CitationDownload as .RIS
Emerald Group Publishing Limited
Copyright © 2008, Emerald Group Publishing Limited
Strategy in the media
Article Type: CEO advisory From: Strategy & Leadership, Volume 36, Issue 4
Making strategy actionable
What goes into a good statement of strategy? Michael Porter’s seminal article “What is strategy?” (HBR November/December 1996) lays out the characteristics of strategy in a conceptual fashion, conveying the essence of strategic choices and distinguishing them from the relentless but competitively fruitless search for operational efficiency. However, we have found in our work both with executives and with students that Porter’s article does not answer the more basic question of how to describe a particular firm’s strategy.
It is a dirty little secret that most executives don’t actually know what all the elements of a strategy statement are, which makes it impossible for them to develop one. With a clear definition, though, two things happen: First, formulation becomes infinitely easier because executives know what they are trying to create. Second, implementation becomes much simpler because the strategy’s essence can be readily communicated and easily internalized by everyone in the organization …
Any strategy statement must begin with a definition of the ends that the strategy is designed to achieve. “If you don’t know where you are going, any road will get you there” is the appropriate maxim here. If a nation has an unclear sense of what it seeks to achieve from a military campaign, how can it have a hope of attaining its goal? The definition of the objective should include not only an end point but also a time frame for reaching it. A strategy to get US troops out of Iraq at some distant point in the future would be very different from a strategy to bring them home within two years.
Since most firms compete in a more or less unbounded landscape, it is also crucial to define the scope, or domain, of the business: the part of the landscape in which the firm will operate. What are the boundaries beyond which it will not venture? If you are planning to enter the restaurant business, will you provide sit-down or quick service? A casual or an upscale atmosphere? What type of food will you offer – French or Mexican? What geographic area will you serve – the Midwest or the East Coast?
Alone, these two aspects of strategy are insufficient. You could go into business tomorrow with the goal of becoming the world’s largest hamburger chain within 10 years. But will anyone invest in your company if you have not explained how you are going to reach your objective? Your competitive advantage is the essence of your strategy: What your business will do differently from or better than others define the all-important means by which you will achieve your stated objective. That advantage has complementary external and internal components: a value proposition that explains why the targeted customer should buy your product above all the alternatives, and a description of how internal activities must be aligned so that only your firm can deliver that value proposition.
David J. Collis and Michael G. Ruksdtad, “Can you say what your strategy is?”, Harvard Business Review, April 2008.
Is continuous improvement the enemy of organizational transformation?
Transformation. The word oozes with potential. Shed the skin of the old and embrace the new. Emerge better, stronger, more powerful. Companies are increasingly recognizing that mastering transformation is becoming a competitive imperative. As formerly isolated markets collide and competitors from emerging markets hone disruptive approaches, product lifecycles are shrinking and competitive advantage is dissipating more rapidly than ever before.
Case studies of sweeping organizational transformation - Nokia moving from rubber boots to mobile phones, Kimberly Clark shifting from a paper provider to a leader in consumer packaged goods, Apple sextupling its stock in five years after a decade of stagnation, Google going from a technology company to an advertising powerhouse, Procter & Gamble hopping from soaps to laundry to skin care to health care - show that successful transformation is possible.
But the breathless hype behind these stories obscures a brutal reality: Most efforts at transformation fail miserably. This unnerving and frustrating reality should not be a surprise - after years of pervasive “continuous improvement” programs, executives are reaping what they have sown. Their organizations, from executives down through the rank and file, have been motivated and compensated to focus on incremental improvement, measured quarterly and annually, along competitive performance parameters established years earlier.
To expect this system to create the breakthrough innovations that power transformation is simply unrealistic. Years of continuous improvement training have caused corporate innovation muscles to atrophy … .
In many organizations, the scarcest resource isn’t money, it’s time.
Scott D. Anthony and Kevin Bolen, “Transform your company for growth”, Forbes, 4 April 2008.
A radical model for software development
In late March, Starbucks launched a new web site to engage its customer community in helping to chart the company’s future course. Called My Starbucks Idea, it serves as a worldwide suggestion box with the added feature of community rating of the ideas. So far, customers’ ideas seem much less varied than their drink orders. Most involve Starbucks’ giving them something free of charge, like wi-fi service or a bonus beverage after 6 purchases, and those are the ideas that are winning in the polling … .
