Feb 222016
 

To emphasize their bold, overarching, and long-term intentions, nations and armies have a long tradition of packaging them as “grand strategy.” This is stirring stuff, so management thinkers were bound to follow suit. In an early definition of corporate strategy, Harvard Business School professor Kenneth Andrews said this:

Corporate strategy is the pattern of decisions in a company that determines and reveals its objectives, purposes, or goals, produces the principal policies and plans for achieving those goals, and defines the range of businesses the company is to pursue, the kind of economic and human organization it is or intends to be, and the nature of the economic or noneconomic contribution it intends to make to its shareholders, employees, customers, and communities.

Business strategy, he said—or what would now be termed competitive strategy—was “less comprehensive and defines the choice of product or service and market of individual businesses within the firm.”[i]

Andrews and his HBS cohort taught legions of managers to think of strategy as a high-level view of how a firm should go about its business. Their students happily accepted this, given the virtually universal belief at the time in top-down control. They were more than content to wallow in platitudes and vagueness while giving short shrift to activities and action. If they were ultimately responsible for tough decisions, the laborious analysis that underpinned them was for lesser mortals. Micro-management was a pejorative term, and being branded a micro-manager plainly marked you as not being a leader.

The “vision, mission, values” gang continues in this tradition, as sure as ever that lofty notions and fine intentions will bring the results they want admid the scrum of hypercompetition. But this ignores two costly disconnects between strategic intentions and results:

  • Messages are lost in translation between the C-suite and the front line. Strategists decide one thing, and people who’re supposed to make it happen choose to do something else. Or they follow instructions, but do it badly. Or they fail to adapt what they must do as circumstances change.

You have only to suffer through one or two strategy sessions where senior people argue about the precise wording in vision, mission, or values statements to understand just how hard it is to create shared meaning. “Excellent,” “the leader,” “world class,” and “integrity” mean different things to different people. Deciding whether to declare that shareholders rank above customers, or the other way around, can waste a ridiculous amount of time. Even worse are debates about whether to insert a comma in a sentence, or a full stop; or to call your employees “associates” or “colleagues”; or to include an instruction to ‘Have fun!”

When CEOs brief me ahead of a strategy project, they almost always tell me, “We need to revisit our vision and mission.” But often, they can’t remember what these say, and when I talk to their colleagues, it turns out that none of them do either. It’s the same in my business school classes, where 20 or 30 senior people from a range of large firms have no idea of what’s in their own statements. (And these are the very people who so diligently crafted that guff!)

This happens with values too. Companies inevitably use the same words—customer service, innovation, integrity, responsibility, accountability, delivery, excellence, professionalism….blather, blather, blather. But again, these mean different things to different people, and are forgotten before the ink dries.

Strategy documents and presentations don’t help: there’s usually too much in them, and their logic is hard to follow. And few people pay attention to them after they’re produced.

Mixed messages are a fact of organizational life. It’s normal for high-level strategy to be ignored, misinterpreted, or side-stepped at other levels—sometimes deliberately, and sometimes because nothing is clear. And managers themselves either cause or worsen both problems.

They overestimate their ability to make themselves understood, and underestimate how much ongoing time and effort it takes. They assume that saying something once is enough. And that what they say arrives in other people’s heads exactly the way they said it, and means exactly what they intended.  And they kid themselves that when they speak, they’re believed.

Communication is without question the biggest challenge in any company. Just because we all do it every day, is no reason to think it’s easy or that we’re good at it. More than anything else, it makes the difference between success and failure.

  • The future is highly unlikely to turn out as the masterminds upstairs assume it will. Despite their best efforts to stay in tune and in touch, they only become aware of many changes long after they’ve emerged—and certainly long after people anywhere near the action can sense them. By the time they snap into action, and get around to redesigning their strategy and issuing new orders, it’s too late. If, like so many, they stick to a one-, three-, or five-year planning cycle, there is no chance they can stay in sync with their context. A divide between what they do and what they should do is assured. And the gap keeps getting wider.

These disconnects are so normal and so evident, and their impact so serious, that you’d think there would be more alarm about them. But managers keep getting predictable surprises on both counts. Things seldom work out as they expect. Their scintillating schemes are constantly upset by human nature, the internal machinations of their organizations, and the unpredictability of the outside world. Good intentions turn out to be no match for harsh reality.

Most firms continue in this futile mode. But as it has become increasingly apparent that strategy is only as sound as the activities that underpin it, and that turning strategy into action is finally what counts and is always a challenge, smart managers have come to realize two things.

First, no amount of analyzing and scheming will on their own bring success. The only thing that will do that is being better at a selected set of activities than rivals are. Since deciding what not to do is every bit as important as deciding what to do, every component of a company’s business model must carefully chosen. They must all mesh with each other, and the effect of each must be amplified through meticulous execution. The whole must be greater than the sum of the parts.

And second, strategy is a learning process. Commitments must be made, but they’re for a future you can’t quite see. So the best you can do is face up to that risk and then learn and adjust as fast as possible.

The past three decades have thus seen a distinct shift in thinking about strategy—at least by some people. Whereas once it was considered to be an intellectual undertaking, all about decisions and quite separate from the messy business of doing actual work, now the line is blurred. Whereas once it was assumed that the future would be much like the past, and that strategy could and should be designed to unfold in a predictable way over multiple years, today even the shrewdest strategy can unravel in days or weeks. If ever there was merit in fussing about the difference between strategy and tactics or about the relative importance of strategy and operational excellence, that time is long gone. Such hoary debates slow things down just when they need to be speeded up.

Strategy is not a desk job. Strategic thinking guides action, but learning through action is the only way to keep strategy relevant and effective.

The famous Tom Peters battle cry to “Try lots of stuff” is just what many companies need to hear. “Ready, fire, aim” goes down a treat in management conferences, and Nike’s “Just Do It” has been filched by any number of managers keen to show their mojo. But just being busy won’t make any company competitive. Action without reason is likelier to bring costs and risks than positive results. Action that doesn’t lead to useful learning is wasteful.

Studies by McKinsey Global Institute have shown that in the same industry across countries there are “almost always dramatic differences in either labor productivity or total factor productivity.” These differences says Robert Solow, who has long served as academic advisor to MGI, were to be explained not by differences in technology or investment, but rather by “organizational differences, to the way tasks were allocated within a firm or division—essentially to failures in management decisions.”[ii]

For strategy to be effective, it must be specific, not only about high-level aims, but also about the actions that will occupy low-level people. Anything less is just hot air. Fred Gluck, founder of McKinsey’s strategy practice, made a point of this in a 1979 paper that he drafted for the consulting firm’s staff, in which he advised that strategic planning should result in an “integrated set of actions designed to create a sustainable advantage over competitors.”[iii]

  • According to UCLA professor Richard Rumelt, “Strategy is a way through a difficulty, an approach to overcoming an obstacle, a response to a challenge.” The cleverest strategies, “the ones we study down through the years, begin with very few strategic resources, obtaining their results through the adroit coordination of actions in time and across functions.”[iv]
  • Michael Porter writes, “The essence of strategy is choosing to perform activities differently than rivals do.”[v] The primary purpose of a strategy is “to inform each of the thousands of things that get done every day, and to ensure that those things are all aligned in the same direction.”[vi]
  • And Eric Van den Steen, a member of the HBS Strategy Unit, provides the best definition of strategy that I know of, saying it’s “the smallest set of choices and decisions sufficient to guide all other choices and decisions,”[vii]

All of these experts make it plain that strategy is not an end in itself, but rather a means to getting the right things done. This has led to another shift: in the way managers understand their roles and how best to drive performance.

Struggling to wring results from strategies that too often ape those of their competitors, they’ve relied increasingly on execution to differentiate themselves. This has led to a sharp rise in the number of books, articles, courses, and conferences on execution, many pointing to the need for intense, hands-on involvement in operational matters. So management by vague decree has given way to managing by getting down and dirty in the trenches with the troops. Micro-management is alive and well—though practiced under the cloak of empowerment, delegation, trust, and other fashionable notions.

The “loose-tight” approach identified by Peters and Waterman in In Search Of Excellence is vital.[viii] Managers have everything to gain from being more overt about it, and everything to lose by pretending that loose is good and tight is bad.

The dilemma, as with so much else, is how to strike the balance.

