Emerald Group Publishing Limited
Copyright © 2011, Emerald Group Publishing Limited
Strategy in the media
Article Type: CEO advisory From: Strategy & Leadership, Volume 39, Issue 4
Learning from success
The annals of business history are full of tales of companies that once dominated their industries but fell into decline. The usual reasons offered – staying too close to existing customers, a myopic focus on short-term financial performance, and an inability to adapt business models to disruptive innovation – don’t fully explain how the leaders who had steered these firms to greatness lost their touch.
In this article we argue that success can breed failure by hindering learning at both the individual and the organizational level. We all know that learning from failure is one of the most important capacities for people and companies to develop. Yet surprisingly, learning from success can present even greater challenges. To illuminate those challenges – and identify approaches for overcoming them – we will draw from our research and from the work of other scholars in the field of behavioral decision making, and focus on three interrelated impediments to learning.
The first is the inclination to make what psychologists call fundamental attribution errors. When we succeed, we’re likely to conclude that our talents and our current model or strategy are the reasons. We also give short shrift to the part that environmental factors and random events may have played.
The second impediment is overconfidence bias: Success increases our self-assurance. Faith in ourselves is a good thing, of course, but too much of it can make us believe we don’t need to change anything.
The third impediment is the failure-to-ask-why syndrome – the tendency not to investigate the causes of good performance systematically. When executives and their teams suffer from this syndrome, they don’t ask the tough questions that would help them expand their knowledge or alter their assumptions about how the world works …
Five ways to learn
How can you avoid the traps we have discussed? Here are some approaches and strategies that you and your organization can use.
Celebrate success but examine it.
Institute systematic project reviews.
Use the right time horizons.
Recognize that replication is not learning.
If it ain’t broke, experiment.
Francesca Gino, Gary P. Pisano, “Why leaders don’t learn from success,” Harvard Business Review, April 2011.
The cloud changes everything
The big deal, though, is the growth of cloud computing. The cloud will rain money on the industry. Why? …
It’ll redefine – maybe – the very idea of the corporation. To see how, consider the implications of cloud computing for small and medium-sized businesses, who can now get world-class IT on a global scale without spending a dime in capital expenses, as BNET has written about. Futurist Paul Saffo once called the Internet “a full-employment act for entrepreneurs.” It just got better-and the little Davids of business have another slingshot to use against the Goliaths. If Quicken put an accountant in a box for small business, imagine what it can mean to have customer relationship management, enterprise resource planning, real-time financials, analytics, and much, much more.
But the cloud also allows big companies to sharpen how they seek a strategic edge. As the economist and writer John Kay points out, there are two broad schools of “the theory of the firm” – i.e., why companies come into being and what gives them the right to win. One has to do with transaction costs; the other with capabilities. The first builds from the fact that sometimes it’s easier and cheaper to perform an activity within a hierarchy – the economic logic of vertical integration – while at other times it’s better to go out to the market. To Ronald Coase and disciples like Oliver Williamson, the sum of these make-or-buy decisions defines the boundaries of a company and shapes the struggle for competitive advantage. You can do smarter, more things in the cloud than you could with Outsourcing 1.0. That significantly widens the domain in which make-or-buy decisions can come up, and hence will lead to another round of re-slicing, re-dicing, re-sewing, and re-assembling the component activities of an enterprise.
As that happens, companies will pare down to a handful of differentiated, interconnected capabilities – a few things they do better than anyone that customers care about. That’s the second broad theory of the firm: A company is essentially a bundled fasces of capabilities and access to capabilities. The strategic value of capabilities is going up, relative of the advantages of mere scale, geographic reach, or the ability to get a cost advantage from operations that customers don’t much care about. Indeed, just about the only remaining advantage to scale these days is the ability to tap into a broad knowledge base and leverage it over a large customer base-in other words, even economies of scale and scope are becoming capabilities-driven.
