GSP Consulting Blog

Entrepreneurs & Global Heroes

2010-06-29T20:28:00.000+01:00

Despite the downturn, entrepreneurs are enjoying a renaissance the world over.

In December 2009, three weeks after the terrorist attacks in Mumbai and in the midst of the worst global recession since the 1930s, 1,700 bright-eyed Indians gathered in a hotel in Bangalore for a conference on entrepreneurship. They mobbed business heroes such as Azim Premji, who transformed Wipro from a vegetable-oil company into a software giant, and Nandan Nilekani, one of the founders of Infosys, another software giant. They also engaged in a frenzy of networking. The conference was so popular that the organisers had to erect a huge tent to take the overflow. The aspiring entrepreneurs did not just want to strike it rich; they wanted to play their part in forging a new India. Speaker after speaker praised entrepreneurship as a powerful force for doing good as well as doing well.

Back in 1942 Joseph Schumpeter gave warning that the bureaucratisation of capitalism was killing the spirit of entrepreneurship. Instead of risking the turmoil of “creative destruction”, Keynesian economists, working hand in glove with big business and big government, claimed to be able to provide orderly prosperity. But perspectives have changed in the intervening decades, and Schumpeter’s entrepreneurs are once again roaming the globe.

Since the Reagan-Thatcher revolution of the 1980s, governments of almost every ideological stripe have embraced entrepreneurship. The European Union, the United Nations and the World Bank have also become evangelists. Indeed, the trend is now so well established that it has become the object of satire. Listen to me, says the leading character in one of the best novels of 2008, Aravind Adiga’s “The White Tiger”, and “you will know everything there is to know about how entrepreneurship is born, nurtured, and developed in this, the glorious 21st century of man.”

This special report will argue that the entrepreneurial idea has gone mainstream, supported by political leaders on the left as well as on the right, championed by powerful pressure groups, reinforced by a growing infrastructure of universities and venture capitalists and embodied by wildly popular business heroes such as Oprah Winfrey, Richard Branson and India’s software kings. The report will also contend that entrepreneurialism needs to be rethought: in almost all instances it involves not creative destruction but creative creation.

The world’s greatest producer of entrepreneurs continues to be America. The lights may have gone out on Wall Street, but Silicon Valley continues to burn bright. High-flyers from around the world still flock to America’s universities and clamour to work for Google and Microsoft. And many of them then return home and spread the gospel.

The company that arranged the oversubscribed conference in Bangalore, The Indus Entrepreneurs (TiE), is an example of America’s pervasive influence abroad. TiE was founded in Silicon Valley in 1992 by a group of Indian transplants who wanted to promote entrepreneurship through mentoring, networking and education. Today the network has 12,000 members and operates in 53 cities in 12 countries, but it continues to be anchored in the Valley. Two of the leading lights at the meeting, Gururaj Deshpande and Suren Dutia, live, respectively, in Massachusetts and California. The star speaker, Wipro’s Mr Premji, was educated at Stanford; one of the most popular gurus, Raj Jaswa, is the president of TiE’s Silicon Valley chapter.

The globalisation of entrepreneurship is raising the competitive stakes for everyone, particularly in the rich world. Entrepreneurs can now come from almost anywhere, including once-closed economies such as India and China. And many of them can reach global markets from the day they open their doors, thanks to the falling cost of communications.

For most people the term “entrepreneur” simply means anybody who starts a business, be it a corner shop or a high-tech start up. This special report will use the word in a narrower sense to mean somebody who offers an innovative solution to a (frequently unrecognised) problem. The defining characteristic of entrepreneurship, then, is not the size of the company but the act of innovation.

A disproportionate number of entrepreneurial companies are, indeed, small start-ups. The best way to break into a business is to offer new products or processes. But by no means all start-ups are innovative: most new corner shops do much the same as old corner shops. And not all entrepreneurial companies are either new or small. Google is constantly innovating despite being, in Silicon Valley terms, something of a long-beard.

