Monday, 15 May 2017

Porter's Generic Strategies and how to use them

As far back as 1980, Michael Porter wrote that all firms must choose to compete on the basis of either cost leadership, differentiation or focus. Firms which attempt to compete on more than one of these three risk wasting precious resources with incompatible strategies. Porter described such firms as "stuck in the middle".

Cost Leadership


In cost leadership strategies, firms compete by lowering prices (relative to value) in order to appeal to a broader target market (especially cost-conscious customers who might otherwise not purchase the product) or to sell higher volumes of product to existing customers.

Cost leadership firms retain profitability by keeping costs low through:

  1. increasing asset utilisation: for example, an airline that can turn aircraft around more quickly at the gate, a restaurant that can turn tables more quickly, or a management consultancy can charge more billable hours per member of staff and/or have fewer support staff, a factory can run expensive machinery 24 hours a day, etc.
  2. increasing economies of scale: for example, manufacturers that produce and sell higher volumes of goods can negotiate better deals on raw materials and distribution, and use more specialised equipment and processes.
  3. utilising the experience curve: for example, firms that repeat processes more frequently and over a longer period of time can use statistical and other methods to learn about and improve those processes.
  4. standardisation: offering few options on products and services, like the Model T Ford "any colour as long as it is black" approach. This will help to drive asset utilisation, economies of scale and the experience curve.
  5. process innovation: for example, by finding a substantially cheaper way to produce something.
  6. employing other low-cost strategies, including operating from low-cost locations, outsourcing, etc.
Firms pursuing cost leadership can deter new entrants to their market by threatening to retaliate with reduced prices. They can lock in powerful distributors with attractive deals, and neutralise supplier bargaining power. Given low prices, customers are less likely to consider more expensive substitute products or services. Rivalry can become an issue if two cost leaders enter into a price war, commoditising the market and competing all of the profits away.

Differentiation


In differentiation strategies, firms compete by offering superior products or services to customers, usually at higher prices.

Firms achieve differentiation through:

  1. customer intimacy: having strong relationships with their customers and knowing what they want and value.
  2. product or service innovation: developing new products, services and features to satisfy those wants and needs (learn more).
  3. brand building: to convince customers that a firm's products or services are somehow superior to a greater extent than what they really are, or to convince customers that they want product or service features the firm offers more than they actually need them.
Firms must find ways to protect their differentiators, for example using copyrights, patents, and/or exclusive/monopoly contracts. If their differentiators can be replicated by competitors, they will lose their competitive advantage and may be forced to compete on price against firms which lead on cost.

Firms using differentiation must rely customer loyalty to fend of new entrants. Differentiators can negotiate with distributors on the basis of such customer loyalty and brand pull - that is consumers will want distributors to carry their products. Differentiators have less bargaining power with suppliers but are better able to pass supplier price increases to customers. Differentiators rely on the utility of their value-added features to fend of substitutes. Rivalry is resolved by convincing customers of the superiority of the product or service, which can require clever marketing. 

Focus


Firms achieve focus by targeting one or more specific customer segments or niches. They then pursue a strategy of differentiation with regard to the product and service features with the attributes most highly desired by those segments, and cost leadership with all other attributes.

Whilst focus combines elements of both differentiation and cost leadership, it should not be seen as a hybrid or blend of the two. Strict separation should be made between those product and service attributes where cost leadership is to be applied and where differentiation is to be applied, and this strict separation should be based on the particular wants and needs of clearly identified niches.

How to use the generic strategies


  1. Decide which of the three generic strategies you want to pursue

    It is often, but not universally true that larger firms must choose between cost leadership and differentiation, whilst smaller firms must pursue focus. This is usually because large firms will struggle to find niches of sufficient size, and because small firms lack the resources to compete on cost leadership or differentiation.

    In large businesses, such as conglomerates, it is possible to for different part of the business to compete using different generic strategies. In such cases, the business may pursue different generic strategies under different brands in order to maintain that distinction in the market.

  2. Actively develop strategies and pursue which are aligned to and strengthen that position

    See the three descriptions above for examples of the kinds of strategies you might pursue under each of the three generic strategies.