Thomas A. Stewart, “How cloud computing is changing corporate strategy,” The Strategist, February 25, 2011, www.bnet.com/blog/strategist/how-cloud-computing-is-changing-corporate-strategy
The market for knowledge workers
Today’s New York Times has an interesting and, if you think about it, fairly scary report about how software is replacing the teams of lawyers who used to do document research … Larry Mishel wrote recently about the overselling of education, pointing out that the college wage premium, after rising sharply in the 80s and 90s, has stagnated lately. Indeed. Here’s the ratio of earnings for full-time working men with college degrees versus those with high school, from the Census:
In my mind this raises several questions. One is whether emphasizing education – even aside from the fact that the big rise in inequality has taken place among the highly educated – is, in effect, fighting the last war. Another is how we can have a decent society if and when even highly educated workers can’t command a middle-class income.
I know, it’s rushing ahead a bit; but remember, the Luddites weren’t the poorest of the poor, they were skilled artisans whose skills had suddenly been devalued by new technology.
Paul Krugman, “ Falling demand for brains?”, NY Times, March 5, 2011.
How Uncle Sam helped Thomas Edison
Republicans are right, of course, to praise inventors like Edison for their pioneering advancements at the close of the 19th century. But inventions alone weren’t enough to guarantee progress.
Indeed, at the time the lack of standards for everything from weights and measures to electricity – even the gallon, for example, had eight definitions – threatened to overwhelm industry and consumers with a confusing array of incompatible choices.
This wasn’t the case everywhere. Germany’s standards agency, established in 1887, was busy setting rules for everything from the content of dyes to the process for making porcelain; other European countries soon followed suit. Higher-quality products, in turn, helped the growth in Germany’s trade exceed that of the United States in the 1890s.
America finally got its act together in 1894, when Congress standardized the meaning of what are today common scientific measures, including the ohm, the volt, the watt and the henry, in line with international metrics. And, in 1901, the United States became the last major economic power to establish an agency to set technological standards.
The result was a boom in product innovation in all aspects of life during the 20th century. Today we can go to our hardware store and choose from hundreds of light bulbs that all conform to government-mandated quality and performance standards.
Technological standards not only promote innovation – they also can help protect one country’s industries from falling behind those of other countries. Today China, India and other rapidly growing nations are adopting standards that speed the deployment of new technologies. Without similar requirements to manufacture more technologically advanced products, American companies risk seeing the overseas markets for their products shrink while innovative goods from other countries flood the domestic market.
To prevent that from happening, America needs not only to continue developing standards, but also to devise a strategy to apply them consistently and quickly.
The best approach would be to borrow from Japan, whose Top Runner program sets energy-efficiency standards by identifying technological leaders in a particular industry – say, washing machines – and mandating that the rest of the industry keep up. As technologies improve, the standards change as well, enabling a virtuous cycle of improvement.
Roger, A. Pielke Jr, “Let there be more efficient light, “ New York Times, March 10, 2011.
Panera profits during hard times
Stroll into any Panera in the country – whether it is in Portland, Ore.,or Portland, Maine, St. Louis, Mo. or St. Augustine, Fla. – and the setting is the same: a wide-open airy space with stylish light fixtures, walls painted in rich red and yellow hues, an assortment of cushy, upholstered seats and perhaps a gas fireplace. The scent of fresh bread baking wafts through the café. Panera’s menu offers hearty $7 sandwiches made on artisan breads, as well as soups, salads and baked goods …
It is not your average fast food joint. Today, Panera attracts both everyday customers and Wall Street investors; it is one of the fastest-growing chains in the US, with 1,420 stores, and a roughly $3 billion market capitalization. During the depths of the downturn, when most companies contracted, Panera’s management invested in its product line and increased the number of stores. The strategy worked: In 2009, the company posted revenues of $1.4 billion, up from $640 million in 2005.
The reason for Panera’s success is simple: The chain has pursued a niche strategy, differentiating itself as a fast food restaurant that serves healthy, tasty, affordable food, according to Lawrence Hrebiniak, a Wharton management professor … Panera offers a wholesome alternative to purveyors of fatty burgers and burritos. Equally important, Hrebiniak says, it provides an appealing customer experience.