[i] Kenneth R. Andrews, The Concept of Corporate Strategy, Homewood, Illinois: Richard D. Irwin Inc., 1980

[ii] Martin Neil Baily and Frank Comes, “Prospects For Growth: An Interview With Robert Solow,” McKinsey Quarterly, September 2014

[iii] Fred Gluck, Michael G. Jacobides, and Dan Simpson, “Synthesis, Capabilities, And Overlooked Insights: Next Frontiers For Strategists,” McKinsey Quarterly, September 2014

[iv] Richard Rumelt, Good Strategy, Bad Strategy,” New York: Crown Business, 2011

[v] Michael E. Porter, “What Is Strategy?” Harvard Business Review, November-December 1996

[vi] Michael Porter, “CEO As Strategist,” Leadership Excellence, September 2005

[vii] Eric Van den Steen, “A Theory Of Explicitly Formulated Strategy,” Working Paper 12-102, Harvard Business School, May 2012

[viii] Thomas J. Peters and Robert H. Waterman, In Search Of Excellence, New York: Harper & Row, 1982

Tony Manning book cover 2015 IMG_0602

This is an excerpt from my book What’s Wrong With Management And How To Get It Right, Penguin Random House 2015

  •  22/02/2016
Feb 222016
 

Managing a firm of any size has never been easy. Now, managers have to produce consistent, sustainable results under awful pressure in a world that gets messier by the nanosecond. Their customers are informed, price-conscious, vociferous, and skittish. Their organizations and processes are increasingly complex. They function within a dense ecosystem of stakeholders with shifting—and often conflicting—agendas and growing clout. They’re ever more reliant on costly and unfamiliar technologies. Risk is all around. And with a growing premium on the imagination and spirit of human beings, and with the global “war for talent” growing fiercer, they must put more effort into people matters. Their employees’ lives are changing, so the new world of work must accommodate their personal needs while also enabling them to be more effective on the job.

This collision of factors keeps managers constantly unsettled. Their need for order, control, and predictability is at odds with the barrage of novel challenges they face. So they’re naturally eager to find the management tools and techniques that will save their skin.

And help is at hand—or so we’re led to believe. Scholars, consultants, executives, writers, and other members of the sprawling management ideas industry churn out a stream of theories, concepts, frameworks, and models, which are seductively packaged, confidently promoted, and eagerly snapped up.

Yet if truth be told, the experts who should be advancing management thought and enlightening harried managers are barely moving the needle. In fact, the best that can be said of many of their efforts is that they’re weighing down organizations beneath layers of activity, hog-tying them in growing complexity, and distracting them from what they should be doing.

For close to 30 years as a consultant, I’ve had a ringside seat from which to watch managers wrestling with demons—on the one hand, with the daily grind of their work and whatever the world throws at them, and on the other, with the “solutions” drummed up by the management ideas industry. I’ve also dug deep into the past 100 years or so of management ideas to find what’s endured, what has been most influential, and what is must-do vs. nice-to-do. And the overall picture is not encouraging.

In fact, given the importance of this matter, it’s downright ridiculous.

Consider these six worrying facts:

  1. Business is the engine of society, and will fund or otherwise facilitate most of the progress we need. So the future of humankind depends on managerial performance—and that performance overall is disappointing.
  2. Most companies do not achieve even average results, and certainly not with any consistency. Their life expectancy is falling. Their financial returns have flattened or declined. And since global economic growth is likely to be slower than in the past, and lead to increasingly vicious competition, better sales and profits will be increasingly hard to come by.
  3. Managers are overloaded with advice, much of which is clearly failing them. The use of just about any management tool is arbitrary, and as there are many ways to do things, there’s no evident downside to not using almost any popular tool.
  4. Hype about “reinventing management” has not translated into reality. Most changes in management practice over the past 100 years have come in response to social, technological, or other contextual shifts. Not only has a small set of basics—the critical core—endured, but most seemingly “new” ideas are actually just more of the same.
  5. Although yet-to-be-discovered management ideas may have some impact on business performance, no one knows what these might be or when to expect them. Meanwhile, failure to excel in known practices will ensure that firms do not exploit the opportunities that exist all around them, and that profits “keep falling through the cracks.”

Finally—and this is the one that should concern us the most:

  1. The most vocal critics of management scholars’ research methods, the relevance and practical value of their outputs, their inability to add much that’s new to management thinking, and the offerings and teaching methods of business schools are insiders, not outsiders. They include some of the world’s most respected management professors and a growing number of business school deans.

The good news is that we know exactly what it takes to compete and win. And there’s compelling evidence that the way to build your competitive advantage, capture and keep customers, and stay ahead in the profit game lies in what you may already know but just don’t focus on. That if you want to be a serious competitor today and tomorrow, less really is more and simpler is better.

As my research shows, and as I explain in my new book What’s Wrong With Management And How To Get It Right (Penguin 2015), there are eight critical strategy practices that apply to all companies everywhere:

  • Growth leadership—Effective leadership that’s committed to growth, and to achieving it by growing people.
  • Fast learning and adaptation—The ability to sense and make sense of change and act on it faster than competitors.
  • Focus, value, costs—Clarity about where and how to compete, and a relentless effort to drive value up and costs down for the “right” customer.
  • Business model innovation—Continual reinvention of the way value is created, captured, and shared.
  • Resource and capability development and leverage—Accessing, attracting, acquiring, and building the strengths needed to compete, and using them to maximum effect.
  • Stakeholder alignment and support—Persuading individuals and organizations with any interest in a firm to “vote” for it rather than against it.
  • Smart sequencing and pacing—Doing the right things in the right order and at the right time.
  • Disciplined execution—Having a deliberate and systematic way to turn intentions into action with sound outcomes.

As in other fields, each of the practices is a bundle of routine behaviors, concepts, tools, or techniques. If the practices are the what you must do, these are the how. There’s a rich array of them, and there will be even more in the future because this is where much study and experimenting occurs.

You might dismiss these practices, as one professor did, as mere “tickets to the game.” Or you might be tempted to write them off because “everybody knows that already.” But don’t be too hasty. Firms don’t fail because they choose not to use balanced scorecards or Porter’s five-forces framework, or because their managers aren’t fans of Six Sigma or blue ocean strategy. But we hear every day of firms that have failed because their inattention to one or more of the eight critical strategy practices.

Companies can’t do everything. It’s all too easy to throw sand in their gears. So they’re most likely to be successful if their managers get back to the principal drivers of business results—what they absolutely must obsess about, and why—and then apply them relentlessly and in the simplest, most practical way possible.

If the past is a guide, though, the management ideas industry will continue to slow them down and confuse them. Resources and effort will continue to be squandered in ways that don’t change what they do or how they do it—and certainly don’t improve their results. We’ll rail against management fads and fashions, or joke about them, yet continue to search for the next ‘silver bullet” that might bring us salvation.

Of course, saying this is an invitation to trouble. But those who disagree need to deal with a simple challenge:

Please name one thing managers must do that we did not know about maybe 50 years ago. Just one. If that proves impossible, perhaps we should just work with what we’ve got.

 

(Note: This blog first appeared as a Thinkers50 blog in July 2015)

  •  22/02/2016
Mar 112013
 

Strategy is the first and most important responsibility of business leaders. But although it’s a big deal in most companies of any size, it’s a major weakness in many of them and they get less from it than they think.

Research by McKinsey & Co. has shown executives to be largely dissatisfied with what strategy does for them. Many prominent academics who’ve spent lifetimes in the study of strategy-making are critical of how it happens and uncertain about its impact. Numerous studies report on the gap between companies’ intended strategies and their actual results. Many managers ask, “Does strategy matter?”

According to regular surveys of management tools by Bain & Company, another global management consultancy, strategic planning did not rank among the top 10 tools as recently as 1993. In 2000 and 2006, it was No. 1 in both usage and satisfaction—perhaps not surprisingly, as this was a period marked by the bursting of the tech bubble, extraordinary uncertainty and change, and hyper-competition.

But then in 2008 and 2010, strategic planning was displaced by, of all things, benchmarking. So at the height of the world’s worst financial crisis in 50 years, when sales, profits, and growth were all being hammered and competition in every sector was exploding, firms apparently thought it more important to watch each other than think about their future.

For all the attention strategy gets, there remains a lot of disagreement about what it is and how to make it. Neither have decades of academic research and theorizing, coupled with the real-world experience of any number of executives and consultants, added much to what we know about strategy or made managers more confident.

Will we see important advances anytime soon? Not likely. For some time—decades, in fact—the quest for new knowledge about strategy has yielded diminishing returns. So this critical subject, with innovation at its very core and so critical in driving innovation, will itself see little new thinking.

I expect a lot of people with an interest in strategy to take issue with this view. They’ll point to many past instances of similar predictions being overturned by advances in knowledge, by new technologies, and so on. But perhaps they should reflect on this challenge:

Name one major idea about strategy that we did not know about 10, 20, or even 50 years ago. Just one.

I’d be interested to hear the answer.

CONFUSION IN THE C-SUITE

There are numerous schools of thought about strategy, and a plethora of concepts, models, frameworks, checklists and other tools, all with their own champions and fans. But where is the “best practice”—a much-used management term—in this “body of knowledge”?

