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.

Droning On: Strategy Isn't Dead, Not by a Long Shot...

Last week, blogger Mark Wilson, in a post entitled "The End of Strategy as We Know It," noted that strategy has become "too slow; too inflexible, too cautious; too protectionist." He bemoans "old-school strategy" and asserts that "businesses need to think strategically, on a daily basis...the solution is that "business leaders should focus on their organisation's innovation behaviour and how to build a culture that supports it."*

At least he got it partly right, unlike Saatchi & Saatchi's CEO Kevin Roberts, who said last year that "strategy is dead, the big idea is dead, management is dead and marketing, as we know it, is also dead." Then he really stepped into it: "Who really knows what is going to happen anymore in this super VUCA [volatile, uncertain, complex and ambiguous] world. The more time and money you spend devising strategies the more time you are giving your rivals to start eating your lunch."**

No one, of course, KNOWS what's going to happen in the future. But throwing up your hands is dangerous.

Take Jeff Bezos' revelation on 60 Minutes last night that amazon.com is testing drones for package delivery. If successful, small packages could be delivered within 30 minutes. Attention getting sound bite? Without a doubt.

But listen closely to Bezos: "I would define Amazon by our big ideas, which are customer centricity, putting the customer at the center of everything we do, invention." Looking deeper, Amazon Fresh, which started delivering groceries in Seattle several years, has now expanded to Los Angeles. Grocery customers typically want same-day delivery and, says Bezos, "if we can make this model work, it would be great because it extends the range of products that we can sell."***

Now this is "old school strategy." What Bezos recognizes that Wilson and Roberts miss is that effective strategies start with insight that defines a marketplace opportunity. Only then can you innovate around customer needs and then drive the necessary changes in systems, structure, skills and culture through the entire organization to meet those needs. Focusing on innovation unlinked to a defined opportunity and you become Xerox PARC, whose radical innovations (Ethernet, laser printers, the GUI and even the modern PC among others) were successfully commercialized by others, not Xerox.

No, "old school strategy" is not dead.

But those who dismiss it soon will be. Their rivals will eat their lunch.

*Wilson, Mark, "Is This the End of Strategy as We Know It?", One Last Thing (blog), http://thehumanlayer.com/issues/issue-7/22-one-last-thing/index.html#!

**"Strategy is dead says Saatchi & Saatchi CEO," The Drum, April 25, 2012, http://www.thedrum.com/news/2012/04/25/marketing-dead-says-saatchi-saatchi-ceo

***"Jeff Bezos Looks to the Future," 60 Minutes, December 1, 2013, http://www.cbsnews.com/news/amazons-jeff-bezos-looks-to-the-future/

Chance Favors Only Prepared Minds

Creating Crises

On January 15, 2009, US Airways flight 1549, with 150 passengers and five crew, struck a flight of geese two minutes after take-off, losing power in both engines. Four minutes later, Captain Chesley B. "Sully" Sullenberger's crew landed the Airbus A320 in the middle of the Hudson River. Aided by first responders, there was no loss of life, and the five injuries and a number of cases of hypothermia were quickly treated.

How did these teams perform such an incredible feat? Was it a miracle? Perhaps. Most commercial flying is routine and pilots rarely experience a real crisis. The FAA reports the odds of a bird strike are one in 10,000, and experts estimate the odds of losing both engines are one in several million.

Yet the crew and first responders instinctively knew what to do. They had rehearsed responses to low-probability, high-impact events in simulated crisis conditions. It's part of their job.*

The chances of an employer going bankrupt in 2012 were 0.007%**, 70 times higher than a bird strike. How many executives rehearse responses to such a high-impact crisis? OK, maybe that's stretching the point. After all, company bankruptcies don't risk catastrophic loss of life.

But what if the odds of business failure were greater than one in two? Writes Harvard Marketing Professor John Gourville, "most studies estimate new product failure rates at 50% or more," ranging "from 40% to 90% across product categories."***

Alternatively, consider the difficulty of sustaining profitable growth. 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 - that's less than one in 20.****

Why not increase the odds of success by taking a page from pilot training and have teams "rehearse" in launch or growth simulations?

Master motivator Lou Gerstner, who took over an IBM in its death throes in 1993, determined that the organization had the capability to perform incredible feats, if only he could refocus its efforts. Early on, he challenged his senior executives to attack their businesses as if they were their primary competitors, in effect "rehearsing" competitive responses.

