Strategy in the media

Citation

Henry, C. (2013), "Strategy in the media", Strategy & Leadership, Vol. 41 No. 3. https://doi.org/10.1108/sl.2013.26141caa.003

Strategy in the media

Article Type: CEO advisory From: Strategy & Leadership, Volume 41, Issue 3

Education and strategic brilliance

The very term “brilliance” implies an outlier; someone well removed from the intellectual norm of society. It is in this rarified region that our best battlefield commanders and strategic minds reside …

And this is where we find the defining characteristic of the strategic thought leaders throughout the ages. It is an intellectual curiosity punctuated by a desire to learn as much as possible from as many people as possible in as many areas as possible as often as possible.

You have to want to learn to learn. If you are intellectually curious, you will go in search of answers – often finding them where you least expect them, growing wiser along the way. Your curiosity will lead you to discover the world is more than either Mechanical Engineering or International Relations. It is the complex interaction of both, and more …

Strategists, by their very nature, are experts at connecting disparate dots into a cohesive whole, necessarily linking people together to accomplish this. Again, the foundation for all of this is rigorous, diverse and continuous intellectual curiosity.

So, what’s the prescription for educating a future strategist? Degrees are fine, but insufficient and end at some point. Therefore, learn everything you can, formal or otherwise, and maximize serendipitous relationships …

The intellectually curious officer will find innovative ways to solve problems. He will have built relationships beyond his service and community to create collaborations and get things done more effectively. He will be better able to empathize with their people better. He will be more attuned to the military and non-military goals of his subordinates. Most importantly, when an adversary arrives in a form that was unanticipated, he will be able to draw upon years of education tested not in the classroom, but in the real world.

Bemjamin Kohlman, “Intellectual curiosity and the military officer,” Small Wars Journal, January 24, 2013, http://smallwarsjournal.com/jrnl/art/intellectual-curiosity-and-the-military-officer

Network science and innovation

Enter network science, an emergent discipline drawing from sociology, medicine, and statistics. Harvard Medical School professor Nicholas Christakis is one of the most prominent figures in the young field – he’s made foundational investigations into how products, sneezes, and behaviors are spread by networked contagion.

“Things don’t just diffuse in human populations at random. They actually diffuse through networks,” Christakis says, noting that we live our lives in networks – the same as hunter-gatherers. Today our networks are the web of relations you have between friends, coworkers, siblings, and relatives. Where you are in that web lends special properties.

The key is exposure. The more central you are to a network, the more connections you have to others, the more you are exposed to whatever’s going around the network – whether it’s Carly Rae Jepsen or H1N1. So if you want to hear the next great pop song, find out about the next great innovation, or catch the next great flu – the center is the spot for you. As Christakis notes, the people with the densest, most central connection form a “sensor group,” a kind of canary in the mineshaft for what’s going to be cool next – or give you a cold …

“If you’re trying to get people to work better,” Christakis says, “it’s not enough to think about individuals, you’ve got to think about how the group of individuals is connected or organized.”

Harvard has licensed Christakis’s ideas out commercially, including to Activate Networks, a consultancy that has built on his ideas and that he cofounded with medical statistician Larry Miller. Miller described to Fast Company how Activate evaluates companies and their customers through the prism of networks – with important conclusions for managers and employees alike.

Miller and his team recently worked with a large engineering company, the kind with several thousand engineers at a given facility, the kind whose job was to innovate. The consultancy was able to map the networks – most of the teams were six to seven people – and superimpose the company’s metrics of success, like patents or commercial entries, onto that survey.

“What we found was striking,” Miller says. More than an individual work, the quality of relationships that a team had was a crucial – especially having someone on the team highly connected to the rest of the network. The most successful teams were the most interwoven, because as Miller says, “If you’re doing great work back in a closet somewhere, it doesn’t matter.”

In this case, too, information – here the process of innovation – acts as contagion. Successful teams were able to spread their ideas through the organization, gathering commentary, criticism, and broader support. Movement of information from person to person and across departments advanced the innovation, Miller says, which couldn’t have happened if it stayed on an island.

Drake Baer “Harvard professor finds that innovative ideas spread like the flu; here’s how to catch them,” Fast Company, January 17, 2013.

