Archive for the ‘Apple’ Tag

How great design can set you apart from competitors

If I could rank all of Steve Jobs’s business lessons, the importance of design in supporting business success would top my list.

Don’t take my word for it, though. Many global market leaders, and not just in fashion, electronics or luxury brands, drive growth by continuously enhancing product design. However, companies without a design heritage or capability can also use this strategy to improve revenue and brand image.

In a simplified process, designers working in collaboration with product managers and engineers take creative ideas and marry them with a customer’s requirements and the company’s goals. The integration of this effort hopefully leads to the creation of an aesthetically pleasing, functional and profitable product. Design is the sum total of the properties of a product or service made up of the form (i.e., the aesthetics around look, feel, sounds etc.) and the function (i.e., the practical benefits delivered). Good design can help a company create or dominate a category (think iPhone); poor design can kill a brand (remember the Edsel).

Design isn’t just the purview of high-end, iconic consumer brands such as Apple, Louis Vuitton, Nike, and Bang & Olufsen. Some B2B manufacturers such as IBM (laptops), Herman Miller (office chairs) and Olivetti (calculators) have used product design leaders to dominate their categories.

Then there’s successful and well-designed brands including IKEA, Samsung and Canada’s Umbria, which have proven neither price nor a Paris, New York or Milan address are required for using design competencies as a key differentiator.

Nor do you need a large investment or a creative studio to compete on design. Take, for example, the experience of one of my clients — a manufacturer of high performance automation systems. The company, challenged to build market share without resorting to price discounting, tweaked its product designs and saw an immediate boost to revenue and brand image. Research showed buyers perceived little difference between products (not unexpected since the systems looked remarkably similar) despite the fact that system performance and warranties varied significantly. Not surprisingly, pricing was their key purchase driver. To stand out, the company had to leverage other attributes.

Management agreed to run an experiment: redesign its product demo to make it visually appealing and high end, then gauge its success through prospect and client feedback. This involved some simple design changes — repainting certain components, enclosing messy cable assemblies and enhancing the documentation and packaging. The response from the sales team and prospects was overwhelming. Sales closing rates and perceived product value jumped. Based on these results, the CEO decided to redesign the entire lineup.

Leveraging design is not for the impatient, undisciplined or risk adverse. World-class firms build internal competencies and ensure they become part of their cultural DNA.

Three best practices to achieve this are:

Learn Acquire a deep and multifaceted understanding of your customers’ needs (including sub-conscious drivers of their behaviour), as well as an understanding of emerging trends, such as mobile computing. Be mindful of Sony founder Akio Morita’s observation that consumers often fail to see the appeal of a breakthrough product on first hearing about it (the Walkman in this case). Keep the creative juices flowing by being plugged in to what is happening in complementary industries and related fields such as technology, nature, entertainment and fashion.

Build Assemble the right ingredients — talent, tools and processes — then give them the freedom to follow a vision consistent with the company’s goals. Collaboration is essential; designers should spend much of their time working directly with the product development and operational groups as well as external partners. Employing the right knowledge management systems and metrics will help ensure design excellence is institutionalized, cultivated and effectively managed long term.

Persevere Making these changes stick requires strong leadership, the pull of motivational values and goals and perseverance, not to mention a re-balancing of priorities. Internal alignment won’t always be easy especially when you are asking engineers and production managers to collaborate with designers. Finally, you need to be realistic. Not every new design, no matter how elegant, will be a hit with customers.

Mitchell Osak is managing director, strategic advisory services at Grant Thornton LLP. He can be reached at Mitchell.Osak@ca.gt.com Follow him at Twitter.com/MitchellOsak

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The Internet of Things is here

We are entering the age of the “Internet of Things,” where sensors, computers and devices are connected in a self-managing ecosystem. At home, this could mean your alarm clock communicating with your coffee maker or your thermostat communicating with your window blinds. In business, this could mean your barcode scanners communicating with your suppliers or your assembly lines communicating with to your repairmen.

In other words, the Internet of Things automates an entire activity, such as building management, medical diagnostics, logistics or manufacturing.

For example, Apple has developed an Internet of Things ecosystem that enables various devices to communicate with each other with the express goal of one day “owning the living room.” Google is also aiming to enter the space by developing driverless cars and increasingly sophisticated remote home monitoring systems.

Some of the technological drivers behind The Internet of Things include: the rise of affordable, high-performance computing, the availability of inexpensive and accurate sensors, widespread access to high-speed wifi, the emergence of sophisticated algorithms and the ability to tie everything together through software interfaces.

The Internet of Things affords tremendous opportunities for increasing productivity, inventing new services and freeing up human capital to re-focus efforts on strategic rather than menial initiatives. Firms that are first movers in the space and that are able to develop the right business models will not only resolve big customer problems and cut costs but also recast the markets in which they operate.

In short: The Internet of Things is coming to every market that has been — or can be — digitized.

