Wednesday, November 30, 2011

Business simulation and strategy implementation

This week’s topic is strategy implementation. When I first think about it, I remembered a simulation game I played in my healthcare marketing class. In that simulation game, four people formed a group and act as VP of branding, market research, advertisement and finance. We compete with other teams in a simulated global computer market for 8 quarters. Every quarter, we can adjust our business strategy according to the competitor performance, our market share, our customer satisfaction and so on. We also launch different products into different segments, design and invest new advertisement, release survey to customers, make financial investments and so on. All of these activities are very realistic and all the market reports we get after each quarter contain a large amount of data for us to analyze. During the past summer when I worked in Bayer, I also heard of their global management simulation game that last for over one year. Company invests in quite a lot of money and formed their group and it aims at training their employees. Now, I started to think that whether this simulation game can be designed scientific enough so that it can help with the strategy implementation process? I believe it’ll have several advantages:

· Because of short market response period, company can see the effect of the strategy very quickly.

· Company can change strategies at different phases and make comparison.

· It’ll be served as a pilot test in order for company to see the risks of the strategy and establish mitigation plan.

I then started to check whether such method has been used in real world. Within my expectation, I found an organization called BTS[i] which engages in helping their clients with building strategy alignment, confidence and result and the tool they use is customized business simulations that create opportunities for meaningful practice. In their blog[ii], they listed the reasons why custom-made simulations are effective:

· Are highly realistic.

· Reflect real-world competition.

· Catalyze critical issue discussion and feedback to senior leaders.

· Drive innovative thinking.

· Can be custom designed for every level in the organization.

· Lead to concrete actions to drive strategy and results.

Coca-Cola is a successful example. They used simulation that is closely modeled on the company’s internal (organization structure) and external (Market, competitive landscape) for their strategy alignment and successfully strengthened leadership[iii].

However, I believe a successful strategy implementation is also associated with the company’s culture. For example, Fedex’s strategy is implemented by establishing the culture as every employee helps in the achievement of FedEx’s reputation of reliable overnight delivery. A strong culture will definitely help with the strategy implementation process. My question is: How can a business simulation simulate the corporate culture?

Bad Strategy Bazaar!

Have you heard? American Airlines (AA) just filed for Chapter 11 bankruptcy yesterday. The world’s largest carrier in 2006, today needs a bailout for a clean slate?[1] What gives?

A number of factors have been said to have contributed to the decision to file for Chapter 11. Among those factors were failed contract negotiations with pilots, “cost disadvantages” compared to rivals who had already cleaned their slate through earlier bankruptcies, loss of business travel customers to competitors, and mergers that reduced the company’s operational efficiency.[2] It’s too bad the now former CEO, Gerard Arpey, didn’t have the opportunity to read our readings from week 5 before embarking on his ultimately failed guidance of AA. Had he read those articles, perhaps he could have avoided the following:

1. Stubbornly Staying the Course – as mentioned in the article “Seven Ways to Fail Big” by Paul Carroll and Chunka Mui, an organization mustn’t minimize a seemingly simple problem causing unnecessary delay or reaction. As mentioned above, contract negotiations (between unions and pilots) served as one of the tipping points for filing Chapter 11. Clearly, AA was trying to maintain the low-cost strategy in working through these negotiations, but they failed to achieve a balanced, winning strategy that would meet the needs of their employees, as well as their operational costs. Now, AA is significantly in the hole – predicting to total $1 billion this year alone.[3] This is an indication that AA had been operating less-than-efficiently for some time. Had AA been less stubborn earlier in the decade and considered filing for bankruptcy alongside other carriers, AA may not have had this extended period of losses.

