Emerald Group Publishing Limited
Copyright © 2011, Emerald Group Publishing Limited
Article Type: Quick takes From: Strategy & Leadership, Volume 39, Issue 4
These brief summaries highlight the key points and action steps in the feature articles in this issue of Strategy & Leadership.
Reinventing management purpose: the radical and virtuous alternativesRobert J. Allio
In the wake of corporate scandals, revelations about executive arrogance and selfishness and regulatory failures, leading management thinkers see the current practices of corporate capitalism as symptoms of its inherent flaws and propose radical and virtuous alternatives.
Flaws in corporate capitalismCorporate capitalism, and state law, today places shareholder value as the core purpose of a business’ existence. But the shareholder value approach does not distinguish between the interests of investors and short-term stock manipulators. It does not reward long-term strategies and investment in innovation. By viewing the corporation as a financial opportunity rather than a living social activity, it fosters destructive tactical gamesmanship for the short-term gain. For example, it is easy to play tricks to boost stock valuation at the expense of long-term strategic advantage. Or to invest heavily in lobbying and tax manipulation and turn tax law departments into profit centers. GE is going to pay little or nothing in federal income taxes for 2010. And the unambiguous reason for this is that GE’s legal team took full advantage of various tax loopholes in the US tax code, some of which it lobbied Congress to adopt.
Alternatives evaluatedThe suggested approaches to reinventing corporate capitalism have a common theme: the need to articulate a new purpose for the firm that is more legitimate than maximizing financial returns for shareholders. The various perspectives for proposed change can be grouped into three categories:
Modify the shareholder value strategy.
Become socially responsible.
Adopt radical management practices.
The views of Gayle Avery, Steve Denning, Roger Martin, McKinsey’s Dominic Barton, Deloitte’s Michael Raynor, Michael Porter and Monitor’s Mark Kramer are assessed in terms of corporate capitalism’s flaws and their cures; the author proposes his own theory of a virtuous corporation.
BottomlineTheir views raise a plethora of questions that need to be researched. It may be that all the alternatives are utopian mirages beyond reach – no matter whether we effectively regulate corporate gamesmanship, adopt sustainable models, or learn radical management techniques. But capitalism must evolve if it is to succeed in a chronically discontinuous environment. Peter Drucker noted many years ago that, “Every single social and global issue of our day is a business opportunity in disguise.” Perhaps we can find ways to prosper in spite of ourselves.
MasterclassThe essential metric of customer capitalism is customer outcomesStephen Denning
Making money and corporate survival now depend not merely on satisfying customers but on delighting them. Increasingly, the customer is in charge, as a result of epochal shift of power in the marketplace from seller to buyer. Consequently, the fortunes of the firm depend on the ability of its knowledge workers to generate a continuing supply of new value to customers, sooner.
Focus shiftAlthough top management knows a great deal about the inputs and outputs of the firm – transactions, outputs and money – there is little moment-to-moment information about whether customers are being frustrated, satisfied or delighted. The outcomes of its interactions with customers are what will drive the long-term health of the business.
How to measure delightTo manage the new bottom line of business – customer delight – firms need to measure the customer outcomes that have occurred, monitor the actions that will determine future outcomes, and track interactions with customers as they happen in real time. The task involves collecting data with a new set of tools and changes in management mindset.
Measuring customer outcomes at the organizational level – Reichheld’s net promoter score (NPS) has its limitations, but it can drive rapid learning and action across the organization.
Measuring customer delight through user stories – Break each work cycle’s outcomes into user stories, which represent hypotheses as to what might delight a customer.
Measuring customer delight: sizing and prioritizing – The next step is to measure how much work will be involved in executing the intended outcome, and decide what priority it should have in each work cycle.
Measuring the forgotten competitive weapon: time – A key facet of delighting customers is delivering value to them sooner. Two tools are critical: value stream mapping and cycle time measurement.
Measuring customer delight in real time: social media – Customers can quickly share disastrous experiences as well as heartwarming tales of extraordinary customer service instantly via the Internet; it is important that management be equally informed.
Fundamental change in management mindset – The measurement of outcomes and customer delight requires a new set of terminologies, tools, and a different way of thinking, speaking and acting in the workplace. Delighting the customer must become everyone’s responsibility with everyone in the organization focused on this goal.
InterviewRoger Martin explores three big ideas: customer capitalism, integrative thinking and design thinkingBrian Leavy
Author and consultant Roger Martin’s bold ideas are stimulating debate among executives. He believes, for example, that the shareholder value approach has devolved into gamesmanship, that good leaders instinctively practice integrative thinking in order to make better decisions and that the best way to produce innovations that boost customer value is via a radical approach he calls “design thinking.”