“Panera has become a symbol of warmth,” he adds. “In advertisements, they position themselves as a warm, welcoming place. They want you to bring your friends and family …
“Frankly there aren’t that many competitors out there that are doing the same thing as Panera,” he notes. Subway, for instance, positions itself as offering healthy and cheap food, but not necessarily a cozy environment. The Olive Garden, meanwhile, is building its brand around family and friends, but it is not positioning itself as healthy.
“Building a brand on the smell of mom’s kitchen: how Panera found success in a down economy,” Knowledge@Wharton, March 30, 2011, http://knowledge.wharton.upenn.edu/article.cfm?articleid=2744
Why culture trumps strategy
When Alfred M. (Al) Gray Jr became commandant (the highest-ranking officer) of the US Marine Corps in 1987, most knowledgeable observers believed that the Corps’s fabled “warrior spirit” culture was already damaged beyond repair. During the Korean and Vietnam Wars, the Corps had grown from its historic level of 75,000 regulars to more than 200,000, and its values and discipline had eroded. It would have been easy for Gray to blame the damaged organizational culture for the problems he inherited, and to launch a formal, full-scale change initiative. But instead, he began to praise and seek out elements of the old Corps culture, such as its ethic of mutual respect. For example, he regularly slipped into the mess halls without insignia, so he would be served the same meals as the privates. To this day, Al Gray is the only Marine Corps commandant portrayed in battle fatigues in his formal portrait in the Pentagon. He is one of the most respected leaders in the Marines’ 250-year history.
Leaders like Gray understand the value of an organization’s culture. This can be defined as the set of deeply embedded, self-reinforcing behaviors, beliefs, and mind-sets that determine “how we do things around here.” People within an organizational culture share a tacit understanding of the way the world works, their place in it, the informal and formal dimensions of their workplace, and the value of their actions. Though it seems intangible, the culture has a substantial influence on everyday actions and on performance.
Organizational cultures don’t change very quickly. Therefore, if you are seeking change in your company or institution, you are most likely to succeed using your existing culture to help you change the behaviors that matter most. Bit by bit, as these new behaviors prove their value through business results, the culture you have can evolve into the culture you need.
Jon Katzenbach and Ashley Harshak, “Stop blaming your culture,” Strategy+Business, Spring 2011.
Too big to succeed?
Fresh headlines cross my desk almost weekly about the crisis in the pharmaceutical business. Jaw-dropping sums of money, about $65 billion a year, flow into the pursuit of new medicines. Yet every year we hear the same old refrain – a pathetic number of new FDA-approved drugs, just 21 last year – come out the other end.
This highly unproductive endeavor has caused endless hand-wringing and finger-pointing. Some like to blame the FDA for being too much of a hard-ass, setting impossible standards for safety and effectiveness. Others accuse scientists for overpromising about the benefits of the genomics revolution, then failing to deliver. Wall Street is an easy boogeyman, given its fast-money obsession that is out of whack with the long-term financial support drug development requires.
But if we really want to see more wonder drugs, then Big Pharma needs to take a hard look in the mirror. Big Pharma’s mega-merger binge of the past few years made quarterly earnings reports look better, and put a lot of money in the pockets of lawyers, investment bankers, and C-level executives. But now that much of the dust has settled, these companies can see they have created enormous global organizations (Pfizer/Wyeth, Merck/Schering-Plough, Roche/Genentech to name a few) that are so far-flung it is darn near impossible to know who’s on first anymore. Pfizer alone now has 110,000 employees around the world.