2. Destructive Competition – in an article from Wharton’s online resource, KnowledgeWharton, titled, “Michael Porter Asks, and Answers: Why Do Good Managers Set Bad Strategies?” one of Porter’s takeaway suggestions for preventing bad strategy is to avoid thinking about competition in terms of competitors alone.[4] Instead of a company trying to identify ways in which to become the “best’ of a market, Porter says companies should focus on how to differentiate themselves from the rest of the market. Arpey’s comments to the press regarding “cost disadvantages” as among the main influences for pushing AA into bankruptcy is a clear attempt to absolve their responsibility

3. The Synergy Mirage – again, from the article by Carrol and Mui, companies may use mergers as a method of increasing growth in a particular market. AA’s move to merge with other carriers to capture broader regional markets such as Trans-Caribbean and created problems within the organization. From pilot seniority, to increasingly complicated wage and benefit agreements, AA found themselves losing operational efficiency post merger with these companies in seemingly similar markets.

It’s really interesting how such large and successful organizations can have such quick, sweeping falls from grace from bad strategy. Having to always define your strategy and to always ensure that it is a strategy (and a “good one” at that) requires the input and review of many people who are highly familiar with the organization and its desired direction, while also keeping a focused eye on what is ahead and how the organization will create its next competitive advantage. One interesting argument between Porter and an author from this week’s reading (i.e., Richard Rumelt), was the issue of whether strategy need be tied to economics.[5] While Porter argues that goals for superior economic performance will be reflected in financial results, Rumelt says instead, that “the essence of a good strategy is logical and practical coherence.” In a large organization such as AA, how do you balance the numbers versus the vision?

As a side note: Curiously, despite Rumelt’s confident statement to fathering the term “bad strategy” (in his article on “The Perils of Bad Strategy”), Porter’s Wharton article also includes that term, and it was published a whole year earlier. Who’s term is it?




[1] http://money.cnn.com/2011/11/29/news/companies/american_airlines_bankruptcy/index.htm?hpt=hp_bn13
[2] idem
[3] http://www.managementtoday.co.uk/news/1106852/american-airlines-owner-files-bankruptcy-protection/
[4] http://knowledge.wharton.upenn.edu/article.cfm?articleid=1594#
[5] http://www.strategyland.com/2011/gsb-on-sale/

Outsourcing Innovation

Outsourcing innovation means giving the job of innovating and coming up with new ideas to other companies. While only few companies considered outsourcing innovation to be safe and benefitting ,a lot of them are doing it now. A strong reason for this trend is that while innovation is essential for an organization ,the current spending on R&D is not yielding expected results. As a result companies want to outsource innovation to both cut costs and yet get sharp minds to work on their R&D projects. The current recession is another reason companies have adopted this strategy as they want to get a head start on developing new products and services for the marketplace.

Let’s consider the mobile handset market. Most of the handsets developed are built from design to development in lesser known technological labs in Taiwan and other countries. The multimedia device prototypes produced by these companies are then bought by famous mobile powerhouses and end up on their shelves under their brand name. Companies like dell and Motorola today are buying complete design’s from technological companies in Asia , tweaking and customizing them and then selling them with their own brand name. Even in the pharmaceutical sector, companies are collaborating with Asian research companies to develop new drugs in an effort to cut costs. The logic being that since most drugs don’t succeed in the market and are taken of the shelf soon, a high R&D cost can really hurt their balance sheets. Proctor and gamble says that it plans to outsource more than half of its R&D operation by 2015 as compared to 20% now.

There are however risks associated with outsourcing ones R&D operations. Motorola had outsourced its mobile design and development operations to Taiwan’s BenQ. But then BenQ, by tweaking the phones to suit the Chinese market began selling them their under its own brand. That prompted Motorola to pull its contract. Thus while most companies have strict outsourcing confidentiality clauses in their agreements ,there is always the risk of intellectual property being misused or transferred which can hurt the parent company. The risk associated also has a bearing on which place the company outsources it R&D to. While US has an advantage in terms of its strong intellectual property rights it is not preferred due to high costs , which is a primary driving force for outsourcing. India is preferred to china in this regard as it has more stringent intellectual property laws. Thus as the definition of core operations for companies change , so does the nature of outsourcing. The question really is should companies continue to outsource innovation ? Is this taking outsourcing too far ? What do you think?

