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Understanding options for business

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Title: Understanding options for business


1
Understanding options for businesscorporate
development.
  • Options for creating and growing value at the
    business and corporate level, directions and
    methods of development, and the ability to grow
    value.

2
Options for the business/ corporation
3
Johns seminar approach
  • Understanding the business as it is.
  • Understanding the drivers of performance.
  • Understanding the drivers of the environment.
  • Understanding and evaluating the options for
    developing the business (ie for growing its
    value).

4
Understanding the drivers of business performance
Understanding business environment/ drivers of
change
Understanding the business/ assessing
performance
Understanding and evaluating options for
business/ corporate development
5
Coming from/ going to
  • We have been examining the characteristics of the
    business, the drivers of business performance and
    the business environment.
  • Our ultimate goal however is to consider the
    possible options for the future development of
    the business or corporation, to maintain or to
    improve its performance as a value creator.
  • Options for growing value.

6
Every case is different?
  • We have emphasised that businesses are different,
    industries are different, environments are
    different. When it comes to options however the
    interesting thing is that these are quite
    limited.
  • The options for growing the value of a simple
    business or a complex corporation, either a
    successful one or a failing one, are fairly
    limited.
  • We can describe the options in terms of
    directions of development and methods of
    development and examine the requirements for
    successful development (the nature and sources of
    c. advantage again).

7
Point of the exercise
  • Immediate point is about doing the exam case/ and
    the BP assignment where it will be crucial to
    discuss convincingly the options for the case
    business and evaluate them as a prelude to making
    a choice.
  • Generally this is the least well done part of the
    exercise. It is harder to do this part with some
    depth and conviction. Beware of just listing
    options. Look to explaining on what basis this
    business/ corporation could realistically
    undertake and create value from a particular
    option.
  • Beware of wishful thinking.

8
Team Tasks
  • Consider options for the business/ corporation
  • possible directions of development and
    methods
  • Evaluate ability to grow value at the business
    unit level via product and market development,
    competitive advantage, co-operation, resources
    and capabilities creation and exploitation,
    innovation, reorganisation, downsizing.
  • Evaluate ability to grow value via corporate
    options with respect to scope (increasing/
    decreasing), MAs and divestment, and joint
    ventures.

9
References guide
  • Material on this topic is found in
  • Bus pol chapters 7/8 and Bus econ chapter 8.
  • Kees van der Heijdens book on scenarios.
  • Textbooks such as Johnson Scholes for lots more
    analytical details and cases.
  • Also the Profit Zone by Slywotski and Morrison is
    good on how some several successful businesses
    have done it.
  • Sadtlers book Breakup is good on unbundling
    option.
  • A lot of good ideas can be found in journals such
    as the Sloan Management Review, California
    Management Review, Academy of Management Review,
    and especially the .

10
Recent HBR articles
  • Porter, What is Strategy Nov. 1996
  • Hargadon, Building an innovation factory May
    2000
  • Kim, Value innovation, January 1997
  • Gadiesh, Profit pools, May 1998
  • Campbell, Search for parenting advantage, March
    1995
  • Goold, Synergy, Sept. 1998
  • Dell, Virtual integration, March, 1998
  • Singer, Unbundling the corporation, March 1999
  • Markides, Diversify or not?, Nov. 1997
  • Eccles, Paying for acquisitions, July 1999
  • Ventakesan, Strategic sourcing, Nov. 1992
  • Kim, Business ideas ,sept. 2000
  • Hamel, Strategy as Revolution, 1996

11
Review of position
  • Understanding strategy/ strategy process
  • Understanding the business as it is
  • Understanding performance drivers in general
  • Understanding environment and change

12
Understanding strategy
  • In the beginning we defined business purpose in
    terms of motivating and co-ordinating the search
    for value. So in considering options for
    developing the business/ corporation this should
    be our focus. How to take the business forward,
    how to grow the business, in a way that
    sustains and extends good performance or improves
    poor performance.
  • Strategy is the organisations view of what the
    opportunities and threats are, how these can be
    exploited/ overcome, how to get things done
    effectively, how to take on the competition, and
    the risks involved. Strategy is doing the right
    thing, structure is doing things right.

13
  • Strategy is your guide to investment priorities,
    SIDS. Investments are the commitments you make
    to pursuing a particular strategic vision. A
    business with no clear strategy will be one with
    no clear investment priorities and this is a
    recipe for failure. Success is about developing
    a coherent strategy and structure to deliver
    sustainable value.
  • In developing options remember what strategy is
    aboutgtgtgtgt

14
  • Strategy is about preparing for the future (PH)
  • about creating/ managing distinctive capabilities
  • about managing survival and success
  • about managing to be different
  • about managing the o/e interface,
  • about managing complexity
  • about managing options creation
  • about managing integration
  • about managing change
  • about managing convergence,
  • about managing competitive advantage
  • about managing resource allocation
  • about managing corporate scope.

15
  • Check then for the extent to which in considering
    options we/ you are
  • Preparing for the future, focused on performance,
    creating and managing caps, managing o/e
    interface, managing success, managing
    integration, managing change, managing issues,
    managing options, managing convergence, managing
    comp adv and scope, .

16
Strategy Process
  • Strategic decisions involve significant
    commitments, are future oriented, are value
    oriented, take account of competitors actions,
    take account of environmental complexity and
    uncertainty, and the problems of implementation.
  • Strategy is a way of defining priorities,
    supporting decision makers, providing
    co-ordination, and a statement of aspirations.
  • Strategy is about understanding the world and the
    organisations options as a prelude to action/
    commitment.

17
Recall the lessons
  • There are no easy recipes for success
  • Strategy is a process not an event
  • Strategy thinking/ making is itself a potential
    distinctive capability
  • Expect the unexpected
  • Get to know yourself, your customers, and your
    competitors well
  • Remember what you are there for!