Answer: there isn’t one.

Most executives have attended management courses, read many books and articles on the subject and one way or another been involved with strategy for many years. Yet they lack a point of view about how to deal with strategy.

They’re somewhat familiar with the lingo, and may even be enthusiastic cheerleaders for this or that catchphrase. But question them, and it’s evident that they’re unsure about what various concepts mean and how to use them.

The result is that even close-knit management teams are divided about the best way “to do it.” They lack conviction about one point of view or another, and never commit to any process. So they keep flailing about and searching for a silver bullet that’ll deliver the results they want, and they chop and change on a whim.

It’s impossible to know all the consequences. But you can be sure that firms playing these games never do as well as they might. There’s always a gap between their potential and their performance.

HOW UNCERTAINTY BECOMES THE ENEMY OF STRATEGY

Strategy is, in essence, about the management of dilemmas. There’s an incessant barrage of these, and new ones arise continually. But strategists need to pay particular attention to four of them—all of which they ironically create for themselves.

First, is the question: What is the purpose of a company? Why does it exist? What should it achieve? Whose interests should it serve—and whose come first?

The answer used to be, to make a profit for investors. For only when that happens is anything else possible. But in recent years things have become more complicated. Firms are now expected to think beyond the bottom line to the triple bottom line—to concern themselves not just with profit, but also with people and the planet. To satisfy an array of stakeholders affected by their presence. “Sustainability” is the in word.

This is by no means a new idea but it’s one that’s gaining popularity. And it goes beyond mere altruism.

Harvard Business School strategy guru Michael Porter, who for almost his entire career has said that the measure of strategy is superior financial returns, has recently been arguing that companies would improve their competitiveness by creating value not just for shareholders, but for all stakeholders (the theme of my 2002 book, Competing Through Value Management.) That while setting out to alleviate poverty, for example, they might find opportunities to sell more products or services and produce superior profits. Other commentators are jumping on the same bandwagon.

But the balancing act is not easy—as companies in virtually every sector are showing. And it will get harder as stakeholders become more vociferous and more empowered by social media, and as politicians and regulators try to appease them.

Most CEOs are hesitant about publicly confessing to be focused first and foremost on profit. But watch them when times are tough and sales and margins take a hit. Without so much as a blink, they shove their virtuous intentions aside, become obsessed by the numbers and do whatever it takes to get things back on track. Their own wealth and survival hinge on satisfying their investors, so that’s what they focus on—if necessary at the expense of jobs, training and development, innovation, and social initiatives.

When the purpose of a business is undecided, every other decision is compromised. Many bad decisions will follow.

Second, is the presence of conflicting views about the causes of corporate success and failure. Do companies become great through focus or diversification? Should they think local or act global? Should they make or buy what they sell? Are there ideal business models for particular industries? Is the “first-mover” advantage a reality or should you be a fast follower? What’s the role of luck? Does leadership matter? And so on.

The answer to all these questions is, “It depends.” But that’s not an answer that makes executives sleep easier. So they keep searching, keep changing their minds, and keep blocking their own progress.

The causes of business success are many and varied, and they change from time to time. But if strategy is a point of view about where and how to compete, business leaders need to think through the “why” that underpins these decisions.

This leads to the third issue: which strategy concepts or tools to use. Should you begin with a review of your vision and mission, do a SWOT analysis, or a “five forces” exercise, or try to define your core competence? Can you disrupt your industry? What about exploring “blue oceans?” How important is agility, and how might you achieve it? Will a balanced scorecard help you implement your strategy?

As with the second issue, this leads to endless questioning, second-guessing, and dysfunctionality. A stream of self-inflicted upheavals keeps people off balance. And while the wheel is being reinvented the world moves on.

Fourth, is the question: which consultant to use. In more than 25 years as a consultant, I’ve never been the first one to facilitate a strategy session for any company. Others have always been there before me. Each arrived with their own process and language, their own pet ideas, and their own style. So each intervention was, in effect, a new beginning. Then I arrive, do my thing and move on too. Next year … another stab by someone else.

This may be entertaining, and management teams may enjoy the variety, but it definitely isn’t smart. In fact, it’s ridiculous.

For one thing, all consultants are not equal. Some do have the experience, knowledge and skill to make a real difference. Many others are hot on buzzwords, but have little practical understanding of how business works. And then there are those who are stuck on a particular theory or approach—and, as the adage says, “When you have a hammer, everything looks like a nail.”

The executives who hire them admit that, “Ketso went down well.” “Dave was so-so” Or, “Meg was disappointing.” But ask them exactly what they mean, and their answers are vague. Yet that doesn’t deter them from starting from scratch yet again—and again—with another stranger and another unfamiliar approach.

Of course, there’s much more. But these dilemmas are real performance-killers. Fortunately, they don’t have to be.

STRATEGY MASTERY REQUIRES BOTH CONTINUITY AND CHANGE

Running a business well requires both continuity and change. Strategy also needs this balance. It takes practice to master a particular way of designing and driving strategy, entrench the processes that flow from it and build the capabilities to support it. There’s no short cut.

Companies should obviously keep abreast of new management thinking, and adopt tools and techniques that will improve performance. A new consultant may well bring a breath of fresh air to a strategy conversation. But these are serious matters, and to be careless—or reckless—about them is an astonishing breach of sound practice and good governance.

It’s easier to sow confusion in an organization than to curb it. To continually replace one set of management ideas with another is to court trouble.  Companies might strike it lucky from time to time with a slant on strategy that really does make a difference, but chances are much greater that they’ll do long-lasting hurt to themselves. By shifting goalposts, processes, tools, and resources, they create uncertainty, disrupt programmes and activities, and stir up even more cynicism and distrust than already exists.

But that’s not the only downside. Because they never stick with one approach to strategy—or one strategy—for long enough, they never become as good as they should be at what they do. They never develop a sound “way we do things around here.” Instead of becoming better strategists and relentlessly honing their strategy, they scramble after new approaches, struggle to apply them, and dump them prematurely.

This is a shaky foundation on which to build any new initiative or grow a business over time. And given that firms are playing for increasingly high stakes, in increasingly tough circumstances, it should surely be avoided.

Running any company is hard work. So it makes no sense to undermine strategy  with a string of theories and dodgy experiments, and a constant quest for glitzier answers.

Managers will always face more dilemmas than they can easily cope with. But to add to them is a sure way to become uncompetitive and unprofitable. Until they acknowledge these five dilemmas and tackle them head on, they will never get as much from strategy as they should do. It will continue to be a matter they know they should know about, but never quite grasp; one that gives rise to buzzwords and bullshit, but whose impact on results is questionable.

LESSONS 

I’ve spent a lot of time studying these issues and thinking about them. As a consultant to many large organisations, I’ve had a front-row seat at their strategy deliberations for more than 25 years.  And I’ve learned a lot about what works and what doesn’t.

Here are some lessons:

  1. The business of business is profit. But profit is a product of value created for many stakeholders.
  2. There is no magical strategy process or theory. Everything we need to know has been known for decades. Stop searching!
  3. Business success is about making a difference for the “right” customers.
  4. Value up, costs down has to be the mantra in every company. It requires the input of every employee.
  5. Every company is a prisoner of its context, and every industry has its own “rules of the game.” So while innovation is critical, and “thinking out of the box” is an attractive notion, most firms could become more competitive by just fixing their basics.
  6. Strategy is partly a matter of analysis, logic and hard choices, and largely a social process. Job #1 is to take your people with you.
  7. Communication is the ultimate driver of business performance.
  8. Simpler is better.
  9. The time to start executing a strategy is when it’s created.
  10. By breaking all work down into 30-day chunks, and assigning them to specific people, you put pressure into the system, learn fast what’s working and what’s not and see who’s performing and who’s not.

Study and repeat. Again. And again. The more you practice, the luckier you’ll get!

(A version of this article first appeared in Directorship, the journal of the South African Institute of Directors, in January 2013)

  •  11/03/2013
Jan 182013
 

When developed economies slumped as a result of the financial meltdown which began in 2007, companies everywhere scrambled frantically to find new markets for their goods and services. Overnight, “emerging” markets (developing nations) became everyone’s target.

By the time of the crash, it was already clear that a massive economic shift was under way from the West to the East, and that future global growth would come more from developing nations rather than the established powerhouses: the U.S., Europe, and Japan.

From the earliest days of global trade, the lure of foreign customers in strange places has been a strong one. Following World War II, innovative technologies and logistics systems, the spread of democracy, and the increasing wealth of billions of the world’s citizens have led to fabulous opportunities for companies selling everything from cement to soap, from food to financial services. But it’s really only been in the past 30-odd years that emerging market mania has taken hold.