This narrower definition of entrepreneurship has an impressive intellectual pedigree going right back to Schumpeter. Peter Drucker, a distinguished management guru, defined the entrepreneur as somebody who “upsets and disorganises”. “Entrepreneurs innovate,” he said. “Innovation is the specific instrument of entrepreneurship.” William Baumol, one of the leading economists in this field, describes the entrepreneur as “the bold and imaginative deviator from established business patterns and practices”. Howard Stevenson, the man who did more than anybody else to champion the study of entrepreneurship at the Harvard Business School, defined entrepreneurship as “the pursuit of opportunity beyond the resources you currently control”. The Ewing Marion Kauffman Foundation, arguably the world’s leading think-tank on entrepreneurship, makes a fundamental distinction between “replicative” and “innovative” entrepreneurship.

Five Myths

Innovative entrepreneurs are not only more interesting than the replicative sort, they also carry more economic weight because they generate many more jobs. A small number of innovative start-ups account for a disproportionately large number of new jobs. But entrepreneurs can be found anywhere, not just in small businesses. There are plenty of misconceptions about entrepreneurship, five of which are particularly persistent. The first is that entrepreneurs are “orphans and outcasts”, to borrow the phrase of George Gilder, an American intellectual: lonely Atlases battling a hostile world or anti-social geeks inventing world-changing gizmos in their garrets. In fact, entrepreneurship, like all business, is a social activity. Entrepreneurs may be more independent than the usual suits who merely follow the rules, but they almost always need business partners and social networks to succeed.

The history of high-tech start-ups reads like a roll-call of business partnerships: Steve Jobs and Steve Wozniak (Apple), Bill Gates and Paul Allen (Microsoft), Sergey Brin and Larry Page (Google), Mark Zuckerberg, Dustin Moskovitz and Chris Hughes (Facebook). Ben and Jerry’s was formed when two childhood friends, Ben Cohen and Jerry Greenfield, got together to start an ice-cream business (they wanted to go into the bagel business but could not raise the cash). Richard Branson (Virgin) relied heavily on his cousin, Simon Draper, as well as other partners. Ramana Nanda, of Harvard Business School (HBS), and Jesper Sorensen, of Stanford Business School, have demonstrated that rates of entrepreneurship are significantly higher in organisations where a large number of employees are former entrepreneurs.

Entrepreneurship also flourishes in clusters. A third of American venture capital flows into two places, Silicon Valley and Boston, and two-thirds into just six places, New York, Los Angeles, San Diego and Austin as well as the Valley and Boston. This is partly because entrepreneurship in such places is a way of life—coffee houses in Silicon Valley are full of young people loudly talking about their business plans—and partly because the infrastructure is already in place, which radically reduces the cost of starting a business.

The second myth is that most entrepreneurs are just out of short trousers. Some of today’s most celebrated figures were indeed astonishingly young when they got going: Bill Gates, Steve Jobs and Michael Dell all dropped out of college to start their businesses, and the founders of Google and Facebook were still students when they launched theirs. Ben Casnocha started his first company when he was 12, was named entrepreneur of the year by Inc magazine at 17 and published a guide to running start-ups at 19.

But not all successful entrepreneurs are kids. Harland Sanders started franchising Kentucky Fried Chicken when he was 65. Gary Burrell was 52 when he left Allied Signal to help start Garmin, a GPS giant. Herb Kelleher was 40 when he founded Southwest Airlines, a business that pioneered no-frills discount flying in America. The Kauffman Foundation examined 652 American-born bosses of technology companies set up in 1995-2005 and found that the average boss was 39 when he or she started. The number of founders over 50 was twice as large as that under 25.

The third myth is that entrepreneurship is driven mainly by venture capital. This certainly matters in capital-intensive industries such as high-tech and biotechnology; it can also help start-ups to grow very rapidly. And venture capitalists provide entrepreneurs with advice, contacts and management skills as well as money.

But most venture capital goes into just a narrow sliver of business: computer hardware and software, semiconductors, telecommunications and biotechnology. Venture capitalists fund only a small fraction of start-ups. The money for the vast majority comes from personal debt or from the “three fs”—friends, fools and families. Google is often quoted as a triumph of the venture-capital industry, but Messrs Brin and Page founded the company without any money at all and launched it with about $1m raised from friends and connections.

Monitor, a management consultancy that has recently conducted an extensive survey of entrepreneurs, emphasises the importance of “angel” investors, who operate somewhere in the middle ground between venture capitalists and family and friends. They usually have some personal connection with their chosen entrepreneur and are more likely than venture capitalists to invest in a business when it is little more than a budding idea.

