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Emerald Group Publishing Limited
Copyright © 2012, Emerald Group Publishing Limited
Article Type: Quick takes From: Strategy & Leadership, Volume 40, Issue 2
Catherine GorrellPresident of Formac, Inc. a Dallas-based strategy consulting organization (firstname.lastname@example.org) and a contributing editor of Strategy & Leadership.
These brief summaries highlight the key points and action steps in the feature articles in this issue of Strategy & Leadership.
Interview Joan Magretta: what executives can learn from revisiting Michael PorterRobert J. Allio and Liam Fahey
Joan Magretta discussed her new book, Understanding Michael Porter: The Essential Guide to Competition and Strategy with these two veteran S&L contributing editors. Based on her long editorial relationship with Porter she suggested some key lessons practitioners should take to heart:
Keep a direct line of sight between your strategy and your financial performance. If strategy is to have any meaning at all, it must link directly to a company’s results.
A distinctive value proposition is essential for strategy. But don’t confuse strategy with marketing (the demand side); the supply side must be linked.
Meaningful strategy makes it clear what the organization will not do. Making trade-offs is the linchpin that makes competitive advantage possible and sustainable.
Do not feel you have to “delight” every possible customer. The sign of a good strategy is that it deliberately makes some customers unhappy.
S&L’s interviewers asked Magretta to explain Porter’s distinction to ‘compete for profits’ vs. compete for customers.
She believes that most people think of competition too narrowly, as a contest between rivals. But the real point of competition is not to beat your rivals, or win a sale. The point is to earn profits. Competing for profits involves multiple players: rivals, customers, suppliers, potential entrants, and producers of substitutes. Sustainable profitability is the sign that you’re creating economic value, using resources effectively to meet customers’ needs.
S&L asked Magretta to summarize Porter’s advice on innovating. Some highlights of her response:
It’s easier to innovate if you begin with a strategy. If you don’t have a strategy, you have no way of sifting through all the possible ways you might innovate, and you will be chasing one fad after another.
Don’t copy. You can learn a lot from the good ideas of other companies, but think about what that innovation accomplishes, and how the idea could be adapted and used to reinforce what makes you unique. Is it relevant to the needs you’re trying to serve? If so, then tailor it to your strategy.
Innovative new products and services are new ways to “deliver” a company’s core value proposition. Successful companies rarely have to reinvent themselves because they are constantly reinventing their methods, their management processes, their offerings. They keep getting better at what they do. They keep searching for ways to create more value.
Michael Porter answers managers’ FAQsJoan Magretta
Michael Porter provides answers to the most frequently asked questions from practitioners seeking his advice. Here is a sampling:
Q: What are the most common management strategy mistakes?
A: Confusing operational effectiveness with strategy. And confusing marketing with strategy. In the latter case, strategy must links choices on the demand side with unique choices on the supply side; focusing only on the value proposition (demand side) is only half way to competitive advantage.
Q: What are obstacles to good strategy?
A: There are many strategy killers. Three are:
Most managers hate to make trade-offs and accept limits. Simply serving more customers with more features does not produce more growth and more profit.
Being pushed by regulators, financial analysts, and industry experts to be the market favorite, to compete to be the best, to embrace the next big thing, results in chasing the wrong goal. In particular, capital markets have evolved to be very toxic for strategy: shareholder value measure over the short term is destructive for value creation.
Q: How to grow without undercutting strategy?
A: The pressure to grow (within a business) is among the greatest threats to strategy.
If your competitor has a good idea, learn from it, think about what that innovation accomplishes, but don’t just copy it. Figure out how the idea could be adapted and modified in order to reinforce your strategy and what makes you unique.
Deepen your strategic position, don’t broaden it. A company can usually grow faster – and far more profitably – by better penetrating needs and customers where it is distinctive than by slugging it out in potentially higher growth arenas in which the company lacks uniqueness.
Expand geographically in a focused way.
Q: Is a business model the same as a strategy?
