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Strategy in the media
Article Type: CEO advisory From: Strategy & Leadership, Volume 39, Issue 5
Myths about China
When many managers think about China, they imagine a container ship whose hold and deck are brimming with cartons of toys, clothing, iPhones, and other goods bound for the world’s consumer markets, whose populations power China’s economic engine.
That view couldn’t be more wrong.
Despite the Chinese government’s well-publicized program to encourage domestic consumption, few Westerners grasp just how much progress the country is making on this front. Although millions of peasants live on subsistence wages, millions more Chinese are moving to urban centers and achieving a recognizably middle-class lifestyle. Consider just a few data points that give evidence of China’s unexpectedly fast-paced move toward a more balanced, consumer-driven economy:
In a variety of consumer categories – including such items as shoes, consumer electronics, and jewelry – China already ranks as the number one or number two market in the world.
The combined flow of shipping containers between Asia and North America and Asia and Europe is already less than the flow among Asian nations – with much of the latter consisting of goods imported to China.
Domestic demand accounts for most sales of Chinese-produced air conditioners, motorcycles, trucks, and steel.
Adoption rates of new technologies among the rising middle class exceed those of nearly every other developing country. China has 400 million internet users, most with broadband access. Mobile telephony is ubiquitous in urban areas, and most of its consumers have leapfrogged landlines.
George Stalk and David Michael, “What the West doesn’t get about China,” Harvard Business Review, June 2011.
Why the Flip failed
“It seemed like a great marriage at the time,” says Kartik Hosanagar, Wharton professor of information and operations management. Cisco – which paid $590 million to acquire Flip from Pure Play Technologies, the startup that launched the one-trick device in 2006 – “was going after the consumer. It bet big that this would be a good opportunity.”
According to Wharton management professor David Hsu, the enormous success of Apple has led many technology companies to look to the consumer market for growth. These companies hope that by focusing on consumer-oriented products, they can acquire the knowledge and experience necessary to produce huge hits like the iPod and iPhone.
Cisco’s acquisition of Flip in 2009 was puzzling at the time, Hsu says, because the product – even though it was very good at what it did – seemed to run counter to the momentum building up for gadgets with many functions. “Cisco was trying to have more of a consumer-based strategy, maybe for corporate diversification,” Hsu notes, adding that the company’s other major consumer product is the Linksys home router which, like the Flip, is positioned as a simple product for the less technologically inclined. Perhaps Cisco, in trying to diversify away from networking, went after a product niche focused on “the consumer side in the easy-to-use segment.”
“The flap over Cisco’s Flip: why the company killed off a popular product,” Knowledge@Wharton,April 27, 2011, http://knowledge.wharton.upenn.edu/article.cfm?articleid=2757
Incrementalism and returns on innovation
Three economists, Pierre Azoulay, Gustavo Manso, and Joshua Graff Zivin, have picked apart the data from the NIH (National Institutes of Health) and HHMI (Howard Hughes Medical Institute) programs to provide a rigorous evaluation of how much important science emerges from the two contrasting approaches. They carefully matched HHMI investigators with the very best NIH-funded scientists: those who had received rare scholarships and those who had received NIH “MERIT” awards, which, like other NIH grants, fund specific projects, but which are more generous and are aimed only at the most outstanding researchers. They also used a statistical technique to select high-caliber NIH researchers with a near-identical track record to HHMI investigators.
Whichever way they sliced the data, Azoulay, Manso and Zivin found evidence that the more open-ended, risky HHMI grants were funding the most important, unusual, and influential research. HHMI researchers, apparently no better qualified than their NIH-funded peers, were far more influential, producing twice as many highly cited research articles. They were more likely to win awards and more likely to train students who themselves won awards. They were also more original, producing research that introduced new “keywords” into the lexicon of their research field, changing research topics more often, and attracting more citations from outside their narrow field of expertise.
The HHMI researchers also produced more failures; a higher proportion of their research papers were cited by nobody at all. No wonder: The NIH program was designed to avoid failure, while the HHMI program embraced it. And in the quest for truly original research, some failure is inevitable.