18
Understanding the business
  • What do we do, how, for whom, with whom, where,
    against whom, how hard, on what basis do we
    compete?
  • Business idea a statement of the principles on
    which you believe the business/ corp can succeed
    as a value creator, in particular your source of
    competitive/ corporate advantage and the unique
    organisational competencies required to succeed
    in the market against others.
  • Business mission organisational purpose and
    direction. A sort of statement of beliefs.
  • Strengths and weaknesses what you do well, where
    you are vulnerable.
  • Bottom line are we creating value or not?

19
Understanding performance
  • What seems to matter is governance, industry/
    sector, growth strategy, and unique
    organisational processes and practices.
  • Basically success needs a strong desire to create
    value allied to a high level of ability. In
    particular the ability to identify and exploit
    valuable opportunities and protect them from
    competitors.
  • The key drivers of performance are purpose,
    policies, positions, privileged assets, people,
    and organisational processes and practices.

20
Performance lessons
  • Keep to attractive industries and try to keep
    them attractive.
  • Build and nurture distinctive assets and
    competencies through HRM, information management,
    and knowledge management.
  • Build processes to effectively utilise people,
    information and knowledge in the pursuit of
    valuable opportunities.
  • Focus policies on value creation.

21
Understanding the environment
  • The potential for innovative thinking about
    growing value, building new resources and
    capabilities, leveraging existing resources and
    capabilities.
  • Opportunities for growing value.
  • Threats to existing performance, the value of
    existing assets and capabilities, from
    environmental change.
  • The implications of change for the business/
    corporation. How change impacts on supply and
    demand. On competition and rivalry.
  • Role of cost factors emphasised.
  • The scenario process, wind tunnelling, and the
    strategic conversation.

22
So
  • Having understood the nature/purpose of strategy,
    and understood the business as it is, and the
    drivers of performance, and the drivers of change
    in the environment, we are now ready to put it
    together and consider and assess the options
    available to the business/corporation for
    maintaining and growing value in the future.

23
Premises for options choice
  • Business in principle is about the on-going
    process of organising and managing the search
    for, exploitation and protection of,
    opportunities to add value. There is competition
    for these opportunities and for the resources
    required to exploit them.
  • Business performance is about the ability to
    identify and exploit attractive positions, the
    ability to develop competitive advantage, the
    ability to develop and exploit distinctive
    capabilities and competencies.
  • Business performance is driven by the 7 ps of ..

24
  • The environment in the future is uncertain and
    unpredictable. Strategy is to be considered in
    the light of the evolution of opportunities and
    threats, alternative scenarios, and the
    likelihood of changing circumstances.
  • Strategy therefore is about taking the business
    forward, growing its value, through appropriate
    investments in people, organisation, products,
    markets, plant and equipment, RD, marketing,
    brands, licences, knowledge, acquisitions, joint
    ventures, MAs, and in reorganisation.
  • Thus crucial to remember that taking the business
    forward, growing its value, does not necessarily
    mean growing the business per se. It may mean,
    at least for a period, reorganisation and
    refocusing rather than growth.

25
Recall McGahan 1999
  • Her analysis of US businesses found
  • 41 were steady moderate performers
  • 20 were chronic under performers
  • 19 were sustained high performers
  • 10 were improving and 10 declining.
  • Thus for roughly 60 of businesses strategy might
    be growth oriented and for the rest it is likely
    to be reorganisation oriented.

26
Managing options
  • Note it is not just about finding THE option.
  • It is a process of building and maintaining a
    portfolio of options, investing in thought
    experiments to aid understanding of options,
    learning about future capabilities and
    competencies, identifying and uncovering hidden
    constraints on the future, combining planning
    with opportunism.
  • Good example given of how Acer developed its
    options by gradually building up its knowledge of
    markets and the required capabilities for success
    see Sloan management review, 1999

27
A key word of warning
  • From Booz Allen Hamilton the US consultants.
  • Before you change your strategy try to
    understand why the old one isnt working
  • It may not be your strategy that is at fault! It
    may be the execution of the strategy. If this is
    so you may end up changing the wrong thing!
  • BAH house journal, 2000

28
Directions/methods/means for development of the
business
  • Usual to begin with a description of the possible
    directions of development and the possible
    methods for pursuing development of the business.
    A taxonomy of development. Usually in matrix
    form. (see BP 7.2)
  • A useful start but remember this is only
    describing possibilities. It says nothing about
    the crucial issue of ability to grow value. The
    means for valuable development.
  • The key issue is HOW value is to be created. For
    example it is open to any business to diversify
    into new areas as an option, but successful
    (value adding) diversification is not easy. It
    depends on both identifying the opportunities and
    having/ or creating the resources and
    capabilities to exploit them.
  • Growth is easy, creating value is hard.

29
Directions and methods
  • Business Policy chap 7 uses the idea of generic
    strategies as the basis for discussion but I want
    to try to improve on this.
  • Bus Econ text chap 11 focuses on scope and
    acquisitions which I repeat here but with some
    added thoughts on divestment, unbundling,
    outsourcing, etc so as to emphasise that strategy
    is about reorganisation as well as growth.

30
Some distinctions
  • In discussing options it is useful to begin with
    the following distinctions
  • 1. Business unit strategy and corporate strategy.
  • 2. Growth strategies and reorganisation/
    retrenchment strategies.
  • 3. Directions of development and methods of
    development.
  • 4. Product and market combinations as the basis
    of development.

31
1.Business v corporate strategy
  • To do with scope of the corporation (increasing
    or reducing it), vertical scope, product scope,
    international scope, acquisitions, joint
    ventures, divestment, unbundling, out-sourcing.
  • To do with the individual business unit (stand
    alone firm or division of a corporation), its
    products, markets, segments, horizontal
    development including possibly acquisition,
    co-operation.

