10 May 10 Strategy Past, Strategy Future

A bacon sandwich, toast, marmalade and coffee.  The perfect start to a Sunday morning.  Then the business section of The Sunday Times flipped open to reveal, in two separate articles, a possible picture of strategy past and strategy in the future.

Tom Bowers’ article Browne’s legacy of cost cutting stored up barrels of trouble[1] paints a sorry picture of the potential long-term effects of cost-cutting and outsourcing (in this case, the use of contractors). To many, cost reduction and the associated use of outsourcing have been essential (in some cases arguably the only) elements of corporate strategy. Certainly, the 1990s and the first decade of the 21st century wear these now indelible strategic hallmarks.

In the same section, another article, Andrew Davidson’s interview with Vineet Nayar[2], reveals a different approach to strategy-making. Nayar points to the real “value zone” as being the point where employees and customers meet. Using this observation, Nayar’s approach is to build advantage through the competences of employees. Indeed, Nayar goes as far as to say “Employee First, Customer Second” – breaking that long-held rule that “the customer comes first”.

Two different perspectives on the source of competitive advantage. One marking the past – one marking the future?

References
[1] Bower, Tom Browne’s legacy of cost cutting stored up barrels of trouble. Sunday Times. May 9, 2010.
[2] Davidson, Andrew The Andrew Davidson Interview: Vineet Nayar. Sunday Times. May 9, 2010.

Tags: competences, competitive advantage, outsourcing issues, outsourcing problems, strategy

19 Aug 09 Social Networking and the Web: An unreliable distribution channel?

Just before I went on my summer break, an interesting article crossed my PC screen – “Social sites losing popularity with young“  – an article in the FT on 6th August[1].

This article makes two interesting points:

(1)  The number of “young” internet users (defined as 15 to 24 year olds) using social networking sites (such as MySpace and Facebook) has, surprisingly, declined for the first time.
(2)  These sites (and others such as LinkedIn) are growing in popularity – but only in terms of older internet users.  However,  these may be totally new social networking users looking to adopt social networking as part of a post redundancy job search exercise.

For me, these are interesting findings and support my own thinking that both the use of the internet and social networking media is at a relatively immature stage and may not offer businesses the total relationship building and distribution solution that many are wishing for.  Therefore, basing a long-term business model on these routes may be risky.

We can make some early inferences:

(a) Usage of the web, and particularly social networking sites, will probably change depending upon the user’s age and life cycle stage.

(b) Users – and I would suggest particularly younger users – will be relatively ‘promiscuous’. From my own family experience, I was surprised to see how quickly MySpace fell from fashion to be replaced by Facebook.

(c) Social networking – a lifecycle. Early indications are that the lifecycle of social networking sites – such as Friends Reunited for example – may be surprisingly short. This leaves us with the question – what will replace Facebook?

If we couple these findings with other work (for example [2]) that looks at the emerging effects on consumer behaviour of the recession – especially amongst generation Y (the offspring of generation X – the ‘baby boomers’) – a complex picture merges. Early research on recession effects inform us that there may be a growing mistrust of larger corporations – and a need for greater personal inter-action – a ‘visible not digital handshake’.

So, a wholly web based distribution and relationship building strategy could look fairly shakey.

If customer lifetime and loyalty maximisation are important for your business then a far more complex model may be needed of which the web and social networking are but two components.

Enjoyed reading this?

If you enjoyed reading this you can register to received news of new articles by e-mail. Just click here.  If you want to learn more about how I can help your business, please click here.

References:

[1] M. Palmer, “Social sites losing popularity with young,” Financial Times, August 6.
[2] U. Haque, “The Generation M Manifesto,” Harvard Business Publishing, Jul. 2009.

Tags: generation y, internet, recession, relationship management, social networking, strategy, web

13 Jan 09 Recession Survival: Look again at the outside world

Every once in a while a piece of academic research lands on my desk just at the right time.

Just last week I read a research article from two academics in the US focusing upon strategy and the way that managers see the business environment (please see References [1] at the end of this article).  In short, the way that managers and business leaders see and interpret the outside world shapes their decisions and of course the strategies of their organisations.  All very commonsense stuff.  But we are facing a period of environmental turbulence and one of those infrequent tipping points where the business world could change dramatically and forever.  So what can this piece of research contribute?

