Emerald Group Publishing Limited
Copyright © 2003, MCB UP Limited
These brief summaries highlight the key points and action steps to be found in the feature articles in this issue of Strategy & Leadership.
Page 4Digital loyalty networks: continuously connecting automakers with their customers and suppliersPeter Koudal and Paul Wellener
Over the past two years, senior managers at several automotive companies have begun to implement a new business model called a digital loyalty network (DLN). The model enables companies in any industry to continuously collect and monitor their customer, product and supply chain data and more precisely adjust engineering, production, distribution and sales/marketing activities to meet current and future demand. Moreover, they can use the same data to enhance their partnership with suppliers.
For example, GM has put in place a number of components of a digital loyalty network, including the implementation of an integrated network connecting the company with suppliers, alliance partners, dealers and customers. GM has also adopted a new formula for managing the order-to-delivery process, has launched Web-portals for customers and suppliers and continues to enhance and support its OnStar system, which allows drivers to communicate on the road with GM customer service representatives and vendors.
Digital loyalty networks have three components:
Digital – the companies use sophisticated information technologies to manage information more effectively.
Loyalty – the system is designed to target, satisfy, and retain the most profitable customers and, in turn, use customer information and loyalty data to make the supply chain more efficient.
Networks – the information system links suppliers, producers and customers and is continuously updated.
DLN companies use information technology resourcefully to increase the effectiveness of supply chain and customer relationship management initiatives. They develop a solid network of digitized information that ties together the value chain and creates loyalty and on both the front and back end of business operations. On the supply side, DLN companies continuously monitor customer value based on feedback about customer requirements, purchase history, and potential purchases and rely on digital technology to make certain their most valuable customers are kept satisfied. They do this by managing inventory through the supply chain so that the best customers are served first, and making certain short and long-term capacity planning responds to these customer priorities.
In addition to General Motors, Deloitte Research identified three other innovators in the automotive industry – Porsche, DaimlerChrysler, and Renault/Nissan – that are developing certain aspects of a DLN. As a result, each has begun to solve the three basic problems that threaten the industry:
General Motors has managed to increase market share for the first time in a generation, and improve profitability based on innovations in everything from supply to production to customer relationships, a process pushed forward by the vision of CEO Rick Wagoner.
Porsche has risen to the top of auto industry profitability by adapting product design and manufacturing to meet demand and supply changes.
DaimlerChrysler has tried several different innovations, including the development of the M-Class SUV for Mercedes Benz, meeting customer demands for a product line extension, and developing new product and supply chain processes.
Renault/Nissan achieved record profits in 2002, in part because of a DLN that has begun to connect Nissan, Renault, its customers, dealers and suppliers.
Page 12"Business wargaming": simulations guide crucial strategy decisionsJay Kurtz
"Business wargaming'' is a role-playing simulation of a dynamic business situation. It involves a series of teams, each assigned to assume the identity of an entity with a stake in the situation. The process steps for wargaming, important lessons to follow, and a case study are all presented in this article.
Wargames offer unique benefits at two points in an organization's strategic planning process:
at its outset, wargames are helpful to convert data and information (about markets, channels, competitors, etc.) into actionable intelligence for subsequent planning; and
after a basic plan is developed, a wargame can test the plan to ensure it is robust enough to succeed in any realistic combination of events or actions.
Attributes of a business wargame:
It involves intense competition among five to ten teams, each representing a distinct stakeholder (such as the market, key customers, suppliers, partners, competitors, channels, regulators).
The team interact based both on quantitative and qualitative information. Through the use of role playing, cultural issues, rivalries and other subjective factors guide development and assessment of strategies.
The wargame process forces a rigorous exam of a situation from multiple perspectives. The various points of view (some hostile) allows the company to recognize opportunities and threats otherwise not noticed using just an "inside-out'' approach.
The gaming allows a broad range of ideas to be developed while the teams aggressively compete to outsmart each other.
Several example cases are cited to illustrate the situations best suited for the use of the wargaming method:
A biotech company needs to anticipate how competitors will attack its flagship product after its patent ends.
A joint venture wishing to know which segment of a huge developing market is best to exploit given large competitors.