32
2. Growth v Reorganisation
  • New products
  • New markets
  • New businesses
  • New segments
  • Expansion
  • Vertical integration
  • Diversification (related/ unrelated)bundling.
  • Internationalisation
  • Acquisitions
  • Fewer products/ markets/ businesses
  • Fewer segments
  • Contraction
  • Vertical disintegration/ outsourcing
  • Refocusing/ down-sizing/ unbundling wrt scope and
    geography.
  • Divestments/ closures

33
SWOT
34
3. Directions v methods of development
  • Horizontal
  • Vertical
  • Related diversification
  • Unrelated diversification
  • International
  • Internal
  • External (acquisition)
  • Co-operation
  • Joint ventures
  • Outsourcing
  • Divestment

35
4. Basis for development
  • Products/ technologies existing, new but
    related, new and unrelated.
  • Markets/customers existing, similar, new, or
    your self (as in vertical integration).
  • This gives rise to the Ansoff matrix (BP notes
    chapter 6) which classifies growth/ development
    strategies as follows market penetration,
    market development, product development, related
    and unrelated diversification, and vertical
    integration.

36
ANSOFFS MATRIX
Customers / Products and
technologies markets Present
New/related New/unrelated Present
Market Product
development
penetration Similar Market
Mark. related
development div. New
Market Tec.
related Conglom.
development div. Self
Vertical
integration
37
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38
To simplify
  • We will simplify all of this by looking first at
    options for business development (growth and
    reorganisation) and then at options for corporate
    development (growth and reorganisation). The
    focus will be on ability to grow value.
  • This will not cover every conceivable variation
    on the theme of options but will introduce all
    the main ideas (I hope).

39
Business policy and value
  • How can we create more value in this business at
    this time? What are our options?
  • We will examine first the conventional or
    textbook approach to this focusing on concepts
    such as market attractiveness, competitive
    advantage and resources/ capabilities.
  • Second we will look at the approach of a leading
    strategy consultancy (BCG).
  • Third we will look at some recent views of
    leading strategy thinkers on Value Innovation.

40
Conventional approach
  • Consider the two fundamental drivers of
    performance market attractiveness and comp.
    advantage as discussed earlier.
  • Different combinations of these are possible
    (next slide). Your options for value creation
    depend on the situation you find yourself in.
    Thus if you are in quadrant 3 your options are
    rather limited. It isnt impossible to succeed in
    an unattractive market but it is very difficult
    if you are starting from a position of weakness.
    You need to consider exit strategy or selling out
    to someone who has the ability to improve your
    prospects.

41
Market attractiveness and competitive advantage
Attractive markets but no competitive advs. ? Is can we develop an advantage. Attractive markets and competitive advs. ? Is how can we maintain this, maybe even extend it.
3. Unattractive markets and no competitive advs. ? Is should we be in this business at all. 4. Unattractive markets but competitive advantages. ? Is can we do anything to improve m attractiveness
42
Market attractiveness
  • If in an attractive market the question is how
    to maintain this or improve it.
  • If market is not so attractive or downright
    unattractive the question will be is there
    anything we can do to improve things.
  • Thinking back to Porters (5 Fs) model we see
    there may be things that can be done.
  • Such as?

43
  • Invest in efforts to co-operate/ collude with
    rivals to reduce intensity of competition.
  • May involve co-operation on output to keep prices
    strong (cartel) or co-operation to reduce costs
    of advertising or RD.
  • If co-operation is problematic then promote MAs
    to reduce the number of rivals in the market and/
    or to close excess capacity.
  • Invest in efforts (individual/ co-operative) to
    discourage further entry (raise entry barriers)
    and to reduce impact of substitutes.
  • Invest in efforts to capture more of the total
    value available downstream and upstream (see
    profit pools).

44
Complementors
  • If the attractiveness of your products depends on
    the availability of complements then consider the
    management of this relationship. Are you
    maximising the opportunities for valuable
    co-development of products? Are you minimising
    the possibility of a threat to your market by
    lack of availability of good complements? Or of
    complementors moving into your territory?

45
Profit pools
  • Defined as all the profits earned in an industry
    at all points along the value chain. (HBR, May
    1998, two articles)
  • U Haul was very successful in the consumer truck
    rental business because realised that better
    profits were to be had selling accessories
    (complements) such as insurance, packing boxes,
    trailer rentals, storage etc.
  • Profits were poor in the core truck rental
    business because consumers shopped around at this
    point. But once a rental was agreed consumers
    tended to buy the whole product bundle from that
    business. So U Haul kept prices low to attract
    core business and made its profits from the rest
    of the package.
  • Therefore, it is argued, the best profits are
    often not in fact in the core business where most
    sales are generated.

46
  • In the auto industry profits are as much about
    financial services as making and selling cars.
    Ford gets half its profits from financing and
    leasing but this is only 20 of its business!
  • The authors explain how to map the industry
    profit pool and to consider the dynamic
    relationships between different parts of the pool
    as a method of spotting new opportunities and
    threats.
  • Dell is given as an example of a business that
    carefully studies the industry profit pool in
    order to develop its business model. Its origin
    of course was in recognising that direct selling
    of PCs was more profitable than just making
    them.
  • The Anheuser Busch case is also very instructive.

47
How to fight a price war
  • If necessary however be prepared for a price war.
  • Diagnosis first understand what you are trying
    to do before you start one or find out why it is
    happening before you respond to one.
  • Actions second Fight smart. Use complex price
    actions (eg bundling), Introduce new products for
    low price segments, Compete on quality, use
    exclusive deals with resellers or related
    providers, advertise your strategic intentions
    (matching, deep pockets).
  • Rao et al, HBR, 2000

48
Analysing the battleground
  • Customers, segments and their price sensitivity
    can customers readily make price comparisons,
    will they necessarily always switch to low price?
  • Company abilities is a price war optimal given
    your cost structures, competencies and
    capabilities, positioning?
  • Competitor responses look at cost structures,
    CC, and positioning. Who will respond, how
    hard, how sustainable.
  • Other parties collaborators, suppliers,
    providers of complementary goods/services,
    resellers, government.

49
Competitive advantage
  • If you have it the question is what is its
    nature, what are its sources, how do you sustain
    it and crucially how to use it as a basis, a
    lever, for expanding value creating activities
    through market penetration, market development,
    and/or product development.
  • If you dont have it the question is what might
    provide it and is there a realistic possibility
    of achieving some as a basis for development?
  • Thinking back to competitive advantage we see
    what this might involve.