“Customer capitalism”In the midst of the current global financial and economic crisis, Martin’s view is that modern capitalism (which has come through the eras of managerial capitalism and shareholder capitalism) must now embark on the new era of “customer capitalism.”
The current belief in shareholder value maximization as the singular goal of the firm is unsustainable. A firm actually maximizes shareholder value by focusing on delighting customers – and that is what Martin means when he proposes that companies adopt customer capitalism.
Why change now? The various key actors – management, stock analysts and hedge funds – have perfected their ability to exploit the theory of shareholder value maximization for their own benefit, in direct opposition to the interests of shareholders. They know how to game the game by hyping expectations in the short term – and make lots of money on their stock-based compensation – and then they get out before expectations plummet. Over time shareholders experience the unattractive combination of lower returns and higher volatility. If customer satisfaction is seen as the primary goal, shareholder value will take care of itself.
Integrative thinkingMartin’s research found that outstanding leaders, particularly at the CEO level, are distinguished most by the way they think (vs. actions they take); by their capacity for “integrative thinking.”
Integrative thinkers are always open to creating a new model that does not now exist. This way of thinking empowers them to find new solutions, new paths.
Design thinking and business managementHow to become more innovative, not only in products and process, but in the area of business management itself? Martin’s answer: look to the concept of “design thinking” and learn how to apply it more widely to processes like strategy development and business model innovation.
Disruption theory as a predictor of innovation success/failureMichael E. Raynor
Managers tasked with developing innovation-driven growth have myriad of theories to guide their processes and choices, but none of them offer statistical evidence of cause and effect. Is it possible to pursue successful innovations using more than a gut-level, intuition-driven art? Is it possible pick winners and losers in a portfolio in a way more closely resembling a science based on repeatable processes with predictable results?
When reviewing current innovation frameworks, the alternative approaches make sweeping generalizations with circumspection, a nudge and a wink. Managers are invited to “cross the chasm”, sail the “blue oceans,” “innovate to the core,” or embark on journeys into “white space.” But managers must undertake these endeavors accepting the enormous uncertainty that continues to surround the challenges of innovating successfully.
In contrast, the use of Christensen’s “disruption theory of innovation” offers nothing more – or less – than a genuine hope of being better at creating or picking winners than would otherwise be possible. This limited claim is based upon supporting evidence: an experiment using the Intel portfolio of ventures.
ApplicationTo conclude that disruption theory offers just another perspective on innovation would waste a valuable opportunity; instead, managers should put it to use in two practical ways:
First, use it to shape existing innovation ideas in ways consistent with the theory’s prescriptions: actively mold the ideas in development to improve their chances of succeeding.
Second, use it to create a more-nearly balanced portfolio of innovative initiatives.
BottomlineGiving disruption theory a starring role in your innovation efforts might appear to be risky, given the limitations of the experiments and the modest effects observed. But, the right benchmark is the evidence and data supporting other innovation frameworks. And in that context, disruption theory compares very favorably indeed.
Disruptive innovation: the Southwest Airlines case revisitedMichael E. Raynor
The many and unique innovations of Southwest Airlines’ business model are undeniably critical elements of the company’s success. But the defining features of the company’s strategy – its “low-cost carrier” (LCC) model – cannot be a complete explanation for the company’s exceptional performance in the 1990s. Its unique business model had been in place for almost twenty years and did not change materially even as the firm’s growth and profitability improved dramatically during that decade. Therefore, what aspects of Southwest’s remarkable financial performance does this strategic analysis explain? Why didn’t a low-cost competitive strategy provide consistent advantage?
Michael Porter’s modelWe cannot explain this shift solely in terms of Porter’s low-cost strategic differentiation model because the trade-offs Southwest was exploiting never changed. Every attribute of Southwest’s LCC business model was in place almost from the start, and certainly underwent no relevant shift between 1990 and 1993, a period during which the company’s stock price increased more than six fold.
It’s plausible that the company got better at what it did over time, but incremental improvements within an established strategy don’t adequately explain the dramatic and abrupt changes in financial performance. So what did happen?
Growth through disruptionSouthwest disrupted incumbent airlines. It did this first by building a fundamentally different business model; that’s the low-cost “strategic positioning” explanation offered by Porter. It was able to compete for ever-expanding share of the US air travel market without changing its business model.
But the key to financial success was the introduction of the Boeing 737-500 in 1990. This change was a critical enabling technology that allowed Southwest’s productivity – based on its operational innovations – to disrupt incumbent hub-and-spoke (H&S) air carriers and allow it to enter new market segments.
