Archive for August, 2009|Monthly archive page

Business Strategy Influencers – General Erwin Rommel

Many military thinkers, including Sun Tzu and Napoleon, have provided strategic insights for business leaders.  One of my favorites was perhaps the most skilled German general of World War II.  Among his many successes, Erwin Rommel’s tank division was the first German unit in the 1940 attack on France to reach the English Channel. Moreover, Rommel’s 1941-42 leadership of the Afrika Corps has served as a classic example of maneuver and indirect warfare.  Throughout his service, Rommel developed a number of maxims on military strategy that have a direct bearing on how business leaders formulate and execute strategy.  Here are a few of his pearls of wisdom:

1.         See for yourself

Rommel regularly operated near the front so as to clearly understand the battlefield situation and to make immediate decisions when the tactical conditions changes. 

Management Learning:  Too often, executives do not spend enough time in the field talking with customers, channels and suppliers to get accurate, unbiased facts. In addition, being on the front lines often improves employee morale and generates goodwill with clients.

2.         Concentrate your force at the decisive point

Despite usually having numerically inferior forces, Rommel understood that if he concentrated his power at his adversary’s vulnerable point he could gain an overwhelming advantage. Splitting the Allied forces in this fashion enabled him to destroy them piecemeal at different times of his own choosing.

Management Learning:  Focusing resources at a competitor’s blind spot or weakly defended market (as opposed to their strongholds) can quickly lead to market penetration and the establishment of a defensible position. This strategy may also reduce your business risk as competition may not be prepared or able to counteract your moves.

3.         Surprise and speed are everything

In every campaign, Rommel endeavored to achieve tactical surprise, hoping to catch his foes disorganized and unprepared.  Once surprise was achieved, Rommel’s aim was to quickly exploit the advantage with highly mobile forces.  It was not an understatement that one of Rommel’s units was known as the Ghost division.

Management Learning:    Attaining first mover position enables new entrants to preempt an immediate and possibly lethal response while potentially building a sustainable advantage.  Furthermore, decisive executives understand that slow or poor execution is expensive, risky and fraught with opportunity cost of foregone revenue.

4.         Protect your supply lines

Rommel recognized that a high tempo, rapidly mobile army requires a flexible yet uninterrupted supply line.

Management Learning:  Rapidly growing and profitable markets requires supply chains that are reliable, scalable and efficient. In knowledge-intensive industries, prudent executives recognize the importance of maintaining their ‘human capital’ supply chains including effective recruiting and training.

5.         Outsiders often are more effective than insiders

Originally trained in the Alps as an infantry officer, Rommel went on to become a leading practitioner of tank warfare, both in the lush, rolling hills of Europe and the bleak deserts of North Africa.  As such, Rommel was not a prisoner of a static frame of reference, conventional wisdom or inherent bias.   His expertise lay in the mastery of many generalist skills including a genius for improvisation, a follow-me leadership style and a propensity for thorough research & planning.

Management Learning:   Rommel’s experience supports the view that effective leaders can come from outside of the home industry.  Possessing traits such as the ability to understand key customer & market drivers, being a creative problem solver and a passionate leader may be just as important as domain expertise.


Accelerating Corporate Innovation

Corporate discussions around innovation often come in two parts. “We need to develop innovative products to beat competition,” followed by “true innovation is so costly and difficult to achieve.’  Is there a way to become more effective and efficient? 

One increasingly popular way is to open up your innovation process to external input and collaboration.  An Open Innovation model integrates a firm’s corporate R&D process with universities, start-ups, inventors, government and suppliers, creating a federated model of research, testing and collaboration.  In essence, corporations solicit and scour the work of scientists and organizations, both inside and outside their industry, for clever intellectual property (IP) they can use and reapply.   Once focused exclusively on cultivating homegrown IP, many corporate labs have now become surveyors, coordinators and integrators within an innovation ecosystem they created.

Many global developments have propelled this change including falling communication costs and the emergence of new collaboration technologies and networks.  As well, the pace of technological change in R&D intensive industries has quickened, driving up the costs, risks and difficulties of centralized and large-scale R&D.  Today, many firms (especially medium-size ones) have little choice but to collaborate if they want to stay in the forefront of product and process innovation. 

Some of America’s largest corporations have embraced open innovation including GE, Eli Lilly, HP and IBM.  One of the pioneers, P&G, launched its Connect & Develop initiative to improve the efficiency and effectiveness of its corporate R&D spending.  So far, results have been impressive.

The benefits of this strategy are considerable including lower R&D costs, reduced project risk, tighter integration with suppliers and quicker adoption of better technology.  However, there are some drawbacks to an open approach.  Coordinating and integrating IP is often messy.  Many scientists and managers are often reluctant to share their ideas, especially when they fear losing resources and control.  Finally, potential cost savings often evaporate when the firm has to pay high licensing and royalty fees to the inventor.

