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Emerald Group Publishing Limited
Copyright © 2004, Emerald Group Publishing Limited
These brief summaries highlight the key points and action steps to be found in the feature articles in this issue of Strategy & Leadership
4 How to grow, no matter what: S&L interviews Michael TreacyDaniel J. Knight
In his latest book, Double-Digit Growth: How Great Companies Achieve It – No Matter What, Michael Treacy strongly believes that many organizations, not just a few industry leaders, can achieve double-digit growth year after year, if they become as disciplined about growth as they are about cost-cutting. From his research on the growth strategies of more than 130 companies, Treacy found that those with the fastest and most profitable growth took disciplined approaches to tapping five fundamental sources of revenue: retention of existing customers; market share gains; market positioning; penetration of adjacent markets; and investments in new lines of business.
To find out how the successful firms do it, S&L asked him: Why do some companies – such as Home Depot, Merck, Microsoft, Wal-Mart and CitiGroup – achieve steady growth and the others in the top 30 companies in the US have an abysmal track record?
Creating a management discipline of steady double-digit growth consists of two elements.
To create a strategy for double-digit growth, management must adopt a common language system based on the five disciplines of growth – customer-based retention, market share gain, market positioning, adjacent market penetration, and pursuit of new lines of business. This gives them a common understanding of the growth "levers."
To build the capability to execute that strategy, management needs to develop both the talent for growth and a management control system that tells them where they are, what the potential for growth is, where the gaps are and what the action steps are.
Combining the two, you have on one side an agreed upon language system and on the other side the talent, information and controls to make it happen.
What are your key suggestions to senior management?
To have the depth and quality of talent needed, they must create a supply chain of growth-minded professionals, and do so faster than the competition.
Choose organic growth (versus acquisition) because it is less expensive, more sustainable, and valued more by the stock market.
Measure success in talent and growth by looking at the outcomes (in the five growth areas), identifying intermediate measures that shows you are on the right path, and tracking the answers monthly. Answers give insights about your customer value proposition and comparison to the competition. Next, map and concentrate on the high growth areas of your core business. Finally, focus on your people. They drive the growth.
11 Exploring the strategic risk frontierAdrian Slywotzky
There is a broad array of strategic risks that can disrupt or even destroy any business. But embracing risk is also part of the growth equation. So the real question should be "what are the risks you should be taking but aren't?"
Executives can benefit by expanding their view of risk. Instead of just defending against the risk of potential calamities, leading companies define and anticipate the upside risks that, when well managed, can deliver the maximum rewards. The discipline of strategic risk management allows firms to raise their growth potential in addition to reducing their economic volatility. That's especially important at a time when aggregate market growth is sluggish, for the biggest risk of all is in not taking the right growth risks for the business.
Furthermore, strategic risk management offers an additional benefit: applying proprietary information and unique know-how to the risk challenges their customers face, a company can ally themselves more closely with customers, establishing long-term planning connections, multiple points of contact, and more powerful, longer-term relationships. This reduces customer turnover, which in turn diminishes long-term strategic risks for both customer and supplier.
While most managers have become comfortable dealing with traditional financial, property/casualty and operating risks, they have not yet recognized that strategic risks can often be a much larger source of value destruction. Failure to anticipate and manage this spectrum of risks can expose a company to dramatic decreases in shareholder value. Strategic risks are different in that companies need to assume and manage them in order to generate high returns. Strategic risk and return, thus, are two sides of the same coin.
The right mindset and an arsenal of countermeasures can help companies improve their risk/reward profile. Cited in this article are the most important forms of strategic risk and the countermeasures that can be used to address them:
new project risk;
brand risk (think of the Martha Stewart case);
industry economic risk; and
market stagnation risk.
In today's risk-intense environment, firms must manage their economic and risk profiles more actively. The goal is not to eradicate risk, but to deliver the maximum reward for an acceptable level of risk.