Here’s the thing about failure in innovation: It’s a price worth paying. We don’t expect every lottery ticket to pay a prize, but if we want any chance of winning that prize, then we buy a ticket. In the statistical jargon, the pattern of innovative returns is heavily skewed to the upside; that means a lot of small failures and a few gigantic successes. The NIH’s more risk-averse approach misses out on many ideas that matter.
Tim Harford, “ Positive black swans,” Slate, May 17, 2011, www.slate.com/id/2293699/pagenum/all/#p2
Ignore costs when setting prices
If customers don’t care about cost, then why do so many firms put so much emphasis on cost when determining price? The answer is that these same firms who rely on cost to determine prices probably don’t understand the value of the products and services they deliver to customers. And because they don’t understand the value that they deliver, they take the easy way out during pricing discussions and introduce internal costs into the pricing equation. The problem with introducing cost too soon into the pricing discussion is that you end up with a price that is acceptable to your own company, but not necessarily acceptable to the market. Translation: your products and services will typically be underpriced.
Instead, you need to go out and talk to your customer base about the value they receive from your products and services. And don’t talk price, talk value. Find out how much economic gain these customers receive from your offerings. Understand if this value is a one-time occurrence or if it is recurs year after year. And also find out what alternates exist in the marketplace today.
Now don’t get me wrong, internal costs are vitally important in the sense that they help determine whether your selling price will deliver adequate internal margins (Margin=Price−Cost). But cost should only be introduced after the price has been determined; not during the pricing discussion itself. Let me repeat that, introduce cost only after price has been derived. Translation: price should never be a function of cost.
Patrick Lefler, “Customers don’t care about your costs,” Blogging Innovation, June 4, 2011, www.business-strategy-innovation.com/wordpress/2011/06/customers-dont-care-about-your-costs/
Lies that throttle innovation
Innovators have to deal with particularly insidious lies – things that people say that they believe are true, but actually aren’t.
Lie#1: Target customer, “Of course I’ll buy that.” Innovators working on new ideas often show early versions to customers to assess “purchase intent.” But customers do a poor job of reporting what they’ll do in the future, particularly if they’re responding to a novel idea. One company that I worked with found that the accuracy of market forecasts for new-to-the-world ideas was roughly equivalent to using the results of a random number generator.
Instead, trust actions over statements. Don’t look at what people say they will do. Look at what they are already doing …
Lie #2: Product developer, “We’ll be ready to ship in six months.” There’s a great term in the psychology literature called the “planning fallacy.” Basically, human beings are really terrible at estimating the amount of time or money it will take to accomplish a task, even when they have previous experience with the task. Product developers have every intention of finishing development on time, but invariably things take longer and cost more than people projected. There’s one project I’ve been watching that has literally been three months away from shipping for 18 months now.
The easiest way to address this lie is to change the development paradigm. Borrow from the Agile software development movement and push for many rapid development cycles instead of a single long cycle …
Lie #3: Salesperson, “Of course I can sell that.” While entrepreneurs have to scratch and claw to get resources, corporate innovators have access to all kinds of resources. Unfortunately, some of those resources end up not being quite as helpful as they first appear …
Ask yourself whether you are asking salespeople to make more money or less. People won’t do what doesn’t make sense to them. Then involve the sales channel in a controlled pilot to see what happens. Don’t just watch the number of sales; look at the number of sales calls and the frequency with which the new offering is pitched.
Lie #4: Senior executives, “We’re open to anything!” One of the most important things that Harvard’s Michael Porter has taught the world about strategy is that it’s about making choices. Leaders often forget this lesson when they focus on innovation. If you push leaders to define what is on the table early in an innovation project, they often will think the right answer is to leave as many choices open as possible.
Not only is this not helpful (constraints can paradoxically encourage innovation), it isn’t accurate …
Instead, find clever ways to test customer demand, the feasibility of schedules, sales expectations, and your degree of freedom.