Asking customers for management input (as opposed to experience feedback) is problematic because customers don’t share the organization’s mission - they have their own agenda. (That’s why they think it’s a great idea to give away the store.) On a deeper level, it can undermine the respect the customer has for the business. While saying so is out of favor in the current Web 2.0 climate, it remains true that customers of many firms actually expect the people they’re paying to be more on the ball than they are. Think of the classic, bitter complaint about the consultant who doesn’t deserve his fee: “you ask him the time, and he asks to borrow your watch.”
Julie Kirby, “Suggestion for Starbucks: try this new way of getting customer feedback”, Harvard Business Review Editors Blog, April 2, 2008, http://discussionleader.hbsp.com/hbreditors/2008/04/advice_for_starbucks_ceo_howar.html
Succeeding under M&A’s new rules
Corporate deal making has a new look - smaller, busier, and focused on growth. Not so long ago, M&A experts sequenced, at most, 3 or 4 major deals a year, typically with an eye on the benefits of industry consolidation and cost cutting. Today we regularly come across executives hoping to close 10 to 20 smaller deals in the same amount of time, often simultaneously. Their objective: combining a number of complementary deals into a single strategic platform to pursue growth - for example, by acquiring a string of smaller businesses and melding them into a unit whose growth potential exceeds the sum of its parts.
Naturally, when executives try to juggle more and different kinds of deals simultaneously, productivity may suffer as managers struggle to get the underlying process right.1 (“foot1”) Most companies, we have found, are not prepared for the intense work of completing so many deals - and fumbling with the process can jeopardize the very growth companies seek. In fact, most of them lack focus, make unclear decisions, and identify potential acquisition targets in a purely reactive way. Completing deals at the expected pace just can’t happen without an efficient end-to-end process.
Even companies with established deal-making capabilities may have to adjust them to play in this new game. Our research shows that successful practitioners follow a number of principles that can make the adjustment easier and more rewarding. They include linking every deal explicitly to the strategy it supports and forging a process that companies can readily adapt to the fundamentally different requirements of different types of deals.
One of the most often overlooked, though seemingly obvious, elements of an effective M&A program is ensuring that every deal supports the corporate strategy. Many companies, we have found, believe that they are following an M&A strategy even if their deals are only generally related to their strategic direction and the connections are neither specific nor quantifiable.
Instead, those who advocate a deal should explicitly show, through a few targeted M&A themes, how it advances the growth strategy. A specific deal should, for example, be linked to strategic goals, such as market share and the company’s ability to build a leading position. Bolder, clearer goals encourage companies to be truly proactive in sourcing deals and help to establish the scale, urgency, and valuation approach for growth platforms that require a number of them.
Robert T. Uhlaner and Andrew S. West, “Running a winning M&A shop”, McKinsey Quarterly, March 2008.
Expanding a manager’s reach
Since the 1930s, business researchers have maintained that bosses optimally should manage about seven to 10 people. But many companies have boosted that average substantially - and scholars and consultants are reconsidering their views of maximum team size.
Assigning more workers to each boss started catching on during the corporate restructuring pushes of the late 1980s and early 1990s, when flatter organizational models took hold. Now some consultants are urging companies to loosen their views of supervising, so organizations can run with fewer bosses. Research in Europe suggests that a manager can oversee 30 or more employees, in part by using technology to communicate and help monitor work.
“If you’re stuck with the traditional emphasis on checking, controlling and intervening, it takes real heroics to push as far as 12 direct reports,” says Michael Hammer, a leadership coach in Cambridge, Mass. “You need to change what it means to be a manager.”
Mr Hammer was a controversial advocate of restructuring initiatives in the 1990s and co-author of the 1993 bestseller Reengineering the Corporation. He now favors giving front-line workers more responsibility. Bosses then exercise influence by training and supporting larger numbers of subordinates. As a result, he says, “You need fewer bosses.”
Mr. Hammer cites PepsiCo Inc.’s Gemesa cookie business in Mexico as a case in point. There, workers have been briefed on company goals and processes so that they do more themselves to keep production running smoothly. New pay systems reward productivity, quality, service and teamwork while penalizing underperformance. That promotes efficiency, PepsiCo says, while letting managers function more as coaches of self-motivating teams.