A: The business model is best used as the most basic step in thinking about the viability of a company: ways of getting revenue and managing costs. If you’re satisfied with just being viable, stop there. If achieve superior profitability (or avoid inferior profitability) is the goal, then strategy will take you to the next level.
Other questions Porter addresses:
Where does disruptive technology intersect with your thinking about strategy?
Is strategy relevant when there’s no existing industry or when conditions are still so fluid that there is no discernible industry structure and no direct competitors?
What are the keys to a successful strategic planning process?
Digital transformation: opportunities to create new business modelsSaul J. Berman
Businesses in every industry are under intense pressure to rethink their customer value propositions and operations. Almost every company is now in the business of creating and delivering “content” – product and service information that is personal, relevant and timely when accessed by the customer. To meet the needs of the continually connected customer, leading companies are undergoing digital transformation to innovatively deliver their unique value proposition.
Three strategic paths to transformationThe path to digital transformation will vary by industry, as will customer adoption and an organization’s legacy environment. Based upon our research and industry experience, the strategic routes to transformation can be summarized by three basic approaches:
Focusing on customer value propositions – what is being offered.
Transforming the operating model – how it is delivered.
Combining those two approaches by simultaneously transforming the customer value proposition and organizing operations for delivery.
A best path?The best path to digital transformation depends on a company’s strategic objectives, industry context, competitive pressures and customer expectations. And it will vary by industry:
Path 1 – In industries where the product is mostly physical and customer requirements for information are not yet advanced, such as minerals and mining, companies may want to begin digital transformation with operations.
Path 2 – In companies, such as financial services, where new revenue-based services can be offered online and through mobile devices, an initial focus on the customer value proposition will provide immediate benefits.
Path 3 – The most challenging path must be taken by companies, indeed entire industries, that need to redefine customer value propositions and operating models simultaneously to succeed in digital transformation.
BottomlineEvery industry is under pressure to change, and every organization needs to have a plan in place. Those that are able to overcome the challenge of optimizing both physical and digital elements–by implementing new business models based on customer demand–can win first choice of talent, partners and resources.
MasterclassCollaborative innovation as the new imperative – design thinking, value co-creation and the power of “pull”Brian Leavy
Seeking innovative ways to create distinctive and valued offerings for customers is the new survival imperative for corporate leaders. So how can open up the innovation process beyond a few designated thinkers and to engage the organization’s many stakeholders – customers, employees, suppliers and strategic allies – to play more active roles in the value creation process? As a start managers need to learn to use all three new tools of stakeholder engagement: design thinking, value co-creation and the power of “pull.”
1. Design thinkingDesign thinking “is beginning to explore the potential of participation – the shift from a passive relationship with the consumer to the active engagement of everyone in experiences that are meaningful, productive and profitable.” Many leading companies – Kaiser Permanente, P&G, Steelcase – have adopted this approach. Masterclass reading: Change by Design by Tim Brown highlights how organizations can employ the principles and perspective of design thinking, so that more and more people within, and across, company boundaries, can collaborate in the development of novel solutions to business opportunities.
2. Empower the user as active collaboratorAs Nike’s global director of consumer connections put it, in the past, “the product was the end point of the consumer experience” as the company viewed it, but now “it’s the starting point.” Masterclass reading: The Power of Co-creation by Venkat Ramaswamy and Francis Gouillart broadens the perspective beyond collaborative design to place the customer experience at the heart of the entire value creation process and show how companies can go about developing engagement platforms that enable the co-creation of personalized value at scale.
3. The power of pullShifting from “pushing” product to passive customers to “pulling” together, and mobilizing resources – as needed – to meet the demands of more engaged consumers, responsively and flexibly as they unfold. The resource that is most central to success in this scenario is human passion and talent. Institutions must learn to become “powerful pull platforms, helping individuals to gain leverage they could never achieve on their own, and as a result, develop their talents more rapidly than they could as independent agents.” Masterclass reading: The Power of Pull by innovateurs John Hagel III, John Seely Brown and Lang Davison, widens the horizon of possibilities by showing how to foster learning and innovation networks capable of achieving increasing returns to scale.