Case Study: Sahara Force India Formula One

Competing in the Formula One circuit is one of the most challenging and technologically advanced undertakings in the world. Increasingly, advantage goes to the team that can better leverage insight drawn from data generated in practice and during races to execute real-time enhancements to the car and provide critical information to the driver.

That’s why Sahara Force India partnered with Univa, a cloud-technology vendor, to create an integrated, closed-loop platform of sensor feedback, advanced data collection and analysis and on-the-fly hardware and software optimization.

“Sahara Force India is second-to-none in pushing boundaries to achieve speed, innovation and capability,” says Gary Tyreman, chief executive of Univa. “Leveraging the Internet of Things enables SFI to reduce development engineering time and money, and take in-race performance to levels which once were considered impossible.”

Here’s how it works: The Sahara Force India analytics team monitors and models car performance in race conditions, generating more than one terabyte of data over the course of a typical race. Trackside engineers and the driver then use insight derived from this influx of information to adjust things such as brake sensitivity and suspension, thereby improving car performance and informing seasonal development plans.

This raises an important point. The Internet of Things requires more than an investment in connectivity-enabled hardware and software. It also requires developing the human knowhow to manage, draw insight from and optimize the system based on the data that’s being captured.

How you can benefit from the Internet of Things

For many firms, the Internet of Things poses a significant threat due to its disruptive nature. For others, it stands as a significant opportunity to outflank the competition. But regardless of how each firm reacts to the rise of the Internet of Things, the fact remains: every company will be affected. This is because the need to serve customers better, faster, with greater ease and at a lower cost will invariably spur Internet of Things investments and strategies.

With that in mind, here are five things you should consider before implementing an Internet of Things strategy:

  1. List the current and emerging needs of customers, suppliers and distributors that your firm is not currently equipped to provide.
  2. Identify how an Internet of Things offering might address those issues and generate value within your enterprise and market. For example, you may want to improve your understanding of customer behaviour in order to improve service.
  3. Think more broadly about an Internet of Things offering than bottom line impact. How could it position your firm for future competitiveness?
  4. Consider your potential Internet of Things offering in terms of its key components: software, hardware and people. Can you leverage existing resources to cut costs?
  5. Analyze how your organization would need to be restructured in order to deliver a successful Internet of Things offering.

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

Internet of Things offering than bottom line impact. How could it position your firm for future competitiveness?

Consider your potential Internet of Things offering in terms of its key components: software, hardware and people. Can you leverage existing resources to cut costs?
Analyze how your organization would need to be restructured in order to deliver a successful Internet of Things offering.

Create categories and profits

Many CEOs grapple with a fundamental problem:  how do you profitably build revenues in low growth, hyper-competitive markets?  Grabbing business from a competitor is a difficult and expensive proposition.  Raising your prices — unless delicately handled — can be risky.  Driving incremental product innovation is a common strategy but one with low odds of success when the value-add is minor and the product remains comparatively undifferentiated.  There is a better approach to reigniting growth:  create your own category.

Pursuing incremental innovation is a tough road to travel.  Various estimates put the success rate of each new product or upgrade at only 10%-20%, resulting in wasted investment, unhappy customers and damaged careers.  However, there is a superior alternative for exploiting innovation.  It is called Category Making (CM).  This proven innovation approach combines cutting-edge product and business model innovation to create an entirely new offering, which by itself establishes a new category. There have been many successful examples of CM including ultra-low-cost, portable ultrasound machines for the Chinese market (GE), Minivans (Chrysler), Xbox Live Gaming system (Microsoft), Greek-style yogurt (Chobani) and iTunes/iPad (Apple).

According to research published in the Harvard Business Review, category makers generate much higher financial returns than incremental innovators.  Specifically, 13 ofFortune’s 100 fastest-growing U.S. companies between 2009 and 2011 were considered category creators.  They alone accounted for 53% of incremental revenue growth and 74% of incremental market capitalization growth of the top 100 over those three years.

Category creators do many things right to produce their industry-leading returns.  First and foremost, they appeal to consumers by:

  • Providing a unique offering that delivers compelling packaging, convenience, functionality or experiential benefits.  Xbox, for example, enables friends to play each other over the Internet.
  • Creating a new pricing model that is attractive to consumers.  For example, iTunes allows consumers to buy only what they want (i.e. individual songs) at a low price.
  • Re-engineering how a product is delivered and distributed.  Consider how Netflix revolutionizes the delivery of movies by leveraging internet-based, home delivery.

Secrets of their success

As a go-to-market strategy, pursuing CM innovation makes a lot of sense for companies:

Less competition

Most incremental innovations launch into existing categories — and right into the teeth of competition.  Category makers seek to outflank competition by introducing a new product into new market space.  This enables the innovator to secure ‘first mover advantage,’ thereby rapidly attracting customers while establishing barriers of entry around distribution, brand image and business partnerships.

Differentiated value

Incremental innovation often comes up short because it does not add enough extra value (or incentives) for consumers who are typically reluctant or unwilling to change behaviour.  On the other hand, category makers rely on a novel customer offering and value proposition. These products can more easily get the market’s attention and deliver compelling benefits previously unavailable.