Disruption does not merely provide a helpful or valuable perspective on Southwest’s success. Rather, disruption is the only theory that explains what happened and when it happened. This case provides reliable evidence to support the application of disruption theory in other industries.
The Typology of Human Capability: a new guide to rethinking the potential for digital experience offeringsKim C. Korn and B. Joseph Pine II
The Typology of Human Capability offers an innovation framework to identify new customer value and develop potential new business models for digital technology across four dimensions of human experience.
Point of view to adoptToday the reach of digital technology is opening new vistas to develop totally new customer value offerings. Consider these points:
Technology is “a means to fulfill a human purpose.”
People – as individuals and in groups – apply technology to fulfill two primary purposes: connecting and doing.
Digital technology differs from all other kinds of manmade technology due to the distinctive characteristics of its component bits. Together, these characteristics make digital technology the technology of experiences. It enables new-to-the-world possibilities for the delivery of emotion-evoking experiences by an ever-broadening array of methods that engage our human senses through endless sights, sounds, and other sensations.
Understanding the linkage between technology, human capability, and value creation can boost a firm’s creative capabilities to design new customer value offerings.
The potential uses for technology across four dimensions of human experience:
Sensing (augmented reality).
Linking (expanding communications immediacy and effectiveness).
Performing (video games that teach how to respond to actual medical emergencies).
Organizing (groups gathering to achieve a common purpose spontaneously via social media).
Typology informed innovationThe Typology of Human Capability framework illuminates how the four capabilities – sensing, performing, linking, and organizing – come into play independently and collectively in all of our experiences. When exploring the frontiers of discovery and innovation, keep these four capabilities in mind. When a technology succeeds in one of the typology’s capabilities, you may find opportunities for innovation in the other three.
Look for opportunities to solve customer problems, find alternatives for them to use their time and resources in ways that improve their lives, extend their current capabilities, or enable them to do things they otherwise would not be able to do.
BottomlineViewing value creation possibilities with this typology helps companies tap the infinite possibility inherent in today’s digital technology. Understanding this linkage between technology, human capability, and value creation can boost a firm’s creative capabilities.
Strategic M&A: insights from Buffett’s MidAmerican acquisitionJoseph Calandro Jr
A merger or acquisition (M&A) can be considered strategic if it is a means to significant differentiation from competition but only if it is reasonably priced. The rationale for this definition is twofold:
Without offering some level of competitive differentiation – scale, scope, speed or special competency, for example – an initiative cannot be considered strategic
Deals priced reasonably have been shown to outperform those that were not. Significantly, low cost deals are consistent with the cost-foundation of corporate strategy.
Case studyTo illustrate this approach to analyzing M&As, the case study of the successful Berkshire Hathaway-led acquisition of MidAmerican Energy Holdings Company (“MidAmerican”) in 1999 is used. It is a good test case because:
Pursuing market share through acquisition in a mature, highly competitive industry (utilities) is likely to be a costly and thus risky strategy.
The valuation analysis brings in the concept of a “nascent franchise,” that is an acquisition that has the potential to operate with a sustainable competitive advantage. Ten years later, Warren Buffett acquired another example of a “nascent franchise” (Burlington Northern Santa Fe Railroad) which paid out a dividend of $2.25 billion in 2 years, three times its pre-acquisition payout.
Questions for strategic M&A dealsTo facilitate future strategic M&A analysis, the following questions should be considered during deal deliberations:
Is the deal differentiated? Is the target either overlooked by the competition or is it atypical of targets frequently pursued? Obviously the capabilities of the acquisition and the acquiring firm must fit strategically and operationally. In the case of MidAmerican, its regulatory-based strategy required strong managerial talent to implement, as well as strong capitalization.
Is deal pricing favorable? Answering this question requires a comprehensive valuation methodology that also quantifies a reasonable margin of safety. The modern value investing approach is ideal for this purpose and also for value realization strategizing.
Are key asset and earnings drivers linked? In MidAmerican’s case, key NAV adjustments supported key EPV assumptions. Such a dynamic can facilitate both value realization planning and long-term performance management.
Can management successfully implement the strategy over time? The answer to this key question doesn’t just depend on the quality of management, the strength of business environment and the responses of the competition.
As Warren Buffet’s successful acquisitions have shown, the smart money looks at implementation in the context of the deal price, the strategic fit, the margin of safety and the business’ potential as a “nascent franchise.”
Catherine GorrellPresident of Formac, Inc. a Dallas-based strategy consulting organization (email@example.com) and a contributing editor of Strategy & Leadership.