References

  1. http://www.businessweek.com/innovate/content/jul2009/id20090722_518153.htm
  2. http://sloanreview.mit.edu/executive-adviser/2009-5/5155/outsourcing-innovation/

By Kailash Pande

The Perils of Congressional Strategy


Richard Rumelt writes in his article, “ The Perils of Bad Strategy”, “Bad strategy has many roots but I’ll focus on two here: the inability to choose and template-style planning -- filling in the blanks with ‘vision, mission, values, strategies’”. I want to evaluate these two elements and the ways they are apparent in U.S. Politics today.. I want to explore this because I think from my limited view that a failure on the part of both Congress and the President has been an inability to “identify and analyze the obstacles” which Rumelt suggests are the key to strategy. This failure seems to be a major factor causing the current gridlock and bipartisanship in U.S. politics today.
        Rumelt suggests that template style planning creates bad strategy. American politics today is reflexive - people tend to look at pat answers that fall within their parties vision. Each party, the republicans and the democrats, have a template strategy. They have set view points and platforms that they use to drive their actions. There are formulas for example - raise taxes or cut spending, support Israel or you are against Israel, etc. Political decisions in todays climate are black and white, democratic or republican. Rumelt suggests that by working with a template-style strategy,  "someone who wishes to create and implement an effective strategy is surrounded by empty rheotric and bad examples. Thererfore if we analyze each political party's performance, than we can see that both parties rely on their template-style for strategy. If politics today did not rely so heavily on the templates of each party, it would allow legislators to look more creatively and broadly at the obstacles facing the country. Ultimately if we moved away from template-style we may also be able to eliminate some of the severe partisanship that is allowing the template style to flourish. This would entail blending the two templates together, looking not at tax increases or spending cuts but at tax reform. These template style strategies do not allow the leadership to look at the real obstacles and asssess them critically, but rather to employ the response from the template. It is impossible to create meaningful change without accurately analyzing the obstacles. Our template-style strategy is preventing us from doing so.
     Looking now at Rumelts other factor, the inability to choose, we can further see the struggles present in American political strategy today. Upon entering office, Presient Obama laid out an agenda, he promised voters he would accomplish while in office. Health Care Reform being one of them, the ending of the Iraq war another, the list goes on. The economic crisis that plagued his first year in office quickly became the priority. On the one hand, President Obama displayed an ability to chose when he initiated the stimulus package bill in his first 100 days. However, on the other hand, moving forward, the administration prioritized healthcare reform over further economic measures over the course of the first half of his first term. Many see this choice as what Rumelt would term an inability to choose, he states, "choice means setting aside some goals in favor of others". At that point, should Obama have prioritized differently? Could his strategy to fix the economy have been improved? The inability to choose is also a fault of the republicans. During the debt crisis the Republicans, many of them anyway, pledged not to raise taxes on anything, which ultimately caused serious delays in debt ceiling neogotiations and led us to a deal that neither party was particularly happy with and one that was signed at the eleventh hour. Had the republicans not focused so much on their template-style and better prioritized their issues they may have had better luck achieving their strategy.
      Finally, let's look at the role fluff plays in all this. Fluff is a huge part of politics. Rumelt says, "fluff is the restatement of the obvious combined with the sprinkling of buzz words that masquerade expertise. Politics is full of fluff, let's start with hope and change. So much of politics on both sides, yes both sides, is about change, hope, a better America, doing what's right. Name any campaign slogan and it is fluff. Unfortunately however, this fluff seems to drive the template style. Compassionate conservative is fluff that has come to define the template style for the GOP. This combination of fluff, template style and an inability to change are creating bad strategy for congress on the whole.   We see movements like occupy wall street emerging as examples of ways to look away from this template-style, and while they are less defined and also without great strategy yet, they are beginning to shift the paradigm with which we view our current politics.  Our current strategy seems flawed and seems to be driving the highly anticipated and promised "change' into impossibility. 
           It is interesting to evaluate Rumelt's framework in terms of American politics today and begin to gain an understanding of what is causing the gridlocks and partisanship. It might be interesting to continue to explore this into the various primary campaigns and how Obama's reelection campaign follows this pattern or breaks away from it. 