In summary, we have four pointers:

Pointer #1: Question your mental model. Now is the time to question some of the assumptions that we have taken for granted when we think about and formulate strategy.  An example would be what our customers want.

Pointer #2: Don’t just look at the usual indicators. There is a temptation to look at the world outside our organisations from an industry perspective.  But now the forces for change won’t emanate from inside our industries but outside.

Pointer #3: Change the way you plan. The danger of “battening down the hatches”.

I will now take a closer look at each of these three pointers.

Pointer #1: Question your mental model.

Arguably, there is just too much information coming in on changes both in the markets that your organisation operates in and the broader global environment for one person to digest.  During the last six months of 2008 I attempted to track the strategic implications of the financial sector ‘meltdown’ on a daily basis.  Apart from taking up time, it left me with a permanent headache!

But in all seriousness, we develop mental models to simplify this complexity to make sense of it all.  That is human nature – and we all do it.  The problem is that we tend to assume when using these mental models that the business world operates in a certain way and that certain strategies and approaches will always work.  In other words, we take predefined ’cause and effect’ relationships for granted. The temptation, as we enter recession, is to do exactly the same as we did during the last recession.  But this time the world may be starting to work in a different way.

So the message is to take a broad minded view of how changes in the outside world could hit your industry.  Don’t just assume that your sector will survive a recession relatively unscathed because it survived the 1990s downturn.  The general insurance sector is probably a good example.  This has its own strong industry cycle so some may think that in relative terms organisations in this sector will do quite well.  Perhaps they will if we extrapolate from the past. But perhaps they won’t – especially if we look at regulatory perspective emerging from the G20’s first meeting.

And here are some other established assumptions that must be revisited.

• Globalisation will continue. Well, it just might not.  Some point to a divided Europe emerging as we progress through a recession [2], others question if globalisation has and will deliver prosperity [3].  This brings the whole issue of BRICs based strategies back onto the drawing board.
• We know what our customers want and who they are. Well we might have done but we don’t now.  As food retailers at the luxury end of the UK food market are discovering, customers are rapidly changing their buying criteria.  And as I have argued before, this recession will deliver major change in the structure of the so-called advanced economies – and therefore major changes in who your target customers really are.

Pointer #2:  Don’t just look at the usual indicators.

Organisations, particularly those in fast moving environments, tend to focus on tracking changes and developments that happen within their industry.  New entrants, changes in distribution channels, changes in supply chains would be examples.  In times of major upheaval look further afield.  My argument is that the shape of your market place over the coming years won’t be shaped primarily by industry forces but by global forces (such as regulation) emanating from outside the industry.

Pointer #3: Change the way you plan

I hear the phrase ‘we’re going to batten down the hatches’ quite a lot at the moment. Now, this gives me the picture in my mind of an old sailing ship about to enter a storm.  The hatches are nailed down and the crew goes below decks and waits for the calm after the storm.  The only problems with this approach are that:

1. You can’t see where you’re going during the storm and
2. The world, I propose, will have changed quite fundamentally when the hatches are opened.

Research [1] tells us that those organisations that sense changes first and move the quickest change the way they plan.  They don’t rely totally on conventional business plans where we construct a plan in concrete for say a year ahead. They rely more on experimentation, deliberately going outside to test what’s changing and what new approaches might work and then bringing this learning back into the organisation to further develop strategy.

Paradoxically therefore recession isn’t a time to batten down the hatches, but to go out and experiment to sense emerging changes especially amongst your organisation’s customers.  If you stay under the hatches you might just lose your customers.

Enjoyed Reading This?

If you enjoyed reading this and would like to keep up to date with posts and articles on my website you can register to received updates by e-mail – just click here.

REFERENCES

[1] S. Nadkarni and P. Barr, Environmental Context, Managerial Cognition and Strategic Action: An Integrated View, Strategic Management Journal, vol. 29, 2008, pp. 1395-1427.

[2] J. Pisany-Ferry and Z. Darvas, Policy Brief 2008/10 Avoiding a new European divide, Bruegel, 2008.