Better use of scare capital & time

Often, the scope of innovation is dialed back in order to minimize capital outlays, limit market risk or because of managers’ risk aversion.   This  “penny wise and pound foolish” approach can hamper the initiative, reducing its chances of success. Category makers see risk but cope with it differently.  They focus on fewer but bigger ideas, and make sure they are properly supported by the organization’s culture and systems.  Raising the internal stakes ensures adequate investment, diligence and management attention.

Making it work

Becoming a CM requires firms to alter their visions, change the way they view risk, and allocate sufficient resources and capital.   Not surprisingly, they will look at innovation in a comprehensive fashion.  For example, category creators:

  1. Use financial, distributional or technological constraints as a catalyst for breakthrough thinking (GE)
  2. Investigate offerings that exist at the intersection of different but complementary technologies and business models  (Apple’s iPad).
  3. Look beyond existing consumer requirements to explore unmet or emerging needs, future trends and adjacent segments (Chobani, Chrysler, P&G).
  4. Seek out the best delivery and distribution model, either by building in-house, purchasing another company or partnering with a complementary firm.  It is not uncommon for organizations to leverage all three (Microsoft)
  5. Think creatively around how they generate profitable revenues without alienating consumers (Apple iTunes)

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

Strategy or execution?

I recently attended a corporate town hall. As part of the Q&A, the CEO stood up and said, “Execution is about results, everything else is a luxury we can not afford at this time.”  The sub-text of his statement was that strategy is about thinking (i.e. inaction, indecision) and execution is about getting things done (i.e. something more important).  This CEO is not alone.  Under considerable pressure to hit aggressive financial targets while minimizing risk, most managers will batten down the hatches and focus on execution. Is this smart business?

Strategic banality

No, but it is understandable given the state of strategy development in many organizations.  Many firms have generic corporate and product strategies that are based on frothy and self-evident statements such as “Our strategy is to become the market leader” or “Our strategy is to maximize customer satisfaction.”  Not surprisingly, these strategies often do not produce the desired results; they are not differentiated, aligned with the enterprise’s core capabilities and well understood internally.  Deploying ineffectual “strategies” can be worse than having no strategy at all, as the process to create them depletes finite resources, uses up valuable time and often leads to employee cynicism. No wonder many results-driven leaders are jaded.

On the surface, the view that strategy is less important than execution is hard to refute. Virtually every manager would agree that you cannot achieve good results without having good execution; similarly, most would concur that having a good strategy alone is no surefire formula for success. But too many people jump to the incorrect conclusion that this makes execution more important than strategy.

Back to basics

Experienced leaders know that strategy is more than clichés. Rather, it is the series of strategic choices (based on thorough analysis and deliberation) organizations make on where to compete and how to win such that they maximize long-term competitiveness and shareholder value at minimal risk. Within this paradigm, execution is about producing results in the context of those decisions. The reality for most companies is that they can’t have great execution without superior strategy. Two well-known examples illustrate this.

Smart phones

It is a foregone conclusion that Apple bested RIM in the battle for smart phone supremacy. Clearly, a large part of Apple’s success traced to its outstanding execution.  However, Apple also made definitive and more coherent strategic decisions about where it would play and how it would compete. These included better choices about its target customers and how to reach them; its value proposition in terms of products and features; and the superior capabilities it needed to deliver that proposition to those customers. It was these superior strategic choices that delivered the profitability, brand loyalty and supply chain agility that enabled Apple to out-execute RIM.

Airlines

Another example can be found in the competitive U.S. airline industry.   Southwest Airlines has outperformed peers for decades primarily due to their more defensible and profitable corporate strategy. Southwest has a more defined target market (the point-to-point economy traveler), a more compelling value proposition (superior price, convenience, and experience), and a closer fit between the value proposition and the capabilities needed to deliver it (e.g., maintaining a simpler fleet, running a point-to-point operation). Of course, the company is a terrific operator in its own right.  But having a better strategy made it possible for Southwest to consistently out-execute its competitors. Unless other airlines improved their strategies, they will never be able to use execution to overcome Southwest’s inherent advantages.

The execution trap

Firms can fall easily into an execution mind-set – to their peril. Market leaders looking to protect their hard-won market share (initially based on a superior strategy) and fully exploit legacy assets will be biased towards execution to drive incremental improvement and minimize risk. Ignoring strategy, however, will leave leaders blind to disruptive products and technologies.  Followers, on the other hand, often succumb to a different kind of cognitive trap.  To grow, these firms will mistakenly look to out-execute the leaders by mimicking their strategies through the flawed use of benchmarking and best practice tools.  Yet, no matter how well followers execute they will still be unable to challenge the leaders who possess superior and proprietary capabilities, technologies and cultures.  Followers will usually be better off finding a more distinctive and compelling strategy.

