Emerald Group Publishing Limited
Copyright © 2005, Emerald Group Publishing Limited
These brief summaries highlight the key points and action steps in the feature articles in this issue of Strategy & Leadership.
How successful companies challenge conventional wisdom about the limits to growthVivek Kapur, Jeffere Ferris, John Juliano and Saul Berman
Growth is again the top priority of businesses after years of focus on cost cutting and risk management. This article, part one of two parts, is based upon an IBM research study that looked at “how” to seek growth. At the end of the article is a diagnostic questionnaire useful for assessing growth potential.
Conclusions of study
Limits to growth are self-imposed and can be overcome – neighborhood is not destiny. Executives have more room to be ambitious than they tend to believe. Winning companies set ambitious growth plans regardless of industry or geographic “limits.” They aim for targets above and beyond what they and their peers typically expect.
Growth is not a function of size – the research showed that companies over US $10 billion grew revenue and TSR as fast as, if not faster than, their smaller counterparts.
Merger and acquisition is a viable growth strategy – companies with revenue greater than US $10 billion made 50 percent more acquisitions over the decade than smaller companies. Importantly, this acquisition-led growth did not come at the cost of value creation. Two reasons are given.
Successful growers bounce back – successful growth is sometimes portrayed in the business press as the result of strategic genius or uncanny foresight. In practice, the vast majority of companies – even successful growers – stumble at some point. Successful companies have the courage and conviction to recover from failures.
Growth doubles the odds of value creation – growth is strongly correlated with higher value: superior growth doubles the odds of superior shareholder value creation. Winners understand the counterintuitive reality that over the long haul, growth – rather than cost cutting – is the lower-risk path. Indeed, the greatest risk is not to bet on growth enough.
To achieve lasting, value-creating growth, companies must be all-around performers. Winning the growth game requires excellence in three key areas (the 3C growth model):
Course – set the right direction by forming a clear point of view on the future, evolving the product-market portfolio without being limited by history, building a competitive model to win and pursuing reinforcing initiatives to sustain growth.
Capability – understand capabilities based on realistic assessments of strengths and limitations – and evolve the operational model to support the growth strategy.
Conviction – while many companies develop excellent plans, truly successful growers build organization-wide conviction that translates intent into action for everyone from top leaders to front line managers.
The 3 Cs are illustrated by the Cisco Systems company story.
Value pioneering – how to discover your own blue ocean: interview with W. Chan Kim and Renée MauborgneBrian Leavy
For the past 25 years, the central focus of the strategy field has been on searching for sustainable competitive advantage. Nowadays, however, leading gurus exhort would-be winners to pay more attention to customers and less to battling competition. The new grail is to learn to develop compelling new value propositions capable of transforming existing market spaces and creating new ones. In their book, Blue Ocean Strategy: How to Create Uncontested Market space and Make the Competition Irrelevant, Kim and Mauborgne offer practical guidelines for going about this challenge.
Tomorrow’s leading companies will succeed not by trying to beat competitors, but by creating “blue oceans” (this is the metaphor the authors use for a compelling new value proposition) of uncontested market space ripe for growth. Kim and Mauborgne offer a systemic approach to making the competition irrelevant, consisting of six principles that every company can use to formulate and execute blue ocean strategies. The six principles show how to reconstruct market boundaries.
One of the essential premises of blue ocean strategy creation is for companies to set as their goal “value innovation”; this requires the simultaneous pursuit of differentiation and low cost. According to Kim and Mauborgne, value and innovation are inseparable, contrary to generally accepted business wisdom. By focusing on value innovation, the benefit is a leap in value for both the customer and the company.
Topics discussed in this interview
Why it is good to de-emphasize benchmarking to competitors.
How durable is the advantage associated with a blue ocean strategy and what is the process for defending it. (First barrier: cognitive; second barrier is organizational; third barrier is economic.)
How often do blue ocean strategies need to be renewed.
The two main analytics and how to use them: the strategy canvas and the four actions framework.
In order to formulate new strategy, why it is better to focus on the big picture and not the financial and operational number.
Two of the most counter-intuitive elements in the blue ocean approach to strategy development involve the approach to customers and segmentation. Why it is better to focus more on non-customers and also less on finer and finer segmentation.
