Creating Winning Strategies by Changing the Dialogue

In far too many companies, "strategy" has become a euphemism for planning or budgeting. The underlying - and unstated - assumption is that marketplace conditions are largely static: the future will be largely an extension of the past and, thus, all we need to do is optimize our current operations.

This assumption, unfortunately, has proved fatal in industry after industry. Just a few years ago, Motorola and Nokia were major cell phone players, Sun was a significant server manufacturer, Blockbuster was the source for many of us for at-home movie viewing, and Borders and Barnes and Noble were where we shopped for books...

To drive serious strategic discussions, you first need to accurately assess your source of competitive advantage. Here's a framework we've found useful:

Source of Competitive Advantage (worst to first):

1. Commodity with cost disadvantage

2. Commodity with cost parity

3. Commodity with 10% to 20% cost advantage

4. One-year offering development lead

5. Two-year offering development lead

6. Brand, patent, copyright

7. Owning the customer relationship

8. A string of dominant positions (for example, cost advantage + development lead + patent protection

9. Managing the value net or ecosystem

10. Owning the industry standard

Importance of Marketplace Insight

The first two, of course, confer no competitive advantage; unfortunately, a realistic assessment of their true competitive position would surprise many companies... Hence the importance of helping decision makers develop relevant marketplace insight. Answers to these critical questions will help:

• What are customers really buying? How are their preferences changing?
• What new initiatives are current competitors undertaking: operations, innovation, marketing, sales, customer service?
• What economic or regulatory trends will impact the industry?
• Which emerging competitors have the potential to change the nature of competitive dynamics?

Assessing the Consequences

Once the decision makers have grappled with these issues, they'll need to assess the impact on the organization, including:

• Systems and processes: Do we need to change our offerings development or production processes? Which need to be re-engineered? Which can we outsource? What support do we need from IT?
• People and skills: Do we need to retrain our existing workforce? Change our hiring requirements? Restructure the organization?
• Culture: Do we need to change the behaviors? If so, where? Only in specific functions? Or everywhere in the organization?
• Incentives: Do we have the right incentives in place? And how will we align these across the organization?
• Profits: How will we make money in the future? How can we protect our profit streams?

Creating Winning Strategies

With all of the above in hand, decision makers can proceed to the important work of re-allocating resources to create:

• Differentiated value propositions
• Innovation, operational and go-to market initiatives
• Organizational alignment

Challenging work, all this, since it means the nature of the strategic discussion must change, from planning / budgeting to strategy, from past to future and from business-as-usual to new business models. Importantly, it means changing mental models - how decision makers interpret information about the marketplace. And this, in turn, means creating opportunities for dialogue and debate, v. reading reports.

But it could mean the difference between organizational life and death.

How Good Are Your Marketplace Insight Capabilities?

Since posting Insight is Where the Game is Won and Lost, many have asked "how can we assess our insights capabilities to identify where to focus?" Building on both internal work I did in the early 2000s, and an article published independently by Herring and Leavitt in 2011,* here is a framework you can use to quickly evaluate your organization's insights capabilities. There are five dimensions to rate your organization on (directions at the bottom):

• Insights culture
• Sources used to generate the information base to help create insights
• Marketplace focus
• Personnel
• Early warning of emerging threats and opportunities

The organization's culture sets the tone for insights creation, which can address markets, customers, technology or competition. Initially reactive (Level 1), executives ask for data and task available personnel to gather information for a presentation or meeting, invariably sourced from easy-to-access published data, such as annual reports, existing market research or industry analyses. The initial focus is on traditional markets, customers, technology and competitors.

Soon, a frustrated executive or ambitious analyst determines that standardized profiles, newsletters and databases will improve organization awareness. Dedicated, often part-time individuals (becoming full-time as demand increases) standardize outputs, create delivery schedules and expand the fact base to include subscriptions to specialized industry publications, and start to focus on partnerships and alliances which impact growth and the ability to compete (Level 2).

Success begets more challenging questions, such as what does this data mean? how will the trends play out? and what emerging customers, technologies and competitors should we be concerned about? Improving capability requires teams of skilled analysts under a functional manager (Level 3). Since the answers are rarely contained in published data, analysts must incorporate validated opinion and observations from individuals who don't have the time to write it all down - customers, channel partners, R&D and sales personnel, their own executives, and industry observers and experts.