Gemesa last year ran its factories with 56 employees per boss, PepsiCo says, instead of the 12:1 ratio that prevailed in the mid-1990s. The changes have helped Gemesa improve its business results, the company adds.
“Overseeing more employees with fewer managers”, Wall Street Journal, 24 March 2008.
Success starts with understanding customer needs
When capturing customer requirements, the unit of analysis must be the job the customer is trying to get done. Most companies support the theory that customers buy products and services for a specific purpose: to get jobs done. By jobs, we mean the fundamental goals customers are trying to accomplish or problems they are trying to resolve in a given situation … This terminology and the thinking behind it have far-reaching ramifications for anyone trying to understand customer needs. Companies must shift their attention from the product and instead focus their requirement-gathering efforts on the execution of the job that the product or service is intended to perform.
From the customer’s perspective, it is the job that is the stable, long-term fixed point around which value creation should be centered. Current products and services are merely point-in-time solutions that enable customers to execute jobs. A vinyl record, a CD and an MY3 file, for example, all help customers get the job of storing music done. Focusing on creating a better record doesn’t help in the creation of a CD or MP3 device, but focusing on the job of storing music supports the discovery and creation of new ways to help customers get the job done better - which is the essence of innovation.
Focusing on the job as the unit of analysis has two additional benefits. First, it eliminates the need to worry about latent or unarticulated needs, because thoughtfully selected customers are always able to articulate their requirements for getting a job done better and to indicate what related jobs they want to get done, even in markets for which products do not yet exist.
Second, a focus on jobs ensures that the requirements captured are universal and have a shared relevance (although perhaps not importance) among customers worldwide, Requirements captured in the United States, for example, are valid fix the customer population in Europe and Asia, and new or different requirements for a job rarely are seen across geographic location. Surgeons around the world have the same requirements for executing a surgical procedure, corn farmers around the world have the same requirements for farming corn and retirees have the same requirements for managing finances. Why? Because in each instance, the individuals are trying to get the same job done - and they execute it in a similar way and measure success in a common fashion. The job is what they have in common, and it supports a universal language for requirements gathering.
Anthony W. Ulwick and Lance A. Bettencourt, “Giving customers a fair hearing”, Sloan Management Review, Spring 2008.
“Keeping your options open” may be a losing strategy
Xiang Yu was a Chinese general in the third century BC who took his troops across the Yangtze River into enemy territory and performed an experiment in decision making. He crushed his troops’ cooking pots and burned their ships.
He explained this was to focus them on moving forward - a motivational speech that was not appreciated by many of the soldiers watching their retreat option go up in flames. But General Xiang Yu would be vindicated, both on the battlefield and in the annals of social science research … General Xiang Yu was a rare exception to the norm, a warrior who conquered by being unpredictably rational.
Most people can’t make such a painful choice not even the students at a bastion of rationality like the Massachusetts Institute of Technology, where Dr Ariely is a professor of behavioral economics. In a series of experiments, hundreds of students could not bear to let their options vanish, even though it was obviously a dumb strategy (and they weren’t even asked to burn anything) …
“Closing a door on an option is experienced as a loss, and people are willing to pay a price to avoid the emotion of loss,” Dr Ariely says.
John Tierney, “The advantages of closing a few doors”, The New York Times, 26 February 2008.
Global capital markets: the long view
Struggling credit markets, slumping stocks, and a sliding dollar have been generating anxiety among executives and policy makers in early 2008. Amid the turmoil, it’s easy to forget that long-term structural change in the world’s capital markets will probably prove more important than short-term fluctuations, as it did after the 1987 US stock market crash, the 1992 assault on the British pound, and the 1997 unraveling of Asia’s financial markets.
Recent McKinsey Global Institute (MGI) research highlights several trends that look set to continue during the years ahead, long after the present bout of market turbulence has ended:
The continued growth and deepening of global capital markets as investors pour more money into equities, debt securities, bank deposits, and other assets around the world.
The soaring growth of financial markets in emerging economies and the growing ties between financial markets in developed and developing countries.
The shift of financial weight in Asia from Japan toward China and other fast-growing emerging markets.
The growing financial clout of the eurozone countries and the significance of the euro.
