Archive for September, 2008

Finding the Right Strategy for Your Business

Posted by 23 September, 2008 Comments Off on Finding the Right Strategy for Your Business

FINDING THE RIGHT STRATEGY FOR YOUR BUSINESS 

In the beginning of this lesson we mentioned Henry Mintzberg’s important book, The Rise and Fall of Strategic Planning. He reaches an interesting conclusion on page 397 of it, one we want to reproduce here in case you don’t make it to the end of his book any time soon: “Organizations differ, just as do animals; it makes no more sense to prescribe one kind of planning for all organizations than it does to describe one kind of housing for all animals.” Dozens of planning methods and approaches have flashed before your eyes as you read this lesson. And believe us, there are many, many more should you care to pursue the planning literature in greater depth! Which, if any, are appropriate to your ways of thinking and the needs of your orga­nization? Possibly, none. At most, one or two in any given situation. It is a terrible (though common) mistake to think that one can “do” planning just by force-fitting a handful of famous methodologies to one’s business. Sure, it helps to know what they are and how they work. But in the end, it is up to you and your fellow planners and marketers to sniff the wind and chose your own path. Perhaps-as is more often the case than we so-called experts like to believe-that path will be largely of your own design, not ours.
In our client work, we’ve noticed that many of the best strategies arise when people trust their instincts and create their own planning processes. Formal situation analysis and planning can provide helpful inputs to this more natural, organic ap­proach to planning-but they are not substitutes for it. Mintzberg seems to be de­scribing the same phenomenon when he writes (of the case studies conducted from McGill) that:

We found strategy making to be a complex, interactive, and evolutionary process, best descrihed as one of adaptive learning…. The process was often significantly emer­gent. . . . Indeed, strategies appeared in all kinds of strange ways in the organizations studied. Many of the most important seemed to grow up from the “grass roots” (much as weeds that might appear in a garden are later found to bear useful fruit), rather than all having to be imposed from the top down, in “hothouse” style.
Strategies as weeds. What an interesting metaphor! And how many of us, espe­cially in the context of established business organizations, are willing and able to give weeds room to grow? All too few, which is one reason why many of the best new strategies in any industry are executed by entrepreneurs, working outside the bound­aries of the established market leaders. Listen to another expert on strategy, Dineh Mohajer, founder of Hard Candy-although she might laugh at our describing her as a strategy expert. But actions speak louder than words (or laughs), and this successful executive founded a nail polish company in her teens and grew it from zero to $10 million is sales in just two years by providing new, fun colors that were not available in the product lines of the giants of her industry. Here is how she and her young part­ners develop their home-run marketing strategies:

We do whatever we like. We don’t do marketing research or anything like that. I’m not even sure what that is-that’s how much we don’t do it. We just go with our gut be­cause that’s what brought us here.
Had she taken her ideas to a market leader, they would probably have been treated like weeds. But now the market leaders are scrambling to imitate this successful strategy.
The question is, can you recognize the next big idea in your market and nurture its growth? We opened the lesson with the search for the new king of strategy and the unsettling news that no heir apparent is in sight. We close on the same thought, with the added insight that it is perhaps best this way. Rather than propose our own candidate, we urge you to find your own. If it is different from everybody else’s, so much the better. Maybe your strategy will be unique, too.
The king is dead. Thank goodness! Now maybe we can create a democratic model of strategic planning.

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The Learning Organization and the Learning Manager

Posted by 23 September, 2008 Comments Off on The Learning Organization and the Learning Manager

 

THE LEARNING ORGANIZATION and THE LEARNING MANAGER

In the days when strategsc planning meant plotting a bunch of growth-share matrices, it was widely assumed that organizational learning occurred in lockstep with the number of units produced. As more units were produced by a firm, it became more proficient at producing them and costs dropped correspondingly. This was one reason why BCG plotted relative market share on its matrix. The firm that held the largest share had presumably produced more units, and therefore had learned how to lower costs the farthest. Now that the Japanese have demonstrated both that a low-share competitor can learn faster and that learning can improve quality as well as reduce cost, U.S. managers are forced to rethink their whole notion of learning. In the emerging view, the kind of changes made by both GE and Xerox are successful be­cause they greatly increase the rate of organizational learning.
Ray Stata of Analog Devises has argued that an organization’s rate of learning is the key to its competitiveness. Specifically, he argues that “At Analog Devises, and many other U.S. companies, product and process innovation are not the primary bot­tleneck to progress. The bottleneck is management innovation.” After deciding to tackle the issue of management innovation at Analog Devises, Stata discovered that organizational learning drove management innovation, “I see organizational learning as the principal process by which management innovation occurs. In fact, I would argue that the rate at which individuals and organizations learn may become the only sustainable competitive advantage.” This conclusion focused his attention on how to use the strategic planning process and a total quality program to increase the rate of learning in his company. Incidentally, how he arrived at his conclusions is an example of the new approaches managers are beginning to take in their quest for organiza­tional learning. Stata joined a group of managers working with two MIT professors to develop and exchange ideas in this field. For example, Stata’s recognition of the key role played by organizational learning can be traced to the influence of fellow group member Arie deGeus, director of group planning at Shell International.
A learning organization is an adaptive organization. It is able to rethink its structure and function and redefine itself in response to market challenges and cus­tomer needs. The need for faster and smarter change is obvious: Many managers be­lieve adaptability is the key to success, and are making it the cornerstone of their strategy. This requires pushing both authority and initiative down into the organiza­tion, encouraging people to think harder and learn quicker-and giving them the freedom to do so. But as Stata also observes, “Organizations can learn only as fast as the slowest link learns,” and, in many cases, the slowest link is management.