The expanding organizational knowledge base generates new requirements: what are the implications of these projections? what options do we have? what should we do about them? how might customers or competitors react? how feasible is a new technology? Mature organizations assign or recruit a senior leader to answer these, using increasingly sophisticated research and analysis techniques and a well-nurtured source network. And the organization expands its focus to better understand the interactions within the industry value chain and how these will play out (Level 4).

Finally, a radical shift occurs, from an emphasis on producing reports to facilitating dialog: the organization structures insights-driven strategic decision-making sessions (Level 5). Key executives interact directly with well-prepared internal and external experts, to determine how to best position the enterprise for future success. Topics might include identifying and evaluating the strategic risks of potential new initiatives, untapped sources of customer value, the next generation of customers, emerging competitive threats (frequently through business wargames) and new growth opportunities.

The importance of early warning. 

The organization's ability to avoid surprises - a major executive concern - increases with the sophistication of its insights capabilities. Fledgling operations frequently start by looking at any of a variety of "megatrends" (example here), "boiling the ocean" to try to find a something the organization can act on. They progress to tracking studies, targeted assessments of specific marketplace issues and systematic monitoring of the periphery (emerging customers, competitors and technologies). But real breakthroughs occur when organizations form heavyweight teams, consisting of both internal and external experts, to address critical emerging issues through innovation and new business models.

How good is your organization's insight capability? Identify where it is in each category, sum the associated levels, and divide by five. If it is:

• below 2.0, it is drowning, with little chance of a lifeline in the next round of budget cuts
• between 2.0 - 3.0, it is treading water, with increasing odds of getting a lifeline
• between 3.0 - 4.0, the shore is in sight, but beware of undercurrents
• above 4.0, the beachhead is secured and the insights function is capable of making a real difference

Now ask what will it take to improve? And, importantly, what will be the impact on the business?

* Herring, Jan and Judith Leavitt, "The Roadmap to a World-Class Intelligence Program," Competitive Intelligence, January - March, 2011 

Growth is Hard

Columbia Business School professor Rita Gunther McGrath writes that only 8% of the 5,000 companies with over $1 billion in revenues grew sales by 5% annually over a 5 year period, and only 4% grew net income by at least 5% annually.* Compounding the challenge are the prevailing conditions found in many markets:

• The new product failure rate is repugnantly high: estimates range from a minimum of 40% to as high as 95%; 

• Few completely new categories have emerged in recent years;

• Risk aversion results in few real disruptive market strategies;

• Rivalry is intense and along many dimensions;

• The role of channels is becoming ever more pervasive and powerful; and

• Cost pressures continue to escalate, absorbing significant company resources to address.

Companies can beat the odds through a structured approach (chart):

• Marketplace insight – What is the customer need or problem a new growth initiative will resolve? How have recent competitive and supplier initiatives and technological developments impacted customer needs? What is going on in competitors’ minds, what are they planning, and how will they respond to our initiatives?

• Opportunity assessment and selection – How can we extend current capabilities to address new opportunities or change the nature of competition? How do we develop and test new growth opportunities beyond our current strategy? Which customer segments will we choose to serve? Which will we not serve?

• Strategy – How do we resolve a market problem / need in a valuable and differentiated manner? What is the value proposition? How will we capture value, what scope of activities will we perform and how will we protect our profit? 

• Organization alignment – What processes, systems, structures, and incentives need to be changed? What will inhibit successful execution of the growth strategy: culture, mindsets, resources, incentives?

• Execution – What specific actions will deliver the product / offering and profitably capture value? How will we measure success? How will we monitor results?

*McGrath, Rita Gunther, “How the Growth Outliers Did It,” Harvard Business Review, January – February 2012

Rice, Autos and Online Retailers

Winning Marketplace Strategies

The biggest threat to success comes from failing to understand and incorporate all aspects of a winning marketplace strategy.

Success arises from differentiation in one or – better – more of three domains:

• Customer strategy (identifying and meeting unmet needs, branding – not just advertising – or finding new ways to go to market); 
• Factor strategy (raw materials, supplier relationships, logistics, manufacturing, technology); or
• Organization strategy (new business models, different systems and processes, new culture).

