Strategic Focus: Core Business Types
John Hagel III and Marc Singer (1999) defining the core business types (infrastructure management, customer relationship management and product innovation) got a similar conclusion that Michel Treacy and Fred Wiersema (1992) in their work about the value disciplines (operational excellence, customer intimacy and product leadership). They show that there are three main different strategies, I mean to focus on cost, customers or product innovation. Perhaps the only different between the two approaches is that the value disciplines study mentions that there are a very few companies that are able to excel in more than one discipline, although the recommendation is focusing in just one (industry leaders used to focus on just one discipline). While John Hagel III and Marc Singer say sharply that “Scope, speed, and scale cannot be optimized simultaneously. Trade-offs have to be made.”
Let see a brief explication of the three core business types:
- Infrastructure Management: Build and manage facilities for high volume, repetitive operational tasks. High fixed costs make large volumes essential to achieve low unit costs. Stresses standardization, predictability and efficiency.
- Customer Relationship Management (CRM): Identify, attract, and build relationships with customers. High cost of customer acquisition make it imperative to gain large wallet share. Highly service oriented.
- Product Innovation: Conceive of attractive new products and services and commercialize them. Early market entry enables charging premium prices and acquiring large market share.
Infrastructure management and customer relationship management are based on volume (economies of scale and economies of scope). So consolidation of a few big players would be a consequence to create the necessary volume to compete in those core businesses.
It is important to highlight that the authors of the core business types recommend outsourcing processes. They suggest outsourcing to maintain firms focus on their core business at the same time that they reduce cost by using specialized firms.
From Value Chain and Processes to Strategy Execution
Value chain concept was created in 1985 for Michael Porter. In 1993 Michael Hammer and James Champy brought us the concept of processes that cut across functional organizational structures. Those processes promise dramatic improvements in terms of cost, quality and speed. We are going to review the value chain, processes concept and the impact on the present interest for strategy execution. This review is essential for turnaround situations because improve strategic focus, get cost improvements via processes, and take care of execution issues aligning firm activities.
First at all, we are talking about processes versus functions. Functional Organizational Charts are still very common nowadays. The explication likely is that many functions are not really affected by cross functional processes (for instance Finance, or Human Resources). Although every function is related to other function, there are just a few functions that are able to take really advantage of process approach (dramatic cost, quality and speed improvements). Indeed, there are two main processes in any organization that can take advantage of process approach:
- Customer Relationship Management (CRM: Marketing, Sales and Services) that manages the processes to generate demand of our products and/or services.
- Supply Chain Management (SCM: Logistics, Production and Procurement) that manage the offer processes. I mean how we are delivering our promised products and/or services to our customers. SAP (the technology firm) offers the possibility of breaking the SCM processes in three processes: Supply Chain Management (SCM), Product Life Cycle (PLM is important for manufacturing companies), and Supply Relationship Management (SRM is important for manufacturing and distribution firms where procurement and purchasing have an important role). However, in this post we are going to consider that we are not breaking SCM processes in order to avoid more complexity.
Adapted Value Chain
Primary process (Porter said primary activities) must be the focus of the company according to:
- Strategy: There are different frameworks to analyze strategy but quite similar in the essence. Let us use the Value Discipline model of Michel Treacy and Fred Wiersema. That model shows us three strategies thrust: Operational Excellence, Product Leadership, and Customer Intimacy. Customer intimacy is CRM related, and the other two are SCM related. Indeed, someone could say for example what about “hiring the best staff for the Human Resources.” Well, this could be a Sustainable Competitive Advantage (SCA) but it is not a strategy.
- Bringing the full potential of processes approach: To materialize processes’ benefits, again we should mainly focus on CRM and SCM processes rather than on support functions/activities.
- With a couple of process (CRM and SCM) we cover the activities much important of the firm: We cover the activities to generate demand of our products and/or services (CRM), and the activities to produce and deliver those products and/or services (SCM).
So is this means that the support activities are not important? Obviously the answer is NO. Finance is an important function that shows us how we are performing, but in order to improve the results’ actions has to be taken in the CRM and SCM processes. Human Resources is another important function because without the right staff we could not run our process properly, but staff is an enable for our primary processes.
Now we would like to review the strategy execution of the value chain tool. Thus, we are going to show some issues related:
- Support function is “support” rather than primary: Basketball teams have a point guard position organizes the team’s offense by controlling the ball and making sure that it gets to the right player at the right time. Something similar happens in handball teams with center backcourt players. So all the team members are important but there is a specific position/function that organizes the game. It is important in the company define clearly primary and support roles. As, we have seen before primary role is sharing between CRM and SCM processes. However, we would say that CRM even have a higher role that SCM, because firms start from customers and even SCM has to support those customer related processes.
- Structure must be clearly shows the different between primary process and support activities: We must realize that any support area could create an organizational centrifugal force rather than a desired centripetal force. This could happen when a support activity decides to take the role of primary activity, and this is the case of “rock and roll star managers” in support functions. Thus, defining a clear structure could avoid those problems (see the difference between the organizational charts show below). Someone could ask for instance the following question: cannot be the Financial Director a primary role (and Finance function a primary activity)? He could be, but we would have to ask ourselves: Is he having that primary role because we have decided it from a strategic point of view, or because people in charge of the primary processes are not the right people? Be aware that there are companies like DHL that strategically are deciding those functional managers (Finance, IT, HR, etc.) are not able to take country manager positions.