THE LEARNING MANAGER

In 1983, around the time Xerox began its total quality drive, Professor Elliot Carlisle of University of Massachusetts at Amherst wrote a story-a parable actually-about a harried manager who bumps into a successful mentor-like manager on an airplane and learns from him a new way of thinking about management. Here is what the men­tor had to say about thinking:

“You know,” he mused, “when you get right down to it, it’s almost impossible to get any real thinking done at work. Not just because of interruptions, but almost more impor­tantly, the whole psychological and physical environment in which managers work tends to discourage contemplation and encourage activity. The higher the level in an organization, the more critical is the role of reflection and the less important that of activity, but so often we’ve become conditioned on the way up through the ranks. How many bosses would give a word of encouragement to a subordinate if they were to come upon him sitting at his desk, chair tipped back, foot resting on an open drawer, and staring into space with an abstract expression on bis face? They’d be far more likely to ask him what the hell he’s doing, and if the unfortunate replied, ‘Thinking,’ he’d prob­ably be advised to stop thinking and get back to work.”
Although there is now widespread recognition of the need to think harder- and, on the other side of the coin, to learn and adapt more quickly-managers still suffer from that conditioning referred to in the quote. In fact, this conditioning is stronger the higher up you go in the organization. According to Harvard Business School professor Chris Argyris:

Any company that aspires to succeed in the tougher business environment of the 1990s must first resolve a basic dilemma: success in the marketplace increasingly depends on learning, yet most people don’t know how to learn. What’s more, those members of the organization that many assume to be the best at learning are, in fact, not very good at it. I am talking about the well-educated, high-powered, high-commitment profession­als who occupy key leadership positions in the modern corporation.
In this view, it is senior management that stands in the way of organizational learning and adaptability, and thus in the way of success in the marketplace. The problem, according to Argyris, is that people habitually reason defensively, uncon­sciously protecting themselves, maintaining their control, and suppressing conflict and negative views. Their behavior blinds them and their organizations to challenges and opportunities that truly open-minded, productive reasoning and learning would reveal. Thus effective, lasting change in any organization must start at the top with self-examination and behavioral change by the leaders.
The effects of the new strategic planning and the market challenges that drive it put this issue front and center. As Rosaheth Moss Kanter, another Harvard Business School professor, sees it, “Competitive pressures are forcing corporations to adopt new flexible strategies and structures.” And this is forcing changes in the nature of man­agement’s work:

The old bases of managerial authority are eroding, and new tools of leadership are tak­ing their place. Managers whose power derived from hierarchy and who were accus­tomed to a limited area of personal control are learning to shift their perspectives and widen their horizons. The new managerial work consists of looking outside a defined area of responsibility to sense opportunities and of forming project teams drawn from any relevant sphere to address them. It involves communication and collaboration across functions, across divisions, and across companies. .. . Thus rank, title, or official charter will be less important factors in success at the managerial work than having the knowl­edge, skills, and sensitivity to mobilize people and motivate them to do their best.

An example of this concept in action is provided by Raymond Gilmartin, CEO of medical equipment maker Becton-Dickinson, “We’re creating a hierarchy of ideas. You say, ‘This is the right thing to do here,’ not ‘We’re going to do this be­cause I’m boss.”‘ This means the vision still comes from the top, but strategies well up from Becton-Dickinson’s 15 divisions, and Gilmartin must be content to sit back and let this more informal approach to strategy work.
When GE pushed down planning to the line managers, this was not simply the outcome of a struggle for authority between corporate staff and operating divisions (as many saw it at the time). It was the beginning of the transformation of managerial work that Kanter speaks of. And when, in words that proved prophetic, Michael Naylor of GE declared in 1984 that line managers had to be catalysts of change through their planning, he was anticipating the new strategic role of the manager. This role requires flexibility and rapid learning, and it requires that managers teach these traits to oth­ers, for these are the traits that a company needs today to identify and implement suc­cessful strategies.
Xerox’s benchmarking is an example of adaptable, accelerated learning, in that it casts a broad net in the effort to learn how to do something better. The fact is that Xerox can learn from L.L. Bean, and vice versa-insight can and must come from all available sources. The truly interesting thing about the new strategies is the way they are pushing (in some cases, dragging) management along this path. As the new strate­gic planning unfolds in the 1990s, two things are bound to become clear. First, it is management (starting at the top) that is the greatest obstacle to change, and that can become the greatest catalyst. (Stata’s quest led Analog Devises to superior perfor­mance, logging an incredible 50 percent improvement in product failure rates every three to six months, for example.) Second, the entire thrust of the many new strategic directions and organizational changes is toward the marketing concept. Managerial companies are struggling to learn and adapt in order to serve customers better-bet­ter than they did before, better than their customers expect, and better than their competitors do.
This implies a never-ending process, and never-ending change. It is a frightening thought-this notion of chasing a moving finish line-and it takes strategy well be­yond the bounds of yesterday’s comfortable matrices. Yesterday’s solutions become today’s problems. Take Xerox’s benchmarking against L.L. Bean to speed up delivery of products. It was an exciting innovation in the copier business last year, but this year Xerox is already looking beyond it. Although Xerox learned to deliver products faster than its competitors, studies showed that customer satisfaction was still suhoptimal- only 70 percent. The problem was that customers wanted to know exactly when their copiers would arrive. Speed was fine, but uncertainty remained a problem. A new team was convened, with people from distribution, accounting, sales, and so forth, and a new solution developed. Xerox now tracks the progress of every copier through the distribution process so that salespeople can tell customers exactly when they will re­ceive their products, thus providing speed and predictability. Now customer satisfac­tion with product delivery measures at 90 percent instead of 70 percent.
But satisfaction still is short of 100 percent, and if it ever reaches 100 percent, competitors may innovate and push it down-satisfaction is, after all, a relative con­cept. So Xerox cannot stop now-it must search for and explore the next frontier. This is the nature of the new strategic planning. As PepsiCo’s CEO, Wayne Cal­loway, explains.,” The worst rule of management is ‘If it ain’t broke, don’t fix it.In today’s economy, if it ain’t broke, you might as well break it yourself, because it soon will be.”