When slow communications are a benefit

Why was the British Empire so efficient? For there is no doubt about it, it was. A mere thousand bureaucrats in the Colonial Office managed an empire so large that the sun never set on it, an empire that included a subcontinent. How was this possible?

One reason, I think, is that the colonies weren’t informatically connected. No phones, no text messages, no Skype, no e-mail, no conference calls, no webinars, no meetings. Therefore, no micromanagement. For reasons of necessity, all decisions had to be pushed down to the lowest possible levels. This not only had the effect of minimizing bureaucracy but it also meant that the character of the Empire’s decision makers was more solid.

Consider, say, the Governor of Tasmania. Halfway around the world, if there was a sudden insurrection or unexpected invasion, it would take two weeks for your urgent request for help reach Whitehall. That means that the soonest help could arrive is a month, assuming the government sends off reinforcements within a day, which it wouldn’t. So who would apply for such a job? Not a bureaucratic manager, content to transport papers from the inbox to the outbox and breath heavily at conference calls all day. But a bold leader, a man of action, might. Somebody, for whom, the lack of connections to the home country would be liberating not enervating.

The result was an efficient, adaptable and decisively run empire.

“Rob Long: ‘Stop Connecting’ or why the British Empire was so efficient,” Canadian Cinncinnatus, January 23, 2013, http://canadiancincinnatus.typepad.com/my_weblog/2013/01/rob-long-stop-connecting-or-why-the-british-empire-was-so-efficient.html

Can there be too much connectivity?

Web technology was supposed to break down cubicle walls and make multinational companies seem as intimate as startups. Email would eliminate tedious meetings, and video conferencing would make offices obsolete.

At many companies, the opposite has happened. We recently studied 2,300 managers at an industrial company with 14,000 employees around the globe. As a group, these individuals sent and received more than 260,000 emails a month, just with one other …

This is today’s connected enterprise: always on, everyone linked to everyone else, a flood of information coursing through its electronic arteries. It’s partly a creature of collaborative technologies, such as email, instant messages, Web-based conferencing, internal social networks and so on. It’s also a result of globalization, capability sourcing and partnerships that extend beyond a company’s walls.

All this information and collaboration should make companies more agile, but technology often undermines organizations that don’t know how to harness its strengths. When that happens, critical decisions slow to a crawl, trapped in an endless cycle of data collection and debate …

When a new CEO took over a struggling software company, he learned that people in the organization complained about unfocused and frustrating meetings, despite vast numbers of PowerPoint presentations. The new CEO instituted a no-presentation, working-session-only rule, with printed documents distributed and no laptops allowed. The leadership team almost immediately noticed a change in energy level, focus and meeting effectiveness.

Connectivity can boost performance or get in the way. If you expect social technologies to cut through complexity all by themselves, you’re in for a disappointment. To accelerate your company’s performance, focus on decisions first and then – only then – figure out how new social technology tools can best support them.

“The dark side of the connected enterprise,” Forbes, January 9, 2013.

Managing an overlooked resource

Few organizations treat executive time as the finite and measurable resource it is. Consider the contrast with capital. Say that a company has $2 billion of good capital-investment opportunities, all with positive net present value and reasonably quick payback, but just $1 billion of capital readily available for investment. The only options are either to prioritize the most important possibilities and figure out which should be deferred or to find ways of raising more capital.

Leadership time, by contrast, too often gets treated as though it were limitless, with all good opportunities receiving high priority regardless of the leadership capacity to drive them forward. No wonder that so few leaders feel they are using their time well …

The myth of infinite time is most painfully experienced through the proliferation of big strategic initiatives and special projects common to so many modern organizations. The result is initiative overload: projects get heaped on top of “day jobs,” with a variety of unintended consequences, including failed initiatives, missed opportunities, and leaders who don’t have time to engage the people whose cooperation and commitment they need. Organizations often get “change fatigue” and eventually lack energy for even the most basic and rewarding initiatives …

When new initiatives proliferate without explicit attention to the allocation of time and roles, organizations inadvertently make trade-offs that render their leaders less effective

Frankki Bevins and Aaron De Smet, “Making time management the organization’s priority,” McKinsey Quarterly, January 2013.