On the top organizational chart without distinction between primary and support activities. Below the organizational chart makes the different between primary and support activities.
- * Primary processes (CRM and SCM) must be managed with a holistic approach: Those processes involve: different activities, value deployment, people management, and so on. Many initiatives are going to be launched from these processes involving other areas. This does not mean an intrusion rather than primary processes are leading the cross functional processes. For instance: customer profitability analysis, activity base costing to manage product costing properly, six sigma initiatives to improve quality and cost to serve customers, change in cost centers to understand much better product cost behavior, and so on.
- * Support functions must adapt their procedures to primary processes needs in case of conflict: If primary processes have to adapt to support processes, we have a sign that it could be an execution strategy problem. Sometimes we could realize that people in support activities create the quite common “functional silos.” E.g. Finance function that rather than suggest new kaleidoscopic approach to costs (quality costs, lean costs, etc.,) they decide that those operational approaches are not necessaries; Quality function that rather than suggest incorporating in procedures time commitment to compete on time and service, they argue that this dimension is not necessary; etc.
10 Steps of How to Implement the Value Chain Concept Successfully
The value chain is one of the most powerful strategic tools. Michael Porter (the originator of the value chain concept) uses this tool to define what strategy is. However, the work of Porter looks more focused on strategy formulation than on strategy execution. There is a gap between understanding the concept of the value chain and implement it. So, let’s go to analyze how to implement in 10 steps the value chain tool successfully.
Infographic adapted from SCOR Process Framework (Supply Chain Council): How to Implement the Value Chain
The 10 steps of value chain
The first step is defining the Business Strategy of the firm. I mean defining our main Value Discipline (Operational Excellence, Customer Intimacy or Product Leadership according to Michael Treacy and Fred Wiersema) or our Core Business (Infrastructure Management, Customer Relationship Management or Product Innovation according to John Hagel III and Marc Singer). Be aware that both are quite similar strategic frameworks to define our strategy. The good point of these approaches to strategy is that those are probably more specific than Porter Generic Strategies (Cost Leadership, Differentiation, and Focus). This is important because the Value Discipline and Core Business frameworks make a better fit between strategy and processes/activities. Processes/activities are the key element for implementation.
In 1996, Porter in his famous HBR article “What Is Strategy?” declared that Operational Effectiveness is not a strategy. He explained that Japanese companies rarely have strategies and those were based on Operational Effectiveness in the 1980s. He suggested that competitors could quickly imitate best practices, management techniques, and so on. However, after two decades from the publication of the article the reality is other. Japanese companies (Toyota, Honda, Bridgestone, Canon, Ricoh, Seiko, Sony, Panasonic, Nikon, Yamaha, etc.) still enjoy of an important Sustainable Competitive Advantage. So, according to the facts we should consider that Operational Excellence is a working strategy.
Some of the Operational Effectiveness tools (benchmarking, best practices, performance management, change management, and so on) are helping us to implement the concept of the value chain despite the Value Discipline chosen.
The second step could be called Configuration. Now, we are aligning the Value Discipline chosen with some of the main functional strategies (Business Model, Marketing, Production, Logistics/Stock, and Performance). This step helps us to define our business strategy deeper in order to have an actionable strategy.
Many firms used to fail in the strategy execution rather than in the strategy formulation process. Failed strategies that demand a turnaround used to involve re-focusing on target industries, product, markets or activities of the value chain. So, the configuration step is one of the most important steps analyzing the value chain. Usually a BCG Matrix or other strategic portfolio tools should be used to get a deeper inside.
The third step is Segmentation. There is a common mistake that is “trying to be everything to all customers.” This used to mean that we are not able to excel in any particular segment because we lose focus. Without the correct focus (segmentation), the value chain implementation will have a high risk of failing.
Then the fourth step should be Process Reengineering. There are a few common mistakes that make firms fail in performing re-engineering:
- Limit the concept of process re-engineering to improve current activities (tactical level): Why do not you use re-engineering to perform different activities? (Strategic level as Porter suggests.) We can use re-engineering at tactical level, strategic level or both. The strategic level should have higher organizational impact. Are you measuring how many of your reengineering initiatives belong to tactical and strategic level?
- Lack strategic thinking on the value chain: Focusing too much in operational processes and neglecting the strategic activities. We should wonder ourselves: what are the key activities that our value proposition is requiring?
- Fail to see the potential of outsourcing: Some people could be afraid of outsourcing because outsourcing could be interpreted as we are not able to improve those processes or activities internally. Indeed, it is very difficult to compete with specialized firms which offer outsourcing services. Therefore, it is a worthy solution to use outsourcing firms in order to leverage us on their Competitive Advantages. Outsourcing is a tool that can bring massive value to our firm (focus, expertise, reduce complexity, flexibility, savings, and cash-flow improvements.)
- Reduce re-engineering tools to process mapping and the ISO norm: Modern re-engineering processes cannot be understood without using analytical and improving techniques like Lean and Six Sigma. Furthermore, other complementary management tools are needed like performance management, best practices, project management, or change management.
- Substitute process knowledge for common sense: Inexperienced reengineering people are not likely able to detect problems, make a diagnostic, and fix the problem quickly. So, their job is based mainly on interviewing users and asking them for solutions. The value that they add is “using common sense” to the input received from the business users. Common sense is necessary, but it is not enough to generate a Competitive Advantage. Highly effective re-engineering required of a deep knowledge of the best class processes (supply chain process, sales process, etc.)