Companies need a good strategy to have first-rate execution. Developing a winning strategy takes time, and requires systematic analytical thinking plus the courage to challenge prevailing assumptions around customer needs, technology etc.  The ability to execute with excellence depends on how well the strategy is aligned with stakeholders as well as how it fits with the culture and capabilities.  For firms in a rut, refining the strategy may hold the key to unlocking better execution and producing breakthrough results.

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

Best practice innovation? Google vs Apple

Companies looking to ignite their innovation engines have two admirable models to emulate: Google and Apple.  Both firms have used innovation to become wildly successful market leaders. Their cutting-edge innovation strategies infuse all facets of their business, from product functionality and operational practices to business model design. At the same time, Google and Apple epitomize two different approaches of fostering and implementing innovation. 

Google

Google’s vision is about using the power of internet technology to enable business, operational and product innovation.  Inspired by its own experience as a lean Silicon Valley start-up, Google’s model relies on bright and passionate minds, rapid experimentation and immediate market feedback to develop innovations. New products and features are quickly introduced online, refined and then re-launched.  At any one time, there could be dozens of innovation projects under way, many of which could be disruptive in nature such as its self-driving car.

Unwilling to rest on its laurels, the company’s mandate is to continuously improve its search, advertising marketplace, e-mail and other services, based on how people use its offerings.  Google’s approach could best be described as bottom-up: customers become partners in product design and operational enhancements through their immediate testing and feedback of new innovations.

The key components of this strategy are employee experimentation, data-driven decision-making, online testing and networked communications. Powerful web tools bring the market inside the firm, enabling crowd-sourced collaboration as well as the rapid prototyping of product ideas.  Furthermore, many employees must commit a certain amount of time to germinating new ideas and creative problem-solving.

Google truly understand Internet economics – rapid software testing, powerful network effects and low cost product distribution – so it can expend relatively modest amounts of time, money and risk to launch new projects. This innovation model is ideal for the development of Web-based products as well as the creation of blue ocean markets like Internet software, online commerce and mobile applications.   

Apple

Apple pursues a very different innovation strategy.  Though networked communications and marketplace experiments add useful information, breakthrough ideas and the fortitude to sustain them come from passionate individuals, not committees or thousands of beta testers. As compared to Google, Apple’s innovation model is more edited, intuitive and top-down.  “There is nothing democratic about innovation,” says Paul Saffo, a veteran technology forecaster  in Silicon Valley. “It is always an elite activity, whether by a recognized or unrecognized elite.” The customer plays a minor role in the early stages of innovation. When asked what market research went into the company’s elegant product designs, Steve Jobs had a standard answer: none. “It’s not the consumers’ job to know what they want.” 

Apple’s more directed approach is also a function of the business that it’s in. Apple’s physical world is far different from Google’s realm of Internet software, where writing a few lines of new code can change a product instantly. Apple must consider a multi-year technology and supply chain roadmap for its products, with new models expected regularly from its zealous users.   Furthermore, the careful melding of hardware with software – a vital differentiator for Apple’s products – is a challenge with multidisciplinary systems design that must be orchestrated by a firm, guiding hand. 

Much of Apple’s impetus for innovation comes from the legacy of Steve Jobs as well as the senior leadership he recruited.  Their job is to harvest a variety of Apple’s information-gathering networks for ideas and inspiration.  As such, top managers need be excellent synthesizers of information ranging from popular culture to semiconductor design.

On average, Apple looks to innovation to deliver product and operational home runs.  The Company tends to put considerable resources and thinking behind a few big ideas and then implement them with excellence and fanfare.  Other vital functions such as product supply, marketing and customer service play a critical role in ensuring new innovations are fully exploited.

Which approach works best?

It depends on how you measure success and shareholder value.  The better question may be:  is there one best approach to innovation?  My experience advising firms with their innovation strategy suggests that combining the best and most practical aspects of each approach will yield the best results. According to Saffo, fostering innovation requires “an odd blend of certainty and intellectual rigour and openness to new information and new ways of thinking” In other words, it should be a blend of top-down guidance and bottom-up discovery mixed with a dash of open innovation tactics.

Open innovation sesame

Both organizations have not been shy leveraging external sources of innovation.  Apple discovered its point-and-click mouse and graphical on-screen icons (which later became the standard for the personal computer industry) in 1979 at Xerox.  In 2010, Apple purchased Siri, a small Silicon Valley start-up, for its talking iPhone question-answering application.  Siri was originally a program funded by the Pentagon. In 2009, Google launched its Google Ventures program, a comprehensive open innovation platform.  Google Ventures includes a start-up university and innovation lab – places where entrepreneurs can develop their products, collaborate and tap into Google employees.

Though Apple and Google may pursue very different paths to innovation, they do share many innovation-enabling attributes such as a nurturing culture and management system.  Moreover, the gap between their two models may be shrinking somewhat. Recently, Google moved toward a top-down approach by culling a diverse collection of more than two dozen projects. Steve Jobs’ replacement, operational expert Tim Cook, will almost by default be more of a bottom-up leader than his predecessor. Ultimately, both models may end up converging.