While the notion of collaboration is not new, the mandate, scope and transparency of the effort has increased. Open innovators have found a myriad of ways to link externally including: sponsoring scientific or granting contests; creating joint ventures with complementary non-profit labs;  participating in IP exchanges and; subsidizing university research.  Mundane but effective, P&G sends its product developers to trade shows and venture capital fairs as well as combing through patent filings.

The jury is still our about whether this innovation strategy is better than the alternative for most companies.  However, no organization, team or country can monopolise  innovation so an open approach is likely to be more productive and efficient.

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Crystal Ball Gazing – Using Contingency Planning

As furtive steps are taken away from the worst economic meltdown since the Great Depression, can we look forward to steady sailing for the foreseeable future?  Probably not.  Most firms remain at risk from a plethora of economic, political and environmental shocks as well as the continuation of existing mega trends.

Very likely we already know, as was the case with asset bubbles and global warming, which shocks loom over the horizon.  However, knowing your risks and doing something about it in advance is another matter.  Despite dire warnings and market signals in 2007/08, the vast majority of companies were unprepared to deal with the impact of the  financial crisis.  Given that, how can firms then deal with unforeseen shocks that (seemingly) come out of the blue? That’s where contingency planning (CP) comes in.  CP is a process that:  identifies key trends and potential contingencies;  determines how they will negatively or positively impact the business and; drives strategy development to preempt or mitigate the impact.   

CP delivers many benefits to the organization: 

  1. Reduces business risk through: driving regular financial assessments; triggering preemptive planning and; minimizing the latency period between impact and management action;
  2. Enables firms to preempt or shape threats before they occur;
  3. Catalyzes ‘out of the box’ strategic thinking to deal with unexpected or unorthodox threats (and opportunities);
  4. Improves corporate morale by reducing uncertainty and anxiety

What are some best practices in CP? According to Wharton Business School and Quanta Consulting research, firms need to:

Think differently 

Although CP is not necessarily new, it is often not practiced in a systematic or non-biased way. In many Companies, most trends are followed in an opportunistic and relatively unstructured way. Unfortunately, a great deal of effort, or a serious shock, is often needed to spark a change in the CP approach.

Get the timing right

Short CP analytical periods are sub-optimal.  They limit the number of potential scenarios, don’t take full account of ongoing trends and restrict available strategic options. On the other hand, overly long planning periods lack predictive confidence, introduce too many variables and have difficulty garnering internal attention and credibility. 

Prioritize major trends and potential scenarios

With CP, strategic priority should be towards those scenarios or trends that are extremely impactful on the business yet highly uncertain in their timing. Contingencies should be analyzed in terms of their impact on the key business inputs, continuity and enablers (e.g., price of oil, availability of broadband or free flow of goods through borders). Ongoing, high priority scenarios and trends should be tracked through an early warning system based on customer, market, media and government data feeds.

Provide strategic options

So that executives have strategic flexibility during threats, a variety of offensive and defensive options should be developed for each priority scenario.  In some cases, preemptive plans could take advantage of contingencies to get you in front of your competitors and improve your market position. The CP exercise should become a part of the ongoing strategic planning process and structure for maximum alignment.  

With the right approach and a little discipline, there is no excuse for Companies to be caught blind-sided by many contingencies. Executives must heed the old adage:  “people don’t plan to fail…they fail to plan”

Second Life, Club Penguin – Do You Have a Virtual World Strategy?

Second Life and Club Penguin are two of the largest emerging business platforms known as virtual worlds.   These 3D online environments are places where people socialize and transact using personalized avatars – a computer user’s representation of himself/herself or alter ego.

Virtual worlds are now prime time. Today, there are over 100 different virtual worlds operating globally, many targeted at specific segments. Although numbers are difficult to verify, Second Life has over 15 million adult members worldwide; over 10 million children and teenagers regularly visit the Club Penguin and Habbo Hotel sites. According to the San Francisco Business News, US virtual goods transactions will total $400-$600 million in 2009, up from only $25-$50 million in 2007. The total 2009 global market for virtual goods is estimated to be $5.5 billion, with the majority of this coming from Asia.  This is only the beginning. Industry giants, Facebook and Apple, are testing virtual business apps to run on their existing social networking and wireless platforms.

Many large businesses are already marketing and transacting with their virtual consumers using virtual currencies.  IBM, Thomson, BMW and others have invested millions of dollars to buy Second Life “Islands” (read: presence or shelf space) to market their Avatar and Island-focused offerings.  So far, consumer activity has  primarily been around the purchases of goods to enhance their Avatars and Islands.  However, the V-Business possibilities are endless, some of which are germinating today: 

Better, Cheaper Learning and Training

The power of a 3D environment enables firms to interact with students and employees through a “real” hands-on experience at a substantially lower cost.  These activities could include virtual conferences, training sessions and product demos.

