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 262013
 

My motto is, “If you don’t make a difference, you don’t matter.”

Business competitiveness is all about making a difference. So key questions in strategy are: “What is our difference?” “Why does it matter?” and “How will we deliver?”

Any firm wanting to be successful has to be able to do some thing exceptionally well. Innovation, for example. Or operating across borders. Or recruiting and managing people with rare skills. Or developing alliances, design, manufacturing, marketing, service—or any of the many other activities that add up to the production of value.

That thing must set the firm apart from competitors and offer unique value to customers especially, but also to various other stakeholders. It must be durable and defendable. And most importantly, it must have “multiplier potential” so that excelling in it today will enable delivery of further value in the future.

Experts on business have been telling us this for ages, using terms like “core competence” or “core capabilities.” Most executives understand it well and will swear they’re driven by it—though in most companies there’s a surprising lack of focus on actually making a difference. Rather, it’s one of those taken-for-granted notions that hovers in the background but is not the central and explicit issue in every conversation or decision. I’ve sat in countless management discussions where no one mentions it at all.

What’s even more of a surprise is that strategy itself isn’t seen as a capability worthy of special focus or mastery. Almost everyone agrees it’s important and knows you have to have one, so you have to “do it.” But get it out of the way, and you can get on with making and selling stuff and making a profit.

Why do I say this? Here are some reasons, gleaned from my own 25-plus years of consulting as well as lots of research by others:

1. Just about every manager you talk to in any company—let alone across firms—has a different take on what strategy is about. They’re all over the place when it comes to why it matters, what it should do, or how to make and execute it. They’ve all read strategy books and attended courses, but they’re unclear about why one approach to strategy works while another is less satisfactory. So ask six senior people about this and you’ll likely get six different opinions. Ask the same questions outside the C-suite, and you can expect blank looks.

2. Few companies have a consistent approach to strategy. They bounce from this concept to that, switching tools and techniques on a whim. They don’t have a “strategy language” that their people understand and that anchors their discussions. As a result, their strategic conversations are poorly framed and conducting them over time is ineffective. A process that should cut through complexity, clarify priorities, and focus resources and efforts has the unintended consequence of constantly adding confusion.

3. They chop and change consultants as if whom they work with doesn’t matter. (Why don’t they do the same with their auditors or lawyers?) They think that outsiders can add value to a strategy process, but are careless about choosing them, often leaving it to some low-level, uninformed person to call around or do a Google search for someone new. They’re not fussy about whether the latest “guru” is really a strategy expert—or a sales trainer or retired factory manager hungry for a new assignment. So the value of the advice they get is spotty, and they’re jerked this way and that by it.

4. They fail to look back and learn, and to use each strategy discussion as a building block for the next one. Amazingly, there’s evidence that only a few firms systematically review their strategies or keep building on them. They make one, get on with life… make a new one… get on with life… and so on. Equally amazing, they rarely review their approach to strategy, asking whether it’s the best they can do or needs to be changed, or debating how to improve it.

5. Strategy is seen as a parallel activity to “real work,” not as real work. And certainly not as the most important of all real work. It’s not woven into the everyday agenda. It isn’t seen as the over-arching issue in business, or as something that concerns literally every person in an organization. It’s a task that has to be dealt with. It gets the spotlight from time to time, and then only a privileged few people get involved with it.

Competing in the future will be quite unlike competing in the past. Things will be much, much tougher. Firms will have to be cleverer and quicker in dealing with the challenges they’ll face. Making strategy “on the fly” will be increasingly necessary. Strategy smarts will matter more and more.

So if there’s one deep competence companies need to develop, strategy is it. The ability to craft and conduct strategic conversation —to design and execute effective strategy—will be the skill that “makes the difference that matters.”

Nothing else—not financial wizardry, innovation, collaboration, “human capital” management, technology, or whatever—counts as much. For without strategy, nothing else will get companies the results they want. And the difference between good strategy and bad strategy will count as never before.

MAKING STRATEGY MATTER
  1. Make building the strongest possible strategy capability an explicit goal and a priority—”Topic #1″ in your company. And involve everyone.
  2. Taking into account your specific needs, choose one approach to strategy and stick to it. Communicate it widely and constantly within your organisation. 
  3. Use a few tools and learn to use them well. Keep checking that they’re working for you (but beware of dumping them too readily). 
  4. Develop a “strategy language” so people talk about things the same way. 
  5. If you need help, pick your advisors carefully. Make it clear to them that while you want their outsider’s views and expert knowledge, you aim to develop a consistent process and to develop the strategic IQ of your team. Make sure that what they’ll bring to the party will be additive and not blow holes in your approach or take you in a totally different direction.
  6. Constantly review with your team what new knowledge and insights about strategy they may have picked up, and rigorously debate whether or not to integrate them into your approach. If you really think they have merit, plug them in carefully.
  7. Always review your current strategy before moving on. It’s tempting to race forward, especially when you face new challenges, but that can hurt programmes and initiatives already in place.
  8. Practice! Practice! Practice! Create opportunities to talk strategy. Begin every strategy discussion with the intention that it will be a building block for the next one. Keep asking, “Why is this working for us?” “How can we do it better?”
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  •  26/01/2013
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
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