50
  • Recall that CA concerns the ability of a business
    to get a sustainable edge over its competitors.
  • This depends on its ability to achieve a
    distinctive cost or diff. advantage, or a
    valuable niche, which the others find hard to
    understand or to replicate.
  • That is to be cheaper, better, newer, more
    innovative offerings, earlier to market, more
    desirable, more distinctive, more reliable,
    better focused, to offer a more cost effective
    solution for consumers (EDS, MCI), or to provide
    a better total system with complementors
    (Wintel, Visa).
  • And this means the ability to organise and manage
    the relevant cost and differentiation drivers.

51
  • The ability to do this depends in turn on the
    effectiveness and integration of the appropriate
    key business activities and processes
    (distinctive capabilities/ competencies) which
    underlie cost competitiveness, quality,
    innovation, speed to market, network building,
    and customer intimacy.
  • Production, marketing, logistics, supply chain
    management, collaboration, branding, quality,
    market development, product development, and
    innovation.
  • Which in turn depends on organisational processes
    and practices such as HRM, information and
    decision management, and relationship management.

52
Discipline of market leaders
  • Treacy/Wiersma argue for only 3 fundamental
    value creating disciplines innovation
    (product leadership), closeness to customers, and
    operational effectiveness. Key is choosing
    which discipline to follow and building the whole
    organisation and its resources/ activities around
    this discipline.
  • John Kay suggests 4 fundamental bases for
    success innovation, reputation, architecture
    (organisational effectiveness), and strategic
    assets. But architecture is the fundamental
    thing.

53
Corporate architecture
  • Is therefore the fundamental issue. Getting
    structures, organisational processes and
    practices, incentives, leadership,
    accountability, culture right. For quality,
    innovation, etc. Why?
  • Hard to do. So hard to understand, hard to
    codify or make into a recipe, hard to replicate
    and hard to buy off the shelf.
  • See my discussion of performance for more on this
    issue.

54
Ex. Customer responsiveness
  • Leadership demonstrates commitment to customers.
  • Production customisation, responsiveness,
    quality.
  • Marketing knowledge of customers, communications
    and learning from customers.
  • Logistics fast response times.
  • RD involve the customer.
  • HRM train staff to put customer first.
  • Information systems use to increase
    responsiveness.

55
EX. Quality
  • Leadership commitment to quality. Set goals and
    create incentives. GE six sigma programme.
  • Production. Trace defects back to source.
  • Marketing. Understand customer demand for quality
    and provide feedback on performance.
  • Logistics. Help suppliers with quality, and trace
    defects back.
  • RD. Design for simpler manufacture.
  • Information systems. Monitor costs and benefits
    of quality.
  • HRM. Quality teams, training in TQM

56
Ex. Total systems
  • Some of the most successful business have
    arguably neither the best products or
    solutions. But dominate by creating a standard
    along with complementors that locks-in the
    consumer.
  • Requirements are building a value creating total
    system with compatible parts which is cost
    effective for consumers.
  • Key is relationship management and complementor
    integration. This runs right through the member
    organisations.
  • Hax, Sloan management review, 1999

57
Building strategic flexibility
  • The new economy requires a new approach to
    organisation it is argued. Involves,
  • Strong leadership, non-linear, systemic thinking.
  • Building dynamic core capabilities
  • Focus on a development of human capital
  • Effective use of new technology especially IT
  • Identifying value adding options (especially
    through co-operation and collaboration)
  • Building new organisation structures and
    cultures, a learning innovative organisation
  • Managing firms as asset bundles (loose-tight
    properties, long-short thinking and other
    paradoxes)
  • Hitt, Academy of management, 1998

58
Options if you have CA
  • First, make sure you understand it yourself, what
    it is, what its sources are, how it works for you
    (your business idea).
  • Second, invest in nurturing it, strengthening it,
    and defending it. Brands, RD stock, HRM, info
    management, knowledge management, collaboration,
    closeness to customers.
  • Third, invest in leveraging it, exploiting it
    more fully. Via market development and product
    development, MAs, diversification (corp. dev.).

59
But remember Icarus and John Wayne
  • Beware of the dangers of the Icarus paradox
    (examined earlier). Where you become so enamoured
    of your own abilities that you begin to believe
    you can do no wrong. DEC, Wang, ITT, PG.
  • And remember the gunfighter syndrome. The greater
    your success the greater the kudos for the person
    who brings you down. Other teams seem to play
    harder against the champions. Bill Gates watch
    out, Linux is in town!

60
Levers for growth?
  • Technology developing new/ better product
    offerings based on your product technology or
    production technology.
  • Customers developing range of products/ services
    for a particular type of customers. Skiers,
    drivers, computer users, over 50s, teenagers,
    hospitals, airports, hotels, schools.
  • Functions developing range of products/ services
    to meet particular customer needs. Lighting,
    household cleaners, financial services, printing,
    packaging, security, insurance, convenience
    foods.
  • Intangibles such as brands, reputation,
    networks, supply chain organisation.

61
M/P development
  • Increase market penetration, pursue market
    widening (new customers), market deepening
    (selling more to existing customers).
  • Improve pricing policies and promotion efforts.
    Advertising/sales effectiveness.
  • Develop the product (upgrading) in ways that
    allow you to maintain/ improve margins. Look at
    Sony with TVs, videos, cameras, music centres
    etc.
  • Look for product add-ons. Can you capture more
    value by selling something else with the product
    such as financial services, breakdown insurance
    and repair contracts, upgrades. Consumer needs
    are complex! Your product offering must reflect
    this. If your total package is valuable to the
    consumer it could be valuable for you.