Red teams and organizational complacency

The red team or red cell is an ill-defined but important piece of military planning processes. The US Joint Publication 2-0 Joint Intelligence defines a red team as, “an organizational element comprised of trained and educated members that provide an independent capability to fully explore alternatives in plans in plans and operations in the context of the operational environment and from the perspectives of the adversaries and others.”

This unwieldy definition poorly defines what a red cell can do for a commander and the fact that it is only defined in an intelligence publication implies that it is an intelligence function … Yet the concept is elegantly simple. The red cell is any person or persons designated to “play” the enemy. While the rest of the staff plans the operation, the red cell studies the enemy in order to ascertain what the enemy may do. The red cell becomes critical during the “wargaming” phase of the planning process. During the wargaming phase, the staff talks or acts through the plan to test it before execution. The wargame is frequently conducted using a turn-based system where the red cell gets to control the enemy units.

The more holes or weak spots the red cell finds in the staff’s plan, the better job he or she is doing. This has the dual purpose of keeping the rest of the staff and the commander honest while also making the plan better. A good red cell, empowered to be as critical of the rest of the staff as possible, prevents the commander and the staff from “falling in love” with their plan and refusing to see weaknesses. Once the wargame is complete, the staff modifies the plan to deal with any enemy actions that were found to be effective.

Outside the military red teams are relatively rare, although the world of white and grey hat hackers has taken them into their collective heart. In this context red teams seek to breach security and force electronic access to shielded systems.

Capt. Brett Friedman, “The political red team,” The Red Team Journal, November 2012, http://recampaign.blogspot.co.uk/2012/11/the-political-red-team.html

How to not innovate

Innovation has become the Holy Grail. Finding innovation is almost a sacred quest for the solution that will create growth, and open new eras of prosperity and well-being.

Unfortunately … the concept of innovation is invoked ritually and ceremonially more than it is embraced in practice.

For all the talk about innovation, I see many leaders in numerous organizations in every sector who actively stifle it. They say they want more innovation. But at the same time, they seem to operate by a set of hidden principles designed to prevent innovations from surfacing or succeeding. I’ve compiled them into a set of anti-rules. Acting in these nine ways guarantees that there will be little or no innovation of any significance, because no one had the time, money, or motivation to innovate:

Be suspicious of any new idea from below – because it’s new, and because it’s from below. After all, if the idea were any good, we at the top would have thought of it already.

Invoke history. If a new idea comes up for discussion, find a precedent in an earlier idea that didn’t work, remind everyone of that bad past experience. Those who have been around a long time know that we tried it before, so it won’t work this time either.

Keep people really busy. If people seem to have free time, load them with more work.

In the name of excellence, encourage cut-throat competition. Get groups to critique and challenge each other’s proposals, preferably in public forums, and then declare winners and losers.

Stress predictability above all. Count everything that can be counted, and do it as often as possible. Sweep any surplus into master accounts, and eliminate any slack. Favor exact plans and guarantees of success. Don’t credit people with exceeding their targets because that would just undermine planning. Insist that all procedures be followed.

Confine discussion of strategies and plans to a small circle of trusted advisors. Then announce big decisions in full-blown form. This ensures that no one will start anything new because they never know what new orders will be coming down from the top.

Act as though punishing failure motivates success. Practice public humiliation, making object lessons out of those who fail to meet expectations. Everyone will know that risk-taking is bad.

Blame problems on the incompetent people below – their weak skills and poor work ethic. Complain frequently about the low quality of the talent pool today. If that doesn’t undermine self-confidence, it will undermine faith in anyone else’s ideas.

Above all, never forget that we got to the top because we already know everything there is to know about this business.

Following these rules ensures that innovation will wither on the vine, if it even surfaces in the first place.

Rosabeth Moss Kanter, “Nine rules for stifling innovation,” Harvard Business Review Blogs, January 15, 2013, http://blogs.hbr.org/kanter/2013/01/nine-rules-for-stifling-innova.html

End-game for Barnes & Noble?

