Archive for September, 2010|Monthly archive page

Business Gaming: Simulate to Success

Those who have participated in strategic planning exercises know the trials and tribulations of the process. For example, the outcome often results in poor decisions.  These could arise from management bias or an overtly company-centric view.  Moreover, traditional planning initiatives are typically time-consuming and onerous undertakings.  Finally, the planning effort will often fail to overcome functional silos, resulting in limited information sharing and inadequate compromises.

While a traditional strategic planning process has its merits, there is another way to develop strategy, preempt competition and secure internal alignment:  business gaming. 

War game simulations were first deployed by the Pentagon and the Rand Corporation (a U.S. think tank) in the 1950s.  Their purpose was to simulate the outcome of various military and diplomatic hypotheses.  Businesses recognized the power of this idea, and today, gaming is used extensively in companies that face high risk/high reward decisions.

Typically, an external consultant will work with management to design the game and create a market fact base. Different cross-functional teams are chosen to represent key competitors and stakeholder groups.  With the assistance of the consultant, these teams role play hypothesis-driven scenarios under real-life conditions which could include environmental or regulatory changes.  The scenarios represent important strategic decisions facing the firm such as whether to launch a product, make a price change or execute a M&A transaction

Business gaming is a powerful complement to all strategic planning approaches.  By their design, simulations bring reality directly into the planning process by incorporating competitive moves and by accounting for the human element in decision-making (e.g. fear,  hubris)  Our experience has shown that business simulations can deliver many benefits: 

Generates better decisions – Potential decisions are torture-tested against competitive moves.  Key assumptions and analytics are more easily challenged.  More creative strategic solutions often emerge.

Improves internal alignment – All participants will develop a much better understanding of the challenges and opportunities. As well, participants will align quicker around implementation strategies and resource allocations. 

Enhances learning and team-building – Business gaming is fun as it appeals to management’s competitive instincts.  Moreover, the level of strategic thinking and data sharing across the organization is usually enhanced. 

The following are some of the games we have run:

Should we raise our price? 

This medium-size software provider was worried about maintaining competitiveness against key rivals and lower-cost open-source tools following a price increase.  We role played the actions of key competitors, a strategic client and the open-source community in a simulation that ran over 1.5 days.  After experiencing a harsher than expected competitive and customer response, the company decided against a list price increase – but in favour of higher integration and support pricing.

How robust is the current plan?

A large financial institution was enjoying market leadership and high margins.  However, senior management was concerned that the existing strategic plan was overly conservative and paid insufficient attention to potential threats from new entrants. We undertook a 2 day game, simulating new product entry from current competitors as well as from disruptive players from outside the industry.  The game highlighted a number of product, service and operational vulnerabilities which the firm moved to quickly to address.

Do we acquire a larger rival?

This small but ambitious firm debated the impact of acquiring a larger competitor, which would immediately vault the firm into a global player.  However, the transaction would also bring considerable attention to bear on the company from large competitors as well as from important suppliers. Our firm role-played potential competitive and supplier responses to the transaction as well as the effect on the company’s tight culture and operational scalability.  The firm decided the opportunity out-weighed the risks and proceeded with the deal.

For more information on our services and work, please visit the Quanta Consulting Inc. web site.

Putting the social in social media strategy

We’ve all heard, ad nauseum, about social media’s marketing potential.  While its value has been demonstrated in areas such as political mobilization, the jury is still out on how effective SM is as a marketing tool.

Few marketers think beyond abstract objectives like generating buzz and building 1:1 relationships when developing SM programs. In this context, little consideration is paid to how SM is a reflection of a firm’s core values, how SM is impacted by consumer behavior and how SM is influenced by social psychology, all of which are encompassed by Social Strategy.  

Given this, it should not come as a surprise that most SM initiatives do little to positively sway consumers. For one thing, the vast majority of what is pushed out in social media is of little value.  Social media pundit Umair Haque,writing in a Harvard Business Review blog claims that 95% of what organizations generate in social media is of no value or relevance to the recipient.   Secondly, the assumption that SM can increase both the relationship breadth (e.g., the number of Twitter follows) and relationship depth  (how much a person cares for the brand/company) fails the common sense test.  Individuals don’t seek out deep relationships with a company (save for a few iconic firms like Harley Davidson and Apple), outside of a commercial one.  Finally, despite the egalitarian appeal of SM, people do not change their fundamental values or adjust their social behaviour when online.  SM research conducted in Brazil showed that online participation in various sites mirrored offline social stratification.

To improve SM’s impact (read: appeal and acceptance),  companies need to focus more on the social side of the equation. To achieve this, marketers must address their Social Strategy.

SM strategy is shaped by the marketing strategy. On the other hand, the Social Strategy exists outside of business strategy, but shapes its. A firm’s Social Strategy is how they relate within societal and individual norms and beliefs.   Developing a Social Strategy involves three steps:  1) building the capacity to understand an organization’s role in society;  2)  crafting a business framework that aligns corporate values with those of the surrounding society and; 3)  acting in a more meaningful, relevant and authentic fashion than your competitors.   

