Strategy in the media

Citation

Henry, C. (2010), "Strategy in the media", Strategy & Leadership, Vol. 38 No. 3. https://doi.org/10.1108/sl.2010.26138cab.001

Strategy in the media

Article Type: CEO advisory From: Strategy & Leadership, Volume 38, Issue 3

Open sourcing comes to manufacturing

The door of a dry-cleaner-size storefront in an industrial park in Wareham, Massachusetts, an hour south of Boston, might not look like a portal to the future of American manufacturing, but it is. This is the headquarters of Local Motors, the first open source car company to reach production. Step inside and the office reveals itself as a mind-blowing example of the power of micro-factories.

In June, Local Motors will officially release the Rally Fighter, a $50,000 off-road (but street-legal) racer. The design was crowdsourced, as was the selection of mostly off-the-shelf components, and the final assembly will be done by the customers themselves in local assembly centers as part of a “build experience.” Several more designs are in the pipeline, and the company says it can take a new vehicle from sketch to market in 18 months, about the time it takes Detroit to change the specs on some door trim. Each design is released under a share-friendly Creative Commons license, and customers are encouraged to enhance the designs and produce their own components that they can sell to their peers …

Jay Rogers, CEO of Local Motors … opted for totally original designs: They don’t evoke classic cars but rather re-imagine what a car can be. The Rally Fighter’s body was designed by Local Motors’ community of volunteers and puts the lie to the notion that you can’t create anything good by committee (so long as the community is well managed, well led, and well equipped with tools like 3-D design software and photorealistic rendering technology). The result is a car that puts Detroit to shame.

Chris Anderson “In the next industrial revolution, atoms are the new bits,” Wired, February 2010.

When is offshoring the wrong answer?

For years, the NCR Corporation simply followed the pack. Like many other large US manufacturing companies, in the past couple of decades the maker of automated teller machines (ATMs) relied heavily on offshoring and outsourcing to trim factory costs. By making much of its equipment in cheaper offshore locations in the Asia/Pacific region, and by hiring Singapore’s Flextronics International Ltd. to make other equipment, NCR could slash hundreds of millions of dollars in plant expenses and be reasonably certain that its ATMs met quality standards.

But recently, NCR has rejected this strategy – at least to a degree. In 2009, the company decided to move its most sophisticated lines of ATMs from its plants in China and India, and from a Flextronics facility in South Carolina, and instead manufacture the machines in Columbus, Ga, not far from the NCR innovation center, where its new technology is on display. The reason: The company was concerned that outsourcing distanced its designers, engineers, IT experts, and customers from the manufacturing of the equipment, creating a set of silos that potentially hindered the company’s ability to turn out new models with new features fast enough to satisfy its client banks …

NCR’s change in direction has raised the possibility that US manufacturers are getting serious about “backshoring” some of the production they shifted overseas in the wholesale offshoring movement that started in earnest in the 1990s. General Electric Company Chief Executive Jeff Immelt recently attracted attention for remarks he gave to a West Point leadership conference calling for US companies to make more products at home. Demonstrating Immelt’s commitment, GE announced in the summer of 2009 that it would build two new plants in the US – a factory in Schenectady, NY, to make high-density batteries and a facility in Louisville, Ky, to produce hybrid electric water heaters currently made in China.

William J. Holstein “The case for backshoring”, Strategy+Business, Winter 2010.

How Cisco stays on top

If you want a lesson in how to weather an economic downturn – even the catastrophic one of 2009 – ask John Chambers for a peek at his playbook. The Cisco Systems Inc. CEO operates his company like a basketball coach calling for the fast break at Internet speed. His ability to time market transitions, change directions on a dime, and capitalize on downturns has become legendary in Silicon Valley.

These days Chambers is upbeat, saying Cisco should make its annual revenue growth target of 12 percent to 17 percent in its core product. His confidence comes from what he’s hearing from customers. It’s the customers’ needs that have always been his barometer; he sees them as the harbinger of change. It’s why Cisco looks very un-Cisco-like these days, as “the plumber of the Internet,” known for its routers and switches, acquires a number of businesses that are consumer-focused.

Cisco bought seven companies in 2009, including Norway-based videoconferencing equipment maker Tandberg for $3.4 billion. It has homed in on the virtualization market – cloud computing – partnering with companies such as VMware Inc. and EMC Corp. and setting its sights on data centers. Then there is Cisco’s recent venture into the energy marketplace, with its creation of a Smart Grid Business Unit.