62
Thus
  • I bought a PC from Dell last year using an
    on-line build your own PC interface, PLUS a
    printer, a scanner, a joy-stick, a sound system,
    software, insurancerepair contracts, internet
    access, delivery and set up, advice-line access,
    Zip discs, games, etc.
  • Why did I buy this whole package from Dell?
    Reputation, ability to specify precise
    requirements, newest technology, good price, the
    convenience of bundling and on-line shopping,
    security, value for money.
  • What Dell spotted was that it is not enough
    simply to design and assemble good well priced
    PCs. You must get closer to the customer,
    understand their needs and concerns, and provide
    a total package to solve consumer problems and
    deal with anxieties about technology, repairs,
    set-up, compatibility, obsolescence,
    specification, up-gradability, guarantees, and
    vitally the longevity of seller.
  • Compare this with Compaq and HP.

63
Segmentation options
  • Growth (or reorganisation) could be based on
    improved understanding/exploitation of customer
    segments. Either identifying those segments which
    are most profitable or identifying emerging new
    segments or by considering a change of segments.
  • However simply finding a neat way to describe
    customer groups is not sufficient. What is
    needed are promising segments which you can
    actually aim to serve as or more successfully
    than someone else.

64
Mass customisation option
  • Has the era of mass customisation arrived yet?
    This is an attempt to join up the benefits of
    mass production/supply push (Fordism) with the
    benefits of customisation/demand pull whereby
    production is pulled by customer specific orders
    (Dellism?).
  • According to McKinsey, not yet. The economics of
    such a model are not yet in place for products
    such as autos. The capabilities required are
    considerable. Close customer interaction,
    production process flexibility, supply and
    delivery logistics.
  • McKinsey Quarterly, 2001

65
Co-opting customer competence
  • In the new economy customers can be more active
    players in value creation. This involves
    co-opting the customer into the network of
    collaborators involved.
  • Active dialogue of equals customers can be used
    for ideas, testing, problem solving.
  • Mobilising customer communities e-word of mouth
    made Netscape, Amazon, eBay, Yahoo into valuable
    brands.
  • Using customer diversity to co-create
    personalized experiences rather than just
    products.
  • Shaping customer expectations learning from
    whilst educating customers.
  • Prahalad, HBR , 2000

66
Market space not share
  • What really matters is maximising your share of
    consumers spending (market space) not specific
    product market share.
  • Seeking to ensure longevity (loyalty), depth,
    breadth, and diversity of spending.
  • BP for example seeks to sell customers energy
    solutions not just oil. Unilever no longer just
    sells cleaning products but markets cleaning
    services/ solutions. Lego embraced the
    possibility of computer games which had
    threatened its traditional business. Virgin
    offers a comprehensive door to door service not
    just a flight. Ford is no longer just about
    pushing the metal but total product/ service
    packages.
  • Vandermere, Sloan management review, 2000

67
Competing for the future
  • Competition is for the best share of
    opportunities in emerging/ evolving markets, not
    just market share in existing markets.
    Competition is about gaining a deeper
    understanding of change drivers and how to shape
    the emerging market towards your own strengths.
    Competition is to acquire and develop the
    necessary resources, capabilities, competencies
    and partners.
  • PH, on the future

68
MAs
  • Successful companies will have opps to acquire
    competitors.
  • First because funds should be available.
  • Second because they should be able to sell the
    deal on the basis of using their superior skills
    and knowledge to squeeze more value from the
    acquired business.
  • Third because competitors may see this as
    preferable to being pushed out of business.
    Indeed they may even invite the acquisition.

69
Constraints
  • Costs of m/p development and promotion.
  • Market penetration efforts might spark a price
    war.
  • Market widening/ deepening (export for example)
    and product promotion can be expensive/risky.
  • Product improvements can be expensive and will
    only be worthwhile if consumers actually value
    them. Even Sony can get this wrong sometimes.
    Waterproof CD players?
  • Defining and serving the market space may not
    be so easy.
  • Getting the product/service bundle right can take
    a lot of trials.
  • A-T actions against MAs possible.

70
But if you havent
  • Then the options are necessarily tougher.
  • First you need to consider what is causing poor
    performance and what it might take to improve it
    in your business/ market. What seem to be the
    key factors for success?
  • Production costs, quality, speed to market,
    responsiveness to consumer tastes, reliability,
    distinctiveness? This shouldnt be too hard to
    work out by studying more successful businesses.
  • Then you must consider realistically your chances
    of reversing the causes of poor performance and
    catching up with the more successful businesses.

71
  • For example what would it take to achieve a
    better cost profile, or higher quality, or more
    distinctive products, or be more responsive to
    consumer tastes?
  • Note that this does not necessarily mean
    following the same business model of the
    successful businesses and competing head to head
    with them.
  • It is more likely to mean developing a
    distinctive model (see later under value
    innovation) which exploits opps they have missed
    (segmentation?) whilst playing to any strengths
    you might have and exploiting any weaknesses they
    have. How did Toyota conquer the West? How did
    Nokia take on the telecom giants? CNN in
    broadcasting.

72
  • This process should identify the sort of
    capabilities/competencies that might be necessary
    for success and you then have to ask
  • 1. Can our existing capabilties/competencies be
    upgraded/ developed to meet our needs?
  • 2. Can we acquire the resources and build the
    necessary competencies in a realistic time frame?
  • 3. Can we build an organisation which creates a
    strong focus on value and integrates and exploits
    these competencies as they develop?
  • Essentially can we find a workable business idea?

73
Constraints
  • This is a demanding thing to do well. To come
    from behind in the competitive race. Very few
    businesses rise from mediocrity to greatness
    (Collins says fewer than 1).
  • Being realistic does not come naturally to
    people. It requires great honesty and courage in
    facing up to weaknesses and realistically
    appraising the prospects for improvement.
  • Some businesses are happy to be mediocre.
  • Acquiring resources (or other businesses) will be
    a problem. Capital doesnt easily flow to poor
    performers, and neither do good people.
  • Wishful thinking thinking you can simply
    diversify your way out of failure or merge with
    other failures to create a success.
  • It may be necessary to retreat in order to
    advance. But retreat is hard. Downsizing meets
    resistance.
  • But the biggest constraint is likely to be time.
    Time to decide, to build and to implement.
    Danger of time-compression diseconomies arises.