To assist firms in this process, the following are some of our best practices and those of Umair Haque:  

  1. Organizations need to work on their character.  Rampant and unfettered use of social media without respect for the individual’s wants and needs is anti-social and counter productive to building deep relationships.
  2. Marketers needs to relinquish some control.  People don’t want to be over-marketed to with canned messages.  Most often, they seek compelling and relevant dialogue with company experts who are found in product management, operations and customer service.
  3. Companies should embrace the market clarity provided by social media.  Typically, customer and stakeholder feedback is filtered through an organizational lens which shapes and biases its message.  Social media can enable unfettered, real-time market feedback which can be used to create better products and more relevant customer experiences.
  4. Customer relationships need to be fostered and nourished to flourish.  With customer relationships, seek and cultivate quality, not quantity. One way to do this is by using Tummling techniques, a form of social moderation, to facilitate rich and productive conversations.

For more information on our services and work, please visit the Quanta Consulting Inc. web site.

Choice Modeling: Polishing the Crystal Ball

When it comes to designing products that customers will buy in droves, the stakes have never been higher.  Despite billions of dollars of investment and countless hours of R&D, 90% of all new product launches will fail within 3 years of hitting the market. Furthermore, many products live as ‘walking wounded’, suffering from low market share, profitability and market differentiation.  The challenge is deceptively simple:  what is the ideal product that balances customer appeal, product profitability and supply chain fit?  The answer can be devilishly complicated, given the myriad of product combinations that could be delivered through different supply chains and sold in a range of markets.  

Fortunately, there are powerful, new analytical tools and methodologies that can help.   One of these techniques, Choice Modeling (CM), can improve new product success rates,  reduce business risk, increase customer knowledge and help define the optimal combination of features, services and prices for existing products. (Another powerful tool is CRM-driven data analytics)

Choice Modeling

As an approach, CM is part science and part art.  CM uses high-performance computer simulations and econometrics to understand and predict customer choice under various product configurations, market and environmental conditions.  In the past, marketers could only rely on simple statistical tools like regression analysis to understand a small set of cause and effect relationships between variables.  Thanks to CM, a firm can now dramatically accelerate the scope, depth and speed of their product analytical capabilities.

CM is being used to design products, services and supply chains in a wide variety of industries including consumer & industrial goods, financial services, hospitality, telecom and retail.

Using Choice Modeling

There are 3 basic steps to utilizing CM:

  1. The first step identifies the number of possible product, service or experiential features  (choices) that could influence a customer’s preference for your offering.  For a new car, the choices would include color, engine size, sales experience and options.  Information on choices can be gleaned from many sources including current product information, customer interviews, surveys and industry data.
  2. The second step is where the art comes in.  Marketers would design a series of simulations that ask customers to choose between a small number of choice options within a series of choice sets.  Using the car example, a simulation could be designed that asks customers to make choices between 2 different luxury packages (choice options) within a series of different feature collections (choice sets).
  3. The final step is where the science takes over.  Powerful econometric models are applied to a representative sample of respondents to identify empirical relationships between their selections of choice options and choice sets.  Unlike traditional tools, CM allows marketers to rapidly model and understand the relationships between hundreds of choices in hundreds of scenarios. Back to the car analogy, analysts would be able to test the impact of various option packages with different features on market share, segment profitability and customer satisfaction, before finalizing the product design and without guessing.

Poised for Growth

With the penetration of Web 2.0 technologies and higher bandwidth, it is now feasible to quickly gather key data and run simulations across multiple geographies, regulatory environments and customer segments.  Importantly, designers can now model unique and customized solutions to individual respondents or micro-segments using new advances in Bayesian statistics.

A Final Caveat

Like other analytical tools, CM is susceptible to “garbage in, garbage out” effects.  Problematic data, shaky assumptions and poorly designed simulations will inevitably lead to misleading results.  Furthermore, the most powerful CM models will not overcome incorrect findings arising from organizational effects like management bias or cultural influences.

 For more information on services and work, please visit the Quanta Consulting Inc. web site.

Turning the Tables on Disruptive Innovators

Over the past 10 years, disruptive innovators (DIs) have taken on established industries like banking, airlines and media  – and have won.  By targeting unmet consumer needs or introducing breakthrough operational innovation, DIs can significantly alter the competitive landscape, industry margins and product offerings.  Unencumbered by institutional factors, DIs pose a major threat to market leaders because of their ability to quickly capture share, drive down pricing and reset the consumer’s value perception.  In many cases, traditional firms have had a difficult time fighting back due to their legacy strategies, financial requirements, and organizational environment. 

