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Strategy in the media
Article Type: CEO advisory From: Strategy & Leadership, Volume 39, Issue 2
Facebook’s revolutionary ambitions
With Deals, smartphone users who download Facebook’s application can “check in” to a physical location, such as their local coffee shop, and get a little reward. If the coffee shop is so inclined, it can create a “deal” for users who check in – 50 percent off, for example, an incentive just to show up. Two days after Zuckerberg’s presentation, the power of Deals became clear as the Gap gave away free jeans to the first 10,000 people who checked in to its stores. As Zuckerberg was still onstage, an analyst leaned over to me and says, “They just changed local commerce forever.” It wasn’t even lunchtime yet.
During his presentation, Zuckerberg uses words such as “revolution” and “disruption.” He talks in sweeping terms and with no sense of irony, telling the crowd, “Our goal is to make everything social.” This is bold talk from the young chief executive, yet he has reason to be bullish. In recent years, as individuals, businesses and political movements have embraced Facebook, the company’s clout has only grown. Though still a start-up by some measures, it is now squarely one of the three or four most influential technology companies in the world …
“If you look five years out, every industry is going to be rethought in a social way,” he says. “You can remake whole industries. That’s the big thing.” His ambition, it turns out, is not simply to make Facebook an influential technology company, but the most important company in the world …
The change is this: Facebook is no longer merely a social network, where users check out updates from friends, glance at photos and play some games. Rather, it is making moves to be an essential part of the entire online experience. The company is becoming people’s home page, e-mail system, and more. Much in the way Google extended its capabilities from search to include e-mail, maps and books, Facebook is becoming a part of ever more daily services on the Web. The company is also making strides to achieve one thing Google has not: It is well on its way to becoming the de facto identity platform for the Internet.
“Facebook’s grand plan for the future.” Financial Times, December 5, 2010.
Managing supply chains in the “new normal”
As economies around the world step back from the financial brink and begin adjusting to a new normal, companies face a different set of supply chain challenges than they did at the height of the downturn – among them are rising pressure from global competition, consumer expectations, and increasingly complex patterns of customer demand.
Executives in this McKinsey survey are divided on their companies’ preparedness to meet those challenges, and fully two-thirds expect supply chain risk to increase. What’s more, the survey highlights troubling signs of struggle associated with key, underlying supply chain processes and capabilities, including the ability of different functions to collaborate, the role of CEOs in supply chain planning, and the extent to which companies gather and use information …
As companies have managed their supply chains over the past three years, the challenges they faced and the goals they set have reflected a single-minded focus on weathering the financial crisis. The most frequently cited challenge of the past three years is the increasing volatility of customer demand. This is no doubt a result of the sharp drop in consumer spending that has reverberated throughout all sectors across the globe. Looking at challenges over the next five years, though, the focus shifts: respondents most frequently cite increasing pressure from global competition. Some issues that receive a lot of public attention, such as climate change and natural-resource use, have remained a low priority since our 2008 survey. Still, the share that identifies environmental concerns as a top challenge in the next five years nearly doubled, to 21 percent, over the proportion saying it was a top challenge during the past three years. This suggests that companies anticipate returning to a new normal, wherein they can focus on issues other than cost at least some of the time.
With regard to goals for supply chain management, the results show a similar shift between past and future, perhaps another indicator that companies are focusing on pursuing growth in addition to cost containment. Of course, executives are not ignoring supply chain costs altogether; after weathering a downturn, they know their companies can manage and control future expenses, now that this issue has been on their radar consistently. Indeed, reducing operating costs remains the most frequently chosen goal over the next five years – as it was over the past three – followed by customer service. In a 2008 survey, 43 percent of respondents said improving service was one of their companies’ top two goals for supply chain management, and though it fell as a priority during the crisis, it is now number two for the next five years.
Executives also indicate that many of their companies have met past goals, with supply chain performance improving in both efficiency and effectiveness as they come out of the downturn. For example, nearly half say their companies’ service levels are higher now than they were three years ago, 39 percent say costs as a percentage of sales are lower, and 45 percent have cut inventories.
“The challenges ahead for supply chains,” McKinsey Quarterly, November 2010.