The four hurdles to execution of the blue ocean strategy.
How the principles of blue ocean strategy apply with similar impact in business-to-business markets.
A right-of-way strategyEdie Weiner and Arnold Brown
Recognizing the value of existing assets is essential to building a strategy to harvest them. The classic example of a failure to appreciate assets is the case of the American railroad business in the nineteenth-century expansion boom. Railroad owners viewed their key assets as rails, trains, real estate – this was the railroad business. Their strategic mistake was not realizing that they were also in the right-of-way business. When the telegraph and telephone companies and mail deliverers sought to use the land alongside the tracks, the railroads gave or bartered away their right-of-way. In doing so, they missed the opportunity to own and profit from the entire communications business.
In today’s world, businesses large and small, dot.com and brick and mortar, spend years establishing a network of customers, suppliers, creditors, investors, employees, and stakeholders that is, in effect, a right-of-way. Unfortunately, few have understood how to capitalize on their right-of-way, thus leveraging one of the most currently underutilized assets in the economy.
One example given in this article discusses the benefits of being “customer-centered” versus “sale-centered”, and by doing so, creating a right-of-way asset. Expanding this viewpoint enables companies to then see and benefit from their “potential” customers instead of just the “best” customers. Amazon.com, for example, looks not necessarily at the current customer but at the customer’s shelves. What other things, the company asks itself, does the customer need on those shelves? Why shouldn’t we, already having access to the customer, be the one to supply those things? This amounts to a key recognition(that managing access to the customers equals managing the right-of-way, one of the most valuable assets a business can have in a time of growing competition.
What are your potential rights-of-way?
Having invested in building a business or a professional practice or an organization or a network, companies have developed associated strategic assets that can be leveraged to provide additional returns. The assets can include customers, real estate, suppliers, advertising, and contacts. Each right-of-way has been paid for by a sizeable investment for purposes of providing a known product or service to a known user group. To understand its true value and possibilities you must first escape the mental trap of limiting your asset management to just the business you think you’re in. Then a strategy based upon creative leveraging is not only possible, it is desirable. One caveat: you must establish trust that whatever you promise can and will be delivered. Therefore, it’s critical that the integrity of your original entity is not only maintained but also enhanced in leveraging your right-of-way.
Pricing strategy and execution: an overlooked way to increase revenues and profitsAlistair Davidson and Mike Simonetto
The development and implementation of pricing strategy is an area with large and rapid payback – often delivering a three to ten times payback on investment derived from significant improvement in revenues, margins, profits and shareholder valuation. Just as importantly, increased profitability increases the strategic resources available to grow the firm.
Surprisingly, surveys suggest that in spite of the large upside available at low risk, few companies are pursuing systematic revenue enhancement through pricing execution. Instead, their pricing tends to be ad hoc.
Pricing variability tends to be the rule in many companies with complex multi-product businesses. The list price – net of discounts, dealer promotions and allowances – often vary widely. List prices are only the starting point in the pricing execution process. The ongoing activities of the organization often revolve around the discounts, promotions, channel discounts, rebates and a myriad other ways that get invented to motivate stocking and purchase.
With all this complexity, the process of setting, optimizing and enforcing pricing policies is usually unplanned and ill documented. Pricing often varies depending upon the time of month of the deal, the negotiating power of the client, the internal political clout of the field sales staff and management and senior management intervention.
What to do?
Pricing management and execution is now a dramatically different area than it has been historically. New software tools give companies a new way of setting, optimizing, and enforcing pricing changes in the organization. An integrated view of customers, their past purchases, benchmarked pricing by segment and size of purchase, relationship data, comparison of trends over time – all are available to provide decision support to field sales representatives, marketers and general managers. While these tools are still generally immature and the companies building them often at early stages of development, the payback from successful implementation is frequently so high that it’s an obvious target for potential profit improvement
Emerging best practices in pricing execution
The desire to simplify and systematically address the processes around pricing has lead to a new set of best practices in pricing. The most important driver of change is the emergence of a new category of integrated pricing management software. A list of software is provided in this article as well as five key issues to evaluate a potential vendor.
What should the CEO do? Realize value from using pricing software and tools
As with any change in the selling process, improving pricing execution is rarely successful without an integrated approach to change. Integrated pricing management software enables superior pricing performance, but it does not guarantee it. Several specific actions and implementation tactics are defined, beginning with educating senior management and making pricing a priority.