Chambers continues to diversify Cisco’s direction, and he says repeatedly that technology is not a religion. When a company falls head over heels for its product, it sinks itself. He saw it happen to his two former employers, IBM Corp. and Wang Laboratories Inc. He watched IBM’s refusal to move away from its mainframe product cause it to miss the market transition and fall three decades behind. He saw it at Wang, which was so smitten by its minicomputers that it never recovered from the market’s shift and went bankrupt. That’s why Chambers describes Cisco’s culture as “technologically agnostic.”

“You have to move on market transitions. They wait for no one,” he says. “That doesn’t mean we don’t have a healthy paranoia that makes Andy Grove (Intel Corp. founder) look relaxed.”

“Not the Cisco you think you know,” Portfolio, December 31, 2009, http://www.portfolio.com/executives/2009/12/31/cisco-ceo-john-chambers-operates-his-company-like-a-basketball-coach/

Is the Volcker Rule the answer?

Amid the Depression, Congress passed the Glass-Steagall Act, separating commercial and investment banks. This restriction was gradually whittled down until Glass-Steagall was repealed in 1999. In recent years, Wall Street’s behemoths have engaged in both commercial and investment banking activities, even betting – and sometimes losing – vast sums on complex, poorly understood derivatives and mortgage-backed securities.

A number of them, such as Citigroup, which was heavily involved in the mortgage-derivatives market, have required costly government bailouts in the financial crisis. The Volcker Rule is a small step toward restoring some separation between commercial and investment banking. It targets institutions like Citigroup, Bank of America, JPMorgan Chase, Wells Fargo and Goldman Sachs.

Some of Obama’s proposals, including the $90 billion tax, are sensible, according to Wharton finance professor Franklin Allen. “The tax seems perfectly reasonable … The banks should have to pay that,” he says. Kent Smetters, professor of insurance and risk management at Wharton, notes that states often impose special charges on insurers after a company fails. “The idea of a tax on survivors to make up for losses is not a completely-out-of-the-question type of concept,” he says. “It’s done at the state level all the time.”

But, like Siegel and Herring, Allen and Smetters believe that the banking proposals miss the big picture. The centerpiece of the proposals, which involves restricting risky practices at commercial banks, would be hard to implement effectively, Smetters says. He argues that it would be nearly impossible to distinguish between trades a firm does for its own benefit and those it executes for customers. What looks like a trade done in a firm’s proprietary account can be part of hedging strategy tied to a customer’s activities, he says. “I’m just totally scratching my head on that.”

“Banking reform proposals: why they miss the mark,” Knowledge@Wharton, February 17, 2010, http://knowledge.wharton.upenn.edu/article.cfm?articleid=2434

Customer immersion as the way to growth

Sarah Jane Gilbert: Your book focuses on how companies can profit, regardless of market conditions, by immersing themselves in the lives of their customers. Please describe the business model of looking “outside-in” versus “inside-out.”

Ranjay Gulati … Most companies with an inside-out perspective become attached to what they produce and sell and to their own organizations. In contrast, the outside-in perspective starts with the marketplace and delves deeply into the problems and questions customers are facing in their lives. It then looks for creative ways to combine its own capabilities with those of its suppliers and partners to address some of those problems. The goal is to bring value to customers in ways that are beneficial for them while also creating additional value for the company itself.

Q: Could you give an example?

A: Sure, bagged salad. Bagged salad would not have risen to what is now, a $2.5-billion-a-year industry, without a revolutionary shift to outside-in thinking that allowed companies such as Fresh Express to realize that busy consumers wanted companies to make the whole salad for them rather than simply continue to tweak the packaging of their lettuce …

Q: What are some of the institutional barriers to developing an outside-in orientation?

A: Developing an outside-in orientation is difficult to achieve because it requires both insight and action. Gaining real insights into customers’ needs demands more of companies than those arising from typical market research. The questions you ask of customers must be more profound and open-ended, with an intent not only to discover how your customers engage with your products or services but also to understand some of the broader parameters of the constraints they are facing in their own lives.

Collating and making sense of all that you learn about your customers is just the starting point. From here, firms have to make a creative leap to discover the unique combination of products and services that may address those needs.