The fourth myth is that to succeed, entrepreneurs must produce some world-changing new product. Sir Ronald Cohen, the founder of Apax Partners, one of Europe’s most successful venture-capital companies, points out that some of the most successful entrepreneurs concentrate on processes rather than products. Richard Branson made flying less tedious by providing his customers with entertainment. Fred Smith built a billion-dollar business by improving the delivery of packages. Oprah Winfrey has become America’s richest self-made woman through successful brand management.

The fifth myth is that entrepreneurship cannot flourish in big companies. Many entrepreneurs are sworn enemies of large corporations, and many policymakers measure entrepreneurship by the number of small-business start-ups. This makes some sense. Start-ups are often more innovative than established companies because their incentives are sharper: they need to break into the market, and owner-entrepreneurs can do much better than even the most innovative company man.

Big can be Beautiful Too

But many big companies work hard to keep their people on their entrepreneurial toes. Johnson & Johnson operates like a holding company that provides financial muscle and marketing skills to internal entrepreneurs. Jack Welch tried to transform General Electric from a Goliath into a collection of entrepreneurial Davids. Jorma Ollila transformed Nokia, a long-established Finnish firm, from a maker of rubber boots and cables into a mobile-phone giant; his successor as boss of the company, Olli-Pekka Kallasvuo, is now talking about turning it into an internet company. Such men belong firmly in the pantheon of entrepreneurs.

Just as importantly, big firms often provide start-ups with their bread and butter. In many industries, especially pharmaceuticals and telecoms, the giants contract out innovation to smaller companies. Procter & Gamble tries to get half of its innovations from outside its own labs. Microsoft works closely with a network of 750,000 small companies around the world. Some 3,500 companies have grown up in Nokia’s shadow.

But how is the new enthusiasm for entrepreneurship standing up to the worldwide economic downturn? Entrepreneurs are being presented with huge practical problems. Customers are harder to find. Suppliers are becoming less accommodating. Capital is harder to raise. In America venture-capital investment in the fourth quarter of 2008 was down to $5.4 billion, 33% lower than a year earlier. Risk, the lifeblood of the entrepreneurial economy, is becoming something to be avoided.

Misfortune and Fortune

The downturn is also confronting supporters of entrepreneurial capitalism with some awkward questions. Why have so many once-celebrated entrepreneurs turned out to be crooks? And why has the free-wheeling culture of Wall Street produced such disastrous results?

For many the change in public mood is equally worrying. Back in 2002, in the wake of the scandal over Enron, a dubious energy-trading company, Congress made life more difficult for start-ups with the Sarbanes-Oxley legislation on corporate governance. Now it is busy propping up failed companies such as General Motors and throwing huge sums of money at the public sector. Newt Gingrich, a Republican former speaker of America’s House of Representatives, worries that potential entrepreneurs may now be asking themselves: “Why not get a nice, safe government job instead?”

Yet the threat to entrepreneurship, both practical and ideological, can be exaggerated. The downturn has advantages as well as drawbacks. Talented staff are easier to find and office space is cheaper to rent. Harder times will eliminate the also-rans and, in the long run, could make it easier for the survivors to grow. As Schumpeter pointed out, downturns can act as a “good cold shower for the economic system”, releasing capital and labour from dying sectors and allowing newcomers to recombine in imaginative new ways.

Schumpeter also said that all established businesses are “standing on ground that is crumbling beneath their feet”. Today the ground is far less solid than it was in his day, so the opportunities for entrepreneurs are correspondingly more numerous. The information age is making it ever easier for ordinary people to start businesses and harder for incumbents to defend their territory. Back in 1960 the composition of the Fortune 500 was so stable that it took 20 years for a third of the constituent companies to change. Now it takes only four years.

There are many reasons for this. First, the information revolution has helped to unbundle existing companies. In 1937 Ronald Coase argued, in his path-breaking article on “The Nature of the Firm”, that companies make economic sense when the bureaucratic cost of performing transactions under one roof is less than the cost of doing the same thing through the market. Second, economic growth is being driven by industries such as computing and telecommunications where innovation is particularly important. Third, advanced economies are characterised by a shift from manufacturing to services. Service firms are usually smaller than manufacturing firms and there are fewer barriers to entry.