I’ve heard something close to this sentiment – on background – from multiple sources within most of the major pharma companies I’ve talked to over the past few months. Mega-mergers create a lot of internal bureaucratic headaches – which mostly get glossed over in favor of the spin about synergy and complementary corporate strengths. Months, sometimes years, get spent as these companies try to figure out exactly what they now have obtained through the merger, so they can figure out what to keep and what to scrap in their newly bloated organization. While they all say that partnerships with small biotechs and academic institutions are critical, becoming Titanic in size makes it hard to stay on the same path with smaller, nimbler organizations.
Luke Timmerman “Bigger isn’t better: it’s time for Big Pharma to break up into Little Pharma,” Xcommerce, March 28, 2011, www.xconomy.com/national/2011/03/28/bigger-isnt-better-its-time-for-big-pharma-to-break-up-into-little-pharma/2/
China’s boom spurs demand for luxury goods
China will account for about 20 percent, or 180 billion renminbi ($27 billion), of global luxury sales in 2015, according to new McKinsey research. Even during the global recession in 2009, sales of luxury goods in the mainland rose by 16 percent, to about 64 billion renminbi – down from the 20 percent growth of previous years but far better than the performance of many other major luxury markets. To get a better idea of the dynamics, McKinsey surveyed more than 1,500 luxury consumers in 17 Chinese cities in spring 2010.2 Three findings stood out.
At a time of rapidly rising incomes, widely available luxury products (and information about them), and shifting attitudes toward the display of wealth, more Chinese consumers than ever feel comfortable buying luxury goods. As a result, China’s love for them is moving down the economic ladder, creating opportunities and challenges for marketers accustomed to serving only the very rich. While wealthy consumers (with incomes above 300,000 renminbi, or about $46,000) will continue to account for a majority of luxury consumption, our research shows that the 13 million households in China’s upper middle class (incomes between 100,000 and 200,000 renminbi) offer the biggest new growth opportunity. They already account for about 12 percent of the market, and their numbers are growing rapidly: we expect to see 76 million households in this income range by 2015, accounting for 22 percent of luxury-goods purchases …
The Chinese are increasingly exposed to luxury goods through the Internet, overseas travel, and first-hand experience. As a result, they have become more discerning.
With the surge in the number of luxury stores, fashion magazines, and Web sites and the use of social media, Chinese consumers are now familiar with nearly twice as many brands as they were in 2008. Half of the consumers we surveyed in 2010, for instance, could name more than three ready-to-wear brands, compared with only 23 percent two years before. As Chinese consumers become more familiar with luxury goods, they are becoming savvier about the relationship between quality and price. In 2010, only about half of consumers equated the most expensive products with the best ones, down from 66 percent in 2008 …
New geographic markets
Rapid urbanization and growing wealth beyond China’s largest cities are creating a number of geographic markets with sizable pools of luxury-goods consumers. More small cities will become large enough to justify the presence of stores catering to them; we expect luxury sales in urban areas such as Qingdao and Wuxi, for instance, to triple over the next five years. By 2015, consumption in such cities will approach today’s levels in Hangzhou and Nanjing – now two of China’s most developed luxury-goods markets – and luxury consumption could pass 500 million renminbi in more than 60 cities, compared with 30 today. But the luxury-goods market will remain concentrated in the top 36, which will account for 74 percent of the market’s growth and 76 percent of total luxury sales by 2015.
Yuval Atsmon, Vinay Dixit, and Cathy Wu, “Tapping China’s luxury-goods market,” McKinsey Quarterly, April 2011.
Getting things done
Companies heading downhill have passive cultures. Unmade decisions pile up. Opportunities are lost. No one wants to risk making a mistake. It becomes easier to sit it out than get into the game. One of my favorite examples involves the backwater bank in which employees would send customers who had complicated problems to the rival bank across the street, rather than try to do anything.
In contrast, in companies with high levels of innovation, people take initiative. They start new things. They don’t wait to be told. They get routine work done efficiently in order to free up the time to get involved in something new. Here are some of the reasons.
Small wins matter. Small wins pave the way for bigger wins. A nudge in the right direction, as Cass Sunstein and the new behavioral economists tell us, can lead to major tipping points) when you achieve critical mass. As I saw in my study of business turnarounds and sports teams, confidence – the expectation of a positive outcome that motivates high levels of effort – is built on one win at a time.