Later, in the early 2000s, IBM embedded "crisis" simulation into the strategy process. Executive business unit teams went offsite to confront their biggest challenges, such as reversing a loss or identifying how to grow revenues by an order of magnitude, in response to likely market, competition and technology evolution. To make the "rehearsal" as consequential as possible, the teams had to present their solutions to the senior-most executives in the organization - the stakes were high. As English writer Samuel Johnson said, “nothing so focuses the mind as the possibility of being hanged in a fortnight.” At IBM, the teams had three days.

Organizations can similarly improve results by running simulations focusing on assessing and responding to growth opportunities, marketplace risks, untapped sources of customer value, the next generation of customers or emerging competitive threats.

While each simulation requires a different approach, the key to success is creating a realistic environment - a "crisis" - that challenges existing mental models and addresses the organization changes required to deliver a new initiative (structure, systems, people and culture).

It's hard work, but the results can be significant: IBM's EPS increased eight-fold over the decade following the launch of the strategy simulations, tripling the share price.

As Louis Pasteur said in a lecture at Lille University in 1854, "...chance favors only prepared minds."

*Newman, Rick, "How Sullenberger Really Saved US Airways Flight 1549," USNews & World Report, February 23, 2009
**42,008 bankruptcies in the US in 2012: "Bankruptcy Filings Down in Fiscal Year 2012," US Courts; 6,049,655 employers: "Statistics about Business Size," US Census Bureau
***Gourville, John, "The Curse of Innovation: Why Innovative New Products Fail," MSI Reports, Issue Four, 2005.
****McGrath, Rita Gunther, “How the Growth Outliers Did It,” Harvard Business Review, January – February 2012

Most Growth Programs Fail - Part II

Most growth programs fail because they require changes to strategy. And changes to strategy nearly always require changes to the organization: new tasks must be defined, new skills built, a new culture must be nourished and leadership must be aligned up and down the hierarchy. Inattention to these increases the odds that a promising strategy delivers disappointing results.

In addition, many companies aren’t fully aware of how far they must go to differentiate new products or offerings. Effecting these changes requires building commitment on the part of those charged with driving the growth initiative.

Building the necessary commitment begins with the creation of a collective understanding of changes in marketplace dynamics: evolution of customer defined value, technology changes, channel shifts, and new competitive strategies. It strengthens as the team jointly assesses and selects the opportunities, builds a robust strategy and identifies the necessary organizational changes. It solidifies as the team identifies the key elements of a go-to-market plan that creates the platform for sustained performance. And the commitment becomes action through follow-up monitoring.

Growth Challenges

Companies seeking a growth agenda face a number of challenges:

• How do we identify big business ideas?
• Do we stay in current markets, creating new portfolios? Do we enter new therapeutic areas?
• How do we launch a growth agenda without losing ground on efficiency gains?
• How do we structure the accountabilities and the incentives to make this a successful initiative?
• How do we change long established mindsets that keep the organization from seeing and acting on new opportunities in the market place?
• How do we launch a growth initiative that has the full ownership of the management team?
• How do we ensure that this exercise goes beyond brainstorming ideas for growth to executing them?
• How do we effectively engage the business developers / sales force in a new initiative?

Which ones do you face?

And what are you doing about them?

Radical v incremental innovation

Innovation, writes Patrick Thibodeau, "is the most abused word in tech." A Google search yields 108 million entries and, without even trying, I found more than 20 articles published in the last 24 hours.

Part of the confusion is that few distinguish between radical and incremental innovation. Radical innovations, like the steam engine, the cotton gin, the telephone, the automobile, the computer (quick quiz: when was the first programmable computer invented? - see the end of the post), and penicillin change the structures of societies.

Know your limits

Late last Saturday afternoon, my wife decided to try the new organic juice (imagine apple, cucumber, romaine, celery, kale and chard...all mixed together!) place that just opened.

No go. Closed.

Sunday afternoon, closed again.

A quick way to destroy your brand: cut prices, buyback shares, don't innovate

The mattress business is clearly not very restful: Tempur-Pedic's share price has dropped from $87 in April to $22 on Friday, a 66% decline. A colleague suggested I take a look at buying the stock. So I did a bit of research:

Innovation hype

'Companies throw the term "innovation" around but that doesn't mean they are actually changing anything monumental,' writes Leslie Kwoh in "You Call that Innovation?"  Now that this has made the Wall Street Journal, "innovation" has probably reached peak of what the Gartner group calls the "hype cycle," and is likely headed for the "trough of disillusionment." But for those who follow trends, this should be no surprise.