Barnes & Noble had a rough holiday season: Same-store sales fell compared to a year ago and revenue from sales of the Nook tablet stalled. Despite a heavy investment in the Nook business, Barnes & Noble is expected to have a three-year cumulative loss of more than $700 million, according to Barclays Capital – an indication that the bookstore’s multi-front war with online retailer Amazon.com doesn’t seem to be working …

Barnes & Noble isn’t alone. Many traditional retailers are struggling against online powerhouse Amazon.com. Best Buy has hatched plans to downsize its stores, focus on installation services and match Amazon’s prices. Target, too, has said it will match prices from Amazon and other select online retailers in 2013. Bricks-and-mortar retailers are battling a phenomenon called “the showrooming effect” the consumer practice of checking out a product in a retail store and then buying it online at a better price.

“Barnes & Noble and Best Buy are places that are showroomed like crazy,” says Wharton marketing professor Stephen Hoch. Hoch predicts that neither chain is likely to survive Amazon’s assault because the stores don’t have the service levels to stand out. “Go into a Barnes & Noble or a Best Buy and you see big box stores that should know their businesses. What you find out, however, is that employees don’t know their business, and you don’t get great help … ”

“These retailers are competing with a crazy man – [Amazon CEO] Jeff Bezos,” adds Hoch, who notes that Amazon is focused on growing revenue, not necessarily profit margins.

Despite the bankruptcy of chief competitor Borders in 2011, Barnes & Noble has struggled to increase sales. It has actively moved to address consumers’ rapid shift from print to digital books and to combat Amazon’s expanding Kindle business.

However, Barnes & Noble’s Nook now faces a growing number of competitors in the sector, including Apple’s iPad and iPad Mini and Amazon’s Kindle HD devices, as well as a bevy of tablets based on Google’s Android platform. The challenge for Barnes & Noble is that it lacks a strong digital content ecosystem relative to Amazon, Apple and Google.

“Barnes & Noble, the last big bookseller standing: but for how long?,” Knowledge@Wharton, January16, 2013, http://knowledge.wharton.upenn.edu/article.cfm?articleid=3167

Disruptive innovation as a global phenomenon

When it comes to innovation you are either the diner or the dinner. It can help you prosper or it can kill you.

The great composer Sir Edward Elgar opened the first HMV shop in 1921 on London’s Oxford Street. HMV stands for “His Master’s Voice”. Its famous logo showed a Jack Russell dog listening to a gramophone. The chain has gone into administration with the impending closure of 236 stores in the UK. The news came just a week after the camera store Jessops closed all 187 of its outlets. And this followed the demise of the electrical retailer Comet. There is a bloodbath on the high street and it is the result of innovation.

HMV’s decline mirrored the inexorable rise of digital downloads. UK consumers spent more than £1bn on downloaded films, music and games in 2012, according to the Entertainment Retailers Association. HMV was overtaken in the value of music sales by Amazon and iTunes. The surge in online retailing is cutting a swathe through the ranks of conventional high-street retailers and there is no sign of a respite. The boards of these retailers could see the trend advancing over many years yet seemed powerless to save their businesses.

Paul Sloane, “HMV, Jessops and Comet – the victims of innovation,” British Quality Foundation Innovation Blog, January 15, 2013, www.bqf.org.uk/innovation/2013/01/15/hmv-jessops-and-comet-the-victims-of-innovation/

“Reshoring” jobs

In 2005, a start-up company from California called ET Water Systems decided to move its manufacturing operations to China. At the time there was a general exodus to Asia in search of lower costs, recalls Mark Coopersmith, the firm’s chief executive. ET Water Systems, which builds sophisticated irrigation devices for businesses, quickly started losing money, not least because it had so much capital tied up in big shipments of goods which took weeks to cross the oceans. Innovation suffered from the distance between manufacturing and design, and quality became a problem too.

When five years later Mr Coopersmith investigated the difference between the total cost of production in China and America, including the cost of shipping, customs duties and other fees, he was amazed to find that California was only about 10% more expensive than China. And that was just on the immediate numbers, without allowing for the intangible benefits of making the devices almost next door. ET Water Systems’ new manufacturing partner, General Electronics Assembly, is in San Jose.