  3. Identify and phase out any activities you currently undertake which do not support your chosen generic strategy.

  4. When evaluating new opportunities, eliminate those which are not compatible with your chosen generic strategy.

Monday, 8 May 2017

Introducing the Enhanced Business Model Canvas

The Enhanced Business Model Canvas combines the Business Model Canvas with the Operating Model Canvas proposed by Andrew Campbell, Mikel Gutierrez and Mark Lancelott in their recent book by the same name (see to the right).

In suggesting this combination, the authors argue that it provides a more operational perspective to the left-hand side of original Business Model Canvas, directly addressing "important issues such as people, organization structure, location and information systems that are critical to the operating model, but often given too little attention when thinking about the business model."

Here is an example of what an Enhanced Business Model canvas for Uber might look like.


(Please note: I have constructed this canvas by way of example only, using publicly available information without any privileged knowledge of Uber. As such I cannot vouch for its accuracy. If you do disagree with anything in this example, it will only serve to demonstrate the usefulness of the tool in fostering understanding.)

The above example was drawn in StratNavApp.com the collaborative online tool for business strategy development and execution.

In simplistic terms, the  Enhanced Business Model Canvas does provide more context and granularity than the original Business Model Canvas. For starters, it considers 11 elements of the business model, compared to the original. If we consider each of the changes in turn:
  1. Locations and Organisation have been added. These are both welcome additions. If Michael Porter's work on the strategic importance of location is not enough to convince you, just think of the importance of, for example, Silicon Valley to the tech sector. With regards to Organisation, please see my previous blog about why Structure follows Strategy.
  2. Key Partners and Resources have been removed. I would argue that they have, in fact, been replaced with Suppliers and Information respectively. In both cases, the new category appears to be slightly narrower than the original.
    1. In the case of suppliers, I think the greater specificity is probably a good thing. Distributors, for example, may be a Key Partner, but they probably fit more logically on the right side of the model, which focuses on customers, under Channels.
    2. The addition of Information is very welcome in today's data intensive, big data-driven world. And whilst other Resources, such as a preferential Location, now have a home of their own, others, such as patents or exclusive contracts may struggle to find a home in the enhanced model.
  3. Key Activities have been renamed as Processes and placed within a horizontal chevron shape, instead of the non-descript block in which all of the other elements reside. I am neutral regarding the name change. Arguably, the shape and orientation of the category make absolutely no difference to the analytical process. However, I can't help feel that the change highlights the active nature of the Key Processes, and also serves to make the model more distinctive.
Only time will tell whether the Enhanced Business Model Canvas will achieve the popularity of the original. For now, StratNavApp.com offers the ability to use either. Undoubtedly, it does add something to the debate on how best to understand, represent and analyse operating and business models, and I'd certainly be interested to hear your thoughts in the comments below.

Wednesday, 3 May 2017

Strategic Analysis: Old Mutual changes its replatforming partner

The most interesting story of the week in UK financial services must be Old Mutual Wealth's (OMW) decision to switch its replatforming exercise from IFDS to FNZ.

Strategically, I think it is interesting on a number of levels:

1. Sunk costs really are irrelevant

Every finance and decision making text will tell you that sunk costs should not influence a decision. However, behavioural economists have ample data to illustrate how difficult most people find it to apply this simple logic, and how seldom they do so.

OMW's decision is a masterclass on the subject. It successfully disregarded £330m of sunk costs in making this decision. (Although, I am sure that not all of that investment was thrown away and presumably OMW will have build up a significant library of requirements analysis and other IP that it can carry forward into its implementation of FNZ.)

In OMW's case, not all the costs are financial, and they would also have had to factor in any potential loss of investor confidence as they approach the break-up of their parent group (Old Mutual plc).

2. Financial cost is a secondary criterion

Even after setting aside these sunk costs, the advertised cost of implementing FNZ (£120m-£160m) is still greater than advertised costs of completing the IFDS implementation (£110m). The decision does not make sense based on those costs alone.

There are two other factors which would have swung this deal:
  1. Benefits: that is the benefits promised by FNZ outweighed the those promised by IFDS.
    AND/OR
  2. Risks: that is the perceived risks of IFDS exceeding budget, over-running schedule, or failing to deliver benefits exceed those perceived risks for FNZ.
All of which only reinforces the view that if the negotiation hinges on costs, then you've already lost.