Deeper Consumers Conservations

Avatar-based interactions allow firms to engage users in sensitive, anonymous and rich conversations about their needs; the quality of these conversations are often unachievable using traditional market research techniques. 

Expanded Sales & Marketing Channels

Without the physical limitations of the real world, 3D virtual worlds enable a potent host of V-Business interactions, including rapid testing of: new offerings, store formats and pricing schemes.  As well, virtual worlds improve the opportunity for brand differentiation by enabling new business models around customer service, community building and image development.

As in the early days of the Internet, virtual worlds mix huge potential with deployment challenges and brand risk.  Just ask Google whose 2008 Lively virtual world execution is considered a flop.  Attaining first mover advantage is important but getting the execution right matters more.

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Better Benchmarking

Benchmarking is not all its cracked up to be according to an excellent 2006 Harvard Business Review article by Jeffrey Pfeffer and Robert Sutton.

Benchmarking is one of the most common analytical tools used across all industries.  Its premise is relatively straightforward:  compare yourself against your peers, identify your weaknesses and adopt the industry’s best practices.  However, improperly practiced, benchmarking does not work and could end up compromising your performance.

A good example of this is the U.S. automobile industry.  The Big 3 benchmarked Toyota’s production system for decades.  In particular, they studied and adopted innovations like Kaizen, just-in-time inventory and statistical process control systems.  While benchmarking did help them improve performance, the U.S. firms were never able to catch up in terms of productivity, quality and production cost.  The Big 3 continued to lose market share, not only because of weakeness on the factory floor, but also as a result of other non-benchmarked factors including design, service and branding.

The Big 3’s benchmarking initiatives fell prey to some common pitfalls. For example, people mimic the most obvious , most measurable, and, frequently, the least important practices. The secret to Toyota’s success is not a set of techniques per se, but a culture that preaches total quality management, continuous improvement and employee engagement.  Second, companies have different strategies, cultures, workforces, and competitive environments.  What one of them needs to do to be successful is usually different from what others need to do. It is questionable whether the U.S. firm’s individual-centered (and at many times confrontational) style would ever have provided the same fertile soil to fully embrace and leverage Toyota’s culture-based best practices.

How can your benchmarking initiatives avoid these traps?  My experience suggests the following-

  1. Avoid the trap of only benchmarking to market share or profitability leaders.   Best practices often come from firms whose strategy dictates they “try harder” or be more innovative;
  2. Only compare and analyze variables that drive your firm’s key performance indicators and that can be linked to employee evaluation systems;
  3. For each variable, look beyond the ranking to truly understand the cause for the target’s strength or weakness; 
  4. Compare your firm to other relevant industry and non-industry firms who share similar internal and external conditions to yours;
  5. Considers the strategic, skill and cultural fit of the ‘best practice’ before you commit to adopting and implementing it;

Properly done, benchmarking is an extremely valuable exercise.  However, use the results with caution.

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Obama’s Health Care IT Stimulus…20% Inspiration, 80% Perspiration

As part of ARRA, Obama’s health care IT stimulus package is slated to dole out approximately $40B in new spending and incentives over the next few years.  These funds are targetted at accelerating the adoption of electronic medical records (EMR) in paper-based and siloed health care environments.  The promise of EMR includes significant cost savings, increased operating efficiencies and improved clinical outcomes.     

Obama’s package is merely the tip of the iceberg.  According to McKinsey, up to $170B in new EMR hardware and software spending is forecasted over the next decade, with hospitals accounting for approximately 75% of the total.  Importantly, the Obama package introduces Medicare/Medicaid claw backs for providers that do not meet certain EMP adoption goals by 2015.  This combination of spending and penalties could be a boon for EMR buyers and vendors.  However, much work needs to be done to realize value.

 Hospitals and Physicians

EMR will eventually benefit health care providers but the road will be bumpy.  Providers will have to recraft traditional policies and processes to accommodate the new technology.  As well, stimulus spending will not cover ongoing (and likely large) operating expenses including training, integration and support which we have to be funded from somewhere.  Finally, significant thought, investment and change management will be needed to fully leverage the potential for EMR-enabled next generation health care models (e.g., online diagnosis and treatment of simple conditions), which could dramatically reduce cost and improve the quality and speed of health care delivery.  

Providers may be wise to review some of the lessons from the 1990s IT boon.  During this period, project time-to-measurable-value was often longer than expected because buyers were not ready or able to rapidly incorporate the new technologies and sellers were not experienced enough to effectively deploy them.