The number of firms known to have “reshored” manufacturing to America is well under 100. Doubtless many more are doing so quietly. Examples range from the tiny, such as ET Water Systems, to the enormous, such as General Electric, which last year moved manufacturing of washing machines, fridges and heaters back from China to a factory in Kentucky which not long ago had been expected to close. Google has attracted a great deal of attention for deciding to make its Nexus Q, a new media streamer, in San Jose …

“Coming home”, The Economist, January 19, 2013.

China’s human capital challenge

China is making a $250 billion-a-year investment in what economists call human capital. Just as the United States helped build a white-collar middle class in the late 1940s and early 1950s by using the GI Bill to help educate millions of World War II veterans, the Chinese government is using large subsidies to educate tens of millions of young people as they move from farms to cities.

The aim is to change the current system, in which a tiny, highly educated elite oversees vast armies of semi-trained factory workers and rural laborers. China wants to move up the development curve by fostering a much more broadly educated public, one that more closely resembles the multifaceted labor forces of the United States and Europe.

It is too early to know how well the effort will pay off.

While potentially enhancing China’s future as a global industrial power, an increasingly educated population poses daunting challenges for its leaders. With the Chinese economy downshifting in the past year to a slower growth rate, the country faces a glut of college graduates with high expectations and limited opportunities.

Much depends on whether China’s authoritarian political system can create an educational system that encourages the world-class creativity and innovation that modern economies require, and that can help generate enough quality jobs …

“It will move China forward in its economy, in scientific innovation and politically, but the new rising middle class will also put a lot of pressure on the government to change,” said Wang Huiyao, the director general of the Center for China and Globalization, a Beijing-based research group.

To the extent that China succeeds, its educational leap forward could have profound implications in a globalized economy in which a growing share of goods and services is traded across international borders. Increasingly, college graduates all over the world compete for similar work, and the boom in higher education in China is starting to put pressure on employment opportunities for college graduates elsewhere – including in the United States.

“Next made in China boom: college graduates,” The New York Times, January 16, 2013.

Shaping corporate culture via social media

In our view, it all starts with culture.

I guess the simplest definition of culture is what happens when the manager leaves the room. That’s when you can feel and sense – in the absence of authority – whether you are aligned with the company’s core values and guiding principles.

Then there’s the people element. Right now, in the connected, knowledge-sharing, social era that we’re in, “you” – the frontline employees – are the brand. Any customer-facing employee has an opportunity to either serve the brand or tarnish the brand. And a social business, when it’s running on all cylinders, is really leveraging the voice of the employees to expand the voice of the brand and what the company stands for.

Structure and process also come into play prior to technology and how flat the organization is. We’re a thousand-employee company, so obviously there are VPs and directors and managers and single contributors and project leads. So I suppose on paper there could be five, six steps before a single contributor, on paper, is removed from the CEO or the CX level. But because we have social technologies and all of our employees have access to them and all of them feel like it’s a safe environment to ask questions and share opinions, ideas can reach from an intern to the CEO unfiltered. And that gives the perception that structurally we’re flat. That’s when the best ideas win, not the best titles …

Now, why Chatter? Ultimately, communication improves culture, and we knew we needed to bring headquarters closer to the field, closer to our sales organization, closer to our service organization. We started chatting sales wins and we started chatting meetings with customers and partners … Really, what I believe has happened, is that Chatter has humanized our business.

I started in this company as a co-op [editor’s note: similar to an internship]. Back then, if a CEO or an executive or a VP walked by that I didn’t know, I kept my head down, and there was no chance they would know my name or that we would have a conversation.

Today, I walk the halls and co-ops and anybody in the company is perfectly comfortable saying, “Hi, Vala,” and we have a conversation.

Vala Afshar, “Creating a culture where the best ideas win,” Sloan Management Review, January 2013.

Strategic planning in a turbulent world

The world has become a more turbulent place, where anyone with a new idea can put it into action before you can say “startup” and launch widespread movements with a single Tweet. This has left organizational leaders with a real problem, since the trusted, traditional approach to strategic planning is based on assumptions that no longer hold. The static strategic plan is dead.

This has led to increasingly polarized attitudes about the value of having a strategy at all. Some leaders are valiantly trying to save strategic planning by urging us to focus even more on rigorous data analysis. Others deny the value of strategy, arguing that organizations need agility above all else (an attitude that famed strategist Roger Martin reports hearing with increasing frequency).