“The outside-in approach to customer service: Q&A with: Ranjay Gulati,” Working Knowledge, February 16, 2010, http://hbswk.hbs.edu/item/6201.html

Global strategy now

Most companies’ global strategies have been based on a vision of a world that’s steadily, even rapidly, becoming more integrated, where the key challenge is keeping up with that integration. But given what we’ve witnessed in the past two years, it makes more sense to adopt a vision in which national differences remain pronounced (and may become even more so), and managing those differences is the primary challenge. Companies whose strategies currently emphasize smoothing differences and achieving economies of scale across national boundaries may need to shift toward adapting to local conditions. Companies whose strategies emphasize arbitrage, taking advantage of differences – may need to make the same shift; now is not the time to be perceived as an exploitative foreigner.

Resource allocation processes will have to change, too. During the years of rising asset prices, many companies came to think of global strategy as one long asset-accumulation play that involved relatively little risk. The idea was to invest abroad and, if that didn’t work out, resell at a capital gain. That may be why, according to a survey of HBR readers, 88% of managers in pre-crisis days thought of global strategy as an imperative, almost an article of faith, rather than as a set of options to be carefully evaluated.

Now that the bubble has burst, many firms are being reminded that a significant portion of their global operations subtract, rather than add, economic value. This isn’t just a result of the crisis; it was true in the years leading up to the downturn. Of course, some global investments will pay off in the long run. Nevertheless, in a post-bubble world, where the cost and even the availability of capital are issues, firms will need to be more ruthless about terminating long-standing loss makers – and more selective in pursuing new opportunities. Some of this selectivity can be imposed by raising hurdle rates and tightening assumptions around terminal values. Some firms are also trying out other approaches, such as allocating resources according to their articulated strategic priorities. A number of large companies have turned on the investment spigots in China and, to a lesser extent, India – and for other platforms for growth – while tightening the financial taps elsewhere. Other companies have responded to resource constraints by offshoring, outsourcing, and forging strategic alliances (which seem to be on an upsurge).

Pankaj Ghemawat “Finding your strategy in the new landscape,” Harvard Business Review, March 2010.

How the best companies stay agile

An organization’s ability to exploit both revenue-enhancing and cost-cutting opportunities within its core business more quickly, effectively, and consistently than rivals do is the source of operational ability. Managers cannot predict the form, magnitude, or timing of these opportunities in advance. They can, however, boost the odds of beating their rivals to them. While there are a number of important steps executives hoping to build operational agility can take, I focus here on two: putting in place systems to gather and share the information required to spot opportunities and building processes to translate corporate priorities into focused action.

Data to spot opportunitiesOver the past few years, the Spanish retailer Zara, which overtook Gap in 2008 as the world’s largest clothing retailer, has been a poster child for supply chain excellence because of its ability to deliver new items to stores quickly. Impressive as this supply chain is, the retailer’s ability to spot trends as they emerge is equally important in serving its target customers – fashion-conscious young women in Europe. Zara consistently spots these opportunities because it has built-in systems to collect real-time market data, to supplement statistical reports with periodic exposure to raw market data, and to share information widely throughout the organization …

Translating corporate priorities into individual objectivesIn many companies, agility stalls in the boardroom when top executives deluge the organization with multiple and often conflicting priorities. That’s not the case at Banco Garantia and its affiliated companies, including the retailer Lojas Americanas, the logistics company América Latina Logistica, and, formerly, the brewer AmBev (which merged with Interbrew in 2004 and acquired Anheuser-Busch in 2008, creating Anheuser-Busch InBev). Garantia’s companies operate in Brazil, traditionally one of the world’s most turbulent markets, and have succeeded through operational agility.

Garantia companies avoid the proliferation of corporate priorities by capping their number at three to five in any year. Executives communicate them clearly throughout the organization to focus attention, resources, and effort on a handful of “must win” battles. Then managers translate corporate priorities into individual objectives. Subordinates negotiate with their bosses to set three to five individual objectives, when possible favoring quantitative targets and those that can be measured on an ongoing basis.

Donald Sull, “Competing through organizational agility,” McKinsey Quarterly, December 2010.

Understanding the limits of financial models

A report by bank super visors last October pointed to poor risk “aggregation”: many large banks simply do not have the systems to present an up-to-date picture of their firm-wide links to borrowers and trading partners. Two-thirds of the banks surveyed said they were only “partially” able (in other words, unable) to aggregate their credit risks. The Federal Reserve, leading stress tests on American banks last spring, was shocked to find that some of them needed days to calculate their exposure to derivatives counterparties …

The banks with the most dysfunctional systems are generally those, such as Citigroup, that have been through multiple marriages and ended up with dozens of “legacy” systems that cannot easily communicate with each other. That may explain why some Citi units continued to pile into subprime mortgages even as others pulled back.