Industry And Competition Analysis (A.K.A It's A Cut-Throat World)

Introduction
Managers in a firm have always known that they operate in a world that is ever-changing. There are factors that influence the opportunities, threats, revenues, profits, losses, advantages, and handicaps on a daily basis. In this world, only the firms that analyze their markets in depth and recognize the importance of competition and the lack thereof can succeed beyond expectations. In this blog post, I intend to briefly describe Michael Porter’s five forces, and the new model proposed by Slater and Olson. Further, we will look at competition from a new angle.


Industry and Market

Today, the ideal unit of analysis is the industry that the firm operates in. However, this is not an easily defined term. When we try to determine the industry, we need to look at the direct customers that the firm caters to, the competition that directly affects the profits and losses, the competition that indirectly results in gain or loss of market share, and the products that are complements, substitutes and influential. For eg: even for a non-profit organization such as Teach For America, the industry would include not only the other non-profit organizations that work in the same space, but also the for-profit organizations as well as part of their in-house non-profit drives.


Michael Porter And His Famous Five Forces

Michael Porter devised a new framework for business strategy analysis to explain how industry forces play a crucial role in how a firm performs its operations, its return on capital and its competitive strategy. As per his proposed framework, every firm is constantly under the influence of suppliers, customers, new entrants, substitute products and competition.

Even though there are many other models such as Delta Model, Six Forces Model, and Value Chain Model, Porter’s five forces system is used extensively, and I am a personal fan of this because it is simple enough for any manager to utilize and complex enough to be a good representation of the scenario. It provides an opportunity to analyze each of the five important forces that affect the firm independently as well as in tandem. In my opinion, it is not always pertinent to assume that some of the forces work together like suppliers and customers. Moreover, there is no real mention of some external factors such as government, nature, etc. However, Porter does refer to these as forces that affect the already stated forces, and hence, the system is relatively acceptable.
(Image Source : Wikipedia)


Proposed System

The new system proposed by Slater and Olson for market analysis considers both incumbent competitors and new entrants as one entity called rivals. Further, it utilizes the new concept of complementors which take network effects into consideration in the new age. In some cases, this can cause positive impacts while in others, there will be negative effects. The new system focuses extensively on double barriers caused due to imitation. In my opinion, the new entrants and new technologies that can completely alter your business can be negotiated by fully utilizing the potential of intellectual property rights. For eg. Google recently bought Motorola’s cellular phone development division. While this might look financial to most people, I agree with the opinion that this is solely for patent purposes since Google was getting sued for patent infringements in their Android platform.

The new system focuses on strategic positioning by creating more market-focuses organizations that establish creative relationships with customers and suppliers while searching and creating new market space.

Competition Analysis

Analysis of competition is essential for new companies as well as incumbents. A periodic search for firms that operate in your territory as well as adjacent territories is of significance not only for acquisitions and mergers, but also for alliances. Every firm should perform a SWOT analysis of their firm as well as competitive organizations to have a clearer idea of the industry and future.

Citations

1. Porter’s Five Forces – Wikipedia - http://en.wikipedia.org/wiki/Porter_five_forces_analysis

2. “A Fresh Look At Industry And Market Analysis” – Stanley F. Slater, Eric M. Olson

3. “Competitor Analysis : Understand Your Opponents” – Harvard Business School Press

Was "Pets.com" Sunk by Bad Strategy?

The World Wide Web is a trove of great examples of obsolete websites that once possessed great potential. Many of these sites failed due to bad strategic decision made by its leadership. Among the most cited examples of a dot-com bust is the defunct “Pets.com”. Pets.com began operations selling pet supplies to retail customers in August 1998. Although sales rose dramatically due to a high profile marketing campaign, the company was weak on fundamentals and actually lost money on most of its sales. After its IPO on NASDAQ in February 2000, it went to liquidation in just 268 days, ceasing operations in November 2000. Its high public profile during its brief existence made Pets.com one of the more noteworthy failures of the dot-com bubble of the early 2000s and nearly $300 million of investment capital vanished with the company's failure. Given this history, I decided to look at how Richard Rumelt’s key hallmarks of bad strategy listed in The Perils of Bad Strategy - the failure to face the challenge, mistaking goals for strategy, bad strategic objectives, and fluff – apply to the epic failure of Pets.com.