Ted Levitt at Harvard Business School alerted companies in 1983 to “The globalization of markets,” and the opportunities in marketing across borders. Jim O’Neill, chief economist at Goldman Sachs coined the catchy terms “BRICs” (Brazil, Russia, India, China) and “the next 11” (Mexico, Turkey, Egypt, Iran, Nigeria, Bangladesh, Indonesia, South Korea, Pakistan, the Philippines, and Vietnam). C.K. Prahalad wrote about “the fortune at the bottom of the pyramid.” New York Times columnist Tom Friedman’s books, The Lexus and The Olive Tree (1999) and The World is Flat (2005), were best-sellers. Many other observers spewed out analyses, reports, articles, and books on the same topic. And it gets hyped to the hilt at the World Economic Forum’s annual Davos get-together.

Growth in rich countries remains sluggish. All evidence suggests that developing countries are where companies will find the sales they need. So competition there will become increasingly hostile, and the demand for fresh thinking on it will rise fast.

But there are some realities that cannot be ignored.

A LITTLE THEORY GOES A LONG WAY

Interest in emerging markets has brought with it an outpouring of views on the attractions of specific countries and what it takes to succeed in them. Usually, these are couched in stirring tales of how this or that entrepreneur beat the odds to make a fortune in some poverty-stricken place; how companies from India, Mexico, or South Africa became admired multinationals; and how firms in rich countries found opportunities in poor ones. Much of what’s on offer is entertaining and even inspiring, but contributes little to a theory of emerging market strategy.

The need for advice on how to crack emerging markets is a big one, and its growth is explosive. So we shouldn’t be surprised if zealous researchers and managers underplay what is already known, and what expansionary firms have learned over many decades—even centuries. Breakthroughs are always more seductive than “the basics.”

A few experts have provided useful insights about emerging market strategy. But by and large, efforts to produce useful concepts or tools specific to this field have been less than fruitful, and will continue to disappoint.

As with other areas of management, there’s only so much that can be said. There will be some incremental advances, but executives should not expect revolutionary new models or frameworks. Those in the advice business will add most value by providing information about particular countries and sectors (context), and what it takes to win in them, rather than about strategy itself (concepts).

THE GLOBALIZATION OF … MANAGEMENT

As I pointed out in a previous post, virtually every market for everything is today an emerging market, in the sense that conditions are in flux, the future is unclear, competitive intensity is high, and the rules of the game are evolving. Strategies and business models that once worked well can quickly become recipes for failure, so both must be adjusted or maybe reinvented to meet new circumstances.

But it also means that whether you’re doing business in Europe or the U.S., or trying to get moving in Malawi or Myanmar, many of the challenges are fundamentally alike. And solutions to them will be much the same, too.

The principles of management that produce results are similar across industries. They’re also similar across countries. It may be fashionable to suggest otherwise, but the evidence is clear.

Management know-how has not only been commoditized, it has also been globalized. So instead of wasting time trying to reinvent this wheel, you can focus on the really hard work of getting to know the market you’re aiming at, and figuring out how to apply the best practices within it.

CONTEXT IS EVERYTHING

The first and most important question every firm must answer when it ventures into new territory is, How will we fit in? This is the make-or-break issue. Deep local knowledge makes all the difference. Personal relationships count for a lot. Most executives who’ve worked in developing markets talk about their steep learning curve, the time it took to gain traction there.

Wherever in the world you do business, you have to be wise to politics, culture, and economics; to the structure and character of whatever market you’re in; to customer expectations and behaviour; and to what competitors are doing. But in developing countries, three issues demand particular attention.

First, there’s the fact that “things don’t work”—or at least not as they do in developed nations. Companies are dogged by what Tarun Khanna and Krishna G. Palepu have termed “institutional voids”: poor infrastructure, dodgy regulation, weak capital markets, lousy services, a lack of skills, and much else. Unhelpful bureaucrats make things worse. Corruption may be a huge problem (although it also occurs in even the most advanced nations). Protecting intellectual property can be a nightmare.

Second, is the difficulty in connecting sellers and buyers. Informal trade is probably the norm; business ecosystems are ill-formed. There’s little information about customers or competitors. Promotions, logistics, and support all present hurdles.

Third, is the management of people. Individuals with appropriate capabilities and experience are in short supply. Productivity, quality, and customer service are not their priorities. They’re unfamiliar with sophisticated working methods. They have to be introduced to a host of new ideas—roles and responsibilities, technical systems, performance management, communication, disciplinary processes, and so on. So foreign executives need to be firm and persistent in providing new direction, while at the same time acutely conscious of local custom.

None of this should be under-estimated. No one should imagine that building a business in a developing country is a cake-walk. It’s folly to believe you can simply charge out of New York and set up shop in New Delhi.

Joburg and Lagos may both be in Africa, but South African managers who think they can easily crack the Nigerian market because “We are African, we understand Africa,” are in for a shock. Success in one country in Africa, Asia, or Latin America is no guarantee of success in others in the same region, let alone elsewhere. Sony’s notion of “glocalization”—”think global, and act local”—is as valid today as it was when it was coined about three decades ago.

Emerging markets—in the sense of developing markets in developing countries—offer exciting prospects for many firms. They differ in many ways from developed markets, but managers should not hope for fantastic new theories for entering them or competing in them. Instead, they need to do their homework, strike a careful balance between importing ideas that worked elsewhere and developing new ones, and recognize that as outsiders they have special responsibilities towards their hosts.

Strategy is always a learning process, and even more so in emerging markets. But emphasis needs to be on learning about these places, not about new strategy concepts or management tools.

IN SUMMARY

Success in these markets depends, more than anything, on putting the right people on the ground with all the support they need.

They should balance a core set of strategic principles and a proven management approach with a sensitivity to local attitudes, customs, and behaviours, and always be respectful of these.

They should understand the importance of local knowledge, and never stop searching for new insights.

And most importantly, they should couple these practical actions with a preparedness to do what it takes to fit in (within reason) and the determination to improvise through difficulties.

Tony Manning_Essentials for emerging market success

A CHECKLIST TO GET YOU GOING
  1. Mindset matters. Given the hurdles you’ll face, you and your people have to really, really, really want to try. You have to be bold, you have to be able to adapt, and you’ll need both courage and perseverance. Above all, you’ll need to be resourceful—your ability to “make a plan” will be constantly tested.
  2. Appoint people who’ll be happy there. Living in Luanda or Laos is not like living in Los Angeles or London. It can be tough. Especially on families. Everyone can’t do it. So give them every chance to understand what they’re taking on, and all the encouragement and support they’ll need.
  3. Go “where the warm armpits are.” As Ted Levitt liked to say, there’s only one way to really understand any market, and that’s to go there and immerse yourself in it. To watch the locals and listen to them. To get to know what turns them on and off, and to learn how things work.
  4. Remember the first principles. Just as focus, value, and costs must be your mantra in developed markets, so they must guide your every action in emerging markets.
  5. Explore, experiment and learn fast. No matter how you prepare, no matter how good your initial information seems to be, and no matter how carefully you think through your strategy, you will get things wrong. This is a fact of life in any market, and especially so in developing ones.
  6. Get stakeholders on your side. You have to gain the support of government, communities, workers—the same array of players you deal with in your home market. But in emerging markets you probably have to work much harder to educate people about business in general and your business in particular. They have to understand not just what you expect of them, but what you can do for them. “Out there,” they can make or break you.
  7. Develop local partnerships. In some countries, they may be mandatory. In many, they’re necessary to open doors, smooth your entry, build alliances, and facilitate your growth. Their knowledge, experience, and contacts can be invaluable and make the difference between success and failure.
  8. Clear values, no compromises. While adaptability is critical, you have to be certain about how you need to behave and what you will and will not do, or you’ll be jerked around constantly—and a sitting duck for crazy demands and corruption. So set the rules early, or someone with another agenda will set them for you.
  9. Be willing to build your own infrastructure. This may mean anything from a shopping centre to a power plant or a water purification facility, roads or runways, a sewage system, accommodation for your staff, or schools and clinics for communities. It could mean offering to train local officials or upgrade their IT systems. Or it could mean working closely with PR or advertising agencies, or other service suppliers, to develop their capacity.
  10. Try, try, and try again. Cracking an emerging market is not a quick process. It’ll take most companies a lot longer than they expect, and cost far more. If you don’t go in for the long haul, you’re wasting your time. If you can’t keep picking yourself up, and adjusting your strategy, you may as well stay at home.
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  •  18/01/2013
Dec 012012
 

Disruption must surely be the hottest strategy concept of the past decade. But it is less of a breakthrough than it’s made out to be. And it may unnecessarily impede your strategic thinking.

