Continuous renewal, and how Best Buy did it

Citation

Gorrell, C. (2007), "Continuous renewal, and how Best Buy did it", Strategy & Leadership, Vol. 35 No. 6. https://doi.org/10.1108/sl.2007.26135fae.001

Continuous renewal, and how Best Buy did it

Catherine Gorrell is president of Formac, Inc., a Dallas-based strategy consulting organization (mcgorrell@sbcglobal.net), 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.

Continuous renewal, and how Best Buy did itBala Chakravarthy and Peter Lorange

Continuous renewal of the business is essential for any company to produce strong profits for shareholders, year after year. The renewal process has two approaches: renovation and innovation. Both approaches can be defined by a matrix of two dimensions: markets (major segments and geographies) and distinctive competencies (assets and know-how that determine how a company adds value).

Renovation entails protecting and extending a firm’s existing market share. It is achieved through continuous improvements in operating performance, successful new product introductions, new approaches to servicing the customer, and new ways of segmenting the existing market.

Innovation necessitates entering new markets and serving them with new competencies. Such innovation stakes out a new business domain for the firm to grow profitably in the future.

The business growth dilemma

The strategic challenge experienced by numerous companies is this dilemma: how to simultaneously push to explore new opportunities and capabilities, and exploit existing markets and capabilities. How to transform while still protecting and extending the core business? The competition for resources is intense. The balance between serving today’s position versus the future’s is fraught with risk and uncertainty.

Recommended strategic solution

Bridge the business from today’s markets and competencies to those of the future, by employing “build” and “leverage” renewal strategies. The initial step: enter new markets by leveraging the existing competencies that already exist. Complementary new competencies will have to be added in order for the company to compete successfully in these new markets. Similarly, the new distinctive competencies that the firm must build in order to protect its existing market franchise, must allow for future leverage into new markets. Both “leverage” and “build” should logically relate to the other. (See the two exhibits.) If the two are linked systematically, they can help the firm migrate to new markets and new competence platforms progressively over time. “Leverage” and “build” are the two strategies that together provide a pathway for continuous renewal.

A company can use these two renewal strategies to perform a dramatic transformation, but through an evolutionary process not a revolutionary one. The present does not have to be discarded; it can be morphed into the future. It is the preferred way to transform the firm without taking undue risks. This is continuous renewal.

Firms like Best Buy, Canon, Nestlé and Medtronic that have sustained profitable growth are masters at continuous renewal. The story of Best Buy’s repeated renewal is presented in the article, including five important lessons learned.

Business model innovation: it’s not just about technology anymoreHenry Chesbrough

Business models matter. Today, innovation must include business models, rather than just technology and product R&D. A better business model often will beat a better idea or technology. Consider Wal-Mart in retailing, Dell in PCs, or Southwest Airlines. But business models are not all the same. To innovate a business model, first understand what it is, and then examine what paths exist to improve upon it.

What is a business model?

All companies have a business model, whether they articulate it or not. At its heart, a business model performs two important functions: value creation, and value capture. More specifically, there are six functions of a business model (cited in article). Each of the six parameters identifies where innovation can generate new value in an industry.

Improving your business model

Assessment. There are six stages (or types) of business models, which, taken together, form a Business Model Framework. Review the stages, assess where your business is now. Then look at the attributes of the next stage of the framework. They provide some guidelines for how to advance your business model further.

Solve the “gap”

Who within your company, other than the CEO, is responsible for all the ways the business creates value in its products and services and captures that value in the form of revenue from its customers? Many organizations have a “business model innovation leadership gap.” That is, no one person in the organization has the authority, tenure and the span of control to innovate the business model. This fosters inertia.

Adopt change

Top managers of the organization reached their current level of responsibility by executing within the current business model. It is familiar to them and they know how to exploit its strengths. The more radically different a potential new model is, the more data needs to be provided to justify its consideration. All too often, the result is that over time the established business model becomes unchallengeable.

Nurture the new business model

There is no way to know today exactly what your company’s future business model will look like. The only way forward is to conduct some experiments, gather the evidence, identify the most promising direction and then run some further experiments. Each model deserves a chance to demonstrate its continued viability. Customers will ultimately be the final arbiters of whether one is better than the other.

