions. The name of the game leaders must play is, “Protect the Idea.” The winner is the one who can maintain the integrity of the original idea through the multitude of decisions during its R&D development, process stage-gating, budgeting, packaging creation, marketing and sales development as well as the many, many meetings that offer endless opportunities to redefine an idea on the basis of cost, impact, strategy and sales – whether you are in the room or not.
Donna Sturgess, “Don’t let organizational processes drag down a great idea,” Blogging Innovation, September 30, 2014, http://www.innovationexcellence.com/blog/2014/09/30/don%e2%80%99t-let-organizational-processes-drag-down-a-great-idea/%23sthash.VRpDdyv7.dpuf
Craig Henry, Strategy & Leadership’s intrepid media explorer, collected these examples of novel strategic management concepts and practices and impending environmental discontinuity from various news media. A marketing and strategy consultant based in Carlisle, Pennsylvania, he welcomes your contributions and suggestions (email@example.com).