The burgeoning role of oil-rich Middle Eastern countries as suppliers of capital to the world, along with the rise of new financial hubs in the Middle East to complement the rapidly growing hubs in London and Asia. While these trends reflect a shift in financial power from the United States toward other parts of the world, the sheer size and depth of the US market will give it a leading role on the international financial stage for years to come.
Diana Farrell, Christian S. Fölster, and Susan Lund, “Long-term trends in the global capital markets,” McKinsey Quarterly, February 2008.
Boeing discovers the pitfalls of outsourcing
Boeing has agreed to buy Vought Aircraft Industries’ stake in a venture that assembles sections of the new 787 Dreamliner, a move that may help the company untangle the production delays dogging its best-selling plane.
The acquisition will give Boeing “more influence” over the four sections of the fuselage that are assembled at the plant in North Charleston, SC, Boeing spokeswoman Yvonne Leach said Friday. Terms weren’t disclosed.
Replacing Vought chips away at a strategy Boeing is using for the first time: having vendors build large sections that the plane maker later assembles.
Vought had “been sort of a bottleneck on the production ramp-up and a poor performer in terms of managing to put those sections together at a fast pace,” said Peter Arment, an analyst with Greenwich, Conn.-based American Technology Research. “This is part of the program that Boeing thought their suppliers would be able to handle. Their hand was more or less forced, given the performance with this joint venture.”
Boeing’s market value has dropped about 28 percent since the first delay was announced in October for the Dreamliner, which has about 900 orders in the company’s most successful new-plane sales campaign ever.
“Boeing buys half of South Carolina 787 assembly plant,” Seattle Times, 29 March 2008.
Motorola’s woes show that innovation requires more than technology
Motorola has decided to split itself in two – a failing mobile-phone business and a so-so network equipment/two-way radio/set-top box business. This is a default strategy.
Motorola tried for months to sell its mobile phone operation and no one in Asia, Europe or North America would buy it.
For good reason. The Razr was a fluke. Motorola was never an innovation-led company. It was a technology-driven company run by engineers who failed to understand the difference between technology and innovation. Let me explain.
I saw the most amazing Motorola technology coming out of its labs in China when I visited two years ago. Touch-screen cell phones, wonderfully articulated for the Chinese market. Motorola never integrated that technology into an innovation system that moved it from China to the US and mass market. Why? There was no innovation process, no regular, systematized, standardized pipeline process that focused on bringing out a steady stream of innovative products.
Engineers, loving their beautiful technology in separate labs for separate businesses, did their thing. And episodically, we got the walkie-talkie and the wonderful Star-tac cell phone, still my own personal favorite. But, like the Razr, there was no real process. Each was a fluke.
Bruce Nussbaum, “Motorola splits in two – why the Razr was a fluke and what the company needs to do now,” Nussbaum on Design, 26 March 2008, www.businessweek.com/innovate/NussbaumOnDesign/archives/2008/03/motorola_ splits.html?campaign_id=rss_ blog_nussbaumondesign
Digital technology and counterinsurgency warfare
… The days of patrol leaders operating half-blind on the deadly streets of Iraq are drawing to a close. After a two-year rush program by the Pentagon’s research arm, the US Defense Advanced Research Projects Agency, or DARPA, troops are now getting what might be described as Google Maps for the Iraq counterinsurgency. There is nothing cutting-edge about the underlying technology: software that runs on PCs and taps multiple distributed databases. But the trove of information the system delivers is of central importance in the daily lives of soldiers.
The new technology – called the Tactical Ground Reporting System, or TIGR – is a map-centric application that junior officers (the young sergeants and lieutenants who command patrols) can study before going on patrol and add to upon returning. By clicking on icons and lists, they can see the locations of key buildings, like mosques, schools, and hospitals, and retrieve information such as location data on past attacks, geotagged photos of houses and other buildings (taken with cameras equipped with Global Positioning System technology), and photos of suspected insurgents and neighborhood leaders. They can even listen to civilian interviews and watch videos of past maneuvers. It is just the kind of information that soldiers need to learn about Iraq and its perils.