- Reinventing the wheel in process re-engineering: There are a few well-developed process frameworks from prestigious organizations (APICS Supply Chain Council – SCC, American Productivity & Quality Center – APQC or Value Chain Group – VCG). However, there are people who do not follow any proven process framework. In those cases they are probably reengineering based on common sense what will take too much time, cost and the result would be poorly compared with competitors using those frameworks.
- Assume that organizations need a specialized process re-engineering team to lead re-engineering rather than support it: I think that is more powerful having the owners of the processes leading and performing the re-engineering tasks. When the re-engineering come from users used to bring more powerful organizational changes and the reengineering is better embedded into the organization. Leading the re-engineering process from inside the areas (supply chain, customer relationship, human resources, etc.) is an indicator of the firm maturity and the quality on the staff. For this approach, organizations need a re-engineering team that train users and offer support rather than decide what must be changed.
Probably the best indicator that we have a solid business strategy and value chain execution is having the capability to replicate successfully strategies in different geographies (e.g. Zara/Inditex or McDonalds). Be aware that replication is quite difficult to achieve without robust and well defined processes.
Fifth step used to be ignoring for many organizations. Timeline is a key element to properly execute activities. Do you think is the same using 5 minutes for machines’ setup times than 5 hours? Do you think is the same unload trucks from 7:00 AM to 12:00 AM than allowing unload any time of the day? Obviously not, so process without timeline means processes not well defined. This will create coordination problems between different areas, friction between people performing sequential activities, problems measuring the important responsiveness KPIs, etc. Probably the most important issue to not defining timelines is that we would be unable to implement the “sense of urgency” in our organization. I mean urgency to satisfy customers’ needs, urgency to invoice customers on time, urgency to receive customers’ payments that improve our cash flow, and so on.
The next step is the sixth, Performance Management (Metrics). Nowadays, it is well known what it is a Key Performance Indicator (KPI). Nonetheless, many firms are not able to answer the following questions:
- What are the strategic attributes of the company?
- What are the overall health, diagnostic and root cause KPIs for any strategic attribute?
- How many KPIs should we have?
- What KPIs should we measure?
The answer of those questions is important in order to be sure that we have in place the correct KPIs to monitor our value chain. We should remember that “what it is not measured, it is not improved it.”
Once that we are able to define our KPIs, the next questions are:
- Where is the information that we need?
- How can we extract that information?
- What are the dashboards or scorecards that we are using to present and communicate properly the KPIs?
Seventh step, Benchmarking: This management tool allows us to compare the performance of our main processes or activities with those of other comparable organizations (internal or external). So, this tool is allowing us to prioritize our value chain initiatives according to the higher gap between our current situation and the potential future state (higher potential benefits) and lower implementation risks.
Eighth step, Best Practices: As Michael Porter said: we could argue that the rapid diffusion of best practices means that competitor can quickly copy them. However, thinking in that way we would likely underestimate implementation diversity and complexity. Thus, we would not consider the competency to implement as source of Competitive Advantage. Why is implementation a source of Competitive Advantage? Because the implementation capability is very complex to imitate and used to make a huge difference between firms competing. For instance, if we ask a few chefs to cook a written recipe, with similar conditions (ingredients, oven, etc.), we will likely realize that the result of each chef can be reasonably similar but very different. Imagine the differences in results with the following circumstances that affect defining and executing the company’s value chain:
- Activities: There are more than 1.000 activities (APQC) and like Porter mentioned trade-offs arise from activities themselves.
- Best practices: There are hundreds of best practices, and trade-offs arise from best practices themselves too.
- IT systems: Companies have different IT systems (Google, SAP, Oracle, Microsoft, etc.) with specific customizations what means that not all the best practices can be implemented in all the IT platforms or in the same way.
- People: Each organization has different people with different mindsets and skills. So, the perceptions of which activities are an opportunity or which are risky rely on the teams of each particular firm.
- Culture: Each organization has its specific culture. For instance regarding innovation we have innovators, early adopters, laggards, and so on.
Other advantage of using best practices is that push us to monitor the external environment in which we are following competitors. Additionally, best practices should help us to think out the box and to foster the creation of our own best practices list which could mean performing different activities than our rivals.
When we are talking about strategy execution, the variable people cannot be missed. Thus, the step ninth is Organizational Design where we assess any gap between the current inventory of our skills and the competencies level.
Finally, the step tenth Change Management considers a much broader implementation concept than just people issues. This is the last step for the value chain implementation, but it is not the less important. It is usual to find failed value chain initiatives where the design team is just blaming users because they did not implement properly. It is true that end users are responsible for delivering results too, although it is well known that there are many handicaps to make things happen. Thus, the design team is responsible for having a change management program, and a periodic follow-up that guarantees the success of all the initiatives.
The Sustainable Competitive Advantage (SCA) Process: The Hearth of Strategy
The concept of Competitive Advantage (CA) is the foundation of your firm direction and strategy. Unfortunately, Competitive Advantage used to be confused having good products/services or being good in some particular competencies. Indeed, Competitive Advantage means having a superior advantage compare with our biggest competitors in a specific market. Failing to build a Sustainable Competitive Advantage means that the future of the organization is compromised because our disadvantages are quickly eroding our capability to attract customers and making profits.
The Sustainable Competitive Advantage (SCA) Process
We suggest having a process for building a Sustainable Competitive Advantage. The process that we propose to have two parts:
- The SCA process that is adapted from David Aaker. This process has five strategic steps/question and the tools to answer those questions.