We think that what is necessary today is a strategy that breaks free of static plans to be adaptive and directive, that emphasizes learning and control, and that reclaims the value of strategic thinking for the world that now surrounds us. Martin acknowledged this point at the Skoll World Forum in 2010 when he said: “Every model is wrong and every strategy is wrong. Strategy in a way helps you learn what is ‘righter’. People think you can prove a strategy in advance. You can’t.”

The approach we developed in working with our clients at Monitor Institute is what we call adaptive strategy. We create a roadmap of the terrain that lies before an organization and develop a set of navigational tools, realizing that there will be many different options for reaching the destination. If necessary, the destination itself may shift based on what we learn along the way.

Creating strategies that are truly adaptive requires that we give up on many long-held assumptions. As the complexity of our physical and social systems make the world more unpredictable, we have to abandon our focus on predictions and shift into rapid prototyping and experimentation so that we learn quickly about what actually works. With data now ubiquitous, we have to give up our claim to expertise in data collection and move into pattern recognition so that we know what data is worth our attention. We also know that simple directives from the top are frequently neither necessary nor helpful. We instead find ways to delegate authority, get information directly from the front lines, and make decisions based on a real-time understanding of what’s happening on the ground. Instead of the old approach of “making a plan and sticking to it,” which led to centralized strategic planning around fixed time horizons, we believe in “setting a direction and testing to it,” treating the whole organization as a team that is experimenting its way to success …

To provide structure to this fluid approach, we focus on answering a series of four interrelated questions about the organization’s strategic direction: what vision you want to pursue, how you will make a difference, how you will succeed, and what capabilities it will take to get there.

Dana O’Donovan & Noah Rimland Flower, “The strategic plan is dead. long live strategy,” Stanford Social Innovation Review, January 10, 2013.

Universities and disruptive innovation

By one, and only one, measure, the institutions of higher education around the world are remarkably successful: They reach far more people today than ever before. About a third of Americans over the age of 18 have attained a bachelor’s degree or higher – up from less than 20 percent 30 years ago. In the rest of the world, far more people than in the past are seeking higher education, especially in emerging economies, where immense numbers of young people yearn for professional careers. By all other measures, however, the 4,500 institutions currently serving more than 21 million students in the US, and the 6,500 other institutions around the world, collectively deserve failing grades.

First, they fail to help students fulfill their goals. Even in the US, which has 60 percent of the top-ranked universities in the world, the overall metrics on successful matriculation are dismal. Less than two-thirds of students enrolled in a four-year institution attain the targeted degree. Of students entering a community college, less than half graduate or transfer to a four-year school within six years. Although not every aspirant will be destined for success in higher education, these statistics suggest a systemic institutional problem.

Second, the cost of a college or university degree is out of control. Despite their questionable performance, tuition at four-year universities has tripled in constant dollars over the past 30 years – a faster rate of increase than much-maligned healthcare – and total US student debt now stands at more than US$1 trillion. Worse still, one out of two recent college graduates is unemployed or working in a job that does not require a degree.

Third, institutions of higher education fail to meet the needs of another critical constituency: employers. Even as the US unemployment rate remains stubbornly high, employment forecasts predict a shortage of educated, medium- to high-skilled employees in the fields of science, technology, engineering, and math (known collectively as STEM). There are simply not enough mathematically capable young people in the pipeline. Despite the prospect of millions of unfilled jobs, many institutions continue to allocate their scarce resources to the softer fields – the humanities and social sciences – while underfunding the investment in science education that would enable and encourage students to pursue these high-demand positions.

Tim Laseter, “The university’s dilemma,” Strategy+ Business, December 2012.

Choosing the right customer

Customer selection impacts not only operating costs and margins; in an entrepreneurial company, initial sales also influence the venture’s trajectory of organizational skills, because businesses develop capabilities and routines in the process of interactions with customers. The choice to do business with a customer also represents an opportunity cost: The money, time and people allocated to customer A are resources not available for customers B, C and D … In a competitive market, moreover, ineffective opportunity management eventually leads to loss of money, time and positioning with customers who are (or should be) core customers. The company runs the risk of becoming better and better at activities that core customers value less and less.