Solving problems by studying successful outliers
Stories of “positive deviants” share the common thread of observable exceptions. This is the unique point of entry for the positive deviance process: focus on the successful exceptions (i.e. positive deviants), not the failing norm. As a problem-solving process, this approach requires retraining ourselves to pay attention differently – awakening minds accustomed to overlooking outliers, and cultivating skepticism about the inevitable “that’s just the way it is.” Once this concept is grasped, attention to observable exceptions draws us naturally to the “who,” the “what,” and especially the “how.”
Positive deviance? An awkward, oxymoronic term. The concept is simple: look for outliers who succeed against all odds.
Richard T. Pascale, Jerry Sternin, and Monique Sternin, The Power of Positive Deviance: How Unlikely Innovators Solve the World’s Toughest Problems (Harvard Business Press, 2010).
Coherence and competitive success
What drives some companies to succeed while others languish? Successful companies develop a system of a few truly unique capabilities that help them create differentiated value for their chosen customers …
We believe that all successful companies – Wal-Mart and Target included – know precisely how they provide value for customers. They make a deliberate choice about their “way to play” in the market, guided primarily by what those companies do uniquely well: their distinctive capabilities. We define capabilities not as “people capabilities,” but as the interconnected people, knowledge, systems, tools and processes that create differentiated value.
They then select a set of products and services that best leverage those unique capabilities and optimally suit their chosen way to play. Most important, they avoid markets, products or services that require new or disparate capabilities, and thus threaten the company’s focus.
Focus for us, therefore, is not about picking just one market, but rather about choosing one coherent way of competing. The true story about Wal-Mart’s and Target’s success is that they have gone to great lengths to focus internally on building capabilities and product offerings that suit their way to play. Kmart, by contrast, has failed to develop a unique or differentiated way to play, and all that goes with it.
… What really underlies Wal-Mart’s advantage is a coherent and differentiated approach to the market.
Their well-defined way to play focuses on “always low prices” for a wide range of consumer items, from food to prescriptions to electronics.
They support their low-cost way to play with an integrated system of capabilities, including: real estate acquisition; no frills store design; and superior supply chain management involving among others expert point-of-sale data analytics.
Their product and service mix is kept tightly aligned with their way to play and capabilities system: avoiding big-ticket items (e.g., furniture or large appliances) where it has no cost advantage, or where new service capabilities might be required. And it innovates constantly within its chosen constraints:, e.g. tailoring product assortments to local trends …
Paul Leinwand and Cesare Mainardi, “Why can’t Kmart be successful while Target and Wal-Mart thrive?,” The Conversation, December 15, 2010, http://blogs.hbr.org/cs/2010/12/why_cant_kmart_be_successful_w.html
Case studies in cataclysmic change
1992 was a killing year for the four computer companies most important to business buyers. All four had been dominant suppliers of minicomputers for the past fifteen or twenty years. But then came the microprocessor, portable databases, Microsoft, and the Unix operating system, which weakened the hold of computer companies on their existing customers and slashed their profit margins. On July 16, 1992, the CEOs of both Digital Equipment and Hewlett- Packard were pushed into retirement. On August 8, Wang Laboratories declared bankruptcy. In December, IBM halved its dividend for the first time ever, forcing the resignation of its CEO a month later …
All four men were smart and experienced. Two were founders of their companies; the others, highly successful career executives. But all of them were simply overwhelmed by the profound changes in technology, cost structures, business models, and markets disrupting the computer industry. And while I found no single explanation for what happened, I did see definite common themes.
Vision alone isn’t enough. The chief executives of DEC, HP, IBM, and Wang fully understood the implications and possibilities of the microprocessor, but still couldn’t adapt to it.
Competition can blind you. IBM’s intense struggle over mainframes with Fujitsu and Hitachi distracted all three companies from identifying the new breed of competitors, including Compaq and Sun. So did DEC’s continuing preoccupation with Data General and Wang, its neighbors in Massachusetts.
Strong cultures can be a straitjacket. IBM didn’t fail because of Bill Gates’s negotiating skills or Microsoft’s brilliant programmers, but because the PC market was driven by consumers. IBM, totally focused on its large business customers, had no expertise in the consumer market and little interest in developing it.
Cost structures can block change. DEC and Wang didn’t fail because of disruptive technology, but because they couldn’t adjust their business model to cut the costs of sales and R&D by ten to fifteen percent of revenues.