The idea grew out of a study by Joseph Bower and Clayton Christensen, both professors at Harvard Business School, which saw light in a 1995 Harvard Business Review article titled “Disruptive Technologies, Catching The Wave.” It was subsequently moulded into a theory by Christensen, making him a superstar and spawning many books and articles by him and others. Thanks to determined promotion, it’s now a term you hear in almost every management discussion—though it’s seldom used as precisely as Christensen proposes.

The gospel according to Christensen goes like this:

In their quest for the most profitable customers, companies innovate and improve aggressively—and give customers more than they need or will pay for. And the more intently they listen to their customers, the more they up their game and sustain that gap.

While they focus on the next-generation performance needs of the most attractive customers, guerilla competitors sneak in under their price umbrella and target less attractive customers who’re being overlooked, ignored or under-served. The upstarts ask, “Who is not getting attention?” “What is value to those customers?”

The customers they aim at aren’t in the market for state-of-the-art products. So these firms can ditch the bells and whistles and keep costs and prices low.

Initially, the leaders don’t see a threat. The challengers are of no appeal to their best customers and aren’t chasing them anyway. Those customers they do lure are likely to be ones who always want a deal, are satisfied with “good enough” offerings, and won’t be missed.

But this is just a lull before the storm. Quite soon, more mainstream customers are tempted by the no-frills competitors. They need to forego some of the “value” they’ve grown used to, but what they get does the job—plus it’s easier to use, more convenient, and more affordable. So it offers them value, albeit not the kind they’ve been used to.

Many established players have been hurt this way—think clothing, airlines, steel, medical devices, consumer electronics, autos, and so on. But then they make things worse for themselves.

In an effort to counter competitors who won’t play by their rules, they typically race even faster up the value path. They invest even more in innovation and pile on features and benefits. But in their efforts to stay ahead of their enemies, they also stay ahead of their customers; and the cost of their overkill forces them to keep hiking their prices.

Some customers stick with them because they don’t mind paying more for products that they perceive to be at the leading edge. But the pool gets smaller. And the harder these firms try to hang on to their traditional business, the more they lock themselves into their “superior” strategy—and the worse things get for them.

FEW OPTIONS

If the leader wishes to retain its low-end customers, it has three options:

  1. Pump up its promotional activities, to hopefully persuade those customers to stay loyal.
  2. Keep offering the same products, but at a lower price.
  3. Eliminate some features and benefits, and cut prices.

The problem with Option 1 is that if customers learn that a competitor’s low-end offering is OK and costs less, some will leave. No amount of hype will convince them to keep paying top dollar for “value” they don’t need.

Option 2 may keep customers coming back, but margins will take a hit and buyers who’d paid the higher price will feel they ‘d been screwed.

Option 3 will result in the loss of top-end customers. The company will cannibalize itself. By offering less and tacitly admitting to customers that they’ve been paying too much, it’ll drive them into the arms of cheaper competitors.

Faced with these unpalatable choices, and trying desperately to evade the pesky newcomers, firms tend to even more doggedly pursue their current customers—whose numbers keep shrinking. Meanwhile, their low-priced competitors improve their offerings, hone their processes, and become more and more dangerous. And as their sales and profits grow, they can afford to intensify their advance.

Market-leading firms attained their dominance by focusing on an attractive target market and working furiously to satisfy it. They have a lot invested in their current strategy—money, resources, capabilities, relationships, processes—and are weighed down by these sunk costs. But even more by their mindset. So they can’t suddenly or easily change. Newcomers, on the other hand, have little baggage and can switch tack with relative ease.

OLD INSIGHTS REPACKAGED

Following Christensen’s thinking over the years, it’s hard to avoid a sense of deja vu. Even a quick glance back into the history of management thought makes it hard not to conclude that much of his “theory” is to be found in Marketing 101 and Strategy 101. And that it’s not all it’s cracked up to be.

Take, for example, the notion of “the job to be done”—a Christensen favourite that’s sure to crop up in any discussion about disruption. This is, in fact, one of the oldest ideas in the marketing playbook.

So old, in fact, that it’s impossible to pin down its origin. But I suspect it gained explicit understanding in the 1930s, thanks to a famous American sales trainer named Elmer Wheeler who coined the phrase, “Don’t sell the steak—sell the sizzle.” His point was that it’s not a chunk of meat that customers want, it’s the pleasure that goes with it: the sizzle and aroma from the barbecue, companionship and fun with family and friends, and so on. This lesson has been drummed into copywriters and sales people for years.

In “Marketing Myopia,” a HBR article that won the 1960 McKinsey Award, Ted Levitt made the then-provocative case that too many companies limited their growth by defining their industries too narrowly, and by being more concerned with what their products could do than what their customers want done. Discussing the oil industry, for example, he noted: “People do not buy gasoline. They cannot see it, taste it, feel it, appreciate it, or really test it. What they buy is the right to continue driving their cars.”

Peter Drucker told us in his 1973 book Management: Tasks, Responsibilities, Practices:“The customer never buys a product. By definition the customer buys the satisfaction of a want.”

Levitt echoed this in his 1983 book The Marketing Imagination, writing that “people don’t buy things but buy solutions.” To illustrate his point, he recycled a quote from one Leo McGinneva, who’d said that when people buy a quarter-inch drill, “they don’t want quarter-inch bits; they want quarter-inch holes.” (Something another marketing guru, Philip Kotler, had said in 1980.) Levitt also observed that “The customer may actually want and expect less.” (My italics.)

Within months of his book appearing, Levitt also published an article in HBR titled “The Globalization of Markets.” The basic argument was that by stripping away the features and benefits that made products particularly appropriate for particular markets, firms could sell them to many more customers across the world. Citing the example of Japanese firms, he said: “They have discovered the one great thing all markets have in common—an overwhelming desire for dependable, world-standard modernity in all things, at aggressively low prices. In response, they deliver irresistible value everywhere, attracting people with products that market-research technocrats described with superficial certainty as being unsuitable and uncompetitive….”

And what about Christensen’s observation that the more closely firms listen to customers, and the harder they work to deliver what those customers say they’d like, the more likely they are to offer too much? Or that to compete with disruptors, the leader should spin off a totally separate business unit?

Nothing new here, either. This, and much else that he says, has been written about for decades. That disruption, as described by Christensen, has become such a fetish is a sad indictment of academic thought and management practice.

DEFINE “DISRUPTION” WITH CARE

The theory of disruptive strategy that so many people swoon over offers a very narrow view of how market disruption may occur, which firms are disruptors, or what disruptive strategy might be.

Can you possibly argue that Apple, say, is not a disrupter, because it sells beautiful, innovative products at high-end prices? (No “good enough” thinking here!)

And what would you say about Elon Musk’s award-winning Tesla S car? Or Woolworths, Nando’s peri-peri chicken, Discovery Health’s Vitality programme, Emirates airline, or Reckitt and Coleman’s household products?

By Christensen’s criteria, none of these deserves to be called “disruptor.” These products are all excellent, and priced accordingly. Their target market is not the “bottom of the pyramid.” Cheaper, “good enough” options are available from other firms.

But all have challenged convention and redefined their categories. And surely, that’s what disruption means.

The fact that some of these big names may face competitors who offer “good enough” products doesn’t shift the disruptor label from them to those upstarts. To split hairs about an arbitrary interpretation of what a word means is ridiculous.

Christensen has chosen one interpretation of what disruption means, and made it his own. He has focused on one strategic formula which highlights a very serious threat to market leaders, and also offers challengers a way to take them on. But no established firm should imagine it’ll be bulletproof if it follows his advice exclusively. Neither should any ambitious attacker close off strategic possibilities. Most managers would do better with a broader definition.

To disrupt something is to overturn the order of things. So how could you do that? Surely, not only by offering cheaper but “good enough” products to customers who’ve previously been ignored or overlooked.

The reality is that, in most markets, there are many ways to compete, many ways to upend convention. So strategic thinking should be about creating possibilities, not shutting them down. It should be about understanding the many ways you could be toppled, not just one.

If there’s one important thing all the chatter about disruption has achieved, it’s to focus managers’ attention on the three most critical strategy questions: who is your customer, what is value to them, and how will you deliver it? (Though you have to ask what else they’ve been thinking about!)

And yes, Christensen has added many examples of why this matters and some advice on making the most of your answers.

But three, five, or 25 years from now, will we look back on the Christensen era as a disruptive one in the annals of strategic thought, or one in which we woke up and went back to basics?

As Levitt said, “Man lives not by bread alone, but mostly by catchwords.” So it’s important to pick those catchwords with care, and to be clear about what they mean and how they might be applied.