Implementing these three powerful “tools” is an evolutionary process, starting with individual initiatives, local experimentation, and far-sighted leadership to help accelerate and broaden the process.
Applying open innovation where your company needs it mostAmy Muller, Nate Hutchins and Miguel Cardoso Pinto
The premise of “open innovation” is that corporations learn to manage an in-and-out flow of ideas and technologies to vastly increase their access to talent, opportunities and partners. The practice now includes input from customers, crowd-sourcing, open-source projects, patent acquisitions, soliciting external insights, supplier integration, venture investing, and joint-development projects. The myriad options for engaging external partners can be daunting, so leaders need a guide for getting started with open innovation that matches the needs of their firm.
Guide to startingStep one: assess your company’s innovation process by using five key questions:
Who is the target customer and what unarticulated needs do they possess related to our business?
What is the offering product or service and the underlying value proposition?
How will the venture create sustainable competitive advantage?
How must the value chain be configured to deliver the offering, and where will we play?
How will the venture generate economic value for our company and key stakeholders?
Innovation processes involve three stages during which the business model elements are conceived and elaborated: idea-generation, idea-development, and commercialization. The question for leaders is: In which of the three stages do your new ventures typically stall? The goal is to qualitatively evaluate the output of each stage of development.
Step two: learn how to manage external relationships
Once the initial opportunities for open innovation are identified, next consider the nature of the relationship with external partners. Relationship types vary from transactional to a full-out acquisition. But all must balance promoting openness and protecting self-interests. Proactive steps are cited.
Making it work for youAdopting an open-innovation approach does not require wholesale replacement of all your current innovation efforts. But it does change the primary question leaders should be asking from, “How can my company capture all the value from our innovations?” to “How can my company create significantly more value by leveraging external partners to bring many more innovations to market?” Look critically at your innovation process, understand where your new venture business models are weakest, and honestly assess the points at which open innovation could add some needed spark. Start with deliberate baby steps. Over time you will find that reaching outside the company can breathe new life into your innovation pipeline.
Better growth decisions: early mover, fast follower or late follower?Stephen Wunker
When is it true that early mover advantage can lock leadership in various markets? What industry circumstances will allow fast followers and late followers to triumph? Each of these three options will only work under certain conditions.
Condition test for early moversEarly movers can win only when a company can:
Preserve an early market lead stemming from entry barriers that later entrants will face.
Build resources and competencies that larger firms eventually could imitate but which they will prefer to acquire.
Avoid becoming locked into inappropriate technologies or business models before the market is deeply understood.
Avoid incurring large upfront costs because it is early to market.
If a company cannot meet at least two or three of these conditions, then it may be better off as a fast follower that learns from others’ mistakes.
Condition test for fast followersFollowers need the discipline to hold back and then to move quickly before an industry’s competitive order becomes set in stone. But there is a critical caveat. Many companies find it impossible to be a fast follower because of their slow decision-making timeframes, product-development cycles and the length of the sales process.
There are some circumstances that give fast followers special advantages. For example, if a company has strong local market power – such as a grocery or newspaper – it can learn from experiments happening in other territories and then copy the winning formulas. Also, firms that have strong sales capabilities can overcome the lead of early movers. Additionally, fast followers can do well if high upfront expenses for early players sap the pioneers’ financial strength and leave followers with a cost advantage.
Condition test for late followersWhen can late followers win? Late followers can succeed best if they can: exploit missteps, leverage their channels, use their network, and/or redefine the category. Apple’s iPhone was a very late entrant into the mobile phone industry. But, by using its immense network of users and application developers, when Apple did enter, it became a dominant player in the mobile Internet space.
Moving to actionA business assessing its strategic options, given its market timing, should first analyze and understand what industry it’s in – what are customers really buying and what is its true competition? Once done, then determine the factors of entering the industry at different times and with its strategic resources, taking into account what its competitors are doing.