Experimenting, testing, refining, and integrating a new business model: all these steps need to be done. If this sounds expensive and time-consuming, it is. But the better perspective is to evaluate the cost of competing in the market with an obsolete business model, against other companies who made the investments and took the risks to innovate a superior business model. Seen this way, investing in business model innovation is money well spent.

Changing your company’s approach to innovationPierre Loewe and George Chen

A flood of recent business articles share a common theme, “innovators win.” Studies have shown that business model innovation yields disproportionately higher returns, and companies that have an established innovation process out-innovate those that do not. With these facts, the next logic step is to focus on amplifying a core competency at innovation. To this end, here are three recommendations:

1. 1.

   Start with fresh perspectives. Leave behind the old innovation paradigm by challenging three outdated assumptions that constrain innovation efforts.

   • •

     “Innovation is all about coming up with new products and services.” New products and services are vital to growth, but there are several other ways in which companies can innovate. Ask what new customers might be served and what they need, how to configure the value chain differently, and what alternative economic model might be used.

   • •

     “Innovation is solely the job of the R&D department.” Yes, “research” and “development” are always important in innovation. But every group inside the company and beyond it – such as partners, customers and suppliers – need to be involved as well to find opportunities to innovate that will produce competitive advantage.

   • •

     “Breakthrough innovation occurs only through luck or a ‘stroke of genius’ from a visionary leader.” Luck is good but not reliable. Hence the need to design and implement a systematic innovation process to maximize the chances that time and time again new profitable opportunities will be identified and taken to market.

2. 2.

   Use “innovation architecture” to design your innovation program. Map out what to do on the three critical dimensions of innovation.

   • •

     The “what” – from product/service to business model.

   • •

     The “who” – from few insiders to many inside and outside.

   • •

     The “how” – from serendipity to systematic process using successive phases of divergence and convergence.

3. 3.

   Avoid seven pitfalls that can thwart the initiative. Learn from the experience of innovation pioneers as you implement your innovation program.

That innovation is an imperative is no longer in doubt. That innovation can be achieved by any company that sets its mind to it and implements a systematic innovation process has been demonstrated by the success of many firms–large and small, high tech and low tech, selling products or services, based in developed and developing countries. The key issue for executives is to figure out how to get an innovation effort with a high likelihood of success started in their companies. The ideas in this article provide that beginning.

Three ways to successfully innovate your business modelEdward Giesen, Saul J. Berman, Ragna Bell and Amy Blitz

As a strategic response to the anticipated fundamental changes that will be affecting most industries in the next two years, many CEOs are innovating in operations and/or products and services. But analysis shows that financial outperforming firms put twice as much emphasis on business model innovation as underperformers. As one CEO stated, “Products and services can be copied; the business model is the differentiator.”

But what exactly does the term business model innovation encompass? And what type yields the best results? To answer these questions, a framework – of three types of business model innovation – can be used. The models:

• •

  Innovations in industry models. This involves innovating the “industry value chain” by horizontal moves into new industries, or by redefining existing industries, or by developing entirely new industries. This dimension leverages white spaces in the competitive environment as well as unique assets.

• •

  Innovations in revenue models. This involves how revenue is generated through offering re-configuration (product/service/value mix) and pricing models.

• •

  Innovations in enterprise models. Innovating the role played in the value chain by changing the extended enterprise and networks with employees, suppliers, customers, and others, including capability/asset configuration.

Key findings

These three types of business model innovation were compared across 35 best practice cases, with these results:

1. 1.

   Each type of business model innovation, with the right strategy and strong execution, can generate success. No significant variation in financial performance was found.

2. 2.

   Opportunities for revolutionary change exist for firms at virtually any stage.

3. 3.

   Diverse strategies, when aligned with a company’s brand, operations, core strengths, and other assets, can work for different companies in the same industry.

4. 4.

   While many paths may lead to successful business model innovation, innovations in enterprise structure that focus on network plays or external collaboration were the most common type of business model innovation in the sample for the study.

Going forward

The questions in the box “Pinpointing your strengths, shortcomings and options for business model innovation,” can be used to support your decision-making process. In general, the best business model innovation strategies provide a strong fit between the competitive landscape for a particular industry and the organization’s strengths, shortcomings and characteristics such as age and size.