Scott Anthony, “Combating four innovation lies,” Harvard Business Review Blog, June 3, 2011, http://blogs.hbr.org/anthony/2011/06/combating_four_innovation_lies.html
A banker looks at his profession
For nearly 30 years, Wilmers has run the M&T Bank, based in Buffalo. When he took it over, M&T had $2 billion in assets; today, its assets exceed $68 billion, and it’s one of the most highly regarded regional bank holding companies …
Wilmers’ report, however, was less about the company’s numbers than about the dismal state of his beloved profession. Wilmers, it turns out, is that rarest of birds: a banker willing to tell harsh truths about banking. That, for instance, much of the money the big banks earn comes from trading profits “rather than the prudent extension of credit that furthers commerce.” That derivatives had helped bring about the crisis and needed to be regulated. That bank executives were wildly overpaid. That the biggest banks – the Too Big to Fail Banks – were operating, as he put it, an “unsafe business model.” …
In the run-up to the financial crisis, the giant national banks – which he viewed as a distinct species from the typical American bank – had done things that deserved condemnation. And, he added, “They are still doing things that I don’t think are very good.”
Such as? “It has become a virtual casino,” he replied. “To me, banks exist for people to keep their liquid income, and also to finance trade and commerce.” Yet the six largest holding companies, which made a combined $75 billion last year, had $56 billion in trading revenues. “If you assume, as I do, that trading revenues go straight to the bottom line, that means that trading, not lending, is how they make most of their money,” he said.
Joe Nocera, “The good banker,” The New York Times, May 30, 2011.
Empty-handed after the tech bubble pops?
At Zynga, they’re mastering the art of coaxing game players to take surveys and snatch up credit-card deals. Elsewhere, engineers burn the midnight oil making sure that a shoe ad follows a consumer from Web site to Web site until the person finally cracks and buys some new kicks.
This latest craze reflects a natural evolution. A focus on what economists call general-purpose technology – steam power, the Internet router – has given way to interest in consumer products such as iPhones and streaming movies. “Any generation of smart people will be drawn to where the money is, and right now it’s the ad generation,” says Steve Perlman, a Silicon Valley entrepreneur who once sold WebTV to Microsoft for $425 million and is now running OnLive, an online video game service. “There is a goodness to it in that people are building on the underpinnings laid by other people.”
So if this tech bubble is about getting shoppers to buy, what’s left if and when it pops? Perlman grows agitated when asked that question. Hands waving and voice rising, he says that venture capitalists have become consumed with finding overnight sensations. They’ve pulled away from funding risky projects that create more of those general-purpose technologies – inventions that lay the foundation for more invention. “… they are building on top of old technology, and at some point you exhaust the fuel of the underpinnings.”
And if that fuel of innovation is exhausted? “My fear is that Silicon Valley has become more like Hollywood,” says Glenn Kelman, chief executive officer of online real estate brokerage Redfin, who has been a software executive for 20 years. “An entertainment-oriented, hit-driven business that doesn’t fundamentally increase American competitiveness.”
Ashlee Vance, “This tech bubble is different,” Bloomberg Businessweek, April 14, 2011.
Climate change and the grocery bill
Climate change will cause the price of staple foods like corn, rice, and wheat to more than double over the next 20 years. It’s already starting in China.
Climate change does more than just wreak havoc on the weather; an unpredictable climate makes it hard to farm, which causes the food in your local grocery store to become a lot more expensive. A new report from Oxfam explains that the price of staple foods like corn, rice, and wheat will more than double over the next 20 years because of climate change – and events in China are already proving the extent of the issue.
A perfect storm of problems is coming together to threaten the world’s food supply: oil price spikes (this translates into increased transportation and fertilizer costs), increased competition for land from biofuel and other non-food producers, and, of course, unpredictable weather.
By 2050, over 4 billion people will live in areas where demand for water is greater than supply. This is because of shrinking glaciers (this reduces water flows in major areas like the Ganges and Yellow River), droughts, increased floods (this contaminates clean water), and rises in sea level (this salinates fresh water). That means there will be significantly less water for agriculture, which is responsible for 70% of global fresh water use …
What can we do to protect ourselves? Farmers would be wise to look into weather insurance programs like WeatherBill. The rest of us should just hope that global-food reserves are increased and that small-scale farmers gain traction. As it stands, just three companies (Archer Daniels Midland, Bunge, and Cargill) control 90% of the planet’s grain trade. That’s not exactly diversifying our food assets.
“The new weather is going to make food prices soar,” Fast Company, June 1, 2011.
Paradoxical findings on CEO tenure and shareholder returns
If you were to name this century’s standout CEO in the consumer packaged goods industry, whom would you choose? Odds are you’d pick-me, too-Procter and Gamble’s A. G. Lafley, who led the company from 2000 to 2009, during which time sales doubled and profits rose fourfold, an awesome performance by any standard.