For some units, anyway, the database is becoming the technological fulcrum of the counterinsurgency. More than 1,500 junior officers – about a fifth of patrol leaders – are already using the technology, which was first deployed in early 2007. The first major unit to use it – the First Brigade Combat Team, First Cavalry Division – returned to the United States in late January. A few days before leaving Camp Taji, northwest of Baghdad, one soldier in this unit, Major Patrick Michaelis – who had many better things to do – paused to write an effusive 1,000-word e-mail to Technology Review.
He said that the technology had saved the lives of soldiers by allowing them to avoid IEDs, and that it enabled them to make better use of intelligence, capture insurgents, and improve their relationships with local people. “The ability … to draw the route … of your patrol that day and then to access the collective reports, media, analysis of the entire organization, is pretty powerful,” Michaelis wrote. “It is a bit revolutionary from a military perspective when you think about it, using peer-based information to drive the next move … Normally we are used to our higher headquarters telling the patrol leader what he needs to think.”
David Talbot, “A technology surges,” Technology Review, March/April 2008.
How to break into the world’s toughest market
Accounting for almost 30% of world GDP, the United States is the world’s largest and most demanding market for almost everything from oil to microprocessors to premium coffee. Companies around the world aspire to do business in the US, or at least with US companies in their home markets. By doing so, they learn much about the latest management practices, they can be closer to the cutting edge of innovation, and they can boost their reputations by supplying well-known US firms.
The market size of the US makes it important target but, in addition, foreign companies often feel they have to crack the US market in order to gain respect. No CEO can lead a global company if that company does not have a strong presence in the USA.
So how do you penetrate the US market? The annals of business are littered with foreign companies that have never quite succeeded in the USA. But here are … companies that have managed to crack the US market. Each carries a special lesson.
Royal Bank of Scotland. This company built up a strong retail market share in the US, not under the RBS brand, but through a series of acquisitions of regional (not national) banks. RBS is adding value for its shareholders by letting these banks retain their individual brand identities, by focusing on improving back office efficiencies and by having the highly respected CEO of one of the acquired entities lead the combined US organization. Meanwhile, RBS is building its B2B brand with institutional clients on Wall Street.
IKEA. IKEA offers a furniture retailing value proposition and experience unparalleled in the US market. IKEA’s location selection expertise and their established global supply chains enable them to offer exceptional category-killer prices that are further keys to success.
ING. The Dutch bank converted its weakness (no retail branches in the US) into a strength. Following a successful Canadian market test, ING gave its entrepreneurial general manager the green light to offer retail banking services to US consumers but exclusively on an on-line basis. Taking advantage of its low no-bricks-and-mortar cost structure, ING was able to offer generous rates on certificates of deposit. Just four years on, ING is the third-largest holder of consumer CD investments in the US.
Posted by John Quelch, “How to penetrate the US market,” Marketing KnowHow, 31 March 2008, http://discussionleader.hbsp.com/quelch/2008/03/how_to_penetrate_the_us_market.html
Who do customers listen to - and when
When deciding to purchase a new product or service, many consumers do their homework, diligently researching options and gathering information from several sources. While common sense says we are likely to consult an expert for details about a particular item, who we turn to for product advice is actually based on a combination of factors, says Professor Donald Lehmann.
Lehmann and co-researchers Jacob Goldenberg, Daniela Shidlovski and Michal Master Barak from the Hebrew University of Jerusalem were interested in finding out who is more appealing as an information source: experts, who have knowledge about technical information such as product features and attributes, or social connectors, who gather, from a large circle of acquaintances, information about product problems and usage experiences …
Contrary to the researchers’ expectations, subjects often preferred to consult with a social connector rather than an expert. While experts may have superior knowledge, they don’t always understand the problems everyday users face and may not speak a language laypeople can understand. “It is natural to want to talk to an expert about a new product or service,” Lehmann says. “If you require surgery, for instance, you want to see the top surgeon in the field, right? But the surgeon is not as good as a patient or someone who knows people who have had the surgery at explaining what your experience will really be like.”
The researchers also found that subjects’ preference for an expert or a social connector changed depending on the level of innovation of both the product and the consumer seeking advice.
For less-innovative products - an update of an existing product, for instance - people are more likely to seek information from an expert than a social connector. Because consumers already possess a basic understanding of the product, Lehmann explains, the additional information a social connector can offer will not be sufficient; they need details only an expert can provide.