- The disruption strategies adapted from Anil Gupta. In this section, we show the main strategies that competitors used to disrupt and neutralize Competitive Advantages.
Image 1: Adapted from David Aaker and Anil Gupta: “The Sustainable Competitive Advantage (SCA) Process”
The Basis of Competition: Backstage Competitive Advantage
In this first step, the tools proposed used to be well known. So, the important is to be aware of a few pitfalls:
- Being good in a particular asset or competency does not mean having a Competitive Advantage. In order to have a CA, we need to be better, faster or cheaper than our biggest competitors.
- Developing a Competitive Advantage in a specific market do not guarantee the CA in other markets. Competitive Advantage is always market-specific.
- Having one Competitive Advantage did not use to be enough to build a success strategy. There are some studies showing that success companies used to have four or five CAs in average.
- The internal, external and SWOT analysis is not a short review of the previous one anymore. The environment is turbulent and changing very fast. What is happening in other industries must be monitored too because industry barriers are dissipating. Moreover, technology is impacting more than ever on business models. The digital transformation is a reality!
- Because we think a competency should be important or strategic does not means it is a core competency for our firm. A core competency required of three things: strategic fit, expertise and resources. If it is not a core competency for your firm, you should think about outsourcing (see What Are Our Core Competencies? Improving Business Focus.)
- Outsourcing is a powerful tool underused yet. Any competitive disadvantage should be neutralized by outsourcing (see When Should We Outsource?)
- Interim Management power is untapped. This is a new way to access to the best people in order to accelerate and cope with the need it organizational changes.
Image 2: Adapted from Anil Gupta: “The Basis of Competition: Backstage Competitive Advantage”
The Business Model is at the Center of the SCA Process
The steps two, three and four are related with the three main elements of the business model (value chain design, target customers, and product/services) and its implementation.
Step 2 – What Do you Offer? Building a compelling value proposition that links with the business positioning is a first step but it is not enough. Firms need to analyze deeply their value chain and compare with the ones of the biggest competitors and new incumbents. Compromises should be reviewed (“Compromises occur when an industry imposes its own operating practices or constraints on customers, leaving them no choice… The compromise often becomes visible when customers have to modify their behavior to use a company’s product or service.” E.g. Hotels check in after 15:00 PM and check out before 12:00 AM). Furthermore, the customer experience and the main customer journeys need to be mapped and optimized.
Step 3 – Where Do You Compete? Traditionally, firms have been focused on markets (business units), target customers and product/services. Nowadays, you need to go farther and expand that focus to channels and geographies.
Step 4 – How Do You Compete? Many firms formulate a good strategy. However, the ability to execute the strategy continue being a handicap. This step guarantee that the corporate and business unit strategies move on actionable functional strategies and programs.
How You Achieve Sustainability: Sustainability Positioning
Until now, most organizations have assumed that the market is dynamic but “just a little bit.” So, the option of Strategic Commitment based on continuous improvement has worked properly most of the times to sustain the Competitive Advantage. Right now, the question is: Is the Strategic Commitment to sustain the CA in the future? It looks that a more dynamic and “radical” approach is needed.
There are other two strategic options: Strategic Opportunism and Strategic Adaptability. Those positionings are based on the belief that we are living in a turbulent environment with a very dynamic market. Thus, those strategic approaches are based on substantial and transformational innovation rather than the traditional incremental innovation.
Image 3: Adapted from David Aaker: “How You Achieve Sustainability: Sustainability Positioning”
Is It Time to Review Your Business Model?
In the 1980s Michael Porter taught us the importance of competition and industry analysis (Porter´s five forces analyses). Nowadays, we are facing a demand crisis, overcapacity, new incumbents from technology firms, industry barriers are falling, and so on. Thus, continue monitoring competition, the industry and reviewing our business model is getting mandatory. Let’s review how the business landscape is changing so fast and affecting almost every industry.
Reviewing some of the major changes affecting to the 7 Types of Business
John Tenenent in his book Financial Management: Principles and Practice developed a simple but powerful 7 Types of Business framework to define the seven broad categories of business according to products and services to be provided. We are using this model to check how many business types are affected for new players or companies using new business model that challenges the current industry status quo.
The 7 Types of Business (adapted from: Tenenent, John "Financial Managemet: Principles and Practice)
We are going to review quickly a few examples of how all of those seven types of business without any exception are being already challenge. This could create an important stream of turnarounds, if companies do not transform themselves before:
1. Raw materials: Companies need to find better and cheaper raw materials to maintain their differentiation or low cost advantage.
- Oil prices are mainly affected for the current overproduction that does not match with demand. However, there are other factor that we should consider regarding the future of oil industry. Eg. fracking technology improvements, renewable energy (substitutes), or the electric car.
- Lithium batteries consume a huge amount of lithium, but graphene could be the next material for batteries.
2. Manufacture: Automation and the use of robots will continue to be a key Success Factor to rise competitiveness.
- Vehicle manufacturer: It looks those technology companies like Google and Apple would like to take a portion of the automotive industry developing for instance their own self-driving cars. The electric car is a disrupting technology bringing new incumbents as Tesla. Another trend in this industry is buying smaller cars with less initial and maintenance cost and more environmentally friendly. Finally, we have to mention the new trend in developed countries to rent car when the use is not very intensive. So Daimler has decided to jump on this related industry with their tiny SMART electric cars (go2car.com).