20 Outsourcing strategies – opportunities and risksBrian Leavy
Corporate strategy (in developed countries) in the last 20 years has increasingly included outsourcing to improve competitiveness and value creation. At first, the outsourcing strategies were driven by the desire to lower costs in the face of intensifying global competition (typically moving low-skilled, labor-intensive activities offshore to South-East Asia and other low cost locations). More recently, there is a growing use of outsourcing to support a range of strategies beyond that of lower cost. Four of the most promising opportunities are to achieve:
Focus – Outsourcing offers a way to hire "best in class" companies to perform routine business functions while focusing corporate resources on activities where the impact will be felt the most by customers. The key lies in selecting the right main value driver for concentration – customer intimacy, product leadership or operational excellence. Examples are Nike's focus on product leadership and Dell's focus on operational excellence and customer relationship management.
Scale without mass – Outsourcing offers the opportunity to grow in market presence without a corresponding expansion in organizational size or bureaucracy. This allows retention of entrepreneurial speed and agility, which would otherwise be sacrificed in order to become efficient as the company greatly expands.
Disruptive innovation – The primary aim of most disruptive innovation is to create a whole new segment at a price point well below the bottom of the current market and then to dominate this segment as it grows. Outsourcing has been prominent in the business models of classic disruptive innovators as IKEA, Ryanair, and Canon.
Strategic repositioning – IBM's strategy to change their value proposition is cited as an example.
While assessing the potential of these opportunities in specific corporate situations, strategists also need to look at two significant associated risks:
The risk of losing skills that could be key to competing in the future. The lesson here is that strategic capabilities are rarely synonymous with discrete functions like engineering or production but tend to be deeply embedded in the collective know-how that reflects their integration.
The risk of turning to outsourcing at the wrong stage in an industry's evolution. Watch out for the 'critical transition' point. This is the point where the majority of customers come to see themselves as being over-served with features instead of continuing to desire more functionality than is currently offered. This is the juncture at which the product rapidly becomes a commodity and where the primary basis of competition shifts to aspects of the value proposition beyond technology – such as price, speed, convenience and customization.
26 Outsourcing as a strategy for driving transformationJane C. Linder
Outsourcing is a business strategy that has been used to cut costs, access new skills, focus resources. It can also be used to drive radical change and enterprise transformation when a company seeks a rapid, sustainable, step-change improvement in enterprise-level performance, either for the near term or the long term.
When should firms consider transformational outsourcing as a strategic option or imperative? Four situations are discussed with examples:
Scaling up rapidly – use outsourcing when there's likelihood that moving too slowly will allow larger firms to use their market power to out maneuver the start-up effort.
Removing the constraints to break-through growth – outsourcing can bring in expertise and achieve fast improvements in under-performing functions and processes that constrain growth.
Catalyzing broad cultural change – an outsourcing move can give notice to the rest of the organization about what happens to operations that do not create value. This makes a strong impression when coupled with a declaration about where and how the company intends to distinguish itself.
Radical renewal – when a radical renovation of critical processes and functions is needed, outsourcing is one way to "replace the engine in the airplane while it is in the air."
How far to take transformational outsourcing? Two choices are given:
Repositioning – when the need is to rapidly move the company to a better competitive situation. Start-ups and radical renewals often fall often into this category.
Accelerating – when transformation is a longer-term initiative. Ultimately, the goal is to reposition the company and, beyond this, to accelerate performance in order to continue to outpace competitors on a sustained basis. Firms that are using outsourcing to catalyze change or remove a competitive roadblock frequently fall in this category.
By definition, transformational outsourcing means making radical changes in an organization's existing business model. The article provides key steps to craft a new business model that works. Two essential elements are:
The new model must benefit both partners. A very tight connection to the business model of another firm – the outsourcing provider – is therefore essential. Most executives ignore this perspective. They think about outsourcing as negotiating a deal, but that is only the beginning. What they really need to establish is an ongoing operation that creates value – in fact, one that promises more value for both partners than they had before.