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

When business opposites attract

In business as in personal relationships, opposites do attract. Companies possessing different markets, capabilities, technologies and products (MCTP), which on the surface bear little resemblance, can share some “thematic” similarities (i.e. synergies) which can open up intriguing business opportunities.  These opportunities could range from leapfrogging into new markets and preempting competitive threats to leveraging complementary product technology or augmenting internal capabilities.   Very often, thematic similarities are missed by industry experts who view MCTP through traditional analytical frameworks or by the barriers imposed by management systems. To outflank competition, managers would be wise to recalibrate their product and strategic planning methods to include thematic analysis. 

In a recent edition of the MIT Sloan Management Review, Professors Michael Gilbert and Martin Hoegl outlined the importance of a dissimilarity-based planning framework.   According to the authors, most managers implicitly use a conventional taxonomic paradigm to understand their competitive position.  A taxonomic way of thinking looks at the degree by which a company, product or technology is similar (i.e. complementary, congruent or synergistic) based on how many features or characteristics they share in common. Taxonomic similarity underpins many popular management classifications including the Standard Industry Classification (SIC) codes – which defines industry boundaries – and the International Patent Classification system – which categorizes different types of patents.

Many firms understand that they may be overlooking opportunities and threats by only using a taxonomic style of business analysis.  With the help of advanced innovation techniques and cognitive psychology, managers now have a new approach – thematic similarity – to uncover strategic opportunities. Thematic similarity is about how two disparate characteristics functionally interact within the same event to create synergistic value. 

Thematic similarity looks beyond surface taxonomy similarity of with how things do interact to how things could interact. Thematically similar companies, products and technologies tend to be taxonomically dissimilar. For example, GPS technology and automobiles perform different roles but are thematically congruent within the driving experience.   Done properly, thematic analysis can be a powerful tool for addressing customer needs, improving operational performance and enhancing competitive position.     

Understanding MTCP at the thematic level is not always easy.  Most strategists are not trained or encouraged to think thematically.  Compelling opportunities are often hidden and difficult to weave together.  As a result, finding and exploiting thematic opportunities can often take some time. For example, it took smart phone manufacturers (Apple’s iPhone to be exact) 6 years to integrate 2 location-focused technologies, GPS and digital cameras, into their products.

There have been many examples of winning dissimilarity strategies,  two of which include: 

Intel purchases McAfee

Most industry pundits were baffled by chip giant Intel’s 2010 $7.7B acquisition of McAfee, a leader in anti-virus software.  Both firms compete in two dissimilar markets with two different strategies etc. While being taxonomically dissimilar, these firm’s MTCP enjoyed a high level of thematic similarity.  Intel claims that acquiring McAfee will dramatically enhance its presence in the mobile wireless space, a rapidly growing market of internet-connected devices that increasingly is being driven by security concerns and requirements.

Launch of Google Maps for Mobile

At first glance, Google Voice Search and GPS technologies have little in common from a taxonomic perspective.  However, in the context of cell phone usage both these tools provide significant value for someone looking for a Starbucks or checking movie listings in their hometown.  Google understood this thematic similarity and launched Google Maps forMobile in 2008.  This product has enjoyed strong user reviews and has helped boost advertising revenues.

How do you enable thematic thinking in your organization?

1.  Follow your mission and vision

A powerful mission and vision can inspire thematic thinking. If you don’t have one, develop and communicate an inspiring yet pithy credo that focuses on the customer yet places no artificial boundaries around how you serve them.

2.  Unleash the staff

Employees need the time and tools to think thematically.  Highly innovative firms like Google and 3M stipulate that each employee spend a designated amount of their time on blue-sky strategic thinking and problem-solving.   To unlock thematic thinking, companies can leverage proven innovation tools like simulations, brainstorming and thematic-driven training

3.  Bring in new blood

New perspectives can challenge analytical dogma and catalyze thematic analysis.  Institute recruiting policies that actively search outside the industry and foster employee diversity.  Internally, rotate people through different departments – especially sales, service and product development – so they are able to see the business through multiple lenses.

4.  Remove organization barriers

In many cases, management systems, structures and processes reinforce traditional thought patterns and habits. Organizations should look to align thematic approaches with a firm’s incentives, processes, and strategic planning methodologies.  Measures could involve including R&D experts in strategy development, involving external consultants in planning exercises or bringing customers directly into the product development process.

A thematic-based planning framework can deliver breakthrough business strategy and product innovation.  This approach, however, will have important implications on how companies deliver on customer needs, design their internal systems, leverage technology, and pursue M&A deals.  The first phase begins with the leadership team setting ambitious goals, rethinking their business and understanding what their customers truly want.

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

Supply chain strategy gone wild

When it comes to best practice supply chain strategy, conventional wisdom is shifting.  Historically, companies – particularly automotive, electronics and telecom original equipment manufacturers (OEMs) – have outsourced most of their non-core operations.  Some firms outsource so much of their operations that they do almost nothing themselves except for design and quality control. This approach, however, has not delivered the hoped for benefits. Many supply chain leaders are now rethinking how they craft and manage outsourcing relationships and whether these continue to be aligned with their core business strategy. 