Many marketers focus exclusively on the first. But because differentiation is critical, marketing, perhaps surprisingly to some, has a significant, if not dominant role to play in understanding buyer behavior through the second and third, and then driving necessary changes through the organization.

To many Americans, rice is a simple foodstuff, something we eat in place of potatoes or bread, and as a side dish in Asian restaurants. And, like many, I grew up on Uncle Ben’s, Rice Krispies and Rice-a-Roni. Yet a master sushi chef in Japan might insist on Uonuma Koshihikari, which costs an order of magnitude more than the rice you’ll find in supermarkets (you can buy a 5kg / 11lb bag online for $130).

In 2009, both GM and Chrysler (for the second time) declared bankruptcy. Yet in 1990 – 20 years before – three MIT academics, James Womack, Daniel Jones and Daniel Roos published The Machine That Changed the World, a book detailing the Toyota Production System (TPS) that simultaneously cut costs and increased quality. Worse, intelligence on this radical new production and organization system was available to Detroit in the 1960s – the ideas that led to the TPS came from Ford, which opened its doors to extensive benchmarking by Toyota executives in the 1950s.

And new internet-aided business models can inhibit if not completely destroy your business. Perhaps the best known examples are the bankruptcies of Circuit City and Borders 2011 and, just this month, the announced closing of the remaining Blockbuster stores, driven by online retailers modeled on amazon.com, founded in 1994, almost 20 years ago…

Rice retailers, restaurants and food processors have multiple factor strategies to choose from, influenced by and influencing their customer strategies. And imagine if, when Chrysler first declared bankruptcy in 1979, US auto marketers had focused on understanding the role of Toyota’s factor and organization strategy on consumer behavior. Finally, only a radical shift in strategy to embrace an Internet business model confounded expert opinion that Best Buy would soon follow Circuit City.

Next: Surprise

What Really Matters

Differentiation

Winning value propositions must be both relevant to customers and differentiated from the competition.

To create one, identify and rank the brand or offering attributes your market intelligence team identifies from customer research, and then have your competitive intelligence team assess these against competition. Organize these into four categories.

• Neutrals. Features and functionality that are irrelevant to customers
• Antes. Features and functionality that are important to customers, but provided by key competitors at similar price points and quality.
• Drivers. Benefits and attributes that are important to customers, and which are highly differentiated from competition.
• Fool’s Gold. Benefits and attributes that do not matter to customers.

You may be shocked at the results – the research may show that something everyone thought was a key point of differentiation is at best an Ante or worse, a Neutral. And you may sadly find that you've been wasting precious resources promoting benefits and attributes that don’t matter.

Clearly, you want to emphasize the Drivers. But also ask what you can do with the others. For example, a recent ad by TD Bank emphasized the difficulty of finding pens that worked in other banks (and often on chains so you can’t “steal” them). TD Bank recognized a customer service and branding opportunity and now stocks logoed pens and even encourages you to take them. The question is, of course, whether this is a Driver or Fool’s Gold, but given the lack of real differentiation between retail banks, a small gesture such as this contributes to and reinforces the overall brand experience.

Another example. Road warriors on overnight flights find it difficult to see their computer keyboards once the lights dim, even with the overhead light on. I experienced this for years, until I found a simple solution on my Thinkpad (simultaneously press Fn-PgUp – the bottom left and top right keys of the keyboard – on older models, or Fn-Space on newer models). The interesting thing is how I learned this. In a meeting with a number of IBM executives where, with the lights dimmed for a presentation, one executive’s Thinkpad had a glowing light. He explained how it worked to this seasoned group, many with decades of experience – none of us knew about it! Again, a legitimate question is whether this is Fool’s Gold, but in the commoditized PC business, it is also legitimate to ask whether it could be turned into a Driver.

Try this test. Ask an objective analyst pick out the key messages from the communications (ads, websites, social media, etc.) of you and your key competitors, present these anonymously to decision-makers and ask them to distinguish who is who.

Now get to work on creating real differentiation.

Next: Effective Communications Briefs