74
Requirements
  • Leaders who know the business well.
  • Who choose and motivate people well, and get rid
    of under performers.
  • Who understand what drives performance in their
    sectors and decide what the business might be
    good at and focus on this.
  • Who focus on getting the simple things right
  • Collins, Good to Great, 2001

75
Organisational failure
  • Consultants BAH reckon most failure stems from
    implementation problems not strategies.
  • The key is aligning the individuals behaviour and
    decisions to the organisations goals.
    Organisational architecture. This is difficult,
    therefore getting it wrong is common and getting
    it right is a source of advantage.
  • Explore how the organisation as it is might be
    damaging implementation and causing failure.

76
Four options for getting out of trouble
  • Sell the business
  • Wind it down/ close it.
  • Enhance short term- performance with quick fixes.
  • Value recovery plan identify and exploit any
    existing capabilities and market positions,
    develop a business model for the growth of
    profits.
  • Price Waterhouse Cooper

77
Value recovery process
  • Stabilise the business
  • Search for and analyse operational improvements
    and strategic options.
  • Implement new strategy and strengthen operations,
    finances, and align organisation structures.
  • PWC cont.

78
Options in a recession
  • Get to know the customers even better.
  • Keep marketing spend up or seek to improve its
    impact (bangs per buck).
  • Adjust product portfolios to suit the consumers
    search for better value.
  • Support distributors and complementors.
  • Adapt pricing tactics but beware of price wars.
  • Focus on maintaining market share perhaps by
    acquiring weaker competitors.
  • Stick to your core values.
  • Try to minimise the damage of retrenchment on
    your distinctive competencies and capabilities.
  • Get prepared for the rebound.

79
Beware of expensive fixes
  • Especially IT. PA consultants research into IT
    investment around the world shows that
  • A. It is expensive and tempting in the new
    economy to see it as a panacea.
  • B. It isnt. Evidence suggests it is difficult
    to make IT investments pay off. Only 40 of
    businesses had confidence it would pay off for
    them.
  • In practice however PA reckon a much smaller
    proportion of projects actually add any value!
  • Look at all the firms that jumped on the
    e-commerce bandwagon recently in the vain search
    for easy growth.
  • Increasing value with IT, PA, 2001

80
Consultants approach (BCG)
  • This builds on the simple fact (discussed
    earlier) that profitability depends on the
    effectiveness of sales (P/S or margins) times the
    effectiveness of assets in generating sales
    (S/A).
  • Therefore we can consider options for development
    with respect to 3 things
  • Building margins.
  • Improving asset productivity.
  • Growing sales revenues.
  • See BCG annual report on top companies.

81
Improving margins
  • Improved pricing strategy. Careful segmentation
    and price discrimination.
  • Careful thought about pricing options is the
    priority better margins or building (protecting)
    share? Pricing for margins works best if market
    growth is slow, current returns are poor, your
    share is high, competitors react quickly to
    attempts to build share.
  • Improved cost management. Better understanding of
    the cost drivers in the business sector.
  • Reduce waste, reduce complexity, improve design,
    reduce time, process innovation, relocation?

82
Improving asset productivity
  • Inventory management.
  • Receivables management.
  • Closure and disposal of redundant or underused
    assets.
  • Improved utilisation of existing assets.
  • Careful evaluation of all new asset acquisitions,
    especially specialised assets.

83
Growing revenues
  • Market widening especially geographical roll-outs
    of successful products.
  • Market deepening.
  • Market segmentation,
  • Product improvements, extensions, add-ons and
    distinctiveness (for which consumers are willing
    to pay).
  • Transfer of competencies to new businesses (takes
    us into corporate strategy).

84
BCG on Nokia
  • A top performer in world terms driven in
    particular by excellent asset productivity.
  • It divested all non mobile phone interests and
    reinvented itself in the mid-1990s.
  • Strong sales growth was driven by focusing
    resources on fastest growing segments of telecoms
    market, deepening and widening.
  • It trebled its margins by introducing new
    products continuously and reaping scale economies
    and learning effects and careful cost management.

85
Remember however
  • The BCG type approach is simply spelling out the
    necessary requirements for growing value. This
    is useful but remember it doesnt tell you how to
    build the organisational capabilities to achieve
    it. This is the really important part and also
    the more difficult part. It may be that if a
    business needs BCG or McKinsey to delineate these
    simple options it may not have the capabilities
    to implement them effectively.

86
Value innovation (VI)
  • More radical approach recently associated with
    big names such as Porter (HBR, 1996),
    PrahaladHamel (HBR 1996, Sloan MR, 1998), Kim
    and Mauborgne (Sloan MR, 1999 and HBR, 2000),
    Markides (BSReview, 1999), Tucker (J of Business
    Strategy, 2001) and HargadonSutton (HBR, 2000).
  • Web site on innovation diamondcluster.com
  • On past experience I suspect this will become
    textbook conventional wisdom.

87
Porter on VI
  • Operational effectiveness is important but it is
    not enough. You need to do something different
    or do things differently to achieve success.
  • Strategy is about finding a way of being
    different. Choosing a different set of
    activities to deliver a unique value proposition.
    It is about perceiving new market possibilities
    and new combinations of activities to serve them.
    (Dell, Amazon, Starbucks, McDonalds).
  • Strategy is the creation of a unique value
    position involving the use of a different
    combination of activities from those of rivals.
    Performance depends on the activity system as a
    whole not the effectiveness of the separate
    parts. This (the fit between parts) is what
    others will find hard to replicate and is thus
    sustainable.

88
PH on VI
  • Value innovation is the capacity to re-conceive
    the existing industry model in a way that creates
    new value for customers and wrong-foots
    competitors.
  • Note, if you dont do it your competitors might
    or a new entrant might. So beware.
  • The objective is to maximise your share of
    industry wealth creation. IBM once had 46 and
    it fell to 14 because others re-conceived the
    industry it dominated. It saw its job as making
    and marketing big computer systems to big
    business and government. The others reconceived
    it as IT spreadsheets, word processing, data
    bases, games, communications. Personal computing.