Software Vendors & Consultancies

The next decade could be a bonanza for these players.  However, firms will need to (or continue to) get things right to maximize share.  For example, they will need to deeply understand the technological and organizational needs of clients and stakeholders.  Moreover, these companies will have to assemble a winning product/service mix and partnership ecosystem that differentiates them in what will be a crowded marketplace.  Finally, firms will need to align their delivery model to available capabilities, resources and skills, not a simple task in a people-dependant, highly-regulated industry. Given the challenges of infrastructure heterogeneity, a lack of standards and the immaturity of EMR technology, vendors and consultancies will need to quickly move down the experience curve to reduce their business risk and build competencies.

Hopefully, Obama’s package will be the impetus to finally take medical records online. However, it will require more than money for many health care players to make EMR work and to realize its huge potential.

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Wal-Mart’s Sustainability Index…To Be or Not to Be

If you think green marketing is a lot of hype, you might want to ponder the implications of a July 16, 2009 announcement. On that day, Wal-Mart launched their Sustainability Index, which measures the environmental impact of every product they sell.  This Index has the potential to reshape retailing and the consumer goods industry by requiring manufacturers to measure the environmental impact (e.g., carbon footprint and recyclability) of each product they sell (Wal-Mart sells over a million products on and offline) and then to label them accordingly. In essence, each supplier is now competing through the Index for favorable treatment from the world’s most powerful retailer, who in 2008 generated sales of $406B.

I have mixed emotions with this initiative.  On one hand, I salute the attempt by a major retailer to bring scale, order and credibility to a confusing and misunderstood subject.  Wal-Mart expended significant effort and cost to develop the plan including extensive consultations with suppliers, other retailers, universities and non-profit environmental organizations.  To maintain impartiality, Wal-Mart plans to have a public-private consortium own and operate the Index.

On the other hand, this type of regulation-yes that is what it is-strikes me as a nervy act of a private sector big brother, especially when the company is often not shy to throw its weight around. Requiring suppliers to analyze their supply chains at the granularity necessary will be neither a simple or inexpensive activity, especially for small firms.  Moreover, one can’t help but ask how different voter-accountable governments, who are ultimately responsible for environmental and consumer regulations, will support this Index, especially when it may not align with different national standards. Finally, one needs to consider how credible is an Index that does not encompass every retailer nor is legally binding.  Could a confusing situation evolve where there are competing indexes, much like there are two different US College Football ranking polls?   

Typically, Companies that embrace and adapt to change faster reap the greatest rewards. However, with most changes, the devil is in the details and not all of these are apparent today. The Index will probably help the environment but will it be at the expense of higher prices passed along to the consumer?  In addition, could the Index be interpreted by other nations as a non-tariff barrier?  If so, there is the potential to trigger international trade problems.

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(A) Social Media

I don’t know anyone who is not a member of a virtual community like Facebook, Linkedin, MySpace, Club Penguin or Twitter. Forrester Research estimates there will 2.2B online members by 2013, up from 1.5B today.  One of the most popular sites, Facebook, has an estimated 250M members today, up from 100M only a year ago. 

With numbers like this you would think Marketers would be drooling to spend their advertising money. However, this is not happening…yet.  In fact, the vast majority of marketers are devoting less than 2% of their total media spend to social networks.  For perspective, leaked internal documents from wildly popular Twitter show 2008 revenues of only $4.4M.

There are many reasons why marketing spending has not followed membership growth.  For one thing, early growth will lag due to management inertia around new ideas as well as a lack of awareness and relevant tracking metrics. Furthermore, existing platforms and member habits do not necessarily translate into a fertile advertising or promotional environment.  For example, social or business communities would rather socialize or network than be bombarded by ads like they would be on a portal. 

Finally, becoming too focused on revenue is risky.  When MySpace emphasized ad generation at the expense of the user experience, they hemorrhaged users and experienced a 15% drop in ad revenue versus 2008.    

Since there is no rush, how should marketers approach social media right now?

  1. Proper targeting and creative execution is the key to effectiveness and minimizing brand risk.  Find out which communities your customers congregate at and target them with the right, community-appropriate message and promotion.
  2. Despite the hype, treat social media as another part of the marketing mix subject to the same decision criteria as other advertising vehicles. So far, best practices and ROI models have yet to evolve.  
  3. To maximize effectiveness, marketers will need to understand the relationship between membership, social interactions and consumer behaviors.   Communities with the best online experience that can generate rich usage data will be the most attractive to media planners.
  4. In their quest for revenues and profits, it is likely many online communities will adapt their business models.  For example, sites could begin to think of themselves as shopping malls renting space to a variety of merchants as well as developers of complementary applications that members would pay for.

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