- Hardware manufacturer: The cloud concept will move massive sales from many corporate customers that today buy from companies like HP or Dell to a few companies (Google, Microsoft, Amazon, etc.) managing huge data centers. Additionally, end users will require less powerful devices like chromebooks to run cloud applications rather than the expensive traditional computer based on.
- GPS: The massive penetration of mobiles and free GPS applications like Google Maps are massively affecting the demand GPS devices from firms like TomTom.
3. Traders: Manufacturers are selling directly to end customers (disintermediation) to improve end customer control and margins.
- Wholesaler: The traditional wholesaler function continue to be reduced by the more flexible solution that Logistics Service provider can offer.
- Retailer: Customers buying by Internet directly to manufacturers have access to the complete portfolio of products and sizes, and receive the items at home or office comfortably. Amazon is entering the Logistics Service provider business and they are offering those services plus retail services with their own web site.
4. Infrastructure: There are some Internet companies taking advantage of private vehicles or apartments underused to offer extra income to owners, and good rates to end customers.
- Taxi: Uber used to offer around 30% cheaper prices than traditional taxis, AND much better service because it is more secure this service that register the taxi driver (this is an important differentiator in some countries where security is an issue), vehicles have and use air conditioner (underdeveloped countries have an important amount of taxis without AC, and in developed countries they have AC but the driver many times decide to switch off to save fuel), the customer service is better (Uber vehicles have sweets, water, and service is evaluated after trips to guarantee the best service level).
- Public transportation: BlaBlaCar connects people without car who needs to travel with people traveling with their own vehicle who has empty seats. That means for people without car savings around 50% compared with bus or train rates. Additionally, those trips used to be faster, more comfortable, and leave you in a more convenient location.
- Hotels: Airbnb is an alternative to traditional hotels.
- Telecoms: It looks that soon telecom main service will be Internet access because almost 100% of calls and SMS will be performed from applications based on Internet (Whatsapp, Skype, etc.)
5. Services: Many services are based on information and-or knowledge. Internet is offering access to people in an easier and cheaper way to get that information or knowledge from applications (Linkedin to find employees/job, etc.). Thus, the value perceived of those traditional services is getting lower.
- Software development: In the past being the leader Operative System owner was a huge competitive advantage in the software industry. Nevertheless, with the disruption of cloud computing it does not matter, if people access to cloud application with a Windows, Mac or Chrome.
6. Banking: Strong pressure to reduce traditional offices and move physical processes performed by people to virtual/electronics ones in order to maintain contribution margins higher than 10%. Moreover, new incumbent from FinTech startups are coming.
- Credit cards: There are more than ten large mobile payment initiatives threaten the credit cards sub-industry, and some of them are commanded for important technology firms like Google, Apple or Samsung.
- Banks: There are many pure Internet banks taking advantage of their low cost structure to offer traditional banking services but with less commissions. Imagin bank just operates on mobiles what pushed the bank to create lean customer facing processes, and will bring better efficiencies.
- Investment house: There are some companies (eg. Wealthfront) starting to offer computer efficient investment advice rather than traditional investment advisor recommendations.
7. Insurance: Pure Internet insurer are facing an important low cost competitive advantage (less offices, “no sales force”, automatic risk review processes, etc.) E.g. Verti.com in Spain (a MAPFRE company), or Zhong An in China. Another interesting example for the insurance business “revolution” is Zenefits that provide free cloud-based HR software when companies use Zenefits purchasing power to buy their health insurance, or to choose a payroll provider, or other service.
What are main trends of new incumbents in the different industries?
- Internet continues moving on from being just a sales channel for traditional companies to be a more efficient business model for new incumbents.
- New Sales Efficient Supply Chain Management models: For instance, the largest retailer in Spain is Mercadona that removed all the items without at least one unit being sold in all the stores every day. So they can have many small and medium supermarkets with items of high turnover which means good prices for customers and good profitability for the company (for more details see our post “Sales Efficient Supply Chain Management (SESCM): A Success Foundation for a Business Model”).
- Innovation firms like Alphabet have born to take advantage of the huge innovation opportunities in many industries. Those really innovation firms are taking advantage of the slow reaction of traditional firms in some cases leading for people who does not properly understand the new technology revolution, or they are too much focus on their traditional industry business model.
- Pricing model is on the top of the business model: Business models must create value for customers, and lucre/profit used to be one of the most important purchasing motives. So we can see companies like Uber taking advantage of idle time of people and their cars to be able to offer at least 30% cheaper rates than taxis. Zenefits is another example selling HR software for “free.”
- Industry entry barriers are falling: For instance, Google and Apple are “thinking/preparing” to enter the automotive industry, while Mercedes Benz is entering the car rental industry with the initiative car2go.com, and so on.
- Some traditional business are disappearing: The printing industry is suffering the impact of electronic books, screens for ads, the use of Internet for marketing communication. Plastic bag manufacturers are suffering the strong campaign of retailers not to use those items for “environmental reasons” and cost reduction. Etc.
- Unicorn firms (current private startup companies valued at $1B and above). The financial support of those firms that could make a revolution in their industry are massive (at the time of writing this post is a total cumulative valuation of $556B).
Should we expect a higher number of turnaround and transformation initiatives in the short and medium term?
There are some studies that analyze why firms are failing, and what are the signs of a troubled business. Those studies used to highlight some management, financial and control issues. However, very soon we will probably see that a new business failure cause will be obsolete business model.