[3] J. Bivens, “Everybody wins, except for most of us, Economic Policy Institute, Nov. 2008.

Tags: business, financial sector, meltdown, recession, strategy

22 Dec 08 Recession Survival: Industry Contagion, Structural Change and Business Strategy

Structural Change

My last two entries introduced the challenge of structural change. I have drawn attention to the fact that recessions don’t just mean a period of economic contraction, they also bring the prospect of economic restructuring. And economic restructuring has fundamental implications for business strategy.

I used financial services in the UK as my example. To recap, in the late 1970s manufacturing employed over 25% of the workforce. This figure is now around 10% (and reports are that it will now take a further hammering). Fortunately, financial services came to the rescue in the 1980s and created jobs that swelled this sector to take eventually 21% of the workforce – up from 10% in the late 1970s.

That was good then.

But having an economy dominated by financial services could be bad now.

I have already pointed in earlier posts to at least two reasons why financial services won’t bounce back. One of these is regulation. It is clear from the action plan that emerged from November’s inaugural G20 summit that the blame for the current recession is being laid squarely at the feet of the financial services sectors of the world’s advanced economies. The G20 action plan focuses upon establishing a global regulatory framework that will prevent another financial services led implosion. And that regulation may restrict innovation and therefore future sector growth prospects.

But this leads us to another problem. And it’s particularly a UK problem.

I have been considering for about two years now the long-term viability of services led economies. My theory is that as manufacturing drifted towards the emerged and emerging economies so eventually would services. Indeed, there is the argument that entry barriers to services would fall as the educational capability of the newly emerged economies increased. Certainly, there is evidence that the newly emerged economies, and China in particular, will focus upon developing its own service sector capabilities to swell indigenous employment. In so doing it is reasonable for it to acquire, through acquisition, the intellectual knowledge held in the advanced economies. And as we have learnt through financial services offshoring, employees do not necessarily have to be located within the countries where the service is delivered.  These factors could dampen the resurgence, from an employment perspective, of financial services in the UK and other advanced economies.

Now, there is a related message from others calling for first order macroeconomic adjustment in the UK[1]. Broadly, the view is that financial services based economies are just too volatile. Essentially, to ensure stability the advanced economies should go back to the past and focus on re-establishing manufacturing, retail and healthcare sectors. Interestingly, some quarters[2] are calling upon President-elect Obama to move resources out of financial services into the “real” sectors of technology and manufacturing.

Industrial Contagion

Whether of not we see this type of economic restructuring depends upon a number of factors, one of the most important of which I will refer to as industrial contagion. By industrial contagion I mean the appearance of the corporate liquidity domino effect – the need for nationally funded corporate bail outs spreading from banking and financial services into other industry sectors.

And there is of course one sector already on the brink -automobile manufacturers and their component suppliers. If the support announced and mooted over the three days 19 21 December fails to stop the big US auto manufacturers collapsing (or only ensures a slow lingering death) then the whole question of the industrial structure of advanced economies will come under the main spotlight. For collapse of the big auto manufacturers in the US will bring almost unprecedented levels of human suffering in the US and beyond.

Over 3m unemployed and unemployment in some US states being pushed up by nearly 9%[3].

This is the type of event that can, and probably will, redefine both industry structures and the role of private enterprise in society.

So industry contagion is a leading indicator of structural change in advanced economies and, regrettably, the appearance of and “L” shaped, and not as hoped for a short-lived “V” shaped downturn.

Business Strategy

What has this to do with business strategy?

Everything probably.

It means that if we do enter an “L” shaped recession when we come out of it chances are that your target customers – whether consumer or business – will look and behave completely differently.

This could also herald an era where the balance of power starts to shift away from the boardroom towards governments, regulators and of course the new shareholder, the public.

It may also bring to end the view that businesses should be driven just to maximise shareholder value. It seems likely that contribution to a broader social agenda will sit alongside profit generation in organisations future balanced scorecards.

Therefore, we should now be using industry contagion not just to judge the shape of the downturn but more importantly how capitalism could change.

Enjoyed Reading This?

If you enjoyed reading this and would like to keep up to date with posts and articles on my website you can register to received updates by e-mail – just click here.