3. Doing is the best form of marketing

I don't know what either FNZ or IFDS spend on sales and marketing, but I suspect that the impact of this one press release outweighed the impact of all of their other sales and marketing activity combined.

FNZ must be grinning like a Cheshire cat right now. In contrast, I suspect there are a lot of difficult questions being asked at IFDS.

Of course, this story isn't finished, and all eyes will be on OMW and FNZ over the next 18 months to see if FNZ can get on any better with OMW than IFDS did.

4. Systemic risk in the sector is shifting

This is perhaps not 'new' news, but this story brings it back to the fore. To put this in perspective, figures from Platforum show that 84 per cent of platform assets are expected to be held on platforms backed by just four technology firms by the end of 2018.

This level of market concentration inevitably attracts regulatory scrutiny, and ultimately intervention.

In the 2008 financial crisis, it was the banks that were considered 'too big to fail'. In the next financial crisis (isn't it inevitable?) it may be the technology providers supplying the financial institutions which take this role.

5. Technology is eating their lunch

According to the Financial Times Global 500 rankings, 5 of the top 10 companies by market capitalisation as of 31 March 2017 are now technology companies (Apple, Alphabet, Microsoft, Amazon and Facebook), as the industrial and financial conglomerates that dominated until recently slowly slip down the rankings.

As the financial services value chain fragments and the number of vertically integrated financial services companies (like Hargreaves Lansdown) declines, it becomes ever more important to understand to where in the value chain the value will flow.

The key motivation for disaggregating your value chain and buying core systems from a third party are that you believe a third party can do the job better and more cheaply than you can. A write-off of £330m is a big negative in that evaluation.

Given the combination of concentration and market cap factors outlined above, it seems likely that value will flow away from financial services providers and towards their technology suppliers, leaving the financial services providers increasingly commoditised, whilst still bearing the capital burden.

As the old adage goes: in a gold rush, it's the shovel-maker who gets rich.

Tuesday, 2 May 2017

Strategic Learning: A practical guide to strategy development and execution

Regular readers of this blog will know just what a complex and multifaceted subject business strategy can be. For those without the time to study the subject in all its guises, actually getting on with the job of developing and executing business strategy can be a daunting task.

That is why I wrote my first eBook:

Strategic Learning: A practical guide to strategy development and execution

In it, I distill what I believe are the absolutely essential steps and considerations for developing and executing a business strategy which creates real value, rather that one that sits on the shelf collecting dust.

You can download your free copy now.

I'd love to know what you think. Please feel free to leave your feedback in the comments below.

Monday, 24 April 2017

Agility needs a strategy

Agility is another idea frequently posited as being superior to strategy.

The argument goes that the world is changing too quickly for long-term plans and strategy to add value, and that firms should instead just focus on being agile and quick to respond to change.

Once again, I think that this presents a false dichotomy. (See also False dichotomies and the noise before defeat.)

Agility is not an alternative to strategy. In fact, as a goal, agility itself requires a strategy:
  1. What should firms do in order to become (more) agile?
  2. How should firms avoid the pitfalls of agility?
  3. How do firms decide where to pivot and where to stick? etc.
Agility is a fairly well-developed concept in the field of software engineering and development. A cursory review of the literature will reveal how many different approaches and methodologies for agility there are. Each has pros and cons and is likely to be relatively more or less suitable under different circumstances. That same literature is also full of cautionary tales of firms who have failed to implement these approaches well.

Strategy itself is not only about the long term. Strategy should also be about the here and now. In fact, one of the advantages of a solid strategy process is that it ensure that the myriad decisions that firms face on a daily basis can more easily be made in a way which aligns towards a common goal.

Strategy facilitates agility. When faced with an unforeseen event, stakeholders can more quickly agree which responses most closely align with the strategy and respond more quickly and with greater confidence and alignment. Contrast this with a firm which makes each and every decision independently - decisions will likely take longer, and may involve frequent changes of direction and even reversals.

However, agility often conceals strategy. Commentators easily observe apparently agile changes without appreciating the underlying strategy which guides them. As Sun Tzu said:

All men can see these tactics whereby I conquer, but what none can see is the strategy out of which victory is evolved.