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  •  01/12/2012
Jul 252012
 

No doubt about it: an outside expert can help you bring your strategic conversation to life, refocus your efforts, introduce useful concepts and fresh ways of thinking to your firm … and shift your strategy from good to great.

So surely if you’re going to take time out for this vital discussion with your top team—and spend whatever it takes—it’s worth getting the pivotal element right. In other words, your facilitator.

All too often, though, organizations leave this critical decision to last. They block time in their executives’ diaries and book flights, venues, meals, and even magicians and comedians … and only then wake up and think about a facilitator.

Result: while they want someone with an “outsider’s perspective” and experience—someone who can challenge, provoke, inform, and advise them—they all too often wind up with a mere “meeting manager.”

But that’s not all. They also give their facilitator too little time to prepare well—to learn about the company and its needs, think about the specific challenge and how it should be dealt with, and prepare any materials that may be necessary.

Choosing the right person to help you craft your strategy is a lot more important than choosing a venue, agreeing on tea-times, or deciding whether to include a round of golf. It’s a make-or-break decision that should be made early and with great care. The job is not for fad-merchants or amateurs. Don’t expect a motivational speaker to morph into a strategy guru, or a sales trainer to make the high-level inputs you need!

If you want real impact, be sure to get someone with 1) the ability to cut to the core of complex issues and identify the few drivers of your success, 2) in-depth understanding of the latest thinking on strategy design and implementation, leadership, and change management, 3) loads of experience with major organizations in virtually every sector, and—oh, yes—4) professional facilitation skill too!

IN OTHER WORDS, HIRE A HEAVYWEIGHT STRATEGIST WHO WILL PROVIDE REAL MEAT TO GET THE MOST OUT OF YOUR TEAM … NOT A LIGHTWEIGHT WHO MAY KEEP TIME AND TAKE NOTES BUT IS OUT OF HIS OR HER DEPTH WHEN IT COMES TO OFFERING INPUT OF ANY SUBSTANCE.

It may cost you more, but having a pro help you design and run your strategy workshop takes you a big step closer to getting the results you want.

What are your objectives for the meeting—i.e., what do you want to walk away with? What preparation is necessary? What should the process look like (presentations, discussions, frameworks, concepts, etc)? What should be on the agenda, and how should it flow? And most importantly, what comes next, when everyone is back at work?

Get this stuff wrong, and you’ll be sure to head down the wrong path. Get it right, and your time, effort, and money will be well spent. But make no mistake: this is where you need real competence.

And by the way, you may think you can facilitate your own meeting, but that’s seldom the best path. When you’re part of a team, it’s hard to stand outside of it; when you’ve been party to decisions and you’re involved in the politics of corporate life, you can’t easily be as objective as you should—and anyway, no one will believe you are.

So hire someone you can trust, brief them thoroughly—and early—and watch the meeting work!

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  •  25/07/2012
May 182012
 

The news out of Europe is terrible. Day by day, things get more dire. However difficult the past four years were, there’s much worse to come. As The Economist puts it (May 12), “the night terrors are back.”

First quarter growth for Germany came in at 0.5%; the Netherlands and France showed no growth; Italy contracted by 0.8%. Greece by 6.3%. The Eurozone as a whole came in flat. More than half of Eurozone countries are now in recession. Unemployment in the 17 hit 10.9% in March.

After years of dithering about what to do about Greece, it’s now clear that kicking that can down the road was always a bad idea. Policymakers have run out of road and hard decisions must now be made. U.K. prime minister David Cameron sees this as “make or break” time.

The only thing that came out of the recent Greek non-elections was proof—as if it were needed—that Greek voters can’t live with the tough conditions imposed on them by the ECB/IMF bailout package that was signed only a few months ago. Their economy has shrunk by 20% in five years. Their lifestyle has gone to hell in a hand basket. Many of them are struggling to survive. They’ve lost hope. The tragedy of their plight is captured in a headline in the New York Times“Increasingly in Europe, suicides ‘by economic crisis.'”

Greece has been in recession for five years, and can’t pay its bills without even more more help. The central bank now holds just $1.9 billion in cash. There are fears of a run on banks, as withdrawals rise. Even if everything goes Greece’s way from now on, it will take decades for the country to trade its way out of the hole. (Will tourism, olive oil, and goat cheese do the trick? Will Greece suddenly become a manufacturing powerhouse, a financial hub, or the next Silicon Valley?)

The elections failed to produce a new government and highlighted deep disagreement about the best way forward. No party won enough support to assume power, and despite days of intense haggling after the poll, politicians were unable to put together a coalition to govern. A judge has been sworn in as interim prime minister to “manage” the place until new elections are be held on June 17—and who knows what will happen afterwards?

Even though it seems most Greeks would prefer to stay in the Eurozone, most analysts believe Greece has no choice but to default on its debts and get out. The bust-up would be traumatic, and the impact nasty. There are massive legal hurdles, and no agreed way of making it happen.

BLEAK TIMES GET BLEAKER

The European dream is unravelling. Whatever Greece does, a long period of deep uncertainty and insecurity lies ahead. And while it drags on, the rest of the world will struggle to grow.

French and German voters have joined the anti-austerity chorus. Francois Hollande became France’s first socialist president in 17 years after defeating Nicholas Sarkozy, and centre-left voters in the German state of North Rhine-Westphalia hammered Angela Merkel’s conservatives. (Merkel’s overall support has plummeted from 34.6% to 26.3%.) Hollande has promised to stimulate growth; Merkel is holding her ground on austerity. So it’ll be interesting to see who blinks first.

Spain is a basket case. The banks are in terrible shape, and it’s getting worse. Moody’s downgraded 16 of them on May 16. Shares in the second largest, Bankia, fell by 29% after reports that customers had withdrawn €1 billion in less than a week. Writing in the New York Times (April 15, 2012), Nobel economics laureate Paul Krugman proclaimed the country to be “in full-on depression, with the overall employment rate at 23.6 percent, comparable to America at the depths of the Great Depression, and the youth unemployment at over 50 percent.”

The Spanish economy, of course, is much larger than that of Greece.

And then there’s Italy… and Portugal… and Ireland… and …

A VICIOUS CYCLE MEANS TROUBLE FOR ALL

Any country that sells into Europe is feeling the freeze. Demand in the region is weak, with finished goods, components, and raw materials all taking strain. Many suppliers are from emerging markets, and the slowdown is hurting their economies—just when they were seen as the growth opportunity of the future. So the ripples are spreading outwards. From India to South Africa to Latin America, growth forecasts are being cut.

GDP in the UK shrank by 0.2% in the first quarter, putting the country into a double-dip recession. The official forecast is for 0.8% for this year; and a return to pre-2008 growth is not likely before 2014. Mervyn King, governor of the Bank of England, is preparing for more fallout from Greece.

China’s growth has slowed month after month, and a Bloomberg survey shows it at a 13-year low. Pimco, the world’s biggest bond trader, now sees 7% as the likely number for 2012. Both imports and exports are sharply down. Domestic demand is sluggish. Bank lending in April was way below expectations. Investment in fixed assets is at level not seen in a decade. Foreign direct investment has fallen six months in a row. Electricity consumption, rail freight, and bank loans are all slipping. The property market is taking strain (house prices are falling at a record pace) as a result of government measures to avoid a credit-driven bubble, and the construction industry is in a funk. And to complicate matters, the inflation rate is heading upwards.

The U.S. economy seems to be getting some of its spark back, but there are still weaknesses. Growth this year should be around 2.2%, but a survey of economists had most of them confessing that their forecasts were probably too optimistic. Krugman says the country (like Spain) is in a depression, not just a recession. Economists warn of a “fiscal cliff” at the end of 2012, when the Bush tax cuts expire and new taxes must kick in, but in this election year, politicians will avoid committing to any action to deal with the problem. March jobs figures were disappointing—unemployment fell slightly to 8.1%, but only because more people have given up looking for work. One American in six can’t always get enough to eat.

Punting his latest book, Paul Krugman warns that the world is in a dangerous place and stimulus is the only way out

 A TEST FOR OPTIMISTS

I could offer many more facts to show just how shaky things are. I could toss in the gloomy views of any number of economists, think tanks, business people, and others worth listening to. But you only have to watch Bloomberg or CNBC, or read the daily news, to get more than enough evidence that the world is in a precarious state.

As I wrote in my February 28 post (“Where is the global economy going, and what does it mean to you?”) we’re in the middle of a colossal economic experiment, and while many people have strong opinions on what to do, there are questions about every “answer.” The past may or may not be a reliable guide to the future. Well accepted theories may or may not hold up in a complex new world.