Innovative consumers (early adopters who enjoy trying new products) consistently turn to experts for advice, regardless of the type of product they are considering or the type of information they are seeking, the researchers found. By contrast, noninnovators (consumers who are more concerned about how easily they can use a new product than what its most advanced features are) prefer to consult with socially connected individuals for radically new products but with experts for incrementally new products.
“When expertise isn’t enough,” Ideas at Work (Columbia Business School), 27 March 2008, http://www4.gsb.columbia.edu/ideasatwork
Getting beyond process to leverage technology at work
“We have to consider people, process and technology.” It’s a phrase I hear quite often, especially among IT folk. Sometimes they say, “people, process, technology and content.” These are the things to consider when implementing a system. There are myriad variations. Yesterday I was told by an experienced consultant that they always consider policy when thinking about process. “People, process and technology” has entered our business thinking much like proverbs such as “a stitch in time saves nine.” They create the framework for our thinking and both guide and constrain our actions.
I’d like to focus on the Process element of this business proverb and would like to suggest that this word creates a limited and inadequate response when thinking about what happens to make a system work. The word ’process’ suggests all those things you can describe and write down, especially using boxes and arrows. Yet we know professional practice and even expert craft is required to get things done. So here is my suggestion. When we use the PPT (all business proverbs should have an acronym – my little joke) let’s expand “Process” and include Practice and Craft. Here is a short-hand way of thinking about it.
Process is what you are told to do.
Practice is what everyone does.
Craft is striving for utmost quality with years of experience under your belt.
And the ways to understand these three modes also differs but it’s hard to categorise except to say that many processes can be analysed, many practices can be observed and illustrated with stories and craft can be observed, experienced and appreciated but takes years to learn.
I’m certain better systems will emerge if we take this wider view of process.
Shawn Callahan “An expansion of people, process and technology,” 10 April 2008, www.anecdote.com.au/archives/2008/04/an_expansion_of.html
Nice guys can finish first
… According to John Zhang and Jagmohan Raju, both Wharton marketing professors, and Tony Haitao Cui, a University of Minnesota marketing and logistics professor, many people aren’t purely mercenary in their business dealings. They care about fairness – and they should, the researchers say, because doing so can maximize their profits.
A manufacturer and a retailer can both end up making more money if they are fair minded, setting prices with an eye to achieving an equitable outcome in their joint marketing channel as opposed to merely maximizing their individual profits, Zhang, Raju and Cui argue in a paper recently published in Management Science titled, “Fairness and channel coordination.”
When people are fair minded, they don’t need to waste time on elaborate negotiations or enter into complicated contracts to coordinate their marketing channel and maximize profitability, the authors contend in their paper. “A constant wholesale price will do. When a fair channel is coordinated through a constant wholesale price, the retailer perceives no inequity. Therefore, a constant wholesale price as a channel-coordination mechanism can help to foster an equitable channel relationship.”
Call it a new glove for the Invisible Hand: the manufacturer sets his price, and the retailer’s sense of fairness takes care of the rest. “We show that you don’t need elaborate coordination contracts because concern about fairness creates coordination, which perhaps explains the prevalence of using simple wholesale prices as channel contracts,” Zhang says.
“In the game of business, playing fair can actually lead to greater profits,” Knowledge@Wharton, 13 March 2008, http://knowledge.wharton.upenn.edu/article.cfm?articleid=1916
Is the US auto industry poised for a comeback?
Last year’s landmark labor deals and the weak dollar are breathing new life into US auto plants, leading Detroit’s auto makers to plan sizable exports of US-made vehicles to markets around the world.
General Motors Corp. is looking to export US-made vehicles to Europe as well as to China and Latin American markets such as Brazil, company executives confirmed. Chrysler LLC, primarily spurred by exchange rates, has already started shifting production from Europe to the US to take advantage of lower costs and available plant capacity. Ford Motor Co. is considering ramping up exports if it can bring labor costs down, people familiar with the matter said.
For years the US has been one of the most expensive places in the world to make cars. But the new contracts with the United Auto Workers union signed last fall significantly improve the global competitive position of Big Three plants. The weaker dollar, which makes production in the US less expensive, is also helping to turn the economics of domestic production upside down.