Using scenarios to create common understanding across different culturesGill Ringland
This case study presents the use of scenarios as an effective strategic thinking/planning methodology. The subject group was culturally diverse academic thinkers who came together to propose an approach to the topic of Converging Technologies for the European Commission.
After two plenary sessions it became clear that various participants were, in several cases, using the same word to mean distinctly different concepts. Another problem was that the specialist scientists found it difficult to communicate with their peers who lacked an up-to-date understanding of other specialties. A third problem was that national cultures and personal inclinations pre-disposed members to have very differing views of what constituted desirable or even acceptable futures. These problems threatened the ability of the group to have meaningful discussions, to analyze the issues, to understand the source of disagreement and to provide the European Commission with appropriate advice.
The group decided that creating four scenarios for Europe in 2020 would provide an explicit framework for discussing the contribution of converging technologies to society and the economy, and thus would ameliorate the communications problems that had plagued them.
Because participants had such different assumptions about the future, there was a clear need to define different specific possible futures and then assess their desirability and likelihood. Scenario technology offers an established process for creating a set of futures that look at distinctly different environmental contexts for an organization’s key decisions.
The participants believed that the discussions that were stimulated by the various scenarios contributed to the clarity of understanding of the issues, which in turn informed the recommendations in the report. Furthermore, the scenarios provided a framework for exploring the very different worldviews and the varying sets of implicit assumptions of the participants. When there were heated discussions in the plenary sessions, it was often possible to move the discussion forward by asking – “Which scenario are you arguing for?” By using the scenarios as a reference point, a member could identify the default assumptions behind another member’s position.
The net result
The diversity of the members of the study group presented the EC with an extreme form of the problem faced by many management teams – to create a common understanding across cultures. Using scenarios to create alternative worlds allowed different views of desirable and acceptable futures to be set in context. The net result was a useful report presented to the European Commission. Managers of other diverse groups could use the same techniques to promote effective communication.
How two Japanese high-tech companies achieved rapid innovation via strategic communitiesMitsuru Kodama
To produce rapid innovation, Japanese companies manage the unique learning experience of working in strategic communities for new product development. The strategic community (SC) is a practical method to rapidly obtain diverse knowledge of high value, from various levels, both inside and outside the corporation. One of the advantages is that SCs are not subject to the same restrictions as existing formal organizations. From now on, companies will probably increasingly require management to use networked strategic communities that include customers to synthesize superior knowledge from a diverse group of members both inside and outside the organization.
Two case studies are presented to illustrate how strategic communities operate. Here are the four basic principles of SCs:
The “Ba” factor – participating in a Ba means transcending one’s own limited perspective or boundary and contributing to a dynamic process of knowledge creation. In an SC, members who possess different values and knowledge consciously and strategically create a Ba in a shared context that is always changing.
Community of practice – working together toward fulfilling a mission.
Boundaries – boundaries allow the participants to transform existing knowledge.
Networks – integrating with the organization as hubs or connectors so that knowledge possessed by people, groups, and organizations is shared, assessed, and integrated across organizational boundaries in order to create unique knowledge with high value.
Struggles and conflicts are a common occurrence among networked strategic communities. It is the leader team’s role to integrate and balance. Syntheses are required in four areas: the values of the participants; the different elements of technology; balancing proprietary development with openness to share knowledge; and balancing business models.
There are four important principles for leaders and managers managing strategic communities for innovation:
Foster a common vision, common interests, common merits, and common knowledge among the actors.
Encourage middle managers to improvise strategic communities and networked strategic communities so that they do not miss out on business opportunities.
Make the commitment of middle managers to the vision apparent to all the actors in the strategic communities and networked strategic communities.
Endorse the value shared among community members.
As shown in the article’s research cases, it is possible not only to enhance business efficiency by organizationally consolidating and sharing knowledge assets possessed by individuals or business units through the formation of strategic communities and networked strategic communities, but also to quickly develop innovative new products and services embodying the new knowledge.
Catherine GorrellPresident of Formac, Inc., a Dallas-based strategy consulting organization (http://email@example.com) and a contributing editor of Strategy & Leadership.