Economics and politics are on a collision course. Society is caught in the middle and is thoroughly pissed off.  Any leader dispensing unpleasant medicine risks losing support and being voted out of office. But without unpleasant medicine, the Great Recession will run and run—and the entire world might be ungulfed by a new Great Depression before we know it.

There is no reason to think we might be in calmer waters anytime soon. There’s every reason to fear some dramatic event ahead that will be calamitous. And to accept that the difficulties we face right now are just the precursor of more to come. The Greek problem is Europe’s problem. Europe’s problem is everyone’s problem.

Here’s Krugman again:

“…it’s hard to avoid a sense of despair. Rather than admit that they’ve been wrong, European leaders seem determined to drive their economy—and their society—off a cliff. And the whole world will pay the price.”

A NEW ERA IN GLOBAL COMPETITION

As I’ve observed many times before, competitive hostility has risen dramatically in recent years. But if companies thought they were walking through fire in the past four years, that was just warm-up time. There’s a new array of daunting challenges ahead. They’re coming from all directions, and they’re coming thick and fast.

Firms in many countries are sitting on piles of cash, too nervous to lay new bets. They face the hard choice: seize the moment and invest in the hope of capturing today’s opportunities and preparing for tomorrow’s, ahead of the herd; or preserve their war chests in case more bad stuff hits the fan. But one thing they cannot avoid is taking another clear-eyed look—and another, and another—at the world around them.

Some companies will sensibly decide to continue with their current strategies, perhaps with some incremental changes. Others will have to pursue a more radical course. And for many, a bit of both will be best.

What no management team should bank on is that their business performance will soon get a lift from either an economic upswing or a breakthrough in strategy. What they should do is:

  1. Stay tuned in to their environment so they quickly sense significant changes.
  2. Get back to basics, dump any activities that weigh them down or distract them, and shorten their “to-do” lists.
  3. Focus on making a difference that matters to the “right” customers.
  4. Fine-tune their business models to deliver, and keep innovating and improving.
  5. Make sure there’s clarity—across their organization—about what they must do, 30 days at a time.

Strategy is always about laying bets for a world you can’t see. That’s becoming trickier by the day.

  •  18/05/2012
Apr 082012
 

The market shares of South Africa’s four big banks—Standard Bank, Absa, First National Bank, and Nedbank—go up and down, but with few big swings. Despite government pressure to do more for the bottom end of the market, and some stabs at doing so, all have continued to focus on their traditional middle- to upper-end customers. That, they’ve held, is where the money is.

And it’s true, that’s where the money was. But growth in that sector has slowed. Profits are under pressure. So the giants been forced to look downmarket, where there are an estimated 8 million “unbanked” and “unsecured” customers, and plenty of growth to come.

The fight will be brutal. They’re all charging into the same arena at the same time, so they’re tripping over each other. The big banks have clout, and are deadly serious about this new venture. But they’re stepping onto the home turf of two smaller banks—African Bank and Capitec—which know how to fight there.

These two operate in different niches. They’ve been growing fast, and extending their presence into new areas with appealing offerings. They’re also solidly established, and far from rolling over under the current onslaught, they now have no choice but to become even smarter and more aggressive.

The bigger of them, African Bank, hardly advertises at all, but has many years of hard-earned experience at the lower end of the market, a sophisticated approach to credit management, almost 16,000 highly motivated people, and a large pool of customers who are real fans and not just locked-in by some gimmick.

Capitec is a younger business, but its promise of simpler, cheaper, and more convenient banking has strong appeal. After initially aiming at poorer black customers, it’s now opening branches in wealthy areas and attracting whites, professionals, and suburban housewives.

There’s a classic disruption strategy at work here, as described by Harvard Business School professor Clayton Christensen:

  1. Incumbent firms keep improving what they’ve been doing, assuming they’ll keep customers happy by doing more of the same better.  But they do lots of stuff customers don’t care about. As they add more and more bells and whistles, their costs rise and they create a “price umbrella” for upstarts.
  2. One or more newcomers sneak in under that umbrella. They focus on customers the dominant firms have overlooked or underserved, with products tailored precisely for “the job they want done.” Unencumbered by entrenched mindsets and legacy policies, practices, and infrastructure, they’re able to keep costs and prices low. They go unnoticed while they fine-tune their processes and build awareness, capabilities, experience, and muscle.
  3. Stuck with a price disadvantage and lots of baggage, the big players struggle to move downmarket. At the same time, the disruptors start moving upwards, to pick off their customers.

The current process has a way to go. The latest phase in the banking war illustrates just how hard it is to stand out in the marketplace today—and why “sustainable advantage” is for more and more companies an impossible dream. It highlights the importance of delivering a “difference” that really is different, but also that matters to customers so they’ll pay for it.

THE DELIBERATE DESTRUCTION OF DIFFERENCE

Virtually in unison, the big guys have announced a flurry of new products and services (or re-promoted existing ones), and started to move downmarket. They’re hoping for the best of several worlds: to keep customers they’ve got, while also stealing some from each other—and to snatch business from African Bank and Capitec, while also luring unbanked customers in that territory.

Since March, print media have been stuffed with one page of ads after another extolling the promises of three of the Big Four: Absa, Standard Bank, and First National Bank.

Absa promises “Better banking”:

IMMEDIATE PAYMENTS…STAMPED BANK STATEMENTS…APPLY ONLINE…SCAN AND PAY…SEND CASH AROUND THE WORLD…FREE eSTATEMENTS…CELLPHONE BANKING…CASH ACCEPTING ATMs…UNIT TRUSTS ONLINE…OPEN ACCOUNTS ONLINE…OVER 8 000 ATMs AND 900 BRANCHES…RECHARGE WITHOUT CHARGE…LOW-COST BANKING…REAL BUYING POWER…REAL CASH REWARDS…

Turn the page, and there’s Standard Bank “Moving forward:

THE CONVENIENCE OF 18 450 PLACES YOU CAN DO YOUR BANKING…HELPING CUSTOMERS SAVE UP TO 50%…ELITE BANKING COSTS R99.00 A MONTH…YOUTH…STUDENT ACHIEVER…GRADUATE AND PROFESSIONAL BANKING…ACHIEVER ELECTRONIC…PRESTIGE BANKING…PRIVATE BANKING…

And without a gap, you get First National Bank, answering its “How can we help you?” slogan with its own laundry list of promises, and its claim to be the industry innovator:

INNOVATION…VALUE…PAY2CELL…KRUGERRANDS…ONLINE FOREX…FNB LIFE COVER…SLOW LOUNGE…eBUCKS…SELF-SERVICE BANKING…INCONTACT…INSTANT ACCOUNTING…FNB BANKING APP…SHARE INVESTING…FUEL REWARDS…MULTICURRENCY ACCOUNTS…eWALLET…TABLET & SMARTPHONE OFFER…

Now, as a customer, what do you make all of this? What’s the difference—or is there really any difference? What does it mean to you? Are you impressed by this growing range of offerings? Or overwhelmed? Or perhaps you just don’t care.

The South African banking industry ranks among the healthiest in the world—thanks to tough regulation. But banks have long been accused of over-charging, lousy service, and bullying tactics. Nobody I know is excited about dealing with their bank. Nobody has ever recommended their bank to me.

As a customer myself, I have absolutely no idea what sets banks apart. I deal with them because I need to, not because I want to. They make a lot of noise, but I can’t hear what they say.

Bank strategists would do well to pay close attention to Beating The Commodity Trap by strategy professor Richard D’Aveni of the Tuck School of Business at Dartmouth. Because that’s exactly the trap they’re creating for themselves—at huge cost, and despite their desperate efforts.

Describing why firms get into a commodity trap, D’Aveni writes:

“…the reasons most companies find themselves in the trap in the first place is because they failed to innovate early enough to avoid it or they later differentiated and cut prices so much that they have exacerbated the trap.”

They’d also to well to heed to these words of Harvard Business School professor Youngme Moon in her excellent book Different:

“Competition and conformity will always be fraternally linked, for the simple reason that a race can only be run if everyone is facing the same direction.”

“…the way to think about differentiation is not as the offspring of competition, but as an escape from competition altogether.”

“There is a kind of difference that says nothing, and there is a kind of difference that speaks volumes.”

Making a “difference that speaks volumes” has always been a challenge to companies and their ad agencies. It’s getting harder as competitors crowd into a field, and as they watch and learn from each other, benchmark themselves against each other, recruit people from each other, attend the same industry events, read the same publications, buy from the same suppliers, and so on. They strive to be different, but do everything possible to look alike.

First National Bank has seized an advantage by not just re-segmenting the market, but by using product innovation as its differentiator and a character called “Steve” to grab attention in broadcast media. But how long will it be before others do the same? Technology constraints might slow some of its competitors down, but they’re sure to fix that. So the rapid reinvention of business models will continue. Future ad campaigns will surely become both more factual and more emotional.