Most markets present businesses with an array of customer opportunities. At one end of the spectrum are transaction buyers in what is essentially a “spot market”; at the other end are relationship buyers. Transaction buyers have short time horizons when purchasing in the venture’s product category. In such markets, the lack of switching costs means that buy/sell adjustments are easy to make. Because transaction buyers invest little in specialized procedures or assets when purchasing in that category, they are less interested in the wider system benefits (or total life cycle costs) that the venture may offer. These buyers purchase a product for its price and performance at a point in time. This does not mean that these buyers are uninterested in quality or value. Rather, they define value as meeting specifications and do not want to pay for a product or service whose quality, applications or scope exceed what they want at that point.

In contrast, relationship buyers have a longer time horizon. There is something about the product, seller or buyer that motivates them to make larger investments in specialized procedures or assets. Once made, the investments are not easily fungible. Enterprise software offers a good example. Historically, the choice of an enterprise software vendor has been a multiyear choice of support, upgrade and other processes – a choice not easily altered after the fact. Because of these investments and switching costs, buyers are interested in the wider system benefits and in choosing a longer-term business partner. Hence, they are legitimately interested in knowing more about the seller’s organization, commitment to the category, future plans, etc. …

To be successful, businesses need to align their selling program with the customer opportunities. If they’re selling solutions to relationship customers, they need to be sure that the longer selling cycles, multiple requests for proposals, custom product requirements and after-sale support services are necessary and “worth it.” In contrast, if they’re focusing on transaction buyers, companies need to find ways to take costs out of the selling process, product offering and after-sale support services. Such decisions have implications not only for sales management (for example, who is hired, the coverage model and relevant sales tools) but also for product development, finance and other aspects of the business.

Frank V. Cespedes, James P. Dougherty and Ben S. Skinner III, “How to identify the best customers for your business,” Sloan Management Review, December 2012.

Hard road ahead for banks

Banks around the world still haven’t fully recovered from the financial crisis that roiled the global economy nearly half a decade ago. Efforts to restore depleted capital and reduce costs have partly succeeded, but the current environment is still a challenge: many banks failed to earn their cost of equity in 2011, and the average return on equity (ROE) – 7.6 percent – is only half of peak levels before the crisis. Global revenue growth stalled too, dropping to 3 percent from 2010 to 2011, compared with 9 percent in the preceding year.

McKinsey’s second annual review of the banking industry, finds that this faltering performance has both external and internal causes. Although the operating environment has stabilized since the height of the crisis–most banks do not face a struggle for existence – the current problems are almost as daunting when taken together …

Technological advances are empowering both nonbank attackers, which have gained share in traditional banking domains by offering viable alternatives, and consumers, who have never found it easier to switch banks.

Macroeconomic volatility continues to create uncertainty in the business. Particularly in developed economies, the pace of deleveraging seems to be up, slowing demand for loans.

Cyclical change could, of course, eventually weaken – or reverse–today’s macroeconomic headwinds, but banks can’t afford to wait. Senior banking executives should focus on the operational and business-culture forces they can change directly, by throwing their weight behind the following goals:

Accelerate the economic transformation of the business by improving capital efficiency, finding new pockets of growth, and embracing industrial-style efficiency to cut costs sustainably.

Reinvent the business model to deal with new realities in customer behavior, innovative attackers, and changing global growth patterns.

Embrace cultural change and enhance value creation. Rightly or wrongly, the industry’s reputation has suffered in the last several years. To reinforce new approaches to the creation of value, banks must examine their organizational culture across four dimensions: balancing the interests of shareholders and the broader society, creating value for customers, ensuring that internal processes are sound, and influencing employee mind-sets.

“The search for a sustainable banking model,” McKinsey Quarterly, January 2012.

How not to build an airplane

The Dreamliner’s advocates came up with a development strategy that was supposed to be cheaper and quicker than the traditional approach: outsourcing. And Boeing didn’t outsource just the manufacturing of parts; it turned over the design, the engineering, and the manufacture of entire sections of the plane to some fifty “strategic partners.” Boeing itself ended up building less than forty per cent of the plane.