Inspired by the Japanese, virtually every North American OEM aggressively shifted to an outsourced and tiered supply chain so that they could reduce costs, minimize capital and focus on their core competencies.   As part of this strategy, managers reduced the number of suppliers a firm directly deals with; gave these tier 1 suppliers the mandate to design, produce and deliver major components and; off-loaded the responsibility of managing lower tier vendors to their tier 1 suppliers.

These blanket outsourcing deals, according to supply chain experts Thomas Choi and Tom Linton, are problematic.  Costs rarely fall significantly, and will often rise.  Moreover, firms may also experience declining competitiveness due to reduced access to emerging innovations and vital market information.  How does this happen? 

Less control over bill of material costs

When the OEM delegate’s control over a product’s BOM, the total delivered cost of the product (including items like inventory management and logistics) become opaque and difficult to manage.  This lack of visibility makes it difficult for the OEM to leverage further volume discounts and to switch suppliers to get better pricing.

Reduced OEM control can also lead to decreased supplier compliance.  When working with an automotive manufacturer, we discovered that tier 1 suppliers often veered from the approved vendor list (of the companies from which top-tier suppliers are supposed to buy parts and materials) when it served their interests.  This was most common with standardized materials and where they could keep most if not all of the cost savings.  Better management of tier 1 suppliers is possible, but it is a challenging and potentially confrontational exercise.

Restricted access to market and technology information

Paying no attention to lower-tier suppliers who serve multiple industries shut the OEM out of potentially important technology and market developments. For example, without close supplier relationships at the raw material level, companies may miss opportunities to adjust orders and lock in favorable prices as well as gain access to the newest technologies. Tight collaboration with lower tier suppliers has enabled companies like Apple and LG Electronics to incorporate the newest chip designs into their products before their rivals do, and to secure these technologies at advantageous prices.

Tier 1 suppliers should be the conduit of market information and innovation.  However, they often don’t have the inclination or time to monitor the technology landscape below them. Furthermore, tier 1 suppliers may pursue a different strategic agenda than the OEM.  For example, tier 1 suppliers could knowingly withhold market information in order to improve their bargaining position with their customers or to use the information to sell to other business prospects.

There are ways to get more out of your supply chain while reducing risk.  For example:

  1. Retain purchasing and technical control over items that have the most significant impact on the total cost of goods sold.  For many products such as a mobile phone, TV or a PC, a few inputs could make up more than 50% of its total BOM cost. Just a 1% reduction in the price of such items translates into considerable savings.
  2. Get more visibility into your supplier networks. Innovative firms like Apple play close attention to what is going on in their entire supply chain’s R&D pipeline.  Five years ago, Apple understood that HMI (human machine interface) technologies would play a strategic role in future products, so it maintained close relationships with companies in that space. The move paid off.  Apple now has excellent visibility into a sub-system that accounts for more than 40% of the iPad 2’s total cost and is crucial to Apple’s goal of delivering meaningful product differentiation.
  3. Pay close attention to lower tier vendors that serve multiple industries.  Some suppliers, particularly in the technology, services and commodity sectors, provide inputs to multiple industries.  These firms can provide early warning signals around technology, pricing and regulatory changes. To lock-in preferential supply arrangements, our automotive client secured contracts with strategic lower-tier vendors.  The OEM then stipulated that their tier 1 suppliers use those vendors exclusively and execute the strict terms on their behalf.

To drive supply chain performance and reduce risk, firms must optimize their outsourcing partnerships.  Our experience shows that many tier 1 suppliers and their vendors are amenable to closer collaboration if given the chance and presented with tangible business benefits. Where outsourcing ends up being too problematic or inconsistent with long term corporate goals, CEOs may want to consider vertical integration as a more appropriate business strategy.  Many companies have, with impressive results.

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

Breakthrough with business model innovation

Many companies find themselves in situations where following the ‘same old strategy’ has little chance of reigniting growth.  Realistic CEOs will quickly come to the realization that when the going gets really tough, the tough innovate their business model.  Business model innovation is a high reward/high risk move that is normally preceded by a financial crisis, the emergence of a compelling market opportunity, or a fatal decline in competitive position. 

Some of the World’s most successful companies – IBM, Amazon, Apple and Google etc – have gained a sustainable competitive advantage and industry-leading shareholder returns by moving boldly away from their traditional business models.  To successfully navigate a shift, leadership needs a true picture of their current prospects, a vision for the future and the perseverance and courage to shepherd major change.

BMI is a fancy term to describe company-wide innovation around i) the value delivered to customers and ii) the operating model to deliver that value.  As compared to incremental product and operational innovation, BMI is a more encompassing and complex form of innovation.  It impacts the core beliefs around the business and market.  For example:    

  1. Do the targeted customer segments have unmet or emerging needs?
  2. What is the ideal product/service mix to satisfy these needs and maximize revenue?
  3. What is the most profitable operational model to deliver this value? 