There are some industries that they have received the wake-up call. For instance the banking industry is involved in the digital transformation. However, I would like to stress that digital transformation is just one of the “must be” transformations. There are others 7 key transformation (growth, sales force, customer experience, supply chain, procurement, lean and culture transformation) with much less media impact but those are essential too to survive after the present amazing and turbulent business environment.
Do You Really Have a Business Growth Strategy? The Growth Strategy Matrix
There are some firms that oversimplified the process to build and analyze the company’s growth strategy. Those companies used to confuse the growth strategy with the growth objectives. Thus, they define the Sales Gross Profit Ratio that they would like to achieve, and they also assign the growth quota to each Sales Rep. Unfortunately, growing is not as easy as define the Sales Gross Profit Ratio, and other sales growth objectives according to the company Strategic Plan.
Other organizations confuse growth strategy with growth tactics. So, they oversimplified again the growth strategy assuming that growth strategy is just defining the new markets, new products and new customers that the company would like to enter.
The four main growth strategies
In order to define our growth strategy, we should consider two variables: sales and profitability. Then, we can get the four main growth strategies according to a high or low growth ability in sales and profits.
Growth Strategy Matrix: Growth tatics for each strategic choice
1. Beat the market: This is the objective of many firms. You have likely heard comments like “we need very profitable sales growth.” However, beating the market as Zara/Inditex is doing in the apparel business quarter by quarter is not an easy task. This leader firm increases revenue consistently higher than inflation and its main competitors, and its net profit grows much faster than sales. Organizations beating the market need to have a solid and replicable business model. Thus, they can growth fast at the same time that they manage very efficient assets, expenses and financing costs.
2. “Stuck in the middle”: In reality this is not a growing strategy rather than a consequence of the failure to implment “beat the market” strategy. This situation happens when organizations are trying to maximize at the same time sales growth and profitability when they do not have a very good and sustainable business model yet. In these organizations, Sales Reps are pushed to quote higher than customers are willing to pay for the perceived quality of their products and services. This situation makes sales growth very low or even negative growth. The sales force gets demotivated because they cannot see any progress, and their bonus and even their jobs get in danger. The cost of sales compared with sales volume is raising and affecting to profitability. The low profitability will affect the self-finance and the future competitiveness of the products and services.
Nokia and Blackberry are two examples of companies that tried to imitate Apple iPhone beating strategy based on hardware plus software in order to growth importantly sales and profits. The consequences have been terrific for both companies. If they had chosen a more conservative and realistic growth strategy, just trying to maximize sales and market share focusing on mobile devices and using Google Android as software platform… Do you think that they would have still lost the important market share from competitors like Samsung or LG? Do you think that this more focused growth strategy would have worked better for them?
Many people sell us the idea that we have to build very innovative firms like some market leaders (Apple and so on). Nevertheless, many times they are missing explaining the consequences of a failure pursuing a market leader strategy especially when they try to lock the market like Apple (creating his ecosystem).
3. Profitability and shareholder value priority: Organizations following this strategy have learnt that more sales do not necessarily mean more profitability and shareholder value. One example was Daimler disinvestment in Chrysler. First, Daimler invested in Chrysler expecting important synergies between both companies but synergies were not materialized. So the company grew in total sales but the new merged company was less profitable compared with the total investment, and less attractive for shareholders. So the focus on profitability support decisions of avoiding and even divesting in some markets, business segments, products, and even some customers.
4. Sales and market share priority: These companies understand that they are not market leaders and customers still have some problems to perceive the company cost or differentiation competitive advantage. So they also understand that strategy is about managing tradeoffs, and most of the time there is a tradeoff between sales and profitability growth. One common tactic to growth faster used to be reduce rates and show more economic value to customers. This tactic is a direct attack to market leaders who used to take advantage of their leadership position to get higher margins.
We have to highlight that growth strategy must be adapt to the context of the organization. For instance, the Spanish oil and gas operator Repsol used to have a sales priority when the crude oil barrel price was higher than USD 100. Nevertheless, for 2015 new Strategic Plan, (at the end of 2015 the crude oil barrel price is around USD 50) they have decided to implement a new growth strategy based on profitability growth (waiting for better crude oil prices to change again the growth strategy to sales priority).
Basically, we can say that a common mistake used to be assuming that all the companies and with independence of the market and company situation can materialize high profitable growth of sales. Most success companies realize that there is a tradeoff between growth sales and profitability, and they decide to prioritize one of these two strategies.
Failing to implement the growth strategy creates some situations which demand an urgent turnaround
“Stuck in the middle” as I have explained is not a strategy rather than the consequence of failure to trying to “Beat the market.”
In the case of failing to pursue the profitability priority, the commonest risk could call being “Kicked out of the market.” I mean sometimes an excess focus on profitability (ROI and ROA) could push companies to focus too much in short-term. Even if the priority is profitability, long-term growth should be in mind to guarantee the long-term survival of the firm.
For sales growth priority, we have to analyze in more detail a few critical situations when the sales growth strategy is not well implemented:
- “Death of success.” The organization does not realize that for most companies (unless you have negative working capital days) growing sales means extra financing needs in order to finance new stock and DSO (Days of Sales Outstanding). So, firms face lack of self-finance because the business grow too fast. The company has to go for external finance what make financing cost very high and unsustainable.