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Planning to Be the Best

Posted by 22 September, 2008 Comments Off on Planning to Be the Best

PLANNING TO BE THE BEST

In the old strategic planning, goals often reflected desired financial returns or con­ventional wisdom about what was reasonable in the circumstances. But the Japanese competitors did not play by the same rules. They saw nothing wrong with tilting at en­trenched leaders in photocopiers or autos, for example, even though entering the U.S. markets for these products meant violating the prescriptions of the BCG and GE portfolio models. And GE’s circuit breaker business went way beyond conventional ex­pectations, making such radical improvements that it was able to grow profits, quality, and share despite a no-growth market. Where do goals such as these come from, and how can they be implemented when the more modest goals of the old strategic plan­ning were so often missed? The case of Xerox will help answer these critical questions.
In 1983, when Xerox CEO David Kearns decided to stem the flood of competi­tion, he announced the beginning of a total quality campaign. To the uninitiated, total quality sounds like tougher quality control, more inspections. It is not. Total quality programs eliminate quality inspection and focus on doing it right the first time. (“It” may be fitness to standard, fitness to need, or fitness to latent need, as discussed in lesson 1.) This means every person must do his or her job right, or stop the process if he or she does something wrong. Total quality involves suppliers and distributors as well. (MeAlpin Industries, a Xerox supplier, now sends its managers to a Xerox quality course, designs its parts with a Xerox team, and endures Xerox auditors on its factory floor.) Total quality touches every process in the company, from manufacturing processes to sales and customer service processes. To accomplish total quality, Xerox puts in charge those people who know each process best: the front-line workers.
This type of program involves a big change for most companies-a change in corporate culture. Employee initiative must be encouraged, and employees can no longer be punished for mistakes. They will not report them otherwise. Employees must be trained in the statistical methods needed to monitor and improve the quality of their own work. And they must learn to work together in teams to solve problems or think of ways to work better.
The first move Kearns made to kick off Xerox’s quality program was an appeal to the company’s 100,000 workers-the task of championing customer needs would fall to them.39 And they have proven more than able to meet such challenges. For ex­ample, in 1990, a team of people from sales, distribution, and accounting determined how to save Xerox $200 million in inventory costs.
Perhaps the hardest part of changing the corporate culture is admitting openly what is wrong with the old one. Whatever is wrong, however, is at the root of any problems and must be grubbed out. The old culture becomes a conservative force, preventing employees and managers from focusing on customer needs and limiting the rate of organizational learning and change. At Fuji Xerox, the company’s total quality program began by admitting that there were some rather serious problems, and that they were systemic rather than the fault of any one manager or group. Hideki Kaihatsu, one of Fuji Xerox’s directors, explains:

The first step was to understand the problems facing the company and why these prob­lems occurred. This soul-searching analysis revealed many surprising facts:

T Our leadership had become fragmented and inconsistent.

T Our managers had become complacent, arrogant, and
had lost their sense of urgency.

T We did not pay close enough attention to
customer requirements.

T We found our product development process
particularly sloppy and not acceptable.

T  We depended too much upon U.S. design capability.

T  The product development process was slow and
there was little cross-functional co­operation.

T We did not recognize the value of maintaining strong
bonds with our suppliers.
In the days of the old strategic planning, a manager’s career could have been ruined for coming forward with even one of these criticisms. In fact, that’s one rea­son consulting firms flourished: When one knew the messenger would be killed, one was eager to hire someone else to deliver the message, regardless of price! But Xerox’s disastrous performance forced its managers to put these games behind them and take an honest look at their company. The result was an almost incredible list of major problems.
Solving them was not as simple, however, as setting the solutions as strategic goals. How could change be accomplished, and how much change was a reasonable goal? How could the goals be broken down into smaller, more attainable tasks? The answers could not be found within Xerox; the needed changes were too radical. But surely they could be found somewhere; there were undoubtedly companies that could provide role models, companies that were the best at each of the individual processes Xerox had to rebuild. With this realization in mind, Xerox created one of the most im­portant of the new planning techniques: benchmarking.
Case Study: Benchmarking at Xerox

 

Benchmarking began at Xerox in 1979 as a way to analyze compet­ing products. According to Robert Camp of U.S. Marketing for Xerox’s Business Services, “Selected product comparisons were made; operating capabilities and features of competing copying ma­chines were compared; mechanical components were taken apart and scrutinized. “42 This reverse engineering of competing products was a natural response to the inroads made by Japanese competi­tors. But with Xerox’s quality program. benchmarking was extended beyond product comparisons, to include process comparisons and companies from other industries.
For example, Xerox used L.L. Bean for benchmarking. Camp tells the story:

When Iwel first informed our management that we were going to assess ourselves against L.L. Bean. There was disbelief. But we had much to learn from them. The L.L. Bean statistics that dealt with their warehouse order picking . . . showed that they were able to do it almost three times faster than Xerox.

This meant that L.L. Bean could fill customer orders faster than Xerox. When Xerox adopted a computerized system like L.L. Bean used, one that “made a conscious effort to sort the orders and minimize the picker’s travel distance” according to Camp, Xerox also was able to fill orders faster. This is an example of what Xerox now calls “func­tional benchmarking.” The following are the definitions of the four benchmarking methods Xerox uses:

1.       Internal benchmarking compares a company’s operations with an internal exemplar, for example, a plant that has innovated suc­cessfully in certain areas.

2.   Competitive benchmarking makes comparisons with individual competitors; reverse engineering of a competing product is one example.

3.    Functional benchmarking is when “we compare function against function across wide sections of different industry types,” as in the L.L. Bean comparison.

4.    Generic benchmarking looks at fundamental business processes that tend to be the same in every industry, such as taking orders. servicing customers, and developing strategies. For these generic practices, Xerox “looks at a wide cross-section” from different in­dustries “to make sure that we have in fact identified those in­dustry best practices,” again according to Camp.
The benchmarking process in its various forms gives Xerox a practical way to set radical goals-the company simply finds some other company that is the best in a certain (often narrow) area, and studies how the company became best. CEO Kearns of Xerox defines it succinctly as “the continuous process of measuring products, ser­vices and practices against the toughest competitors or those com­panies recognized as industry leaders. ” It must be a continuous process, according to Kearns, because “we realize we are in a race without a finish line. As we improve, so does our competition.” Xerox cannot afford to become complacent, and the new planning tools give the company the ability to compete effectively in the cur­rent environment. Kearns adds that “Five years ago, we would have found this disheartening. Today we find it invigorating.”