Microsoft, Genentech, Gap and The Limited were all founded during recessions. Hewlett-Packard, Geophysical Service (now Texas Instruments), United Technologies, Polaroid and Revlon started in the Depression. Opinion polls suggest that entrepreneurs see a good as well as a bad side to the recession. In a survey carried out in eight emerging markets last November for Endeavor, a pressure group, 85% of the entrepreneurs questioned said they had already felt the impact of the crisis and 88% thought that worse was yet to come. But they also predicted, on average, that their businesses would grow by 31% and their workforces by 12% this year. Half of them thought they would be able to hire better people and 39% said there would be less competition.

Source: The Economist

The Virtual Organisation

2010-06-29T20:25:00.002+01:00

The virtual organisation has an almost infinite variety of structures, all of them fluid and changing

It is widely alleged that the business organisation of the future will be virtual. But precise definitions of what it means to be a virtual organisation are hard to find. The origin of the phrase, though, is clear. It comes from the expression “virtual reality”, an experience in which electronically created sounds and images are made to resemble reality. A virtual company resembles a normal traditional company in its inputs and its outputs. It differs in the way in which it adds value during the journey in between.

The virtual organisation has an almost infinite variety of structures, all of them fluid and changing. Most of them need virtually no employees. A New York insurance company was once started from scratch by someone whose overriding aim was to employ nobody but himself. The UK’s Virgin Group briefly held 5% of the British cola market with just five employees. This was achieved by tightly focusing on the company’s core competence: its marketing. Everything else, from the production of the drink to the distribution of it, was done by someone else. A virtual organisation relies for the most part on a network of part-time electronically connected freelances, sometimes referred to as e-lances.

The virtual organisation has few physical assets, reflecting the fact that adding value is becoming more dependent on (mobile) knowledge and less dependent on (immobile) plant and machinery. Hollywood is often cited as a template for the virtual organisation. The way that movies have been made since the industry freed itself from the studio system (where everyone from Bette Davis down to the doorman was a full-time employee) has been virtual. A number of freelances, from actors to directors via set builders and publicity agents, come together with a common purpose: to make a movie, to tell a story on celluloid. They then go their separate ways and another (unrelated) bunch of people (with a similar set of skills) comes together to make another movie. And so it goes on, very productively.

Linked to the idea of the virtual organisation is the idea of the virtual office, a place where space is not allocated uniquely to individual employees. People work as and when they need to, wherever space is available. This practice is commonly referred to as hot-desking. The virtual office has the advantage of providing a different vista every day. But it makes it difficult to form close relationships with colleagues.

In “Rethinking the Future”, Lester Thurow, a former dean of Sloan School of Management, gave a vivid portrayal of the virtual office:

You walk in and there’s an electronic board that says room 1021 is empty. You go to 1021. You have your personal telephone number. You call up your computer code. You press a button and your family picture is up on the flat-screen TV set on the wall. And that’s your office for as long as you’re there. The minute you leave, it ceases to be your office.

We know why you don’t do that at the moment; human beings like to have a cave. But the first company that figures out how to make this work will save 25% on office space, 25% on telephones, 25% on computers. These will be the low-cost producers, and low-cost producers will inherit the earth.

AT&T, an American telecoms company, reckons that it saved over $500m between 1991 and 1998 by reorganising its office space along virtual lines.

The process of defining the virtual organisation is a gradual one. As companies withdraw more and more into their core competencies, so they become more virtual. The virtual organisation is able to leverage this core into almost any industrial sector. Thus it can be in the pensions business and the railway business at the same time (as is the Virgin organisation in the UK). It can then rapidly desert any one of those businesses, and equally rapidly move into something completely different by establishing strategic alliances with organisations that have the essential skills that it lacks. It can do this anywhere in the world.

The virtual organisation is inevitably ephemeral because it has no repository of long-term memory, no individuals who have worked for the same organisation for years and years. Nor has it any long-term geographical presence or a local community that remembers “Old Mr Chambers from way back”.