Great sales organizations are often the crown jewels of successful companies. But they can also become the most powerful barrier against changes in product innovations or distribution models, however necessary.
First movers can fail, too. The PC leaders in 1980 were Apple, Commodore, and Radio Shack. All used the microprocessor to pursue outdated business models and lost their lead positions to latecomers with better perspective.
Forcing the retirement of a CEO can become an especially thorny issue when the CEO is a founder who has led the company’s early success. But a failure to force a timely change can ruin a company, as we’ll see at DEC and Wang but notably not at IBM.
Ernest von Simson, The Limits of Strategy (iUniverse, 2010).
From retrenchment to growth at NPS
In 2006 NPS Pharmaceuticals Inc., a midsized biopharmaceutical firm, was in trouble. For many years, the company had focused solely on developing a blockbuster osteoporosis drug. But in March 2006, the US Food and Drug Administration (FDA) asked the company to run an additional, expensive clinical trial largely because of concerns over a side effect. The company’s stock price dropped 37 percent in a single day, and then steadily retreated in the months that followed. Cash reserves dried up, and the company faced US$191 million of debt coming due within 12 to 15 months. So Dr Francois Nader, the company’s chief operating officer (who joined NPS shortly after the FDA’s news), came up with a bold strategy.
Nader, who became president and CEO in 2008, transformed NPS into a late-stage development company focused on rare (“orphan”) diseases. He shut down the company’s in-house discovery and manufacturing infrastructure in favor of outsourcing. He also hired a team of industry veterans to strengthen the new company’s capabilities. In the years that followed, what could have been a disaster ended up a success story. By specializing in one part of the drug development process rather than seeking to do it all, and by zeroing in on diseases that lacked effective treatments (and lacked competition from other pharmaceutical companies), NPS turned its prospects around. With only 60 employees, the company now has two promising, high-revenue-potential treatments for rare diseases in the final stage of clinical testing, a strong cash position, and growing royalty revenue from partnered products …
Laura Geller and Greg Rotz, “Getting big by going small,” Strategy + Business, Winter 2010.
Can a consumer brand be a disruptive technology?
For more than a decade, some of the nation’s shrewdest marketers have tried to muscle in on the neighborhood dry cleaner, only to give up after years of labor and millions of dollars in investments.
Undeterred, Procter & Gamble is taking a shot at it, again. Having persuaded Americans to buy synthetic laundry detergent, fluorinated toothpaste and disposable diapers, P&G believes it has finally cracked the code on the dry cleaning business, too.
Where other dry cleaning entrepreneurs have tried to come up with clever business models for dry cleaning, P&G’s primary innovation is in the brand name itself: Tide Dry Cleaners, named after its best-selling laundry detergent.
With more than 800,000 Facebook fans and legions of loyal customers, Tide will draw people into the franchise stores, and superior service – which includes drive-through service, 24-hour pickup and cleaning methods it markets as environmentally safer – will keep them coming back, company officials predict.
“The power of our brands represents disruptive innovation in these industries,” said Nathan Estruth, vice president for FutureWorks, P&G’s entrepreneurial arm. “Imagine getting to start my new business with the power of Tide.”
And the lure of its fragrance. P&G plans to infuse the stores and its dry cleaning fluids with the scent of the brand that’s been cozily familiar to generations of households …
The idea for Tide Dry Cleaners came from P&G’s FutureWorks, a unit that comes up with ways to expand famous brands like Pampers, Oil of Olay and Crest.
Many of those brands are experiencing robust growth in developing markets, but finding new ways to increase revenue in saturated markets like the United States is more challenging.
Four years ago, FutureWorks began considering franchise opportunities, looking for industries where ownership was fragmented and consumers weren’t satisfied. It came up with a three-inch binder of ideas …
“Smelling an opportunity“ The New York Times, December 8, 2010.
Cisco’s virtual management laboratory
We are also keenly aware that when a company is large and successful, it can also grow complacent. Somewhere along the way, Cisco had started acting less like a hungry startup with everything to gain and more like an established market leader with too much to lose. By the early 2000s, we began to wonder whether our company was losing its edge. The more we studied the issue, the more concerned we became, especially about our innovation decision-making processes. We were green-lighting only those ideas that produced immediate returns. In many instances, this yielded gains in profit and market share. But it also meant that we were missing opportunities – the consumer networking market and many others.