Information Sources

[1] S. Johnson, P. Boone, and J. Kwak, “Get Ready for an L-Shaped Slump,”

Peterson Institute: Real Time Economic Issues Watch, Dec. 2008;

http://www.petersoninstitute.org/realtime/?p=330.

[2] P. Boone, S. Johnson, and J. Kwak, “Op-ed: An Economic Strategy for Mr.

Obama,” Peterson Institute, Nov. 2008;

http://www.petersoninstitute.org/publications/opeds/oped.cfm?ResearchID=1046.

[3] R. Scott, “Automaker bankruptcies would cost up to 3.3 million U.S. jobs,”

Economic Policy Institute, Dec. 2008;

http://www.epi.org/content.cfm/webfeatures_snapshots_20081217.

Tags: business strategy, economic contraction, economic restructuring, g20 summit, recession, strategy

10 Nov 08 Recession and Strategy: The old questions don’t work anymore

Overview

We are all deep into the annual planning process. But this time the challenges are different and therefore the questions that we should address must change. An era of uninterrupted economic growth has come to an abrupt halt. The hopes emanating from last year’s planning cycle, that the world would experience just a temporary economic slowdown, have been dashed at least for those of us in the developed economies.

The one uncomfortable fact that we must now face is that no one knows, with any degree of confidence, what the business environment will look like next year, let alone in five years time. We are entering a true period of uncertainty.

The future shape of the world and therefore the competitive strategies that we must craft to survive and flourish will be formed by a complex confluence of global, national and socio-demographic forces. I will explore these forces, their interaction and, most importantly, future global formative events that could have a material impact upon the structure of our business environment later in this briefing series.

But now onto some suggested questions that you should now be considering as part of your current business planning process.

The New Questions

Whilst the future is clouded, there is a range of questions that must be addressed during this year’s planning process. To help you, I am going to suggest that we divide or categorise our questions into three different time periods:

Period 1: Managing the Present: The next 6 months.

Period 2: Surviving the Middle Years: 12 to 48 months out and

Period 3: The Long View – New Strategies for New Markets: The 5 year view

Each of these periods will have different challenges and therefore different questions must be presented and answered.

Period 1: Managing the Present

The short-term focus is making sure that the business is in a fit state to survive, grow and potentially out-manoeuvre more inwards thinking competitors. The issues to consider have been dealt with in my briefing Recession: Key Questions for Business Survival and Growth, but the central message was do not take actions that would make contraction and decline a self-fulfilling prophesy for your business.

Three of the key questions that could help you in the immediate future are:

(i) How are our customers’ needs and decision making criteria changing in the short-term? In past briefings I have referred to this as the “Aldi Effect“. Customers’ needs, or more importantly, decision criteria will change more than once during the cycle of this downturn. Customers will make certain immediate changes to their decision criteria. One simple example is that “eating in is the new eating out” – as restaurants empty takeaway pizza operations flourish. The first task is to identify how customers are now changing what they buy and how they make up their minds. This is as much true for business to business markets as it is for consumer markets. In business markets the perceived risk agenda will be changing as will the decision making process and the composition of the key people involved in the decision making process. This is a question that must be answered now, as it will have significant implications for your offerings and management of target customers over the next 12 months.

(ii) How can we reduce and manage costs creatively? Rather than opting straight away for across the board headcount reductions or freezes, consider carefully your exposure to frictional costs. By frictional costs I mean the costs related to:

• Activities that are duplicated either in your organisation or elsewhere in your value chain for example similar processes, activities and decisions made both by your organisation and your distributors
• Activities that have historically been carried out but in today’s environment add little value.

Remember that the consultants McKinsey have calculated that most organisations can deliver substantial process cost savings by conducting a ground up review of processes – for example up to 30% gains in direct labour productivity, lower material costs and reductions in establishment expenditure.

(iii) How should we manage the survivors? It is an unfortunate fact that employment levels may have to be reduced. Few organisations will be totally insulated from a contracting economy. If you do have to make staff redundant, consider carefully how you manage and motivate the survivors. They too will still feel insecure and threatened and Human Resource policies must change accordingly.