Source: The Economist

Value Creation

2010-06-29T20:23:00.001+01:00

The ultimate measure by which a company is judged

Value creation is a corporation’s raison d’être, the ultimate measure by which it is judged. Debate has focused on what is the most appropriate type of value for the corporation to create. Is it:

the value that the stockmarket gives the company (its market value);
the value shown in its balance sheet (the accounting or book value of its assets minus its liabilities);
something based on its expected future performance - profits or cash; or
none of these?

In the 1990s, the main emphasis of executives was on creating value for shareholders - a value that was reflected in movements of the company’s stock price. But measures based on stockmarket values are subject to the same wild fluctuations as the market itself. In a rising tide, all boats get raised. But when macroeconomic changes force up markets generally, it does not mean that the value of each individual company in that market has changed similarly. Markets are moved by sentiment that has little to do with the underlying value of individual corporations.

The dotcom frenzy at the end of the 1990s was proof of this. Small new internet firms were suddenly lifted into the stratosphere by investors’ enthusiasm for their stocks. But their underlying value throughout the frenzy remained more or less unchanged - for many of them, that value was ultimately measured by a liquidator.

However, any measure based on book value has to get over the fact that accounting measures are not carved in stone. They can (and do) differ from country to country. It is also stymied by the fact that book values fail to take full account of intangible assets - things you cannot kick, like brands, patents or partnerships. These have come to assume a growing proportion of many companies’ value, particularly in the high-tech sector where the most valuable assets walk in and out of the front door every day. At the start of this century, it was estimated that intangible assets could account for as much as half of the value of the entire American economy.

Measures that attempt to value a company based on its future prospects are no easy alternative. They soon run into the difficulty of quantifying what those prospects are. The popular idea that a company is no more than the net present value of its future cash flow depends on guessing first what that cash flow is going to be, and then what future interest rates are going to be. Interest rates are used to discount those cash flows and calculate their present value. However, these measures do have the advantage of being independent of accounting rules, so they can be used to compare companies in different industries and countries.

A measure developed to overcome these problems is called EVA (economic value added). This is the measure of output (taken as operating profit after tax and some other adjustments) less input (taken as the annual rental charge on the total capital employed, both debt and equity). Managers have all the elements of this equation (costs, revenues, debt and capital expenditure) in their hands. So when it increases or decreases they have no one to praise or blame other than themselves. This makes it (in theory) a good benchmark against which to measure their bonuses and other perks.

Source: The Economist

Value Chain

2010-06-29T20:21:00.002+01:00

The value chain was first developed as a business idea in the second chapter of “Competitive Advantage: Creating and Sustaining Performance” by Michael Porter, first published in 1985. In it he wrote:

A systematic way of examining all the activities a firm performs and how they interact is necessary for analysing the sources of competitive advantage. In this chapter, I introduce the value chain as the basic tool for doing so.

In the decade after the book was published, the idea became one of the most discussed and most misunderstood in the whole of the management arena. Each link in a value chain consists of a bundle of activities (value activities), and these bundles are performed by a firm to “design, produce, market, deliver and support its product”. “Value activities are the discrete building blocks of competitive advantage,” wrote Porter.

Rival firms may have similar chains, but they may also have very different ones. Porter quoted the example of People Express, one of the earliest of the low-cost airlines, and United Airlines, a more traditional firm. They were both in the same business, but there were significant differences in the way that, for example, they ran their boarding-gate operations, their aircraft operations and their crews. Differences such as these, claimed Porter, are a principal source of competitive advantage.

Critics of the idea focused on the difficulty in identifying the discrete building blocks. Without defining them carefully it is not possible to compare and contrast them with those of rivals and thereby to seek ways of gaining competitive advantage. Porter tried to help. He said:

“[Every value activity] employs purchased inputs, human resources (labour and management), and some form of technology to perform its function. Each value activity also uses and creates information … the appropriate degree of disaggregation depends on the economics of the activities and the purposes for which the value chain is being analysed.”

He also said a bit about what value chains were not. For instance: “Value activities and accounting classifications are rarely the same,” he explained. But still, most firms found it hard to spot a value activity when it hit their factory floor. Non-manufacturing businesses found it even harder.

Since the idea of the value chain was first introduced, it has been taken in a number of different directions. One has attempted to extend it beyond the straightforward manufacturing processes for which it was, in its early form, most suited.