The failure to face the challenge – “If you fail to identify and analyze the obstacles, you don’t have a strategy. Instead, you have a stretch goal or a budget or a list of things you wish would happen.”

Pets.com was an early entry in the immature online shopping industry and was uncertain whether a substantial market niche even existed. No independent market research preceded the launch of Pets.com. Instead, the management chose a "land grab" strategy focused on increasing its market share then finding ways to make a profit. The "land grab" strategy presupposes that your market is large enough or will grow fast enough so that revenue allows a profit before seed money runs out. Pets.com wished that it would magically become profitable while it waited for the market to mature. During its first fiscal year (February to September 1999) Pets.com earned revenues of $619,000, yet spent $11.8 million on advertising. It failed to realize its problem would not be gaining market share, but generating revenue to sustain it until it could place adequate resources into market share focused strategies.

Mistaking goals for strategy – “Create the conditions that will make the push effective, to have a strategy worthy of the effort called upon.”

When the company did turn its focus to its business model, it created unrealistic conditions in which to operate effectively. For example, Pets.com offered a guaranteed $4.95 shipping to anywhere in the United States. Unfortunately, Pets.com initially only had one distribution warehouse in California and every shipment to the East Coast cost more than $4.95 and therefore shipped at a loss. It lost money on nearly every sale because, even before the cost of advertising, it was selling merchandise for approximately 1/3rd the price it paid to obtain the products. During its second fiscal year the company continued to sell merchandise for approximately 27% less than cost. The company had it sites on being the number one online pet supplier but failed to leverage key strengths to build on other than a very costly push for brand recognition.

Bad strategic objectives – “A scrambled mess of things to accomplish—a dog’s dinner of goals. A long list of things to do, often mislabeled as strategies or objectives, is not a strategy…Good strategy, in contrast, works by focusing energy and resources on one, or a very few, pivotal objectives whose accomplishment will lead to a cascade of favorable outcomes.”

As I researched Pet.com history, I was amazed by the number of “strategies” the leadership claimed. Not all inclusive, CEO Julie Wainright and executives focused on numerous initiatives in an attempt to stand out from the competition. 1) Strive to offer a huge variety of product offerings; it listed more stock keeping units than any other online pet supplier 2) Offer abundant editorial advice from veterinarians, animal lawyers, breeders, scientists, and pet experts 3) Extend its brand offline in the Pets.com print magazine 4) Develop and offer its own proprietary brand of Pets.com pet supplies 5) Acquire a key competitor, Petstore.com 6) Create alliances to allow Pets.com to offer animal health insurance, be the featured petstore on the Yahoo! link to pet health advice, be a part of the Go.com (Disney) network, and establish charitable foundations.

These all seem like good objectives, if focused on one at a time. They also seem like objectives fueled by capital but not sustained by revenues. The management of the company appeared so focused on several objectives that it never developed a solid business model focused on being profitable and generating sustainable returns.

Fluff – “Superficial abstraction…designed to mask the absence of thought.”

According to analyst Jacques Chevron, “Pets.com failed to give its prospective customers a reason for its existence. Its tongue-in-cheek advertising claim ("Because pets don't drive") seemed like an admission of its lack of a reason for being.” Pets.com seemed focused on being the most comprehensive site for pet owners that it failed to be successful in any of its objectives. While it continued to claim it was the one-stop site for all pet needs, it never established a reputation as being good at anything other than advertising.

--

In one year Pets.com raised over $110 million in capital funding and its IPO brought in $82.5 million. According to Nielsen/Net, Pets.com became the most trafficked online pet store, with 1.4 million visitors in July 2000 alone. The company had massive infusions of capital, dwindling competition, and award winning national ads that grabbed the public’s imagination. The question I pose: Did bad strategy sink Pets.com? If so, was it the fact that the company focused on so many objectives (Rumelt’s “dog’s dinner”) rather than establish a profitable business plan and focus on just a few reasonable short-term goals?