Berkshire Hathaway and GEICO: an M&A case studyJoseph Calandro, Jr, Ranganna Dasari and Scott Lane

A well-documented fact is that many corporate mergers and acquisitions (M&A) fail to deliver the future value anticipated at the time the deals are announced. In contrast, Warren Buffett, the Chairman and CEO of Berkshire Hathaway, is a remarkably successful acquirer. His competitive advantage: the valuation techniques of Graham and Dodd.

To illustrate how modern Graham and Dodd (G&D) methodology works, the authors apply it retrospectively to Berkshire Hathaway’s 1995 acquisition of GEICO. The case shows how the modern G&D valuation approach could be utilized in a corporate setting to improve the odds of successful M&A.

The Graham & Dodd approach

G&D valuation differs from other methodologies in that it approaches valuation through a unique construct, the value continuum. This continuum not only focuses on assets and earnings, but also on competitive advantage and growth. By evaluating these elements within an overall framework, the G&D method frequently produces more insightful valuations than other methods. Furthermore, those valuations can be proactively utilized to effectively guide due diligence.

Applying the four components of G&D valuation

1. 1.

   Net Asset Value (NAV) is the first and most tangible level of value along the continuum and is estimated by reconstructing the balance sheet.

2. 2.

   Earnings Power Value (EPV) adjusts income already earned by a firm to arrive at an estimate that is sustainable into perpetuity. By ignoring growth, analytical focus can be directed to core earnings power, which can be reconciled with NAV. This validation feature is another benefit of the G&D approach.

3. 3.

   Franchise Value of a firm reflects its ability to operate with a sustainable competitive advantage thereby generating economic profit. This profit is reflected in the valuation by a substantial spread between EPV and NAV.

4. 4.

   Growth Value is the final and most intangible level of value. The valuation identifies a margin-of-safety for the acquisition within growth. The margin-of-safety is the G&D risk management mechanism and Buffett has repeatedly stressed his adherence to it. Risk in this context is defined as the possibility of paying a higher price for an asset than its intrinsic value supports.

Graham & Dodd and M&A

Although a significant portion of the investment community applies G&D valuation, this trend does not seem to be so for corporate M&As. While the G&D methodology is certainly not a panacea it can be utilized in a corporate setting to improve valuation practices, which should increase the odds of successful M&A.

Global expansion: balancing a uniform performance culture with local conditionsJoshua B. Bellin and Chi T. Pham

Executives today are rightly nervous about maintaining a common corporate identity as their companies expand across the globe: successfully managing across diverse organizations may just be the key factor that separates the winners from the mere survivors in the competitive international arena.

The core questions

How can a company resolve dual concerns: how to maintain a common identity, a unity of purpose and a consistent way of doing business and be flexible to succeed in vastly different global markets? How to keep the company’s competitive edge (their brand promise) and continue to expand its global reach?

The answer: fostering shared mindsets

To be both consistent and flexible globally, companies not only have to change their business configurations and organizational structures, but also their “behavioral context” – the motivation, values, and commitments of the company’s employees.

Shared mindsets represent the missing link between a company’s values and its business performance. When mindsets are widely shared, they translate established company values into practices by means of commonly understood guidelines on how to recognize and solve problems – which, in turn, guide the organization in making decisions when faced with many possibilities.

In addition, shared mindsets create a common identity that can be codified and introduced to new employees when the company enters new regions. By having a common identity, a company can unify regional operations and overcome the challenges of operating in diverse cultures and regions. Finally, shared mindsets help a global workforce to focus on common goals. In high-performance businesses, the performance mindsets form a strong link that helps organizations live their values through observable decisions, actions and, ultimately, results.

The five performance mindsets

For successful international expansion, five mindsets help resolve the need to balance global uniformity with responsiveness to local conditions:

1. 1.

   Balancing market making and execution.

2. 2.

   Cultivating and managing talent.

3. 3.

   Leveraging information technology as a strategic asset.

4. 4.

   Measuring performance selectively.

5. 5.

   Seeking continuous renewal and innovation.

Creating and sustaining the five performance mindsets requires the participation of managers at all levels of the organization. Reinforcement of the mindsets can be done by suggested practices. With the participation of leaders, the company’s management of its performance mindsets can become a distinctive capability and thereby a source of international competitive advantage.