But if you had to name the five companies in the category with the highest total shareholder return in that period, well, no one would win that office pool: From 1999 to 2009, the leaders are Reckitt Benckeiser, Alberto Culver, Inter Parfums, J.M. Smucker, and Tupperware, each of which delivered an A-plus return above 300%. (The company you’ve never even heard of, Reckitt Benkheiser, makes Woolite, Calgon, and French’s Mustard, among other products, and produced about 650% for shareholders.) My Booz & Company colleagues Steffen Lauster and Elisabeth Hartley explain the success of this quintet by arguing that the advantages of scale have generally declined in the industry (except when it comes to expanding into emerging markets) while the benefits of focus have soared, with the result that the biggest winners have been companies that concentrate their resources and collective intelligence to leverage capabilities in relatively narrow product portfolios.
But get this: the more focused a company is, the more likely the CEO will lose his job. Or so it seems. Booz’s just-released annual study of CEO succession this year looked at turnover rates for companies with four different leadership styles, ranging from the CEO who is hands-on and operational (think Alan Mulally of Ford) to the hands-off leader of a holding company (e.g., Warren Buffett at Berkshire Hathaway). In 2010 there were 291 changes in command at the world’s 2,500 largest companies. Among them, the study notes, “the tenure of a holding company CEO is a third longer, on average, than that of an operationally involved CEO.”
Thomas A. Stewart, “Are you focused on the right thing?,” The Strategist, May 17, 2001.
The only change that mattered
What have been the biggest stories since human civilization began?
We domesticated animals, learned to farm, and founded cities. We suffered from plagues and climate changes. We explored other lands, bringing guns, germs, and steel along with new foods, customs, and genes. We established many new religions and political systems; some of these spread far and wide and stuck, other flared brightly then burned out. In our darker periods we waged horrible wars and committed genocide.
So which of these matter the most? Which have made the biggest difference in the human condition? This is, of course, an impossible question to answer definitively. But one way to get some insight on it is to draw a simple graph of human population over time. A development that changes the slope of this graph substantially could, I argue, be categorized as a big deal for the species …
There has been exactly one development that’s greatly changed the course of humanity – changed it just about 90 degrees. And it’s a technological development.
The graph of human population went from horizontal to vertical because of the industrial revolution, the invention of a set of technologies (starting with James Watt’s reciprocating steam engine) that let us get beyond the limitations of human and animal muscle power. As historian Ian Morris writes in his fascinating book Why The West Rules – For Now, “the industrial revolution … made mockery of all that had gone before.”
… Which leads me to a question: will overcoming the limitations of our brains be as big a deal? As I’ve written before, the computer revolution has multiplied our ability to calculate about as much as the industrial revolution multiplied our ability to lift, pull, push, and carry. We’re no longer held back by our ability to crunch numbers – to store, process, and transmit data …
When we overcame the limitations of muscle capacity, it’s no overstatement to say that the world changed – no, improved – as never before. So what should our expectations be about overcoming the limitations of mental capacity?
Andrew McAfee, “The one big story, and the next one,” June 1, 2011, http://andrewmcafee.org/2011/06/mcafee-industrial-revolution-computerization-human-development/
Customer loyalty and customer service
Businesses that offer their customers the highest levels of service might like to believe that all their efforts to pamper and please will pay off with an extremely loyal following.
“Customers you might expect to be the most “stuck” are the ones who are disproportionately vulnerable to service competition.” But as new research from Harvard Business School demonstrates, the customers you think are your best and most loyal are likely to be the first to cast you aside when a challenger to your service superiority barges into the market.
“Our results suggest that this is due to increasing expectations for service in these markets – the longer a firm has held a service advantage in a local market, the more sensitive are its customers to it service levels relative to those of competitors,” says Harvard Business School’s Dennis Campbell. In other words, you reap what you sow.
In “How Do Incumbents Fare in the Face of Increased Service Competition?”, Campbell, fellow HBS professor Frances X. Frei and doctoral student Ryan W. Buell explore this dance between service levels, customer loyalty, and competitive strategy. The study drew on extensive data gathered from a large US domestic bank operating in more than 20 states from 2002 to 2006.