89
  • Other examples quoted are Nike, Compaq, Amgen,
    Home Depot, Gap, Intel, and Wal Mart.
  • Conventional strategy approaches have no idea
    about where the bold new ideas come from and thus
    is unlikely to be the source of exceptional
    performance (only 4 of businesses they reckon
    are exceptional).
  • Question is then how can you find such
    strategies? Stop thinking about crafting the
    strategy they argue and start thinking about
    creating organisational conditions (architecture)
    which will promote value innovation.
  • Encourage the creation of new insights and the
    chances of acting on them.
  • The business of strategic management is to help
    in the emergence of innovative strategies, to
    compete for the future, not to plan the future.

90
Routes to industry revolution
  • Radically improving the value equation (HP
    printers)
  • Separating function and form (seeing new
    functions in old forms, such as credit card
    makers)
  • Achieving joy of use (Trader Joes)
  • Pushing the bounds of universality (single use
    camera)
  • Serving demand for individuality (personal fitted
    jeans)
  • Increasing accessibility (telephone banking)
  • Rescaling the industry (SCI funeral service)
  • Compressing the supply change (disintermediation,
    as Wal Mart)
  • Driving convergence (blurring the boundaries of
    markets as in telecoms)

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What would help this?
  • New voices. The process should be pluralistic
    and participative.
  • New conversations. Across organisational
    boundaries and beyond the organisation.
  • New passions. Encourage a passion for change and
    innovation.
  • New perspectives. New ways of looking at
    yourself, customers, competitors, opportunities.
  • New experiments. Experiment in the market and
    seek to learn from it. There is a lot you can
    only learn from doing.

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KM on VI
  • Strategy must focus on creating new markets not
    on beating the competition. Successful companies
    do not focus on the competition but on making
    competitors irrelevant by providing buyers with a
    quantum leap in value.
  • Value innovators use the consumer as the
    reference point not the competition. Innovation
    is driven not by the technology but by customer
    value.
  • VI ask are we offering consumers radically
    superior value? Are our prices accessible to the
    mass of buyers in the market?
  • VI uses target pricing to build volume and target
    costing to ensure good margins.
  • Examples Wal Mart, Ikea, CNN, Kinepolis, SAP,
    Starbucks, Enron.
  • Emphasis of these companies is not on patentable
    ideas but on the combination and arrangement of
    elements attractive to consumers.

93
KM on VI
Building blocks of strategy Conventional Value innovation
Competition Beat the competition Make it irrelevant
Customers Retain existing and find new Target the mass of buyers
Capabilities Leverage existing Develop new/ use partnerships
94
Questions for value innovators
  • Does the business challenge the inevitability of
    industry conditions?
  • Does the business focus on domination by
    advancing customer value?
  • Is management prepared to start anew?
  • Does the business search for key value ideas that
    can unlock a mass market even if some existing
    customers are lost?
  • Does the business think in terms total customer
    solutions even if this pushes it beyond
    traditional offerings?

95
Organising for VI
  • Small autonomous units or teams focusing on a
    product or business goal.
  • Team members from diverse backgrounds and
    perspectives to promote creativity.
  • Encouraging a willingness to share knowledge and
    ideas and to co-operate.
  • Developing fair process which engages people in
    decision making, explains decisions, and
    establishes clear expectations.

96
KM on testing new ideas
  • What determines the success of a new business
    idea?. Based on research into 100 businesses
    with a good track record.
  • Involves using 3 analytical tools.
  • 1. The buyer utility map.
  • 2. The price corridor of the mass.
  • 3. The business model guide
  • In addition they consider overcoming adoption
    hurdles to the new ideas
  • HBR, 2000

97
Buyer utility map
  • Testing the likelihood that customers will be
    attracted to the new offering
  • This involves outlining all the levers that can
    be pulled to deliver utility to customers.
  • It identifies six stages of the buyer experience
    cycle (purchase, use, maintenance, etc) and six
    utility levers (simplicity, convenience,
    solutions, image, etc) giving a 36 map.
  • Examples are given of how Dell, Starbucks,
    Philips identified opportunities in on the map.

98
The price corridor of the mass
  • Identifies the strategic price that could
    unlock the biggest group of customers.
  • Key is to reach a mass market quickly to amortise
    development costs and leave as little room as
    possible for imitators.
  • Involves two stages identifying the price
    corridor of the mass and then finding a price in
    this bandwidth which will discourage imitators.
    Thus if the idea is patentable you can set a
    higher price. If it isnt then you cant.
  • Examples Schwab, Quicken, and Megaplex.

99
Business model guide
  • A framework for figuring out how the firm can
    deliver the new offering at the targeted price.
  • A series of questions designed to get managers to
    questions of cost targets, the required
    capabilities, partnership possibilities,
    acquisition of capabilities, pricing models to
    create the best profit opportunities.
  • Examples of Swatch, SAP.

100
Adoption hurdles
  • Resistance both inside and outside the business
    to the new ideas and how to deal with them.
  • Employee resistance.
  • Business partners.
  • General public.
  • Examples SAP, Morgan Stanley, Monsanto.

101
Hargadon and Sutton on VI
  • They call it knowledge brokering businesses
    which intermediate between otherwise disconnected
    pools of ideas. There is a knowledge brokering
    cycle involving four practices
  • Capturing good ideas.
  • Keeping ideas alive by passing them around and
    playing with them.
  • Imagining new uses for old ideas by plugging them
    into new contexts.
  • Testing promising new concepts to learn about
    commercial potential.