- “Death spiral.” Too fast growth and/or low capital when we are growing up in new opportunities. The fast growth and/or low capital make a weak and unsustainable growth strategy. In order to support the “New Children” (Boston Consulting Group Growth Matrix), we remove resources from the “Cows” business. If we remove too much cash, the consequences are very dangerous for all Business Units. “Cows” lost competitiveness very fast because the exit of cash reduces their purchasing power. Additionally, Directors taken those decisions used to try to take maximum advantage of the well-established Business Units (“Cows”) to maximize DPO (Days of Purchasing Outstanding) which used to erode even more the credibility in front of Suppliers. Suppliers start reducing quality because they prioritize the orders from other customers who pay better. The company lost the option to have better future payment terms in case that the business will face cash issues. The business units are interconnected, I mean “Children” need the cash from “Cows” to survive. So, any cash flow problem in the “Cows” will be immediately moved to “Children.” The lack of planning of the appropriate amount of cash that could be removed from “Cows” can collapse the whole group of Business Units.
- “Running away to the front.” When the firm has made important investments before materializing the sales. Low profitability of the investment and important finance costs because the self-finance is low can strangle the firm.
- “Self-cheating.” The lack of competitive advantage of the company is solved by selling according to the firm Gross Contribution Ratio rather than Operating Profit Ratio. So overheads are not supported for new sales and even for contract renewals. Contract by contract, and month by month the firm is eroding its profitability with low sales margins.
Growth is not just a company desire. Growth requires a lot of human and financial resources. Without the necessary planned resources, we will have just a false start in our implementation growth plan.
Steps to implement the growth strategy
- What is the context of your organization (External Environment, and Internal Analysis)?
- What is your company and competitors Positioning?
- What are your Products and Services?
- What is your Value Proposition?
- What is your Route To Market (RTM)?
- Define your Growth Strategy (Sales priority, Profitability priority, or Sales & Profitability)?
- Review all the step (move from “what is” questions to “what should be”) according to your Growth Strategy choice.
- Create your plan to implement the new Competencies to develop, Positioning, Products/Services, Value Proposition, and RTM.
Common growth mythic
Growth and profitability depend on hiring a “Sales Guru.” So there are organizations that think what they need to do is contacting with a headhunter to bring a “Sales Guru” from the success market leader. Unfortunately, with the time many firms realize that those “Sales Guru” are not performing as expected. Likely, the main reason is that sales depend heavily on company’s products, and those depend on company’s processes, and those depend on company’s people. So, most of the “Sales Gurus” used to work for well-organized companies that they have been able to build a cost and/or differentiation sustainable competitive advantage. It is quite unprovable that “Sales Gurus” over perform in mediocre firms. Mediocre firms need to reorganize their cost structure and services before trying to revamp sales importantly.
Growth is the responsibility of Sales Department. Growth should be a responsibility of the whole company. Sales Reps in order to properly sell need:
- Well-defined products and services (Marketing responsibility)
- New and better products (Engineering and Product Development responsibility)
- Quality product and services (Quality, Supply Chain and Operations responsibility)
- Cost-efficient processes that make attractively the rates of product and services according to the quality offered it (Supply Chain and
- Operations responsibility)
- Enough cash to pay properly to suppliers and being able to get better rates and services from suppliers (Finance responsibility)
Sales profitability is the responsibility of Sales Department. Sales profitability should be a responsibility of the whole company too.
- Sales Reps in order to achieve a good sales profitability required the following support:
- Well marketing material that supports profitable rates.
- New product and service features that show a good value for money.
- Good customer perception of quality.
- Good processes that allow having low running cost.
- Low finance cost.
- And so on.
Growth leading firms used to have in common that they are excellent almost in all areas of the company. Sales and profitability growth are a responsibility of the whole company and especially of the CEO.
Focus Strategy: How Successful SMB Firms Compete
In 1980 Michael Porter brought to us the concept of the three generic strategies (low cost, differentiation and focus). The first two have been quite well understood, but the focus strategy looks that there is an important number of firms that they do not understand the importance of that strategy well. The focus strategy would be able to allow SMB to compete with global players, and win the battle at least at local level, or in one specific industry niche, or in any specific product/service.
We have countries like Germany that shows us how successful can be the focus strategy. In Germany you can find villages with SMB that are worldwide leaders in their products. Those firms follow a focus strategy concentrating all their resources in a particular product, and/or industry and/or market in order to be the leader of that segment. In my experience working with German organizations, I would not say that they have better skills or resources than other European or North America countries. However, those German firms use a more realistic short-term and practical focus strategy. On the other hand, we have other countries that CEOs strategy is thinking in a much broader way losing the opportunity to concentrate their limited resources in specific “market battles.”
Why do not firms realize the focus strategy advantages?
Assuming that as many growing opportunities (more products, more markets, more industries, and so on) that you get in, faster growth and profitability
However, following many growing opportunities especially for SMB used to create organizational chaos and an inefficient management of limited resources. The consequence used to be: poor differentiation, poor cost structure, lack of focus, then facing low growth and profitability. We should be aware that there are large firms that they are facing exactly the same problem for lack of focus, even though they are large organizations.
Uncertainty for the inexperience in focus strategy
Because firms are facing growth and profitability issues, they are afraid that just focusing on a niche could be a very limited and risky strategy. They wonder what about the future of the company if the chosen niche is not the correct.
Falling in the trap of nice growth plans from dreamers Sales Managers
What is it nicer? Having a plan that says we are going to be the global leader, in all the geographies, all the most important industries and providing a broad portfolio of solutions to our customers; or having a plan that says we are going to be the leader of a very narrow product line, providing that solution for a specific industry, in a defined region. Well, the first plan sound nicer. Furthermore, if both strategies are working well, the first one “promise” higher results. Indeed, the first plan used to be a plan that required massive investment, and much higher risk.