The CEO of a hospital chain faced with "uncontrollable'' factors (such as changing demographics, regulations, e-health technology) did not think his management team was prepared to deal with them. Wargaming changed their attitudes; they saw what could and would probably occur. New intelligence generated in this exercise led to dramatic changes in their strategic direction.
The time, cost, and effort in preparing a major wargame are spelled out. So is the potential pay-off in cases where the wargame greatly improves strategy.
Page 22Scenario planning: persuading operating managers to buy in Gill Ringland
Good scenarios offer a number of realistic but different views of the long-term future. If the scope of these several scenarios covers the full range of conditions relevant to the organization's major decisions, the methodology is probably the best available method of preparing for the business environment ahead.
Too often, however, having several possible, but distinctly different views of the future seems of dubious relevance to managers consumed by day-to-day and quarterly deadlines. They crave "likely'' forecasts, and they don't like having to "waste'' time learning to prepare for a number of business environments that can't all come true. But scenario-planning benefits from the input of operating managers and they in turn learn a great deal of value from being exposed to scenarios. This happens in two important ways:
Many key decisions in organizations are made at the operational level, with default assumptions based on corporate culture and the experience of the individual. When line managers experience how it would be to conduct their day-to-day operations in scenarios that are different from "business as usual'' they often reveal and then confront their assumptions.
In addition, by virtue of their exposure to customers and competitors, the line managers often pick up the subtle signals that are the first alert of significant changes to an organization's operating environment. By exposing line managers to various possible alternative scenarios, organizations can reduce the risk of ignoring the small environmental changes that are the advance warning for major discontinuities.
So, how do you convince managers at all levels of the organization to seriously consider the strategic and tactical implications of each scenario and to believe that scenarios are irrelevant to their tasks? The answer is to make scenarios accessible to line managers with four stages of preparation:
creating scenarios clearly grounded in today's events and trends;
identifying business options under each scenario;
having a clear process for making choices based on the scenarios; and
developing a clear set of events that would be early indicators for each scenario.
If there are one or two people who are absolutely clear at the beginning of the work session that they know what the future was, and therefore found any other scenarios unacceptable, then stress the confirming evidence for several possible scenarios in current trends. This will help them understand that the future is likely to be as confusing as the present and that it is a question of understanding commonalities and differences.
Scenarios fit well into the toolkit of every organizational leader and senior manager. They provide a process and mechanism for anticipating change, for monitoring early warning signs, and for creating more robust plans. The corporate planner needs to understand how best to apply scenarios across the organization, and to empathize with the discomfort felt in many parts of the organization at line managers' exposure to uncertainty.
Page 29Assessing your strategic alternatives from both a market position and a core competence perspectiveBrian Leavy
The practice of strategic decision-making has come a long way over the last two decades. During that time, two major perspectives have emerged to help us create and maintain competitive advantage in the face of a range of business challenges. One stresses market position and the other core competence.
Market position – the positioning approach to strategy development is associated mainly with the work of Michael Porter; strategic choice is focused primarily on the structure of the industry and how it might be shaped to advantage. The aim is to establish a "privileged''/hard-to-replicate position in an industry that is difficult to enter. A good example is given in the discussion of Southwest Airlines.
Core competence – the competence-led perspective is associated with the work of C.K. Prahalad and Gary Hamel; strategic choice focuses primarily on assessing which distinctive competences should be built, then considers the market opportunities that would exploit them best. A good example is given in the discussions of Cannon and Nokia.
Often complementary, the two perspectives are based on different methodologies, and frequently offer conflicting views.
Two strategic issues where it matters
In today's competitive environment, companies need to approach strategy development by concurrently managing two different processes:
exploiting current market positions; and
exploring for new ones.
The major lesson provided by the Nokia example in the article is that while the positioning perspective remains crucial to the first, competence-led thinking holds the key to the second.
It may be tempting to use one approach or the other because the market position and core competence approaches do create perspectives that see things very differently, and their analytical methodologies offer different guidance. But it is important to keep in mind that although both aim toward designing competitive advantage, instead of picking one over the other, the astute strategist may be best served to test out both perspectives and generate a wider range of options. This is shown in the article's illustrations of corporate strategy in the multi-business firm and strategic renewal.
In sum, looking at your business from both approaches will generate two sets of contrasting perspectives and options for action. For many firms, this binocular vision of the available strategic options will lead to a better result than if either perspective was used alone.