Monday, 10 April 2017

The digital spiral towards innovation at the core

The nature of what the digital revolution means is evolving as organisations adopt digital in more mature and fundamental ways.

It started at the edge of the organisation, where the organisation touches its customers and has evolved ever deeper into the organisation to where it now enables completely new ways of creating and delivering value.

Although this evolution is a continuum of change, I find it helpful to divide it into four distinct phases.

1. E-commerce


The first phase allowed businesses to market and sell their (existing) products and services to more customers more easily over digital channels. It started with marketing, using informational websites, email and social media to reach customers, and gradually grew to include selling, and eventually servicing.

During this first wave of e-commerce, often referred to as Web 1.0, a myriad of startups flooded the market selling everything from books to pet food, whilst established pre-e-commerce business struggled to keep up. The inevitable bust which followed the boom left a much smaller number of massive winners (think Amazon.com), a much larger number of failures (think Pets.com) and that almost no businesses exist today without a web-site.

E-commerce had more fundamental impacts on business strategy, though. Most importantly it exposed how a lack of integration within the organisation and its system made it difficult if not impossible to deliver coherent DIY and self-service solutions to the end customers. From this, the concept of customer-centricity was born. (Although I believe this term has now taken on a life of its own and been widely misappropriated.)

2. Supply chain automation


Whilst the focus of this first phase of e-commerce was on end consumers, the second phase tackled the B2B relationship between corporate buyers and their suppliers. B2B e-commerce sites quickly evolved to provide more direct integration between buyer and supplier systems. Standards, such as XML quickly evolved to facilitate this.

Supply chain automation can be used to make existing exchanges of information more efficient. It can also increase the flow of information. For example, RFID allows retailers, distributors and manufacturers to track stock levels and movement, automating stock management and better integrating with robotics.

Not only did this improve efficiencies, with smaller orders and faster delivery cycles, but it also allowed previously monolithic organisations to disaggregate into networks of smaller interdependent and more specialised suppliers.

McKinsey & Co estimates that whilst 49% of companies invest in E-commerce, only 2% of companies invest in digitalising their supply chain.

3. Workforce automation


With both the customer and supplier ends of the value chain being digitised it was inevitable that digitisation would begin to encroach on the work done by employees in between,

Although we've had expert systems for many years, it is the development of digital customer and supplier interfaces which generate the data required to move them towards true artificial intelligence. For an explanation of this effect, see More data usually beats better algorithms.

Information-based jobs will inevitably be hardest hit first. Think of insurance underwriters and claims managers, fund managers, accountants, etc. But inevitably most jobs with any element of repetition will be impacted. Taxi drivers are at risk from autonomous vehicles, for example, and there is already talk of robots performing some surgeries more accurately than skilled surgeons. There is already evidence that banks are hiring fewer people with finance backgrounds to do the work, and more people with technology skills to automate it.

I prefer to think of workforce automation in terms of augmentation, rather than replacement of people. The industrial revolution provides a well-established narrative of technology replacing labour and yet somehow creating new and different jobs in the process. I think most of us are grateful that we don't have to do the heavy labour now replaced by machines, and I think that future generations will be grateful not to have to do some of the repetitive and uncreative jobs many people do today. (The emerging millennial workforce is already rejecting much of this kind of work.)

It strikes me as anachronistic that organisations are slow to adapt and to provide their employees with the same level of tools to use in their jobs as other companies provide them to use as their customers. Ultimately, this flows through into the customer experience when call centre operators are unable to provide quick and definitive solutions, leaving you with the impression they are still switching between multiple disconnected systems to get answers and process requests.

4. Digitisation


The resulting end-to-end digitisation of the value chain opens up possibilities, not just for delivering existing products and services more effectively, but for creating entirely new products and services.

Again, this started with information-based products: think, for example, of the development of subscription-based streaming media services, compared to purchased physical media or broadcast services. But it is now moving increasingly into physical products as well.

This is enabled by the Internet of Things (IoT), a network of sometimes semi-autonomous things able to sense elements of the real world and communicate with each other and controlling systems. Already we have devices fitted in cars which can collect data about the performance of the car and can communicate this to service technicians and insurance companies. We also have activity trackers which measure things like sleep, activity levels and heart rate on a continuous basis, and upload the data to servers for analysis.