In the depths of the crisis some banks were unaware that different business units were marking the same assets at different prices. The industry is working to sort this out. Banks are coming under pressure to appoint chief data officers who can police the integrity of the numbers, separate from chief information officers who concentrate on system design and output …

The way forward is not to reject high-tech finance but to be honest about its limitations, says Emanuel Derman, a professor at New York’s Columbia University and a former quant at Goldman Sachs. Models should be seen as metaphors that can enlighten but do not describe the world perfectly. Messrs Derman and Wilmott have drawn up a modeller’s Hippocratic oath which pledges, among other things: “I will remember that I didn’t make the world, and it doesn’t satisfy my equations,” and “I will never sacrifice reality for elegance without explaining why I have done so.” Often the problem is not complex finance but the people who practice it, says Mr Wilmott. Because of their love of puzzles, quants lean towards technically brilliant rather than sensible solutions and tend to over-engineer: “You may need a plumber but you get a professor of fluid dynamics.”

One way to deal with that problem is to self-insure. JPMorgan Chase holds $3 billion of “model-uncertainty reserves” to cover mishaps caused by quants who have been too clever by half. If you can make provisions for bad loans, why not bad math too?

“Number-crunchers crunched: The uses and abuses of mathematical models,” The Economist, February 11, 2010.

Rethinking business education

In 1999, few others in the business-school world shared Mr Martin’s view. But a decade and a seismic economic downturn later, things have changed. “I think there’s a feeling that people need to sharpen their thinking skills, whether it’s questioning assumptions, or looking at problems from multiple points of view,” says David A. Garvin, a Harvard Business School professor who is co-author with Srikant M. Datar and Patrick G. Cullen of an upcoming book, Rethinking the MBA: Business Education at a Crossroads.

Learning how to think critically – how to imaginatively frame questions and consider multiple perspectives – has historically been associated with a liberal arts education, not a business school curriculum, so this change represents something of a tectonic shift for business school leaders. Mr Martin even describes his goal as a kind of “liberal arts MBA”

“The liberal arts desire,” he says, is to produce “holistic thinkers who think broadly and make these important moral decisions. I have the same goal.”

… But even before the financial upheaval last year, business executives operating in a fast-changing, global market were beginning to realize the value of managers who could think more nimbly across multiple frameworks, cultures and disciplines. The financial crisis underscored those concerns – at business schools and in the business world itself.

As a result, a number of prominent business schools have re-evaluated and, in some cases, redesigned their MBA programs in the last few years. And while few talk explicitly about taking a liberal arts approach to business, many of the changes are moving business schools into territory more traditionally associated with the liberal arts: multidisciplinary approaches, an understanding of global and historical context and perspectives, a greater focus on leadership and social responsibility and, yes, learning how to think critically.

Two years ago, for example, the Graduate School of Business at Stanford made a sweeping curriculum change that included more emphasis on multidisciplinary perspectives and understanding of cultural contexts. The first-quarter mandatory curriculum, for example, now includes a class called “The Global Context of Management and Strategic Leadership.” First-year students also must take a course called “Critical and Analytical Thinking.”

“Multicultural critical theory. At B-School?,” New York Times January 10, 2010.

Give your products meaning not just low price

In reaction to the Great Recession and the forecasts that consumer demand in the US, Europe, and Japan will remain anemic for the foreseeable future, many companies are focusing on stripped-down “value” products. In doing so, they risk making a big mistake: Assuming that consumers in hard times care more about utility and low price and less about the emotional and social dimensions of products.

While people, of course, do care about price; they care even more about how products give meaning to their lives. Even when they are pressed financially, they do not want to feel poor. So the challenge for companies is to cut costs without cutting meaning.

One of the most successful products to do this was the Panda, a three-door hatchback city car that Fiat created in response to the oil shocks of the 1970s and the economic downturn that followed. The Panda was conceived as a “no frills, big thrills” rugged car. Its backseat was a cloth rectangle stretched between two tubes that could be folded to hold a baby or fragile parcels, unfolded flat to make a bed-sized mattress, or removed, rolled up, and stored in a slot carved out of the floor behind the front seats to create a cargo bay.

The Panda’s design not only allowed it to be assembled rapidly and inexpensively but also gave it a distinctive personality: According to Fiat’s market analyses, only 38% of customers considered price a significant reason for buying a Panda. Most wanted a rugged, all-terrain, lighthearted car; being cheap was just an essential part of its “no frills, big thrills” concept.