Accomplishments come in pieces. A journey of a thousand miles is daunting. The single step with which the journey begins is manageable. Every step you take now adds up by getting that much closer to a goal. Busy people in high-productivity environments tend to take just one more action, return one more phone call, set one more thing in motion before calling it quits for the day. By tomorrow, new demands will start piling up. Mental tricks like dividing big tasks into numerous small steps make it possible to identify immediate actions to get big things off the ground.
Rosabeth Moss Kanter, “Four reasons any action is better than none,” HBR blogs, March 28, 2011, http://blogs.hbr.org/kanter/2011/03/four-reasons-any-action-is-bet.html
Education for the new realities
The relationship between the humanities and commerce is one of the most important in our civilisation. They are made for one another. Like star-crossed lovers they find themselves getting furious, squabbling or brushing past one another unawares in the night.
When Michael Andrew talks about higher education, Universities should pay a lot of attention. Mr. Andrew is the Chairman of KPMG – ‘the major customer’ of the sector, taking on 750 Australian graduates last year. He’s also the chair of the education taskforce set up by the Business Council of Australia (BCA). And last week he put forward some suggestions about how to improve higher education.
He wants to see our universities educate people as leaders, as good communicators and as fruitful collaborators. It’s really quite a remarkable demand and one that universities should welcome with open arms … Commerce needs people who can think independently, who have imagination, who can wonder about the bigger picture, who can articulate their doubts in a constructive manner …
Mr. Andrew calls for an education in problem-solving; he wants to see more of what used to be called the “generalist”. That is, the person who can move intelligently from one context to another, who isn’t imprisoned in a specialist silo. It is wonderful – really significant and important – that this message is coming from the very heart of the business community.
What this really means is that the BCA is calling the humanities home. It is inviting higher education to its biggest and most central task: to cultivate the minds and characters of its students. This is the sacred soil of the humanities. Their classic ground is not the cloister, or its modern equivalent, the ivory tower.
The humanities should want to be where the action is. Think of how Aristotle, Cicero, Goethe, George Eliot or Tolstoy would respond to the BCA. In their view, a truly humane and broad education should equip you to thrive in the world in which you live; it should help you to contribute fully to your society and enable you to take up a constructive attitude towards its betterment. They would be eager for collaboration.
John Armstrong, “Calling the humanities home,” The Conversation, April 5, 2011, http://theconversation.edu.au/articles/calling-the-humanities-home-679
What makes a good manager?
Starting in 2008, Google’s statisticians began “Project Oxygen”. The plan was to statistically analyze years of performance reviews to identify which behaviors were associated with the best performing managers. The methodology also allowed them to rank-order the behaviors. Here they are, from top to bottom:
Be a good coach. Provide specific, constructive feedback.
Empower your team and don’t micromanage.
Express interest in team member success and personal well being.
Be productive and results-oriented.
Be a good communicator and listener.
Help your employees with career development.
Have a clear vision and strategy for the team.
Have key technical skills and use them to help your team.
Of course, this was done only with Google managers and there is no evidence that the findings transfer to other organizations. And yet, none of this is surprising. You’d learn pretty much the same things in any MBA program’s course on leadership. Still, it’s interesting that even in a super-creative, high-technology company, the same principles of leadership seem to hold true.
Keith Sawyer “Google’s study of effective managers,” Creativity and Innovation, March 15, 2011, http://keithsawyer.wordpress.com/2011/03/15/googles-study-of-effective-managers/
Exuberant activity is the essence of the d.school, or, formally, the Hasso Plattner Institute of Design at Stanford … Bundled into project teams that blur all the traditional academic lines, the students who converge here focus first on reinventing themselves, then maybe the world.