Disruption is coming

Many factors can contribute to an environment where a company would seriously consider revamping its business model.  Markets can become commoditized, resulting in zero profitability for most of its players; a firm’s cost position can become untenable; a technological breakthrough can provide opportunities to serve users in a completely new and powerful fashion or;  a new regulation creates the potential for the industry structure to change.  Bold and visionary leaders who are prepared to make major moves can reap considerable benefits.

Superior returns are attainable

Properly designed and executed, BMI is a proven business-building strategy.  Research from the consultancy BCG has shown that total shareholder returns versus peers for BMI was five times higher than product or process innovation (8.5% vs 1.7%) over a 3 year period and over 55% higher (2.7% vs 1.7%) over a 10 year period. In many cases, BMI practitioners have leapfrogged competition and carved out new market space.   

Your move

Companies often pursue BMI for defensive reasons.  In many cases, however, leaders may choose this strategy in order to change the rules of the game.   BCG studied the implementation of BMI in a variety of industries.  Below are 3 success stories:

1.  Beating Back Competition

In an effort to compete with a successful low-cost airline, Virgin Blue, Qantas launched a new, ultra low cost airline, Jetstar.   Structured as a separate division with a business model designed from the ground up, Jetstar was effective in blunting Virgin Blue’s share growth while providing consumers with a unique and customizable flying experience.   

2.  Reigniting growth

By 2001, Apple’s proprietary and closed approach to hardware and software development had relegated the company’s PCs to niche shares.  By leveraging its unique and compelling core capabilities and brand, Apple was able to create entirely new categories of consumer electronics and smartphones through the iPod and iPhone platforms.  As well, Apple used its proprietary advantages and outsider status to establish the de facto standard for fee-based music downloading, a model that had evaded the music industry for years.

3.  Extending the business model

Ikea discovered, through its experience launching stores in Russia, that the land value surrounding its new outlets would appreciate markedly following a store opening.  The company decided to capitalize on this happenstance by leveraging its brand and real estate competencies to develop adjacent malls.  Ikea’s new division, Mega Mall, now makes more profit on building and managing malls than it does through its retail division.

Making BMI work

Organizations considering BMI need to ensure they have the capability to design, plan and implement a major transformation.  The challenge of pulling this off must not be underestimated.  Experience is usually scarce as firms do not often retool their businesses.  Moreover, BMI is typically undertaken in times of internal stress, limited resources and competitive pressure. For company’s considering BMI, they would be well served  to use a proven approach to transformation.  Our firm deploys this simplified 4-step process:

Know thyself

  • How urgent is the need for change?
  • What are our strengths and weaknesses?
  • Are there any assets that can be extended beyond the core business? 

Uncover opportunities

  • What gaps exist between the current value proposition and delivery model, and industry trends, underserved customers needs/preferences and relative industry competitiveness?
  • What new offering, value proposition and operating model can address the gaps?
  • How do you generate high margin revenues?

Align

  • How do you reorder the value chain?
  • What resources – capital, talent, assets, information – are needed?
  • What is the impact on the organizational structure and culture?

Implement

  • How do you mobilize the organization to change?
  • How do you deal with barriers and risks such as customer retention?

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

Innovating with services

In this difficult economic climate, most executives are looking to improve competitiveness and profitability by becoming more innovative.  In most cases, their attention has been focused towards the product and operational areas of the business.  However, successful product and operational innovation may still not be a long term panacea.   Mega trends like rapid technology diffusion, globalization and falling industry barriers to entry will continue to drive product commoditization and shrinking margins. 

One way to outflank competition, meet increasing customer demands and improve revenues is to target innovation efforts against the services side of the business.  In essence, product suppliers would reinvent themselves as service companies, offering complementary services, support and tools that satisfy a wider range of customer needs and differentiate their firms.  Granted this is not a new idea.  Whats really interesting is how the approach is being implemented.  

One powerful strategy borrowed from cutting-edge R&D firms is to move to an open services model, whereby a company offers complementary services, delivered internally or via external providers, through an open and collaborative framework.  In particular, outside firms are encouraged to proffer their services through access to product technology, integration into the product firm’s operational infrastructure and through joint marketing and channel management programs.  Many industry leaders have successfully operationalized this model including Apple, Xerox, IBM, 3M and Amazon.

There is now a critical mass of best practices around making an innovation in services strategy work.   Open  innovation pioneer, Henry Chesbrough, recently summarized some of these in an interview in strategy+business magazine.

Focus on platforms

A powerful way of catalyzing innovation in services is by leveraging a powerful yet open platform. A platform is a foundational product (or products) which can support an ecosystem of complementary services, support and process methodologies.   One of the most successful examples of a platform is the iPhone.  The iPhone owes much of its success to the services that accompany the product, whether these are delivered internally (e.g., iTunes) or externally through thousands of externally developed applications, crowdsourced technical support and functional add-ons. 