If experience from other industries is anything to go by, the banks have started what could be a costly “race to the bottom” (and not just the bottom of the market). Together, they’re transforming their world. The best they can hope for is that none of them does anything really silly, and that the market stays reasonably stable. They also need to hope that their efforts don’t create a credit bubble and provoke their regulator to clamp down on them.

Whichever way things go, we’re about to see:

  • What difference strategy can make, vs. the importance of being able to think on your feet, change direction in a blink, and run faster than your enemies.
  • How important real product innovation is vs. vaguer corporate branding.
  • Whether conventional forces can take on guerrilla fighters and win, and what it takes.
  • How guerrillas can withstand an onslaught from multiple well-armed attackers.

There will be important lessons here for all managers, so  this is a battle worth watching closely. (More on this in a coming post.)

 Capitec and African Bank have given the South African banking industry a long-overdue wake-up. Now, watch the shake-up.

 

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Apr 042012
 

When Samsung announced in mid-2010 that to grow its business in Africa, it would design products specifically for Africa, it confirmed two facts about global competition today:

  1. As growth in developed markets gets more difficult, firms must seek and exploit opportunities in developing markets.
  2. To succeed there, they need to “act local.”

Explaining Samsung’s plan, George Ferreira, COO of Samsung Electronics SA, said:

“In line with our key value of co-prosperity, coupled with our business and development sector partnerships, we have a vision of developing technology that is built in Africa, for Africa, by Africa”…We will over the next few years be allocating more local R&D investment for further local product planning, design and development.”

A press release from the company added:

“Samsung have undertaken extensive research and development (R&D) to develop technology innovations, specific to the African consumers’ needs. These include, TVs with built in power surge protectors, triple protector technology for air conditioners to ensure durability, power surge protection and safeguarding against high temperatures and humidity, deep foam washing machines that are 70% energy efficient – saving up to 30% water use, dura-cool refrigerators with cool pack – allowing the refrigerators to stay cool without power, as well as dual-sim technology and long battery life phones with battery standby times of up to 25 days.”

According to a report on Moneyweb, “The electronics group hopes to attract the African market with a range of television and refrigeration products that are designed to withstand power surges, dust particles and humidity and camera and camcorders that are designed to take “better” pictures of dark toned people.”

In one example of how it will pursue its strategy, Samsung has teamed up with the University of Cape Town (UCT) in South Africa and Strathmore University in Kenya to develop unique mobile phone applications for Africa. Such collaboration is sure to yield ideas that the company wouldn’t develop on its own, and to speed up the time-to-market process.

However, what the electronics giant did not say was that innovations in developing markets may prove valuable in developed markets (a process known as “reverse innovation” or “frugal innovation”). This has been the experience of companies producing products as diverse as soap, tractors, and medical scanners. And innovations may include not just new products, but also processes and business models.

Innovations from developing markets give firms new opportunities in developed markets by providing simpler, cheaper products

Reverse innovation will be one of the most important trends of coming years. It opens many new opportunities for developing markets and for the companies and innovators in them. And it provides new reasons to go to places you weren’t really sold on, to invest there, and to make a deliberate effort to learn whatever you can from being there.

Champion of the movement is V.J. Govindarajan, professor of international business at Tuck School of Business at Dartmouth College, and the first professor in residence and chief innovation consultant at General Electric. His October 2009 Harvard Business Review article, “How GE is disrupting itself,” co-authored with GE chairman and CEO Jeff Immelt and Chris Trimble, another Tuck faculty member, won the McKinsey Award. His new book, Reverse Innovation (co-authored again with Trimble), will probably draw similar praise—and stoke interest in the concept. They provide many examples of how firms have gone about it, plus advice for those who want to.

In an interview with [email protected] (April 2, 2012), Govindarajan explained some of the rationale behind the concept:

The fundamental driver of reverse innovation is the income gap that exists between emerging markets and the developed countries. The per capita income of India, for instance, is about US$3,000, whereas it is about $50,000 in the U.S. There is no way to design a product for the American mass market and then simply adapt it and hope to capture middle India. You need to innovate for India, not simply export to India. Buyers in poor countries demand solutions on an entirely different price-performance curve. They demand new, high-tech solutions that deliver ultra-low costs and “good enough” quality.”

“Poor countries will become R&D labs for breakthrough innovations in diverse fields as housing, transportation, energy, health care, entertainment, telecommunications, financial services, clean water and many more.

Reverse innovation has the potential to transform wealth in the world. Growth in developed countries has slowed down. Much of the growth is now in developing countries. The 2008 financial crisis and the more recent debt crisis [in Europe] have only exacerbated this situation. As such, we are likely to see the center of gravity for innovation shifting from rich to poor countries.”

Questions to ask now:

  • What will developing countries do to promote not just their market opportunities, but also their innovation opportunities?
  • What will local firms in those countries do to take advantage of this trend?
  • How will local universities and other potential partners respond?
  • How can you exploit this idea?

The entire world is a learning laboratory. No place has a monopoly on ideas. Today, it’s foolish—and potentially costly and risky as well—to be myopic.

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  •  04/04/2012
Mar 052012
 

Most companies have a strategy, but the quality of those strategies varies greatly. Not all are equally sound. A lot are utterly useless. And all too often, even the best of strategies won’t get turned into action because of organizational weaknesses.

You might wonder if strategy really is necessary in today’s environment of extreme uncertainty, roller-coaster volatility, resource constraints, and rising competitive hostility. The answer: unequivocally yes! In fact, right now, strategy matters more than ever. Precisely because the world is so hard to understand and there are so many surprises, you need a strategy in order to give you the best possible chance of defining your own future.

This is no time to be careless or vague, to bet on yesterday’s strategy taking you into the future, or to bank on your competitors being idiots. A carefully thought-through, robust strategy is essential for riding the “white waters” we’re in, and that in turn requires a systematic, disciplined strategy process. Now, more than ever, you need to subject your strategy—and the way you made it—to tough, dispassionate review.

No doubt you and your colleagues have put a lot of effort into your strategy. You’ve probably thought long and hard about the best process to use, what it should address, what you should finally say, and how you should communicate the outcome. But before you rush ahead with implementation, pause for a moment. Stand back and take another long, hard look a what you’ve decided. Use this checklist to stress-test your strategy. These 20 questions may highlight weaknesses, trigger new insights, or lead to new decisions.

One set of questions helps you evaluate your overall strategy:

  1. Is your strategy based on specific and sound assumptions?
  2. Is it based on adequate and accurate information—most importantly, about customers, competitors, your operating context, and your own capabilities?
  3. Does it address all the key issues facing your company, or have you overlooked some or skirted around the tricky ones?
  4. Are you clear about the results you want, and will it raise your chances of delivering them?
  5. Will it give you a meaningful advantage over competitors, and can you capture the value of that edge?
  6. Have you made the right trade-offs, or are you making too many compromises?
  7. Do you have what it takes to make it work—resources, capabilities, attitude, stakeholder support, etc?
  8. Will it be sufficiently hard for competitors to understand, copy, or nullify?
  9. Will important competitors worry about it, and wish they’d thought of it first?
  10. Does it lock you into a particular course, or will you be able to change direction when you need to?
  11. Is this strategy unquestionably the best you can do given your current circumstances?
  12. Does it have legs – i.e., will it give you the results you want for long enough to make it pay off?

A second set of questions looks at your chances of making your strategy work:

  1. Is your strategy simple, clear, and specific (i.e., will it be easy to explain, will it make sense, and will you be able to stay “on message”)?
  2. Does it have just a few (3-5) key goals that are unquestionably the priorities, and will achieving them get you where you want to go?
  3. Are those goals followed by (3-5) well-defined actions, and are specific individuals responsible for those actions within specified time-frames?
  4. Do you have the right people in all functions, and are they excited about your strategy and aligned behind it?
  5. Do the “pivotal people” on your team (the few who are the most critical “gears in the system”) have the skills and clout they need to make things happen?
  6. Do they have the information, resources, and support they need, and will they continue to get it?
  7. Will your organizational arrangements (structure, processes, systems, culture, incentives, etc.) support your strategy?
  8. Do you understand the risks that lie ahead, and do you have plans to deal with them?

All of these appear to be quite simple questions. But they may be tougher than you imagine. Getting to the answers may be painful, and you and your colleagues may not like them.

But remember, strategy is not just about logic, analysis, and hard decisions. It’s also a highly-charged social, political, and emotional subject. If you don’t start out with that understanding, and if you fail to confront reality while you craft your strategy, don’t expect great results. The world is just too tough for that, and it’s getting tougher.

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  •  05/03/2012