Sources:

Chevron, Jacques. “Thoughts about the demise of Pets.com”. Duh.com. December 2000. http://www.jrcanda.com/art_duhcom.html

Cheyfitz, Kirk. Thinking Inside the Box: The 12 Timeless Rules for Managing a Successful Business. Simon & Schuster. 2003

Matulich, Erika and Karen Squires. “What A Dog Fight! TKO: Pets.com”. Journal of Business Case Studies. May 2008.

Rumelt, Richard. “The Perils of Bad Strategy”. McKinsey Quarterly. June 2011.

Wolverton, Try. “Pets.com latest high-profile dot-com disaster” CNET. November 7, 2000. http://news.cnet.com/2100-1017-248230.html

“The greatest defunct Web sites and dotcom disasters”. CNET. June 5, 2008. http://web.archive.org/web/20080607211851/http://crave.cnet.co.uk/0,39029477,49296926-8,00.htm

Apple – the shark of the blue ocean

When I read the article – “Blue Ocean Strategy”, the one and only company that stood out to me was Apple and how effectively they have applied this strategy. Eccentric, visionary, rash, overly detailed, etc. are some of the adjectives associated with Steve Jobs, the late CEO of Apple. However, he was one of the greatest proponents of creating the blue ocean – giving people something that they don’t even know they want. As I am currently reading Steve Jobs’ biography, it is easier for me to look at the various strategic moves of the company and try to understand this concept.

The Blue Ocean

When Apple launched the iPhone and subsequently the iPad, they practically created a completely new segment where one didn’t exist. Though mobile phones were prevalent, there wasn’t such a device that captured the imaginations of such a huge population. It was a device like no other and created a whole new space for mobile networking and mobile-device Internet access. Though such devices already existed and was hugely competitive, Apple created a whole new area where it became convenient to do so. With the launch of the iPad, they moved away from competition but creating a segment of tablet computers. [2] Even though companies had tried it before, the sheer quality of the device made people crave one, even if there was no perceivable need for it.

As I look at the company, it seems to me that a single company can use more than one strategy as mentioned in the “Types of Strategy – Which fits your business?” article.[3]

Differentiation

Right from the offset, Apple tried to differentiate itself by making products look good and intuitive. Even though they didn’t really make the technology (the GUI idea was taken from Xerox PARC), the execution and the overall final product made the company stand out. The attention to detail and the kind of technology that was built into the original Macintosh machines made it one of a kind.

Customer Relationship

By aiming to be the best in whatever they do, and also by being detail-oriented, Apple has setup the award-winning AppleCare system, which provides service to the various products they sell. Given the kind of volume that Apple deals with, being customer-oriented and making sure that the customers get the best service is something that is ingrained in each activity.

Network Effect

By creating the iTunes store for downloading music and by creating the App store for mobile applications, Apple was successful in creating two really huge networks that are growing each day. Apple reaps benefits of positive network externalities that make the whole network more valuable as more people join in. The developers get more money as more customers join and given that the App store has a huge number of apps already available; it gives users the incentives to join. The recently launched iMessage will add to the network effect that is present. [4]

I conclude by stating that no matter the size of the company or the domain, a successful company can choose to follow more than one strategy at the same time, however by making sure that each of the strategies are aligned to the overall goals of the company.

References

  1. Blue Ocean Strategy, W. Chan Kim and Renee Mauborgne
  2. Apple launches the iPad, Jan 27th 2010, http://www.apple.com/pr/library/2010/01/27Apple-Launches-iPad.html
  3. Types of Strategy – Which fits your business, excerpted from Strategy: Create and Implement the best strategy for your business.
  4. Apple launches iMessage, Ysolt Usigan, Oct 23th 2011, http://www.cbsnews.com/8301-501465_162-20119854-501465.html
  5. Steve Jobs, Biography by Walter Isaacson