Be open…to a point

Many successful platforms such as GE (infrastructure financing), General  Motors (OnStar information services) and Xerox (Managed Print Solutions) mix internal and external services, products and partners within one ecosystem.  A hybrid approach is the ideal strategy for most firms as it leads to economies of specialization i.e. leveraging the optimal mix of services, expertise and resources. Despite apparent successes, we have seen some companies struggle with implementing and managing this strategy.  For example, organizations need to be collaborative by nature and must be willing to expose  their product roadmap, delivery model and their brand.

Understand the full gamut of needs

In our experience, launching innovative services requires that firms possess a deep understanding of customer purchase habits, supply chain dynamics as well as their core competencies.  Amazon is a good example of a firm that uses consumer data to catalyze innovation in services.  The company has leveraged a deep understanding of consumer  needs across the full shopping, purchase and delivery spectrum to deploy innovative services like customer reviews, 3rd party book selling and referral tools.  These combine to enrich the shopping experience, differentiate the offering and generate incremental revenue. 

Every industry can be “opened”

Many “big iron” manufacturers, not traditionally viewed as service businesses, can benefit from a service innovation strategy.  Case in point, the Taiwan Semiconductor Manufacturing Company.  In the mid 1980s, TSMC began to decouple the design of chips from the manufacturing of chips creating an entirely new services business model called a foundry. TSMC’s foundry leverages  an open services model.  The company can manufacture chip designs from fab-less chip designers, provide design tools, testing and process technologies or co-create chips with partners. As a result of this innovation model, TSMC is now one of the World’s leading semiconductor firms.

Fast forward 3-5 years, it is likely most leading product companies – save the lowest cost, highest volume players – will have a robust open services offering.  Their challenge will remain making it all work.

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

Great innovators: Nature vs Nurture?

These days virtually every company looks to gain competitive advantage by launching innovative products and programs.  In many companies, innovation is more about people than it is about sub-optimal capital, structure or strategy. With this reality, how can managers spark more innovative thinking within their existing human capital pool?

A recent issue of Working Knowledge from the Harvard Business School published an excerpt from an interesting new book. Written by authors Clayton Christenson (of disruptive innovation fame), Jeff Dyer and Hal Gergersen, The Innovator’s DNA argues that innovation skills can be taught, cultivated and embedded into a company’s DNA. 

Conventional wisdom says that innovators are typically right brain individuals with a strong independent streak and flair for out of the box thinking.  For a firm to become more innovative, they need to attract as many of these unique people as possible.  Unfortunately for this line of thinking, a significant amount of academic and medical research on twins confirms that the majority of creativity skills are not simply genetic traits endowed at birth.  Rather, they can be developed and fostered. The research shows that 60-75% of our innovation skills come through learning – first from understanding the skill, then practicing it, and finally from gaining confidence in our creativity capacity.

If innovators are made and not born, then which attributes are important?  The authors canvassed approximately 5,000 executives to understand the different skills that separate innovators from the average executive.  Their research identified 5 major skill sets (4 behavioural, one cognitive) that can be taught and nourished:

Observing

Innovators spend a lot of time studying the market and technology ecosystem with a focus on customers, products, and competitors.  The observations gleaned in one place often serve as new ideas or ways of doing things in other places.  As an example, many of Steve Job’s ideas for Apple’s innovative Macintosh computer and mouse came from Xerox PARC’s research facility.

Associating

Innovative people are often able to identify, synthesize and recombine disparate ideas or technologies – a cognitive process known as Associating – into something new.  While some see this as a welcome confluence of events, innovative people have a knack of connecting seemingly unrelated factors into new concepts or problem solving.  On a corporate level, well-known innovators such as P&G and 3M incorporate associational strategies into their innovation programs. Our firm helps companies develop Associating skills through specialized facilitation and creativity-enhancing learning.

Questioning

Innovators are passionate and curious people who spend more time than the average person asking and valuing questions.  These questions seek to bring clarity and solve difficult problems by challenging conventional wisdom or key assumptions.   Out of the answers come breakthrough insights, ideas and results. Albert Einstein may be the most famous example of this kind of innovator.

Experimenting

Innovative people thrive on new experiences, experimentation and change.  Very often, their restless nature translates into a impetus for launching pilot programs to test hypotheses and new products.  One of the most prolific inventors of all time, Thomas Edison was a relentless tinkerer who also headed an industrial laboratory and major corporation (Edison General Electric, later GE).

Networking

Innovators understand the power of the network in identifying and catalyzing new thinking and action.  These people expend a lot of effort collaborating with others on existing projects as well as seeking to connect with new people and organizations for inspiration, new ideas and resources. As an example, Steve Jobs was coaxed by a friend to check out a small and eccentric computer graphics company named Industrial Light & Magic.  He ended up buying the firm for $10M and turned it into Pixar, which he eventually took public for $1B.

Inculcating these five talents in whole or in part in people can lead to significant increases in individual and organizational innovation. Akin to a person’s DNA, these discovery skills are necessary building-blocks for firm’s to ramp up innovation capabilities and outcomes.

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