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Strategic Planning and Process Redesign

Posted by 22 September, 2008 Comments Off on Strategic Planning and Process Redesign

STRATEGIC PLANNING AND PROCESS REDESIGN

So what does GE do now? Its circuit breaker business provides a good example. This stagnant SBU in a mature industry would have flunked all the screening tests, but with a billion in yearly revenues, it hardly seemed appropriate to divest it and leave the market to competitors Seimens and Westinghouse. Besides, if any lesson had come out of the old planning models, it was that profits did not necessarily come from high-share, high-growth SBUs. (As Stephen Hardis, Eaton Corpora­tion’s vice president of planning, put it, “It’s great to say, ‘Why don’t we all go into growth businesses?’ But those are not all highly profitable. If there’s a hell for plan­ners, over the portal will be carved the term cash cow.”)33 Instead of divesting, GE consolidated operations-from six circuit breaker plants to only one (in Salisbury, North Carolina).34 Solving this problem in just one location seemed like enough of a challenge.
Then management assessed the problem, but not in the conventional way, by asking planning staff and consultants for a report. Instead they formed an interdisci­plinary team with specialists from manufacturing, marketing, and design, and asked them to figure out how to make the manufacturing process profitable. The group de­cided to compete on the basis of speed, and adopted the goal of reducing manufac­turing time from three weeks to three days.
This radical change could not be accomplished given the existing process, in which GE engineers designed a unique box for each customer using a selection from GE’s 28,000 parts, then factory workers assembled the boxes by hand. So the team re­designed the product line, paring parts to 1,275 while still allowing customers the ability to customize their boxes. Next the team developed an expert computer system that could automatically convert customer requirements into instructions for the fac­tory machines. This eliminated the engineers and the delay needed for custom design­ing. The team also added more machines, increasing the automation of the production process.
Finally, the team tackled personnel problems on the factory floor. The key issue was delays associated with decision making. According to a Fortune reporter:

The solution was to get rid of all line supervisors and quality inspectors, reducing the organizational layers between worker and plant manager from three to one. Everything those middle managers used to handle-vacation scheduling, quality, work rules-be­came the responsibility of the 129 workers on the floor, who are divided into teams of 15 to 20. And what do you know: The more responsibility GE gave its workers, the faster problems got solved and decisions made.
Because of these changes at GE, costs dropped, quality improved, and cus­tomers believed they had more features from which to choose. Delivery was made in three days, as hoped; the backlog shrunk from two months to two days; employee morale was up; and market share was growing despite the flat market. The 1989 sta­tistics, for example, were quite amazing: Productivity was up 20 percent, and ROI was above 20 percent. But it was not easy to turn this dog into a star; the project began in 1985, four eventful years before the stunning results we report. Everything had to change, from product line through production process to corporate structure and cul­ture. Not every line manager is capable of leading such a transformation, but it defi­nitely takes a line manager to do it. No central planning staff would undertake such goals, or succeed if it did. Still, the new planning approaches are tougher on manage­ment. Managers must champion change; they must be willing to push authority down into the organization; and they must learn to use, and work in, teams. As GE’s Roger Schipke puts it, “Now it’s a question of ‘Can they develop a strategy for their busi­ness?’ Some will make that cut, some won’t.” When he took over the major appliance group, only one of the four top managers reporting to him made that cut. The others were fired.
Success with the new planning approach also requires reducing the barriers be­tween company and customer-touching customers and listening in the proactive sense described in lesson 1. For example, GE now promotes an answer center in TV ads and on product packaging. Staffed 24 hours a day, the center may be reached via a toll-free call. Several million calls are logged annually. Frank Sonenberg of Ernst & Young’s Consulting Group says that, “By making information easily available to con­sumers f General Electric] builds brand loyalty in a tough competitive field.”

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The General Electric Screen

Posted by 22 September, 2008 Comments Off on The General Electric Screen

THE GENERAL ELECTRIC SCREEN

GE developed a more flexible, multidimensional matrix on the theory that the portfo­lio approach should not be limited to relative market share and market growth. Too great an emphasis on these two variables may mask many other factors that make a business or brand attractive and indicate its strengths. Also, relative share is of great­est importance where economies of scale and “experience curve” effects give the largest producer a significant cost advantage. (An experience curve reflects a decline in unit costs as more units are produced; it is the result of learning or “experience” in contrast to straight economies of scale.) Yet the experience curve does not always apply. As a result of such insights, many strategic planners have gone beyond the BCG approach to other approaches that rely on multiple measures of a firm’s ability to com­pete successfully. One of the first and best known of these alternative approaches is the investment opportunity chart or business screen developed by GE.

In the business screen approach, a strategic business unit (SBU) is classified ac­cording to how well it rates on certain success measures, referred to as its business strength. The industries in which SBUs operate are classified on the basis of measures of opportunity, referred to as industry attractiveness. Among the measures of business strength are the SBU’s product quality, price sensitivity, knowledge of the market, technological capability, image, and so on, whereas industry attractiveness is mea­sured by factors such as intensity of competition, seasonality of sales, legal con­straints, importance of technological change, and the like (Exhibit 2.5). Not all these factors can be measured as objectively and precisely as market growth, relative mar­ket share, and cash flow. On the other hand, the GE method offers much greater flex­ibility and comprehensiveness than the BCG approach.

The business screen is used in the following way: The nine cells shown in the il­lustration are placed in three zones. GE colored these zones green, yellow, and red; hence, this is often called the stoplight approach. The three zones at the upper left in­dicate industries that are attractive and match the SBUs’ strengths. They have a green light” for investment. The three cells along

(if you are having trouble viewing the image, click the below thumbnail to view the actual and clear image)