Period 2: Surviving the Middle Years

Some interesting forecasts have started to appear focusing upon the immediate impact of the “melt down” in the banking and broader financial services sectors.

Some forecasts point to, in London alone, 60,000 job losses in financial services[1]. To put this in perspective, there are some 230,000 people employed in this sector in London and the South East of England[2]. Broadly up to 1 in 4 employees could lose their jobs. This statistic, together with broader global developments, points towards a potential structural shift in the economies of the developed world.

The last time that we witnessed a structural shift in the developed economies was in the late 1970s when, as an example, the UK’s economy made the transition from manufacturing to services. This transition, in employment terms, is illustrated below and it can be clearly seen that the financial services sector came to the rescue as the manufacturing sector withered.

Source: Office for National Statistics. Workforce jobs by industry: United Kingdom, Thousands, Seasonally adjusted.

The issue that we must consider is “What the financial services sector gave, will it in turn take away?”

There is no guarantee that the employment structure in developed economies will be the same after the recession as it was before.

Critically, we need to consider if there will be a post services based economy in the developed economies and what form it could take.

There are a number of forces that could dampen a post-recession resurgence in employment within financial services including:

* Regulation. Regulation will prove to be a key shaping force in a post recessionary world and I will cover this issue in more depth in a subsequent briefing. It looks however currently that at least in the banking sector, innovation in new “products” will be more tightly monitored and controlled.  This brings with it the likelihood that past levels of employment may not return, at least in the developed economies.

* The Emerging Economies. Arguably, when referring to the BRICs (Brazil, Russia, India and China), we should now use the term “emerged economies”. One of the next challenges for the newly emerged economies, and China in particular, will be continue to boost employment growth. We have seen massive investment, within China, in heavy industry. The one problem is that heavy industry is not a significant generator of jobs. But the financial services sector has just that potential[3]. We can therefore expect further inwards and outwards investment in financial services that will, in turn, place financial services organisations in the developed economies under pressure.

As indigenous financial services organisations grow in the emerged economies they will become acquisitive looking, amongst things, for the ability to travel up the learning curve at maximum possible speed. In this scenario, one of the problems faced within the developed economies is that it is relatively easy to migrate financial services sector employment, as the recent trend towards outsourcing has demonstrated. So when organisations are acquired, the employees could be located anywhere globally.

However, the hallmark of the current crisis is that we are at a complex road junction. It is impossible to know which route the world will take.

An alternative argument to that articulated above is that the collapse of Sterling, for example, rewrites the economics of the outsourcing equation and that more jobs eventually could come home. Governments too could take a more protective stance in employment terms in respect of financial services organisations where they have acquired financial interests.

Another buoyant perspective is that increased demand from the new middle classes in the emerged economies could eventually lead to resurgence in the manufacturing sectors of developed economies creating new sources of employment.

What we can be reasonably sure of is that certain sectors of the economy, such as financial services, will probably shed jobs and contract as we progress into recession. Others will be more resilient. The immediate challenge is to look at the transition period, as shown in the illustration above, and address this question:

“Which of our customer sectors are most exposed to decline and which, in turn, may prove to be the most resilient?”

Considering three dimensions – industry sector, geographic area and firm size may be a good way to approach this question in your business. The answer may reveal that significant changes are required in respect of the definition of target customer segments, the products and services that are provided and the distribution channels that are used.

Period 3: The Long View – New Strategies for New Markets: The 5 year view

The argument presented in the last section, that the pre and post recession structures of economies in the developed world may be significantly different, forms the foundation for the most challenging question of all:

“What form will a post recession economy take?”

There is some emerging evidence that economies at least in the developed world may undergo a structural change, just as we witnessed in the 1970s and 1980s.

It may therefore be dangerous to assume that post recession things will be exactly as they were before.

If you enjoyed this briefing you can register to receive news of latest additions to my website – please visit the Registration Page.

References:

[1] I. Dey, “Goodbye To The City … And Hello To The Life As A Teacher or Gardener.” The Sunday Times, Nov. 2008, p. 7.

[2] “NGRF – LMI Future Trends – Regional / national dimension (Sector: Financial Services),” NGRF; http://www.guidance-research.org/future-trends/banking/regional.