The d.school’s defining mission is to foment personal transformation. Founder David Kelley, a guru of ingenuity and intuition, loves any scenario in which students are collaborating, the more radically the better, and prototyping their imagined solutions using everything from mallets and pliers to cameras and laptops. It all falls under the rubric of “design thinking.” Students who absorb that method, says Kelley with a gregarious twinkle, can apply it to nearly any part of their lives, from finding a suitable spouse to throwing a killer dinner party.
“I think everybody’s creative,” says Kelley, who has taught in Stanford’s venerable product design program since 1975. “I just always felt like they had blocks, that they weren’t being allowed to be creative. So it became more and more clear to me that this was something that was pent up inside of people.”
The d.school is his ultimate solution to that problem. Despite the institute’s relatively short history, its tangible achievements – inexpensive, solar-powered lamps for the rural poor in the developing world, for example – are impressive. But Kelley prefers to emphasize the process rather than the products. What really matters, he says, is the creative confidence students acquire as they connect with their inner inventor.
During decades of work inside and outside of Stanford, Kelley honed an array of techniques for spurring innovation. What often sounded fuzzy to others – a process for unlocking dormant creativity – was coalescing in Kelley’s mind like a coach’s playbook. “I started to see,” Kelley recalls, “that we could teach this as a methodology that everyone else could pick up on.”
The fundamental nature of an assignment has been overhauled: Rather than asking a class to grapple with somebody else’s idea of a problem that needs solving, the d.school approach is to designate squads of students as investigators of social or institutional conditions that pose challenges for human beings. A recent example: studying the everyday struggles of parents with young children, from installing car seats to negotiating day-care drop-off to preparing dinner. Through direct observation and interviews, student teams seek to identify what needs fixing and how to go about it.
Mike Antonucci, “ Sparks fly,” Stanford Magazine, March 2011.
Understanding information overload
One of the traps we fall into when we talk about information overload is that we’re usually talking about two very different things as if they were one thing. Information overload actually takes two forms, which I’ll call situational overload and ambient overload, and they need to be treated separately.
Situational overload is the needle-in-the-haystack problem: You need a particular piece of information – in order to answer a question of one sort or another – and that piece of information is buried in a bunch of other pieces of information. The challenge is to pinpoint the required information, to extract the needle from the haystack, and to do it as quickly as possible. Filters have always been pretty effective at solving the problem of situational overload. The introduction of indexes and concordances – made possible by the earlier invention of alphabetization – helped solve the problem with books. Card catalogues and the Dewey decimal system helped solve the problem with libraries. Train and boat schedules helped solve the problem with transport. The Reader’s Guide to Periodicals helped solve the problem with magazines. And search engines and other computerized navigational and organizational tools have helped solve the problem with online databases.
Whenever a new information medium comes along, we tend to quickly develop good filtering tools that enable us to sort and search the contents of the medium. That’s as true today as it’s ever been. In general, I think you could make a strong case that, even though the amount of information available to us has exploded in recent years, the problem of situational overload has continued to abate. Yes, there are still frustrating moments when our filters give us the hay instead of the needle, but for most questions most of the time, search engines and other digital filters, or software-based, human-powered filters like email or Twitter, are able to serve up good answers in an eyeblink or two.
Situational overload is not the problem. When we complain about information overload, what we’re usually complaining about is ambient overload. This is an altogether different beast. Ambient overload doesn’t involve needles in haystacks. It involves haystack-sized piles of needles. We experience ambient overload when we’re surrounded by so much information that is of immediate interest to us that we feel overwhelmed by the never-ending pressure of trying to keep up with it all …
The cause of situational overload is too much noise. The cause of ambient overload is too much signal.
The great power of modern digital filters lies in their ability to make information that is of inherent interest to us immediately visible to us …
Bottom line: When the amount of information available to be filtered is effectively unlimited, as is the case on the Net, then every improvement in the quality of filters will make information overload worse.
Nick Carr, “Situational overload and ambient overload,” Rough Type, March 7, 2011, www.roughtype.com/archives/2011/03/situational_ove.php
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).