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the diagonal indicate industries of medium interest. They have a “yellow light” to denote caution; usually these SBUs warrant a strategy geared toward maintaining their present market share. The three cells at the lower right show weak SBUs for which a harvesting or divesting strategy may be the best option. The circles A through G represent the SBUs; their size is in proportion to the size of the industries in which they compete. The pie slices repre­sent each SBU’s market share within its industry.
The GE business screen’s history is representative of the history of strategic planning. Developed in the 1970s by William Rothschild at GE with Mike Allen of the consulting firm McKinsey & Company, the tool was carefully-and laboriously- applied in annual planning and forecasting by GE’s large central planning staff. Now, however, according to GE spokesman Bruce Bunch, the business screen “takes too much time” and is not used at GE any more.29 In fact, neither GE nor McKinsey will claim ownership of it today (in response to inquiries concerning permission to repro­duce it for publication). Once the heir apparent of the strategy throne, this method is a homeless orphan! (It remains a standard in the business school curriculum and im­portant for the concepts it represents, even though it is no longer in widespread use.)
What happened? The SBUs of GE and many other firms that were identified as winners according to the business screen were not necessarily better than other SBUs. They ought to have been-nobody could dispute that these represented great business opportunities. However, GE line managers did not necessarily know how to pursue the opportunities, and someone else-perhaps someone from Europe or Japan-might have pursued an opportunity more effectively. The model leaves out the focus-focus-focus factor after all.
As a result of problems in implementing strategies produced with such matri­ces, bigger companies, GE included, pushed planning back to the line managers and cut central staff. For example, in 1984, Michael Naylor, General Motor’s director of strategic planning, declared that “planning is the responsibility of every line man­ager,” and added that “the role of the planner is to be a catalyst for change-not to do the planning for each business unit.”
The case of GE’s Major Appliance Business Group is instructive. The group’s central planning staff numbered in the 50s at the beginning of the 1950s. Although some of the planners’ calls were right-for example, they identified the Japanese threat back in the 1970s-operating managers resisted the growing authority of plan­ning staff and tended to ignore them. They insisted on ignoring Japan and treating Sears as their major competitor, for example. In other cases, planners were dead wrong-their focus on numbers blinded them to realities of implementation. As GE’s Roger Schipke concluded when he took over the major appliance group (and booted out planners) in 1982, “An awful lot of conclusions were drawn by that group some­what in isolation. We had a lot of bad assumptions leading to some bad strategies.”

Business Week performed an interesting study in 1984, tracking a random sample of 33 planning strategies described in the magazine in 1979 and 1980. The tally: 19 clear failures and only 14 clear successes.32 A lot of planners lost their jobs that year!

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Competitive Position Matrix

Posted by 22 September, 2008 Comments Off on Competitive Position Matrix

The matrix can be modified to analyze the position of products relative to their com­petitors. In Exhibit 2.3, the top ten beer brands are plotted using 1990 data. The mar­ket growth rate is not used, because it is the same for every brand in this market (total 1990 U.S. beer sales grew 3.1 percent over 1989, but were flat for the three previous years). Instead, the growth in each brand’s sales is used to show which grew faster. Sometimes, as in this illustration, each brand’s growth is made relative to the growth of the market to show whether its share is growing or shrinking. (To do this, divide a brand’s annual revenue growth or unit growth by the market’s annual growth, or by dividing current market share by last year’s market share to find the percentage of change in market share, as in Exhibit 2.3.)

Exhibit 2.4 shows the data we used to create a competitive position matrix for the U.S. beer market. This kind of analysis can show the market in a new light. The leader in sales, Budweiser, had a strong relative market share, but was weak on the growth dimension of the matrix-its share was slipping. The hot brands were Coors Light and Miller Genuine Draft, which gained a significant share in 1990. The cash flow implications of the BCG matrix do not necessarily apply, however, because com­peting brands may be owned by different companies. This analysis can be taken a step farther by identifying each brand’s brewer and comparing the company portfo­lios, or by plotting companies instead of brands. One could learn, for example, that Anheuser-Buseb had the largest share, 43.4 percent, and that its sales grew 7 percent, more than twice as fast as the total market. Also, one would find that brewer’s share is closely related to performance. The top three-Anheuser-Buseb, Miller, and Coors-were responsible for all the market growth in 1990. (Of course, you would need to update these statistics to the latest available before making any “real world” decisions about how to market a brand of beer, or any other product!)
EXHIBIT 2.4 COMPEITIVE POSITION ANALYSIS

Brand

1990 Share
of Shipments

1989 Share
of Shipments

% Change
in Share

Relative Market
Share, 1990

Budweiser

25.2%

25.9%

-2.7%

2.40

Miller Life

10.5

10.5

0

.42

Coors Light

6.2

5.6

10.7

.25

Bud Light

6.1

5.7

7.2

.24

Busch

4.6

4.8

-4.2

.18

Milwaukee’ Best

3.6

3.6

0

.14

Old Milwaukee

3.3

3.6

-8.3

.13

Miller High Life

3.2

3.8

-15.8

.13

Miller Genuine Draft

3.0

2.4

25.0

.12

Coors

2.2

2.7

-18.5

.09

Calculations:
25.2/25.9 = 0.97; 0.97 – .1 = 0.027 x 100 = – 2.7%
25.2/10.5 = 2.4
One might also plot a matrix that compares light and regular beers, which would indicate that, of the top 25 brands, the only light beer to lose share in this sample pe­riod was Old Milwaukee Light. Altogether, light beers in 1990 had about a 30 percent market share and annual growth of 12.5 percent. And some background reading on the beer industry would reveal that Old Milwaukee Light’s sliding share reflected the fi­nancial problems of its parent brewer, Stroh, which cut Old Milwaukee’s advertising and other marketing expenses in 1989 in an effort to harvest profits from its brands and thus lost 12 percent of its volume. This analysis would indicate that light beers are currently the high performers of the beer market.
This example illustrates a fundamental principle of the new strategic planning:

The firm must use available techniques and information creatively to gain new in­sights into its position and opportunities. It is not enough to crank out the same old matrices that were used last year, even if they are as venerable as the BCG matrix. It is important to ask intelligent questions (“Are light beers fueling the growth in the beer industry?” “Is the leading brand losing share?”), and to take a creative approach to analysis to answer such questions clearly. The firm that asks an intelligent question before its competitors do may be able to seize an opportunity first.26
It is fair to say that nobody uses the BCG matrix as the cornerstone of plan­ning any more. It exists only in the textbooks littering the nation’s business schools. And yet there is a fundamental wisdom to this planning model that should not be ig­nored. Perhaps it even makes sense to bring the tool back again-at least in modi­fied form.
The strongest argument for the BCG matrix is that market growth rates and market shares are still good indicators of strategic potential. After all, which do you think will do better, all else being equal: A brand with low share in a mature, slow-growth market, or one with high share in a dynamic, fast-growth market? You see- there is something worth saving about it after all!
The continued relevance of the BCG approach is underscored by a recent “breakthrough” contribution to the strategy literature from two top people at Bain & Company, which bills itself as an international strategy-consulting firm. The authors of the Bain study examine the conventional wisdom which “holds that market share drives profitability” by examining profitability and other variables in a wide selection of consumer products. Their finding? Surprise! “Instead, a brand’s profitability is driven by both market share and the nature of the category, or product market, in which the brand competes.” Specifically, “A brand’s relative market share has a dif­ferent impact on profitability depending on whether the overall category is domi­nated by premium brands or by value brands to begin with.”27 To put this finding in the context of the BCG matrix, it turns out that in the competitive consumer prod­ucts markets of the United States in the 1990s:

T Relative market share is still an important predictor of ROI,
T But it is still mediated by the attractiveness of the market,
T However, market growth rate seems less important than whether the
market is brand or price oriented.
Note the qualifier here-that the attractiveness of the market, while still a key to returns, is not well represented by market growth rate. This may reflect the sad re­ality that most of the brands in the study are in similarly mature, slow-growth mar­kets. But whatever the reason, the point is that a matrix approach to predicting future success would work today, as long as you modified the matrix by substituting a premium brands-versus-discount brands variable for the slow-versus-high growth variable of the original matrix. Otherwise, the portfolio approach’s reliance on a market share variable and a market attractiveness variable is still sound.
We want to expose you more deeply to this school of strategic planning by show­ing you variants on the BCG model that permit the user greater control over the vari­ables, thus making it easy to adapt the model to changing market conditions.

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Portfolio Analysis: is It Ready for a Rebirth?

Posted by 22 September, 2008 Comments Off on Portfolio Analysis: is It Ready for a Rebirth?

PORTFOLIO ANALYSIS: IS IT READY FOR A REBIRTH?

Perhaps no company has contributed more to the “old” strategic market planning than General Electric (GE). In the 1970s, GE reorganized its forty-eight divisions and nine product lines into strategic business units (SBUs). Each SBU consists of one or more products, brands, company divisions, or market segments that have some­thing in common, such as the same distribution system, similar customers, or the same basic technology. At the same time, each SBU has its own mission, its own dis­tinct set of competitors, and its own strategic plan. About 20 percent of the largest manufacturing firms in the United States have adopted the SBU system. Recently, for example, Campbell’s Soup Company established eight SBUs: soups, beverages, pet foods, frozen foods, fresh produce, main meals, grocery, and food service. The SBU structure’s great merit is that it defines the company according to the markets it serves-one SBU per market. Smaller companies are often focused on a single mar­ket, but larger ones easily lose their marketing orientation without the SBU structure to force it.

The Boston Consulting Group (BCG) suggested in the 1970s that SBUs should be managed as a portfolio the way financial investments are managed (Exhibit 2.2a). Differ­ent SBUs may have different missions, but all work together to achieve the organization’s overall objectives. Top

Optimum Cash Flow

management decides which business units or brands to build up, maintain, phase down, or eliminate. In short, the organization is continually attempting to improve its portfolio of SBUs by divesting itself of units that do not perform well and, at the same time, acquiring promising new ones (Exhibit 2.2b).
The BCG approach focuses on three factors: market growth, the SBU’s relative market share, and cash flow. An SBU’s relative market share is determined by dividing its market share by that of its largest competitor. Thus, if Gillette’s razors-and-blades SBU has a 65 percent share of that market while Schick, its largest competitor, has 16 percent and BIC has 11 percent, their relative market shares are:

Gillette 4.1 (65%/16%)
Schick 0.3 (16%/65%)
BIC 0.2 (11%/65%)

The dividing line between high and low relative market share is set at 1. Only the market leader can lie to the left of this point. The more dominant the leader’s share, the stronger its position in the marketplace.
SBUs are categorized by the amount of cash they generate, resulting in the fol­lowing four categories:

1. Stars-These SBUs are in industries with high sales growth rates, and they have a high relative market share. The stars are the leaders in their markets. They need continual inputs of cash to maintain their high growth rates. Even­tually that growth will slow and they will become cash cows.

2. Cash cows-Cash cows are SBUs with a higher market share than competi­tors in a low-growth market. They have high sales volume and low costs. Thus, they generate more cash than they need; the excess cash can be used to support other SBUs. At Gillette, the razors-and-blades SBU generated 32 per­cent of the company’s 1989 sales revenues, but 64 percent of its profits. Profit margins on this SBU were a whopping 34.7 percent, compared with 15.2 percent for stationary products and 6.9 percent for toiletries.25 Domestic beer is a cash cow for Anheuser-Busch, supporting the new product lines discussed earlier.

3. Question marks-These high-growth, low-market-share SBUs are problems for management because their future direction is uncertain. They require a lot of cash simply to maintain their position, let alone increase their market share. Management must decide whether to pour in enough cash to make them into leaders; if not, these SBUs probably will be phased out of the portfolio.

4. Dogs-Dogs are low-growth, low-market-share SBUs. They may provide enough cash to support themselves, but they are not a substantial source of funds. Such SBUs often are in the process of entering a particular market or phasing out of it. Either way, their position is below average.
The distribution of an organization’s SBUs in the different categories provides a profile of the firm’s health. But such an analysis also needs to consider the direction in which each SBU is moving. Organizations prefer to turn question marks into stars and, as growth slows, into cash cows that can be used to fund other question marks. This is precisely the sequence that occurred at Gillette, where the excess cash from the razor blade business was funneled into disposable lighters. Eventually Gillette’s Cricket lighter became a star.
The portfolio approach aids in the setting of marketing strategies. The follow­ing basic strategies are closely related to this approach:

· Build-This strategy is appropriate for question marks if they are to grow into stars. The firm invests heavily to improve product quality, develop promo­tional campaigns, or subsidize price reductions-all in an effort to beat the competition.

· Hold-This strategy is used to protect cash cows and stars that are strongly en­trenched. The market leader simply defends its market share and maintains cus­tomer loyalty.