The model must anticipate change. Since transformational outsourcing initiatives are likely to last for seven to ten years, planning for the future of the outsourcing relationship is an essential part of making it sustainable.
32 Lost in migration: offshore need not mean outsourcedSimeon Preston
Is your company considering moving operations to an offshore location? If so, then it is important to know that the most egregious mistake made by executive is assuming that migrating operations offshore requires outsourcing them to another company.
The first step: offshoring has flourished, and as a result it has become more manageable. The political and regulatory environments of host countries have eased considerably (most notably in India). At the same time, the flexibility and skill-level of local labor markets have increased without losing cost competitiveness. Finally, shareholders and lenders have become less nervous about major investments in remote emerging markets. Management's first task is to identify what processes and activities should be migrated offshore – and this should be irrespective of how that migration will be executed.
The second step: to define the most effective offshore solution for the business, the second (separate) task is to determine the full range of offshore alternatives for both implementation and subsequent operations – for example, to own those operations outright (an in-house offshore model), outsource them or set up something in between, like a joint venture. Contrary to received wisdom and the well-publicized claims of the outsourcing industry, businesses that establish their own operations on foreign soil may generate the most attractive strategic, economic and operational benefits over time. Offshore need not, and often should not, mean outsourced.
A third step: subject each alternative to rigorous, objective evaluation against strategic, financial and organizational criteria. The right offshore business model provides the most appropriate trade-off between ownership, operating flexibility and economics – both at points in time and over time. The decision to run an in-house operation or outsource it hinges on three critical factors:
the ability of the management team to manage the migration;
the economics of the alternative operating models; and
the extent to which the activities are "core" – that is, either crucial to day-to-day operations or vital to the technological or market intelligence learning process.
The final task: identify what the preferred model will take to deliver in terms of management resources, capital, capabilities and time. A high-quality execution team can then be assembled with the right skills and incentives to ensure timely delivery.
By taking these steps sequentially, the offshore evaluation team will achieve the best strategy for the company.
37 Case study: Outsourcing enables an American startup to enter the Japanese funeral services industryKenneth Alan Grossberg
This business case study described the strategies the start-up company All Nations Society (ANS) is using to become a serious contender in Japan's tightly knit, cartel-driven funeral service industry. The business model was based upon one used in the United States, but tailored to create a competitive advantage in the unique Japanese marketplace.
The Japanese market potential is increasing, as the death rate is expected to rise to 1 percent by 2010. It operates much as the US market did before the consumer movement raised Americans' consciousness and make them more sophisticated about negotiating prices. In Japan, funeral bills are high because services are bundled; the cost of individual components of a cremation ceremony are concealed, and most often not given until after the purchase of services; and full-service is assumed.
ANS saw an opportunity to differentiate itself from existing service providers by unbundling its offerings (it specialized in cremation-only service), promoting price transparency (boldly listing a menu of services and what each would cost), and outsourcing to give it the needed leanness and resiliency to respond to market changes. The outsourcing partners provide the various services needed for a Japanese style funeral: caterers, florists, crematoria, Buddhist priests, limousines and hearses, casket and funeral urn manufacturers. The ANS practice assumes that the family wishes to start with a minimal cremation-only service, and add options one at a time (the reverse of the standard service model in Japan).
After less than a year in operation, ANS proved that it could make a difference in the cremation market in Tokyo by offering cut-rate, no frills funerals for those who wanted them. Potential clients are impressed by the straightforward way in which ANS tells them how much they will need to pay for a cremation ceremony, with clear itemization for each component part. ANS encouraged consumers to pick and choose only those services that they wanted, and thus lowered the price from a high of more than $30,000 to a low of less than $3,000. By offering the economically stressed Japanese middle class a chance to save a lot of money on funerals, ANS was breaking with industry practices and social tradition but gaining a market niche.
All Nations Society is bringing transparency to one of the most opaque of Japan's industries, and is creating a competitive advantage for itself by leveraging its distinctive competency, which is the ability to save overhead by packaging a funeral for a customer through the skillful use of outsourcing.