One common strategy is to launch a similar business model as the DI.  In effect, the new model competes against the DI in the low cost segment while the traditional model continues to fight it out in the core market.  This strategy, despite considerable effort and resources, is generally not successful in defending against DIs. In particular,  managing two different business models in the same industry at the same time is extremely difficult.  Furthermore, a dual business model plan is loaded with economic contradictions and frequently leads to insufficient investment and focus on one of the units.   Some management gurus like Michael Porter and Clayton Christensen believe it is possible to fight DIs with two business models if executives get certain things right.  These prerequisites include autonomously structuring and operating the business units with each choosing its value chains and go-to-market approach. As well, executives would need to integrate the units where they can coordinate strategies, reap scale economies and capture synergies in areas like finance, purchasing and channel management.  Who is right?

A study recently published out of MIT’s Sloan School of Business looked at what worked and what didn’t work with a dual business model strategy.  Sixty-five public and private companies were analyzed between 2007 and 2009. The authors concluded that running the units autonomously may not be enough in making a dual unit strategy work.  To successfully defend against DIs, the study recommended firms consider 5 fundamental questions before committing to any strategic moves:

  1. Should the company enter the market space created by the new business model?  Incumbents may correctly choose not to defend in the short term.  The new market may not be attractive or be a good fit with the firm’s competencies.
  2. If the firm wants to enter the new market, should it do it with the existing business or a new unit?  There is no simple answer to this question.  The decision will be based on which strategy best serves the customers and delivers the highest profitability. Furthermore, companies may decide to get into the market without adopting the DI’s model (e.g., an acquisition or strategic partnership).
  3. If a new model is required, should the company follow the same strategy as the DI?  The research indicates that incumbents will not be able to beat DIs at their own game.  Instead, firms should look to ‘disrupt the disruptor’ with a better business model, where they could better leverage their strengths in areas like scale, talent and relationships. 
  4. If a new business model is developed, how much should be leveraged from the parent company?  The question is not whether units should be separate or apart but rather which assets or activities should be run together and which should be run separately.  The decision should be based on careful deliberations around 5 factors:   1) name/brand 2) location 3) equity 4) value chain activities and 5) organizational environment.
  5. If a new model is formed, what are the specific challenges of managing both of them at the same time?  Not surprisingly, winning companies tended to give much more financial, organizational (e.g., culture, incentives and processes) and strategic autonomy to the new business unit.

Ultimately, the most successful companies are the most pragmatic and ambidextrous, basing their approaches on their unique circumstances and capabilities.

 For more information on our services and work, please visit the Quanta Consulting Inc. web site.

CEO Succession: Who is minding the ship?

CEO changes, particularly unexpected ones, are an expensive proposition. The abrupt and unforeseen departure of HP CEO Mark Hurd triggered a share price drop of over 9% immediately following his resignation. Given the business and financial risks, one would think that all publicly traded corporations have comprehensive plans in place to manage CEO transitions, especially in times of crisis. The reality, however, is much different. New research out of Stanford’s Rock Center for Corporate Governance and recruiting firm Heidrick & Struggles point to a significant lack of preparedness on the issue of CEO succession. In a 2010 survey of 140 CEOs and board directors of North American public and private companies, more than half of companies today cannot immediately name a successor to their CEO should the need arise. This gap poses a major risk to corporate health and shareholder value, especially for firms challenged by the current economic climate and those poised for significant growth. Responsibility for this situation is fairly obvious. Poor succession preparedness traces to neglect on the part of Boards and the senior leadership team. According to one of the researchers, “…this governance lapse stems primarily from a lack of focus: boards of directors just aren’t spending the time that is required to adequately prepare for a succession scenario.”

Other research findings include:

While 69% of respondents think that a CEO successor needs to be “ready now” to step into the shoes of the departing CEO, only 54% are grooming an executive for this position. Furthermore, 65% of firms have not asked internal candidates whether they want the CEO job, or, if offered, whether they would accept.

The lack of Board attention is fairly common. The average Board spends only 2 hours per year on succession planning. Moreover, only 50% of Boards have a written document detailing the skills required for the next CEO, suggesting that many Directors may not understand what it takes to run the company.

A full 39% of respondents cited that they have “zero” viable internal candidates. This worrisome finding has negative implications on a firm’s leadership development program as well as the Board’s ongoing exposure with potential internal CEO candidates.

While 71% of internal candidates know they are in the formal talent development pool, only 50% of these executives are in regular contact (typically yearly or bi-yearly) with the Board. This communications gap could have a negative impact on executive retention as qualified executives may choose to leave the firm without understanding their potential career path.

Only 50% of companies provide on-boarding or transition support for new CEOs. This finding magnifies the odds of organizational instability as even designated heirs may struggle without support systems. Ironically, shareholders might not be too concerned about succession risk if there were formal mechanisms to on-board new CEOs.

What can Boards do now to reduce the risk of hasty or unplanned CEO exits?

  1. Direct more attention and resources in the areas of succession planning and leadership development.
  2. Immediately review and ‘stress test’ existing succession plans against current environmental, personnel and business challenges.
  3. Where no formal plan is in existence, develop a practical succession program that fits the operational and organizational realities of the enterprise.
  4. Pay attention to the supporting leadership of the firm, including having regular exposure to a short-list of viable candidates.

 For more information on our services and work, please visit the Quanta Consulting Inc. web site.