· Harvest-When the future looks dim for a weak cash cow, a dog, or even a question mark, the best strategy may be to harvest as much profit from it as possible before letting it go. Marketing (especially promotion) and research and development expenditures are curtailed; economies of production are empha­sized; and customer services are reduced. In short, all costs are lowered as the SBU is “milked” of its cash-generating potential.

· Divest-When a dog or question mark has no future, it is sold off or dropped from the portfolio because the cash needed to fund it can be used better else­where.

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Situation Analysis – Environmental Scanning & the Organization-Looking Inside the Strategic Window

Posted by 21 September, 2008 Comments Off on Situation Analysis – Environmental Scanning & the Organization-Looking Inside the Strategic Window

In the next step of strategic planning-the situation analysis-planners traditionally analyze information about the firm’s environment, especially its customers and com­petitors. This environmental scanning involves looking at the present state of the en­vironment and forecasting trends in its various aspects. Planners also look inward and analyze their organization’s strengths and weaknesses. They assess not only tangible, observable resources, but also intangible resources, such as the skills of personnel and the company’s image. The focus then shifts to matching the opportunities that exist in the environment with the firm’s particular strengths. The outcome of this analysis is an understanding of how to take advantage of the opportunities by using the dis­tinctive competencies of the organization. It may also require some revision of previ­ously set goals. This crucial step in the strategic market planning process may utilize analytical tools such as the Boston Consulting Group’s growth-share matrix, which will be discussed shortly. It also draws on an organization’s ongoing efforts to monitor its business environment.

Environmental Scanning

A navigator would not plot a course without first establishing the ship’s position and examining a chart with care. Nor should a manager develop strategy without examin­ing the environment. As a practical matter, it is essential to simultaneously monitor the business environment and develop and refine strategy on an ongoing basis.
But what do we mean by the business environment? In the world of strategic planning, this term encompasses any and all important events-and even undercurrents that might lead to future events-in a wide range of areas. Classically, an environmen­tal scan looks for both opportunities and threats, and does so in the following areas:
The social/cultural environment, including the beliefs, values, and norms of be­havior that are learned and shared by people in the business’s environment.

The competitive environment, including changes and objectives at established competitors, plus any and all new competitive threats from entrepreneurs, for­eign companies expanding into the market, and so forth.

The technological environment, including any and all new technologies that might impact the products and/or processes of the industry or related industries.

The economic environment, including any trends that might affect the company directly, plus all that affect consumers and their spending patters.

The political/legal environment, including any legislation that might alter the rules of the game in the firm’s industry and markets. (Anyone in health care right now is used to worrying about this factor!)

The natural environment, including the natural resources the business and its customers depend on, any surprises the weather may dish up, and issues con­cerning the firm’s environmental impact and how to minimize it.
As the breadth of this list makes clear, any full-blown situational analysis must cover a broad range of issues. It is a demanding research project. And yet, even when done carefully and thoroughly, such scanning may fail to reveal the most important threats and opportunities in today’s highly turbulent business environments. The most exciting and important new directions are often difficult to tease out of the mass of data and piles of reports. Managers and marketers must learn to listen for weak signals as well as strong ones. And, increasingly, the eyes, ears, and instincts of the entire organization are required to find and amplify these weak signals in time for appropriate action. That is why Henry Mintzberg refers to modern strategies as “emergent.” They may spring up, like weeds, from unexpected sources anywhere in the organization, or even beyond its doors in the network of suppliers and distribu­tors surrounding it. Scanning can no longer be left to a centralized planning staff-it is so important that everyone needs to be involved.


The Organization-Looking Inside the Strategic Window

Once the external environment has been analyzed, planners traditionally examine the firm’s resources, both tangible and, often more important, intangible. Planners should thoroughly review the tangibles-the firm’s financial resources, production and distri­bution systems, and the like. They also should analyze intangible resources, such as the company’s image and culture, the creative and administrative talent of its personnel, employee attitudes toward the company, and the company’s vulnerability to competi­tion. These intangibles, though difficult to assess, can make the difference between success and failure.
Does Starbucks have the core competencies and financial deep pockets needed to go head to head with leading consumer brand marketers in a battle for grocery store market share? We don’t know for sure, but if we had to make the decision, we would start with a brutally honest examination of the organization itself.

Categories : Marketing Tags : ,

 

Market Share As a Strategic Goal

Posted by 21 September, 2008 Comments Off on Market Share As a Strategic Goal

Agreat many marketing missions and objectives rest on the assumption that a domi­nant share of your market is a sure-fire recipe for success. Think again about the Starbucks mission-“to dominate every place coffee is sold.” This is in fact a market share objective, and it makes sense only if there is some payoff for holding a dominant share of markets.
Because of the importance of assumptions about market share, a group of pro­fessors with the Strategic Planning Institute (SPI) has assembled a highly detailed database of information on the performance of thousands of individual businesses and business units over four years or more. It tracks the standard financial measures, plus many of the marketing and strategy variables thought to drive financial perfor­mance. In this Profit Impact of Marketing Strategy (PIMS) database, two striking trends appear. First, on average, market share and return on investment (ROI) vary together. A smaller share is typically associated with lower ROI, and vice versa. In fact, the relationship is virtually a straight line, varying from an average ROI of 11 percent for businesses with market shares of 10 percent or less, up to an ROI of 40 percent for businesses with shares of 50 percent or more. Professors Buzzell and Gale write that:

The primary reason for the market share-profitability linkage, apart from the connec­tion with relative quality, is that larger share businesses henefit from scale economies. They simply have lower per-unit costs than their smaller competitors. These cost ad­vantages are typically much smaller than those once claimed hy overenthusiastic pro­ponents of “experience curve pricing strategies,” but they are nevertheless substantial and are directly reflected in higher profit margins.
Second, as their brief aside about quality hinted, the data also show a clear relation­ship between quality relative to competitors, as perceived by customers, and both market share and ROI. The data support the arguments of quality advocates that there does not need to be a trade-off between quality and cost. Higher quality seems to be associated with higher share and lower costs (thus higher margins and ROI) in actual operating data from thousands of companies.
So what happened to Xerox? If firms gain 3.5 points of ROI for every 10 points of market share on average, as the PIMS database indicates, Xerox’s 86 percent share in 1974 should have given it a greater than 25 percent lead in ROI over its closest com­petitors. How could anyone possibly afford to challenge Xerox? This is exactly what its management assumed, and what many leaders in other industries assumed as well. (The U.S. auto industry is a classic example.) But this assumption ignores the impact of quality. Higher profits do not guarantee dominance-it depends on how you spend them! Xerox did not use its cost advantage to maintain its leadership in quality and product superiority, and customers do not share planners’ regard for market position.
Market share represents customers’ past purchases, not their future purchases- something planners tend to overlook-and if a better product comes along, future pur­chases will not remain consistent with past purchases. Market share is a good objective for management, but it is not an impenetrable shield against competitors, as Xerox learned.