Of course, it is still hard to imagine where this could go. Imagine that your calendar/organiser is able to determine where you are now, where you need to get to for your next meeting, and can arrange for an autonomous vehicle to take you there, all without you needing to do anything.

Note only does digitisation replace or enhance physical products, and create completely new entirely digital products, it also often develops whole new ecosystems of digitally connected organisations, people and devices which collaborate together in previously unimaginable ways.

McKinsey and Co research suggests that 70% of companies approach digitisation without changing their overall strategy, but that the 30% that do, generate 3 times the profit

When I look at offices and factories full of people hunched over keyboards, screens and other equipment, I always get the sense that somehow it is the people working to satisfy the requirements of the machines. I read today a prediction that in 10 years time, most interfaces will not have a screen. I believe that is because the machines will talk to us, as we now talk to each other, and talk to each other silently using some form of wireless protocol. In a fully digitised world with a fully developed IoT, you can imagine that finally, it will be the machines who serve the people, fading into the background as they do.

Lessons


I think there are two key lessons from understanding this evolution of digital strategy:
  1. Organisations who remain focused on e-commerce alone will eventually be outcompeted by those that embrace all four stages of digitisation. All organisations must now look at all four phases of digital in parallel in order to remain competitive.
  2. Organisations where a high proportion of the total labour cost is direct (that is directly proportionate to the volume of products and services provided to customers) rather than indirect (that is devoted to researching and developing new and improved propositions) will fall behind. Employees should be firmly focused on creating new sources of value, and not delivering existing sources of value.

Monday, 27 March 2017

False dichotomies and the noise before defeat

I was reading yet another blog post the other day about how, in today's fast changing world, execution is more important than strategy; that strategy has somehow become irrelevant, even. I find such articles to be about as unhelpful as the similarly argued ones about how culture trumps strategy.

The problem is that they are based on a false dichotomy. That is, they assume that we need to choose strategy OR execution (OR culture). The reality is, we need strategy AND execution (AND culture, etc.) in order to succeed.

Arguing that execution is more important than strategy is like arguing that the heart is more important than the lungs. Without the lungs, the heart would pump unoxygenated blood, and we'd die. Without the heard, the oxygenated blood would not circulate, and we'd die just as quickly.

The film, Titanic, gives a great example of what happens when you focus too much on execution and not enough on strategy. The journey starts off splendidly. So much so, that the captain orders the crew to increase speed so that they can arrive in New York ahead of schedule. Execution was humming. Unfortunately, all that extra speed just meant that they hit that iceberg even harder!

What they lacked was strategy: a process which might have resulted in them identifying and anticipating icebergs earlier, loading more lifeboats, sticking to the planned speed, charting a different course for New York, etc.

Execution without strategy simply take your business in the wrong direction more quickly.

The saying, often misattributed to Sun Tzu, goes:
Strategy without tactics is the slowest route to victory. Tactics without strategy is the noise before defeat.
Yes, it is true that the world we live in now is quite different to the world in which the authors of the classic texts on strategy lived. But a read of Sun Tzu's 2,500 year old text, The Art of War, shows that many things remain remarkably the same.

One thing that has changed is the very pace of change itself. New ideas spread more rapidly now than they ever have before. But the pace of change has been accelerating since at least the invention of the printing press, and we can only expect that it will continue to accelerate. So, in a sense, even this is nothing new.

Furthermore, the accelerating pace of change makes the importance of strategy even greater than before, and certainly not less. To suggest that we abandon strategy in the face of accelerating change is a folly akin to suggesting a driver closes his eyes whenever the car exceeds a certain speed. Instead, at higher speeds, we need better systems for sensing, anticipating and responding to what is coming. And, as the case with cars illustrates, we need to increasingly rely on technology to do so.

In short, strategy needs to evolve alongside everything else. It should not be abandoned or subjugated.

So, let's be done with the false dichotomies, accept that we need strategy AND execution (AND culture, and a whole host of other things) and redouble our efforts to do develop and execute better strategies even more effectively.

photo credit: 3279461836 via photopin (license)