102
  • The original innovation factory was Thomas
    Edisons Menlo Park laboratory from which General
    Electric arose.
  • IDEO founded in 1978 has given rise to thousands
    of new products for various companies (Palm V,
    Twist and go cups).
  • Idealab in California specialises in internet
    ideas.
  • Business needs to change how it thinks about
    innovation. It is all about the right sort of
    people and the right sort of incentives and
    culture for fresh thinking and experimenting.
  • See also Edison in the boardroom (Wiley, 2001)

103
Markides on VI
  • Simple principles of breakthrough strategies
  • Choose a unique strategic position (who/what/how
    questions answered clearly).
  • Generate options/ ideas, the more the better.
  • Question the firms implicit assumptions and
    beliefs.
  • Create a culture of innovative thinking/ allow
    for errors.
  • Make clear choices, you cant do everything.
  • Think holistically, focus on the big picture as
    well as the details, strategic integration.
  • Seek environmental fit without loss of
    flexibility.
  • Create the appropriate organisational support
    systems.
  • No strategy remains unique for ever.

104
Tucker on VI
  • Some ways to search for imaginative new business
    models.
  • Opportunities in market re-positioning more for
    more, less for less, same for less etc.
  • Opportunities in customer outsourcing.
    Accountants into general consultancy.
  • Opportunities from rethinking the accepted way of
    serving customers. Dentists moved from cavities
    to cosmetics.
  • Opportunities to reinvent the model. Progressive
    insurance reinvented auto insurance in the US.
  • Rethink the pathways to the customer. Avon
    cosmetics, Dell, eBay

105
Slywotsky and Morrison on VI
  • Business re-inventors have a different logic.
    They begin with what is important to the consumer
    and look to see what they need to do to provide
    it profitably. The profit zone.
  • Great business design is the product of superior
    knowledge and strategic imagination.
  • Identify 22 different successful approaches
    associated with these re-inventors (some below).
  • The Profit Zone, 1997

106
Some examples
  • Customer solutions GE, ABB, HP. Deepening the
    market by understanding the customers problems
    and selling solutions as well as products.
  • Product pyramiding Swatch, Mattel. Filling the
    product space from the low end to the top of the
    market, making it hard for new entrants to get in
    at the low end, so protecting the high end. US
    car makers failed to do it and let the Japanese
    in.

107
  • Multi component systems Coca Cola, Starbucks.
    Where the market segments into more and less
    profitable components, such as for CC, grocery
    (poor), fountain (good), vending (excellent). CC
    uses the grocery market to maintain its brand but
    fights hard for share in vending to maximise
    profits.
  • Profit multipliers Disney. Packaging the same
    product in different forms. Films, videos,
    theatre,books, clothes, theme-parks,tie-ins, and
    so on.

108
  • Blockbuster profits in industries such as
    pharmaceuticals and movies the key activity is
    project based. The new drug or the next movie.
    Up front development costs are immense but not
    every project can be a winner so the secret of
    success is raising the success rate by focus and
    tight project management. Drug companies such as
    Merck focus on particular areas ulcers, asthma.
  • After sale profit in some markets selling the
    product isnt profitable but financing and
    servicing and replacement which brings in the
    money. GE is a master at this, FordGM do it
    also.

109
  • Installed base Microsoft. Xerox. Gillette.
    Create an extensive installed base as a
    foundation for selling follow up products and
    add-ons.
  • Sequenced specialisation EDS. Mastering the
    requirements a specific sector such as health and
    building a strong base before moving on to other
    sectors such as insurance, banking, travel, and
    so on.
  • Source The Profit Zone (Slywotsky).

110
Ability to V Innovate?
  • Summing up on the ability to VI.
  • PH suggest some ideas for encouraging the
    development of v innovation in organisations.
    New voices etc.
  • KM suggest how to organise for v innovation and
    in particular how to deal with adoption hurdles.
  • All seems to come down to organisational
    architecture and culture again. Getting
    structures right to encourage the search for and
    effective implementation of innovative
    strategies.

111
E-strategy options
  • Giving away your product (Netscape)!
  • Link and leverage (Amazon).
  • Understanding the power of networks and
    exploiting network effects (Sun Micros).
  • Be prepared to adapt constantly.
  • Use psychological warfare to keep competitors off
    balance, eg vapour-ware.
  • Credit Suisse equity research

112
Atomising option
  • In the new economy the winner takes all so
  • Focus everything on a well defined narrow market
    niche or sliver where you have the best chance
    of achieving rapid dominance. Do not spread your
    bets. You do not have to be an industry giant to
    dominate the best niches. In fact the giants are
    at a disadvantage. Msoft, Intel, and Nokia
    examples.
  • McKinsey Research

113
Hyper-competition options
  • DAveni argues that under conditions of
    hyper-competition you must seek
  • A vision for disruption through Superior
    understanding of dynamics of change.
  • To build capabilities for Speed and Surprise to
    achieve market disruption.
  • To change the rules of the game, send out strong
    Signals of Strategic intent, undertake
    Simultaneous and Sequential thrusts to shape the
    direction of the competitive process.
  • Disruption as a means not an end, the idea being
    to undermine the competition before it undermines
    you, to create opportunities to Seize the
    initiative. Requires?
  • A will to dominate, a radical departure,
    non-cooperation, and competing aggressively.

114
Simple rules the easy option?
  • In turbulent markets firms need strategic
    flexibility but this can be disciplined by the
    application of an appropriate simple clear
    rule(s). For example
  • Boundary rules strictly define the sort of
    opportunities to be pursued by the business
    (Miramax).
  • Priority rules define a basis for ranking
    acceptable opportunities such as how to allocates
    production capacity (Intel).
  • Timing rules such as Nortels rules for product
    development (must be less than 18 months).
  • See also Rules according to neutron Jack slide.
  • EisenhardtSull, HBR, Jan. 2001 for more.

115
Hi-tec venture options
  • Mercer consulting research into hi tec ventures
    shows that they are on average quite unstable,
    rise rapidly and fade quickly (3 years cycle
    now).
  • Success for these innovators depends on moving
    downstream by for ex
  • Focusing on the installed base rather than new
    sales for ex by upgrades and follow on services .
  • Understanding and enhancing the cust
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