Since then, we have made deliberate efforts to pioneer innovative management practices at Cisco: designing and implementing new, unconventional approaches for taking advantage of market transitions and preparing for competitive threats. Our efforts are not limited to a specific program or team; they represent a commitment by decision makers from across the company to consider alternative ways of doing business. It’s as if we set up a virtual management laboratory, part culture initiative and part best practices, to make use of every asset Cisco has. We have relied on this “lab” to help overcome a variety of challenges over the years. Three of the most powerful examples of its work have been embracing complementary business models, developing disruptive innovations (the kinds of game-changing products and services that open up new businesses), and overcoming go-to-market obstacles.
Inder Sidhu, Doing Both: How Cisco Captures Today’s Profit and Drives Tomorrow’s Growth (FT Press, 2010).
The iPhone deficit and the innovation economy
Pundits love to claim that America’s job market will come roaring back as soon as everyone learns to “embrace the innovation economy” and churn out more high-tech gadgets. Well, maybe they should think different. Two academic researchers at the Asian Development Bank Institute in Tokyo recently that the most iconic American gadget of all – Apple’s iPhone – last year added $1.9 billion to the US trade deficit.
The explanation is fairly simple: iPhone parts manufactured in the United States account for a mere 6 percent of its estimated $179 wholesale cost. The rest of the iPhone’s cost comes from components made in Japan and Germany and their final assembly in China. “High-tech products such as iPhones in this context do not help increase US exports,” conclude the researchers, Yuqing Xing and Neal Detert, “but instead contribute to the US trade deficit.”
… If all iPhones were assembled in the US, it would have added $5.7 billion to US exports last year.
Josh Harkinson, “The iPhone’s trade deficit problem,” Mother Jones, December 16, 2010, http://motherjones.com/mojo/2010/12/iphones-trade-deficit-problem
Groupon’s challenge to local advertising
Groupon’s got a healthy business. Almost forty million people, in more than a hundred and fifty cities around the world, have signed up for its e-mails, and every weekday it sends subscribers a daily deal, typically from a local business – fifty per cent off spa treatments, say, or twenty bucks off sushi. Groupon’s gimmick, such as it is, is that you get the deal only if enough people sign up for it, but at this point the site is so popular that just about all the deals go through. In essence, what Groupon offers is an innovative twist on the tradition of loss-leader marketing: just as retailers have always used steep discounts on certain items in order to get people into their stores, Groupon’s deals are an easy, low-risk way for small businesses to attract new customers. It’s an appealing business model, particularly in recessionary times. But is it, as Groupon’s CEO, Andrew Mason, suggested recently, a company that’s going to transform the way local business works? Or is it just another overpriced flash in the pan?
The answer, most probably, is neither. Groupon isn’t going away. Unlike many Web companies, it’s been profitable from the start. (It takes fifty per cent of the revenue in every deal.) This year, it had half a billion dollars in sales, and estimates are that, before long, it could have as much as two billion dollars in revenue. The market for local advertising, which is really the business Groupon is in, is huge (more than $130 billion a year) and still relatively untapped online. And, while Groupon has many competitors, it’s by far the biggest and most respected player around.
James Surowiecki, “Groupon clipping,” The New Yorker, December 20, 2010.
Can any company become innovative?
Most of our management rituals were designed (a very long time ago) to promote discipline, control, alignment and predictability – all laudable goals. But to outrun change or head off a newcomer at the pass, these processes have to be re-engineered so they facilitate rather than frustrate bold thinking and radical doing.
What limits innovation in established companies isn’t a lack of resources or a shortage of human creativity, but a dearth of pro-innovation processes. In too many organizations one finds that …
Few, if any, employees have been trained as business innovators.
Few employees have access to the sort of customer and industry insights that can help spur innovation.
Would-be innovators face a bureaucratic gauntlet that makes it difficult for them to get the time and resources they need to test their ideas.
Line managers aren’t held accountable for mentoring new business initiatives or lack explicit innovation goals.
Innovation performance isn’t directly tied to top management compensation.
The metrics for tracking innovation (inputs, throughputs and outputs) are patchy and poorly constructed.
There’s no commonly agreed-upon definition of innovation and hence no way of comparing innovation performance across teams and divisions.
Gary Hamel, “Who’s really innovative,” The Wall Street Journal, November 20, 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).