In addition to proving what earlier models only hinted at – that new challengers offering high levels of service can siphon off the best customers of long-standing incumbents – the researchers learned something else: firms rated lower in service quality are more or less immune from the high-end challenger.
These findings suggest that before mounting a counterattack on a competitor’s incursion, it’s important to understand your customer priorities and your business’s place along the service cost continuum. In some cases it can be advisable or even necessary to invest in a response. In other cases, you may as well save your money, according to the researchers.
The study also concluded that even though high-end customers can be fickle, a company that sustains a superior service position in its local market can attract and retain customers who are more valuable over time.
“What loyalty? High-end customers are first to flee,” Working Knowledge, May 16, 2011, http://hbswk.hbs.edu/item/6679.html?wknews=05162011
The importance of “economic facts”
During the second half of the 19th century, the world’s biggest economies endured a series of brutal recessions. At the time, most forms of reliable economic knowledge were organized within feudal, patrimonial, and tribal relationships. If you wanted to know who owned land or owed a debt, it was a fact recorded locally – and most likely shielded from outsiders. At the same time, the world was expanding. Travel between cities and countries became more common and global trade increased. The result was a huge rift between the old, fragmented social order and the needs of a rising, globalizing market economy.
To prevent the breakdown of industrial and commercial progress, hundreds of creative reformers concluded that the world needed a shared set of facts. Knowledge had to be gathered, organized, standardized, recorded, continually updated, and easily accessible – so that all players in the world’s widening markets could, in the words of France’s free-banking champion Charles Coquelin, “pick up the thousands of filaments that businesses are creating between themselves.”
The result was the invention of the first massive “public memory systems” to record and classify – in rule-bound, certified, and publicly accessible registries, titles, balance sheets, and statements of account – all the relevant knowledge available, whether intangible (stocks, commercial paper, deeds, ledgers, contracts, patents, companies, and promissory notes), or tangible (land, buildings, boats, machines, etc.). Knowing who owned and owed, and fixing that information in public records, made it possible for investors to infer value, take risks, and track results. The final product was a revolutionary form of knowledge: “economic facts” …
The importance of economic facts may not be obvious to Americans … But it’s easy to grasp from the perspective of the developing and former communist countries where I live and work. In these countries, most of our assets and relationships are in the informal sector, outside the legal economy. Because they’re not recorded in public memory systems, they cannot be written up as facts and are, in effect, invisible. All we have are shadow markets.
Without standardization, the values of assets and relationships are so variable that they can’t be used to guarantee credit, to generate mortgages and bundle them into securities, to represent them in shares to raise capital.
Hernando de Soto, “The destruction of economic facts,” Bloomberg Businessweek, April 28, 2011.
Evaluating your value proposition
We are always reminded of the power of being critically honest about whether your product is “nice to have,” “good to have,” or “must have” …
Getting to the land of must-haveness, faster allows one to be on a path to not just higher levels of revenue, but on a path to a higher quality of revenue. That combination of growing revenue levels and revenue quality is a formula for significant value creation.
But what practical advice can get you to the land of must-haveness, faster?
Strive manically to understand your customers and end-users. What are the attributes of your product that they care about the most? Look at your internal usage data, do qualitative and quantitative customer research, and benchmark against the competition to understand the top attributes by customer segment. It is unlikely that your customer sees every feature of your offering as must-have, so figure out which ones she cares about most and focus on defending, messaging, and improving those.
Rapidly prototype. You cannot rely on just existing features. Based on continuous customer research, feedback, and gut instincts, what are the new attributes you should be rapidly testing with your customer base? The ability to test more, faster is greater than ever in digital and information industries, as product development costs have dropped and speed to market has increased …
Get the right metrics – so that you know if you are winning the race to the land of must-haveness. I am constantly amazed by all the metrics companies measure when it is usually only a few that really matter. The ultimate metric we know to measure your must-have value is recurring revenue rate (or its inverse cousin: churn rate). Put simply: what percentage of customers who were with you last year are with you today?
Anthony Tjan, “Getting to the land of must-haveness, faster,” Harvard Business Review Blogs, May 4, 2011, http://blogs.hbr.org/tjan/2011/05/getting-to-the-land-of-must-ha.html
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).