[3] G. Dyer, “Comment – How the financial crisis is changing China,” FT.com, Oct. 2008; http://www.ft.com/cms/s/0/e5d48044-a04c-11dd-80a0-000077b07658.html.

Tags: business, Business Planning, economic downturn, recession, strategy

26 Jun 08 Strategy and Communication: The 15 second test

Can you pass the 15 second test?

We all work in a world crowded with competitors and it is important for any business to be able to answer the question ‘What makes you different?’ in a crisp succinct attention grabbing manner.

It’s an important question when it comes from a potential client because it is a screening question – in other words – it is a question designed to help screen out potential suppliers that might not make the grade.  When I ask this question in 90% of cases I get a long and rambling reply and my mind drifts away during those vital 15 first seconds.  So if you can’t identify what your organisation does and how it can make a real difference to a client in 15 seconds then you could be screened out.

To help construct your answer think about:

• What are the key issues of the moment for organisations in your target market – what is keeping them awake at night?
• How your organisation can create value for a client in a way that your competitors cannot.

Then compose a short statement that entices your potential client to ask “Tell me more …”

Many of my potential clients are long-established organisations facing the challenge of new entrants with different and revolutionary mindsets so my answer to the what makes you different question is:

“Changing the way your organisation thinks.”

Tags: client communication, communication, strategy

25 Apr 08 Strategy and Uncertainty: Traditional planning systems don’t work anymore

A quick review of just one edition of the Financial Times (Friday 25th April 2008), reveals that we now live a world of sudden, unforeseen shocks.  Thumbing through the pages of this edition over a cup of coffee reveals the following potential headaches for businesses, that probably were not on the strategy radar screen last September, when many companies would have been embarking upon the well established annual planning and budgeting cycle:

• The prospect of a long-term recession led by failings in the financial sector.
• Capital rationing.
• Global food shortages.
• Question marks over the wisdom of turning to biofuels as an alternative to fossil fuels.
• Fragmenting consumer values.
• Ever shortening product life cycles especially in consumer electronics.
• The rise of national protectionism in the face of the “sovereign wealth fund”.
• The rise of anti-Western sentiments in China with Western brands taking the brunt.
• A wave of increased and possibly draconian regulation.
• Banks looking to raise liquidity.

The point is, that working with one picture of the future, which is probably an extrapolation of the past, won’t work any more.  Neither will the annual planning cycle.  Both are too slow, blinkered and cumbersome.

We have spent so much time over the last decade in building measurement systems (e.g. the Balanced Scorecard) to help us monitor the internal status of our businesses that we have forgotten to monitor the outside world.  And this is the area that must change.

Arguably the first challenge is to broaden the corporate mindset.  We have all been trained to focus on one path, one picture of the future.  Now we need to take a different course and develop a wider awareness of the range of possible futures that could face our businesses.

Take a piece of paper.  Draw a central vertical line marked “business impact” down the centre of the page.  Label the top of this line “high” and the bottom “low”.  Now draw a horizontal line across the middle of the page – with the left end labeled “high uncertainty” and the right “high certainty”.  You now have for boxes.  We need to concentrate on the top two boxes.  The top right will show us events that we know a lot about and are fairly confident that they will happen.  But if they do come to fruition, then our businesses will be really hurt.  Events in the top left hand box will really hurt us too – but we may not know much about them and we can’t say with certainty that they may happen.

The trick is to think about, as I call them, “macro” forces that can produce the type of sudden shocks described above.

Review the list of shocks that I have extracted from the FT again.  You should be able to identify these macro forces behind each:

(a)  Economy
(b)  Environment
(c)  Legislation and regulation
(d)  Politics
(e)  Technology
(f)  Demographics.

Why not spend time over a coffee every month with your work colleagues to think about how each of these six forces could produce “future shocks” and “future opportunities” for your business.  And don’t then stop there.  Your strategy must change to directly include the entries in the top right box – and you must use the entries in the top left box to test the resilience of your strategy.

The challenge for the coming decade will to become as good at scanning the outside world as we have become at assessing and measuring our inside world.

Tags: PESTEL, planning systems, recession, scenarios, strategy, uncertainty