The trap of being a customer centric organization
There are managers who understand that a customer centric organization is one that offers one-stop-shop strategy. They tried to be everything to all customers. Their objective is growing with customers and providing all the services that they could need, avoiding that competitors’ entry in those accounts. Again following one-stop-shop strategy push companies to lose focus: investing in many products and geographies, offering some products not competitive from the quality and cost perspective, customer perception about our company is being damage for not delivering value, and the result is reducing our firm profitability because the company is in a low level of the experience curve for some of those products. Being a customer centric organization should be a firm that can deliver real value to customers, I mean best value for money, and a proven successful way is using a focus strategy with leading products of high quality and competitive price in their market segment.
Learning from large firms experience
Unfortunately, there are not too much literature about SMB success stories. In fact, so many SMB CEOs learn from large companies’ experiences, and they try to replicate their strategies. But we cannot compete successfully with global companies using their own strategies. Focus is a success strategy where SMB can win the battle in specific niches.
Forgetting that one Key Success Factor of strategy execution is strategy and resources alignment
There are companies that define their strategy (where they would like to be in the future) and they forget the viability analysis of that strategy. Do we have enough resources to implement that strategy at the speed required? Performing an alignment between strategy and resources availability could we push us to follow a focus strategy.
There are a few questions that can help us to review the coherence of our strategy, for instance:
- What are our current (the actual, not what we would like to have or what we are working on) differentiators?
- What is our current (the actual, not what we would like to provide) value proposition?
- What is our customer targeting/segmentation strategy?
- Do we have enough resources to implement with the speed necessary our customer targeting strategy?
Using those questions in a self critical way could help us to realize that our firm could need a focus strategy to avoid getting “stuck in the middle.”
How to Make Any Project or Initiative Work: The 10 Prerequisites for Change and Transformation
The 10 Prerequisites for change and transformation
Let’s review briefly any step of this framework adapted from HP way, Barry Newland “The four prerequisites for change” and completed with ideas of other relevant authors like John P. Kotter or Richard Bevan.
1. Sense of urgency: The sense of urgency is what keep people going. Without this sense any project or initiative have a slow start with the risk of losing momentum. Urgency is key because is an important “wake-up call” to provoke action. Unfortunately, there are large firms that fail in this first step because of self-complacency and over optimism. So they are not able to recognize the severity of some business issues/risks. On the other hand, SME many times justified their lack of urgency because they have limited resources.
2. Vision: Without vision there is not direction. So the consequence of failing to build a concise easy to communicate/understand and realistic vision is confusing people. We have to highlight that the vision must be realistic in order to be adopted.
3. Communication: If the vision is not communicated, how can we expect to be properly implemented? There are two common mistakes in communication: first think that the vision is shared just with managers rather than with the whole company. “Hidden” this “non-confidential” and necessary information for employees creates distrust and demotivation; second oversimplified the vision communication, so people do not understand what is exactly expected from them; and third thinking that communication is just one off communication rather than a continue communication process during many months using any opportunity to reinforce the message until the whole organization internalize and execute the vision properly.
4. Guiding coalition and empowerment: Without the support of the company leaders and some influencer managers at different organizational levels, it is difficult to implement large initiatives like turnaround or transformation ones. As Kotter said “a paralyzed senior management often comes from having too many managers and not enough leaders.” In those situations used to be necessary a few interim management positions to build a success guiding coalition and a real sense of urgency and change. For more details of guiding coalition, please see our short article about “bunker concept.”
5. Skills: Bad leaders used to distribute tasks that should not be performed without checking, if the team members had the right skills for those tasks. So they create anxiety on unskilled people. Good leaders coach and train the team what will probably consume a huge amount of time, for this reason many times are required of external support to build an outstanding organization.
6. Incentives: Why is anyone going to get out of his/her comfort zone? The incentives accelerate or decelerate the change and transformation process. There are two common mistakes: first, think that motivation could be just pure recognition of the work performed. Recognition is a necessary condition but it is not enough. The highest recognition of a company is sharing a portion of the profit with employees who make it happen. So promotion and bonus plans should be in place to celebrate the success and maintain momentum; the second mistake is ignoring the power of “pain” in case of failing. The job of good leaders is to make to success their team members providing coaching, training, resources, and so on. Using “pain” like a motivator is not easy because it could create anxiety especially on unskilled people. Thus, this should be used carefully just on people that they can perform much more but they are “relaxed” or sabotaging the project.
7. Resources: Leaders must provide the necessary resources to the team. It is important to explain at the very beginning of the project the resources available and why in order to prevent future frustrations of any team members. Success turnaround and transformation initiatives have into consideration the need of external support resources to seek competitive advantage without disrupting daily operations.
8. Engagement: The success of the guiding coalition depend on their skills to build a sense of ownership and commitment. This is a very difficult task that is taking many months because of affect to the culture of the firm. Without ownership and commitment, just chaos could be expected.
9. Action plan: Some leaders confuse vision and action plan. Thus, they just build a nice vision and they get surprised when the implementation is not happening. Basically, the absence of an action plan makes no possible have detailed enough of activities necessary to materialize the vision.
10. Short-term wins: Large transformational initiatives require to be divided in affordable steps that maintain the momentum. Those wins must be celebrated and rewards in order to sustain the improvements.