This strategy was trumpeted as a reinvention of manufacturing. But while the finance guys loved it–since it meant that Boeing had to put up less money–it was a huge headache for the engineers. In a fascinating study of the process, two UCLA researchers, Christopher Tang and Joshua Zimmerman, show how challenging it was for Boeing to work with fifty different partners. The more complex a supply chain, the more chances there are for something to go wrong, and Boeing had far less control than it would have if more of the operation had been in-house. Delays became endemic, and, instead of costing less, the project went billions over budget. In 2011, Jim Albaugh, who took over the program in 2009, said, “We spent a lot more money in trying to recover than we ever would have spent if we’d tried to keep the key technologies closer to home.” …

In a different time, none of this might have mattered much. As plenty of people have pointed out, “teething problems” have, historically, been common in new planes. The 747’s engines were notoriously temperamental, the DC-10’s cargo doors were a major safety issue, and a number of Lockheed L-188s had wings shear off in flight. By those standards, you might think the Dreamliner’s battery issues are minor. The problem for Boeing is that those standards don’t apply anymore. The expectations of both customers and regulators are much higher, because, these days, so many products work well from the start. Automobiles, major appliances, televisions: a quality revolution in the past few decades has made products more reliable and durable than ever before. So our tolerance for failure is lower.

The same is true when it comes to airline safety. In the past, the F.A.A. was remarkably hesitant to take planes out of service. The problems with the DC-10 were well known to regulators for years before a 1979 crash forced them to ground the plane. But, again, those standards no longer apply. In the nineteen-seventies, after all, airplane crashes occurred with disturbing regularity. Today, they are extraordinarily rare; there hasn’t been a fatal airliner crash in the United States in almost four years. The safer we get, the safer we expect to be, so the performance bar keeps rising. And this, ultimately, is why the decision to give other companies responsibility for the Dreamliner now looks misguided. Boeing is in a business where the margin of error is small. It shouldn’t have chosen a business model where the chance of making a serious mistake was so large

James Surowiecki, “Requiem for a dreamliner?,” New Yorker, February 4, 2013.

How not to build and airplane (II)

The US military’s F-35 Lightning II was going to change everything. A product of the Joint Strike Fighter program, which aimed to design a strike fighter that would satisfy the needs of the Air Force, Navy, and Marines, the F-35 would be revolutionary in its versatility, applicability, and a host of other -ilities too. And it was going to be really, really expensive. But worth it!

With “the world’s most expensive fighter jet” now coming under additional budget scrutiny, National Public Radio highlighted the hurdles that the program has run into. Most predictably, cost overruns; this is, after all, a government project. But also notable are the design tradeoffs among the three models. The Air Force wants a sleek plane that avoids radar detection, the original remit of the design, but the Marines need vertical takeoff and landing capability, which requires an ugly bump behind the cockpit to accommodate a fan, and the Navy version has to include a tail hook for carrier landings (something the version tested early in 2012 could not accomplish, as the British, who are helping fund the plane, discovered to their chagrin).

Then there’s the testing. “Thanks to a strategy known as ‘concurrency,’” according to NPR, “the F-35 is being flown and tested at the same time. Concurrency was supposed to speed up the F-35’s development. But the jet is years late.” You can see where the military was coming from with this idea. Testing usually preceded widespread use, happening well before the military pilots got their hands on the aircraft for a real shakedown. But testing takes time, often inordinate amounts of it, and everyone wants to get the plane in the air. To avoid this lag, the military decided to try to do it all at the same time, a plan, I’m guessing, that frustrated pilots had been discussing for years. The US Government Accountability Office has been expressing concerns about concurrency, for a while now, but only, apparently, after the fact. Up until they realized they had never done anything like that before did the real worries set in.

Tim Sullivan, “The F-35 and the tradeoff fallacy,” HBR Editors Blog, January 3, 2013, blogs.hbr.org/hbr/hbreditors/2013/01/the_tradeoff_fallacy.html

Craig HenryStrategy & Leadership’s intrepid media explorer, collected these examples of novel strategic management concepts and practices and impending environmental discontinuity from various news media. A marketing and strategy consultant based in Carlisle, Pennsylvania, he welcomes your contributions and suggestions (Craighenry@aol.com).