Page 36Managing stakeholders vs. responding to shareholders Bill George
Would many companies have better growth records today if their corporate executives had not previously succumbed to pressures to increase their stock prices and shareholder value in the short-term? As CEO of Medtronic, the author feels strongly that an enterprise is better managed if it addresses the long-term needs of stakeholders rather than making decisions based primarily on short-term shareholder value considerations.
At Medtronic, the primary management emphasis is on meeting the needs of customers and motivating employees to do so. The principle is clear: companies that put their customers first and empower their employees to serve them will inevitably provide greater growth in shareholder value than those corporations that focus primarily on boosting their stock price and only give lip service to other constituencies. Fortunately, Medtronic's long-term shareholders recognized the truth behind this principle and supported a stakeholder strategy.
The hardest challenge is to meet the demands of all stakeholders concurrently. Leaders are continually confronted with the competing interests of their stakeholders. The conflicts among their interests are real and ever-present. The article offers five lessons learned about managing the needs of each stakeholder groups – customers, employees, shareholders, the media, government, and communities. Three are key:
Lesson #1: Customers
Determining what is in the best interests of your ultimate customer is the first question to answer. Success at Medtronic was achieved by serving the interests of the customers' customer. Over the long term, it is market share that is the best measure of how well a company is servicing its customers.
Lesson #2: Employees
With all the emphasis on meeting quarterly earnings, leaders have lost sight of the crucial differentiating factor in business competition: the motivation of employees. When employees are highly motivated to serve their customers and create breakthrough innovations, the company will gain a competitive edge that is extremely difficult for competitors to match. The leader has to make every employee understand that pursuing the mission of superior customer service is a key source of competitive advantage. The corollary to this is that managing merely for near-term shareholder value will eventually diminish competitive advantage.
Lesson #3: Shareholders
To create lasting value, the CEO should give most attention to the long-term stockholders and concentrate on meeting their needs. Otherwise, leaders can get whipsawed by the short-term holders, hedge funds, security analysts, and even the short-sellers.
Yes, there are competing interests among stakeholders. The leader's job is to define them and ensure that all stakeholders are well served.
Page 41Successful turnarounds: three key dimensionsOrit Gadiesh, Stan Pace and Paul Rogers
If your company needs a transformational management to survive, then a one-sided response – across-the-board-layoffs or a new tranche of funding – is unlikely to set the stage for sustainable results. According to Bain & Company's research, successful corporate turnarounds require a response that addresses three dimensions of an organization's problems: an overhaul of finances, of strategy, and of corporate pride. Moreover, true turnaround artists attack these dimensions simultaneously and with a high-speed process.
The most successful turnarounds, according to a study of 21 top-performing business transformations of the past decade, happen within 20 months. Key managerial changes were made at the outset. To transform finances and strategy, these turnarounds focused on results, not elaborate change practices. To reinvigorate company pride, CEOs reached out through speeches, events and targeted incentives to re-energize employees and executives. Indeed, among the 21 companies Bain studied, all of which took that approach, stock prices rose on average 250 percent during and after the turnaround process.
Where to start?
Financial turnaround: Shoring up your balance sheet and cash position is the first order of business in corporate turnarounds. Once that picture is clear, then managers can set realistic budget goals and measures that will tell whether the organization is on track from day-to-day, and week-to-week.
Strategic turnaround: Faced with trouble, many senior leaders behave as though their companies can "reset'' themselves simply by doing the same things – rallying around the same goals – with fewer people. Not so. Successful turnaround stories – turnarounds with sustainability – usually involved substantial strategic repositioning.
It's important to emphasize that even the savviest strategy can't succeed without ability. And that means a strong management team. Nearly all-successful turnarounds replace senior management who cannot perform up to the company's new standards, or who fail to commit to the organization's new direction. Bain's research shows that replacing senior management correlates closely with successful change; broad employee layoffs do not. Almost every one of the 21 textbook turnarounds substantially replaced the senior team.
Pride turnaround: Third, the most successful turnarounds pay close attention to employee morale as they move towards renewal. Top leadership must lead the charge to reclaim collective pride. Start by making the company a place where people want to come to work again. Practice and require honesty at all levels. Communicate accurately the potential prospects if everyone works together.