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Strategy as a Focus Rather Than a Plan

Posted by 21 September, 2008 Comments Off on Strategy as a Focus Rather Than a Plan

One reason strategic planning will never die is that without a strategy of some sort, there can be no clear focus. Many organizations are resuscitating strategic planning, in spite of their inability to see very far into their futures. But the role of strategic planning is fundamentally different. Let’s look at this interesting transition.
In most industries today, events are so fast-paced and unpredictable that no­body can write a plan or create a forecast worth the paper its printed on. H. Igor Ansoff has documented this change in an extensive series of studies. Ansoff’s formal title is Distinguished Professor of Strategic Management at the United States Univer­sity in San Diego-but many people in the marketing field refer to him as “the father of strategic planning” because of his important work in the development of this field. In recent years, his work has provided perhaps the strongest documentation that many of the conventional planning methods are antiquated. Most striking is his mea­surement of what he terms the turbulence level of a business’s external environment. Here is Ansoff’s turbulence scale:

Turbulence Level Name Description
1 Repetitive No change
2 Expanding Slow incremental change
3 Changing Fast incremental change
4 Discontinuous Discontinuous, predictable change
5 Surprising Discontinuous, unpredictable change

Further, he has demonstrated in a range of studies that “a company’s profitability is optimized when a company’s strategy and management capability both match the tur­bulence in the company’s environment.”iS This means, for example, that if your orga­nization used to face a turbulence level of 3 but now faces a level 4.5 environment-a transition typical of most industries over the last two decades-then the old strategies and management approaches will lead to failure today just as surely as they led to suc­cess yesterday. In the high-turbulence environments most businesses now face, Ansoff finds that entrepreneurial and creative strategies work, while reactive and anticipa­tory strategies do not. Yet conventional planning cycles, in which data is gathered, numbers crunched, forecasts generated, and long-term strategies formulated, are gen­erally reactive or at best anticipatory. Not entrepreneurial, and rarely creative.
Which is why, as we observed earlier, formal planning processes were downsized almost out of existence in many companies. And why Tom Peters, that most popular of management gurus, wrote that “madness is afoot” and advised managers that, in order to thrive on the chaos around them, they should abandon their long-range strategic plan in exchange for “a strategic mind-set” so as to be able to foster “internal stability in order to encourage the pursuit of constant change.”i9 In other words, strategic plan­ning as usual is dead.
But strategic planning is experiencing something of a rebirth in the late 1990s. (As Mark Twain once said, “The reports of my death are greatly exaggerated.”) Per­haps the most striking symbol of this rebirth is the rising stature of strategic planning in what was supposed to be its replacement-total quality management. And this is seen nowhere more clearly than in the annual judging criteria for the Malcolm Baldrige National Quality Award. These criteria are modified every year in an effort to provide a better standard for the management processes of U.S. firms, and lately strategic planning has emerged as a key component of the criteria. According to Vicki Spagnol, a member of the award’s board of examiners, “In recent years, Category 2, Strategic Planning, has undergone significant evolution, which has expanded its scope and made it more central to the overall criteria.” She summarizes the change as follows, “The scope of planning was broadened from planning for quality and op­erational improvements to developing an overall business strategy. Greater emphasis was also placed on translating strategy into action-oriented ‘key business drivers,’ which could be used to deploy strategy throughout the organization.” Why bring strategic planning out of moth balls, especially when many people argue it is what led to the need for new approaches like total quality management and reengineering in the first place? Because, in Spagnol’s words, “The faster the rate of change, the more important it is to understand the dynamics of the marketplace and to have a strategy that will enable an organization to outperform its competition over the long haul.” Fast change makes a good strategy more essential than ever. But-and here is the paradox-fast change (and the high turbulence with which it is typically associ­ated) makes coming up with a good long-term strategy almost impossible. Whatever knowledge base the strategy rests on will be antiquated by new events before the im­plementation is half-way complete. How do you resolve this paradox-this great need for good strategy in conditions which make it terribly hard to design good strategy?
The most successful answer-and the key to strategic planning’s rebirth- seems to be to use strategy as a source of focus and direction, not as a blueprint. Lis­ten to Steve Roemereman, vice president and strategy manager of Texas Instruments’ Defense Systems & Electronics business (which won the Baldridge Award in 1992):

Most of those companies that had a great decade did it not by planning out forty great quarters. They had a strategic plan, and then they executed forty great quarters more or less along the lines of the plan. Their people knew where the company was going, and the shared knowledge made it easier to get good quarterly performance.
In other words, the strategic plan gave everyone a common focus, a vision of where the company wanted to go. And then everyone did whatever seemed necessary to get there. The role of this plan, then, is to provide focus rather than direction, to give a common purpose rather than to give specific instructions. The entrepreneur­ial, creative elements aren’t in the plan. They have to be provided by the people who implement it. Nobody can forecast those. But without some agreement on where the entrepreneurship and creativity is supposed to take you, everyone would pull in dif­ferent directions.
In order for strategic plans to perform this focusing role effectively, everyone must have what is coming to he called a line of sight, which is a clear view of the con­nections between their own work and the big picture of the organization’s strategy. Without it, they cannot improvise without losing the tune. The American Society for Training and Development reported that the goal alignment provided by such lines of sight “has a significant impact on employee performance” because it “enables em­ployees to see how their work helps the company succeed.”22 Thus strategy still has a vital role-perhaps an even more vital role-because in turbulent markets it may be the only constant, the only clear beacon to aim for, amid the chaos.

Categories : Marketing Tags : ,