“Combined with the weak dollar, we’ve got a contract that puts ourselves in a great position to ship products to other countries and do it making a profit,” said Mike Herron, a UAW official at GM’s assembly plant in Spring Hill, Tenn., who is involved in negotiations with the company.
“Detroit sets bold goal: exporting US cars,” The Wall Street Journal, 8 April 2008.
How the best companies find the best talent
The top private equity firms have a genius for hiring superior talent. All organizations need great people, but PE measures talent with one test only: performance. It’s not that private equity firms are heartless. Rather, their three- to five-year time horizon doesn’t allow for misfires. They are hardheaded – it’s all about what they need, what they’ve got, and where to fill the gaps. And they act quickly to replace senior managers who fail to deliver.
Where do PE firms find the right executive talent? As a rule, they conduct a broad search, looking well beyond the scope of their personal contacts. They rigorously screen candidates inside the company and out for an attitude that gravitates toward responsibility and action, traits that are as important as a strong skill set and track record. They seek managers who are hungry for success, are willing to put their own financial upside at risk, and relish the challenge of transforming a company.
They also fully harness the talent of their board members. Such value-added boards help coach CEOs, provide real business input and make quick decisions on corporate requests. This requires members who really understand the industry and the company, as well as the strengths and weaknesses of the management team. Vigorous boards are also well-steeped in the key initiatives, which helps them evaluate both candidates and their progress toward reaching goals.
Orit Gadiesh and Hugh MacArthur “How to compete for talent like a private equity firm,” Memo to the CEO, 31 March 2008, http://ceomemo.harvardbusiness.org/2008/03/how_to_compete_for_talent_like_1.html
Disruptive innovation requites a viable business model
Last year, a friend said, “I’ve got a great example of an early-stage disruption for you.” He showed me a full page advertisement for a new airline called Skybus. The model seemed to hit key disruptive notes: fares as low as $10 coupled with new revenue streams such as branded planes.
But earlier this week Skybus shut down. What went wrong? The short answer: Skybus’s strategically sensible move to find a disruptive-friendly pocket of the aviation industry ran counter to its need to develop a profitable business model …
The airline industry can be surprisingly difficult for low-cost entrants. In ideal disruptive circumstances, market leaders are happy to cede low-end markets to attackers. But incumbent airlines care a great deal about serving even the least demanding customers because the marginal cost of adding an additional passenger to a plane is relatively low. Incumbents typically respond to a low-cost incursion by slashing prices to try to drive the entrant out of business.
Thirty years ago Southwest Airlines found a way out of this dilemma. The key to Southwest’s historical success was flying in and out of secondary airports, such as Baltimore, Maryland and Manchester, New Hampshire. Instead of trying to cherry pick passengers on existing routes, Southwest historically grew by flying non-competitive routes.
Skybus tried to follow this approach. Only one of its initial routes (Columbus, Ohio to Los Angeles) overlapped directly with a major airline’s route. It also borrowed RyanAir’s model of “unbundling” plane tickets, or charging seemingly impossibly low fares to entice more people to fly and then layering on additional charges for various services like checking in bags.
Southwest succeeded because it coupled the most attractive secondary routes with a very low-cost business model. RyanAir has been able to succeed because its cost structure is incredibly low, its operations are incredibly efficient, and it has high capacity utilization. In both cases disruptive success traces back to business models that allow prosperity at low price points.
After all, at the end of the day succeeding with a low-priced offering requires a business model that turns low prices into attractive profits. Otherwise a low-priced model is simply a recipe to make less money than market leaders …
Seemingly disruptive beginnings don’t always lead to disruptive endings. Perhaps Skybus’s model would have flourished a decade ago when competition was less fierce and the economic climate was rosier. But Skybus’s failure to create a profitable model meant its long-term chances of success were quite low.
Scott Anthony, “Why it’s so hard to disrupt the airline industry,” Innovation Insights, 8 April 2008, 5:59 pm, http://discussionleader.hbsp.com/anthony/2008/04/why_skybus_didnt_take_off.html
Craig HenryStrategy and Leadership intrepid media explorer, collected these sightings of strategic management in the news. A marketing and strategy consultant based in Carlisle, Pennsylvania, he welcomes your contributions and suggestions (Craighenry@aol.com).