Its meaning and identity allowed the Panda to remain popular long after the economy recovered. While competing cars lasted an average of 8.5 years, the Panda endured for 23. During that time, Fiat made only minor changes to the model and sold 4.5 million worldwide, with only minor changes. It was one of the most profitable cars ever produced.

Some other companies are masters at creating products that are good-enough value price-wise, but don’t daily remind their owners that they couldn’t afford to buy more expensive alternatives. For example, people love to buy IKEA furniture because of its modern, clever design, and Swatch watches because they can be used as fashion accessories. They use Skype not only because it provides a free alternative to traditional phone calls, but also because its multimedia tools, which include video calls, chats, and file sharing, allow them to stay intimately connected with friends in faraway places.

In these hard times, remember that people still love meaningful things. Do not just design to cost. Design to mean.

Roberto Verganti, “Cut costs without cutting meaning,“ The Conversation, February 11, 2010, http://blogs.hbr.org/cs/2010/02/cut_cost_not_meaning.html

Modernization and national disunion

Why are there so many countries in the world? At the end of World War II, there were 74 nations. Today, the United Nations has 192 members. Proliferating nations are more than an academic curio. As trade ministers and environment ministers know, one of the reasons it is so difficult to strike an international deal these days is because it requires the agreement of a couple of hundred representatives.

In The Size of Nations, Alberto Alesina (Harvard) and Enrico Spolaore (Tufts) present a theory of country size that is as simple as it is powerful. In determining how big countries should be (and therefore how many countries there are in the world), they argue that there are two opposing forces. For economic reasons, nations should be big. For political reasons, countries should be small.

Economics favors large nations because it means more of us share the costs of running the central bank, paying for embassies, and maintaining an air force. And because commerce is easier within borders than across them, businesses are more likely to prosper in a big nation than a small one.

But politics drives towards smaller nations because large nations are hard to control. Smaller nations are more homogenous on several dimensions. Incomes tend to be more equally distributed, there is less ethnic and racial tension, and people are more likely to share a common language and religion. It’s a lot easier to find common ground when you’re the President of Costa Rica than if you happen to be President of the United States.

… The two great forces of the post-war era – globalization and democratization – both favor smaller nations. Globalization does it by making secession more attractive. In 1950, when average tariffs were around 40 percent, regions paid a large price for going it alone. Now that the average tariff is around 5 percent, breaking up is easier to do.

Andrew Leigh, “Breaking up is easy to do,” Australian Financial Review, February 2, 2010.

What comes after the Great Recession?

Uncertainty remains: we will be operating in the aftermath of the great recession for years to come:

• •

  Current initiatives to “reflate” the global economy amount to an unprecedented and historic experiment; some of the measures have never been put into practice before. So, the big question remains: Is this the end of the crisis, or will the Great Recession simply follow a different pattern than previous downturns?

• •

  There remains a problem with “zombie banks” – that is, banks that don’t or can’t make loans – and it may take years for banks to become truly healthy again. The resulting shrinking of credit will be troublesome for economies around the world; conventional wisdom says that it takes from $3 to $6 in credit for every $1 of GDP growth.

• •

  Even in the best-case scenario – with job-creation rates reaching the 1990s boom level , it could take until 2014 for unemployment in the United States to return to its prerecession level of around 5 percent.

• •

  US consumers generate a very large share of global GDP – on the order of 18.8 percent – and there is no obvious short-term replacement for this mainstay of global commerce. Even China’s economy will not have sufficient strength to save the economy: a 32 percent increase in private consumption in China would be needed to offset just a 5 percent reduction in US consumer spending.

• •

  Executives grew more pessimistic over the course of 2009. According to the March BCG survey, a majority (63 percent) expected a “U”-shaped recession with an upswing in 2010 or 2011, and 22 percent expected an “L”-shaped recession, similar to Japan’s Lost Decade. But in September, 46 percent expected an “L”-shaped recession and 43 percent expected a “U”-shaped recession. (Notably, in September, nearly half of US executives, 50 percent of those in Germany, and 74 percent of those in Japan expected an “L”-shaped recession.)

David Rhodes and David Stelter, Accelerating Out of the Great Recession: How to Win in a Slow-growth Economy (McGraw-Hill, 2010).

Craig HenryStrategy & Leadership’s 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).