In 1993, Richard Norman and Rafael Ramirez argued that the value chain was outdated, suited to a slower changing world of comparatively fixed markets. Companies in the 1990s, they said, needed not just to add value but to “reinvent” it. This they could do by reconfiguring roles and relationships between “a constellation of actors” - suppliers, partners, customers, and so on. One company they pointed to as having done this particularly well was IKEA, a Swedish-based international retailer of home furniture.

Later on, Jeffrey Rayport and John Sviokla applied the idea to the virtual world, the world of information, arguing that managers must pay attention to the way in which value chains work in both the tangible world of the marketplace and the virtual world of the market space. Just as companies take raw materials and refine them into products, so (increasingly) do they also take raw information and add value from a chain of five activities: information gathering, organising, selecting, synthesising and distributing.

Source: The Economist

Unique Selling Proposition

2010-06-29T20:17:00.003+01:00

Uniqueness is rare, and coming up with a continuous stream of products with unique features is, in practice, extremely difficult

A unique selling proposition (USP) is a description of the qualities that are unique to a particular product or service and that differentiate it in a way which will make customers purchase it rather than its rivals.

Marketing experts used to insist that every product and service had to have a USP, at least one unique feature that could be distilled into a 60-second sales spiel, the equivalent of a single written paragraph. But this idea was usurped by the view that what really matters in marketing a product or service is its positioning, where it sits on the spectrum of customer needs. Shampoos, for instance, claim to meet all sorts of different customer needs and sit in all sorts of different positions—the need to wash dry hair or greasy hair, dark hair or blond hair, or the need to wash hair frequently or not so frequently. Few of them, however, can claim to have a unique selling proposition. All of them clean hair.

Uniqueness is rare, and coming up with a continuous stream of products with unique features is, in practice, extremely difficult. Philip Kotler says that the difficulty firms have in creating functional uniqueness has made them “focus on having a unique emotional selling proposition (an ESP) instead of a USP”. He gives the example of the Ferrari car and the Rolex watch. Neither has a distinctive functional uniqueness, but each has a unique emotional association in the consumer’s mind.

Uniqueness can be sought in a number of ways:

By offering the lowest price. John Lewis, a British department store, used to claim that it was “never knowingly undersold”. Its USP established it as the cheapest vendor (under certain prescribed conditions) of the items that it sold. But this is a rocky route to success, particularly at a time when there are firms prepared to sell (temporarily) at well below cost just to establish turnover. This was the case with many early internet retailing experiments. Moreover, buyers who base their purchasing decisions on price alone are often disloyal. Customers continue to go to John Lewis for many reasons other than its price promise.
By offering the highest quality. This is the Rolls-Royce approach to selling.
By being exclusive. In the information age, this is an increasingly common type of USP. More and more firms offer a unique packaging of information or knowledge.
By offering the best customer service. Domino’s Pizza became the bestselling brand in the United States on the basis of its USP: “Fresh, hot pizza delivered in 30 minutes or less, guaranteed.” It did not promise high quality or low price, just fast delivery. A side benefit of a USP like this is that it compels the firm’s employees to try that bit harder to achieve the promise. A firm that fails to fulfil the promise in its USP is condemned to a short future if it cannot quickly come up with a new one.
By offering the widest choice. This is particularly appropriate to niche markets. A specialist cheese shop, say, can claim to offer a wider selection of cheeses than anyone else.
By giving the best guarantee. This is particularly important in industries such as travel and catalogue selling, where customers pay for something upfront and then have to hope that what they think they have bought is eventually delivered.

Jay Abraham, a marketing consultant who once described himself as “the most expensive and successful marketing consultant on the planet”, said that most businesses do not have a USP:

[They have] only a “me too”, rudderless, nondescript, unappealing business that feeds solely upon the sheer momentum of the marketplace. There’s nothing unique; there’s nothing distinct. They promise no great value, benefit, or service—just “buy from us” for no justifiable, rational reason.

Source: The Economist

Total Quality Management

2010-06-29T20:11:00.002+01:00

Built on the belief that quality is a matter of conforming to a customer’s requirements

Total quality management (TQM) is the idea that controlling quality is not something that is left exclusively to the “quality controller”, a person who stands at the end of a production line checking final output. It is (or it should be) something that permeates an organisation from the moment its raw materials arrive to the moment its finished products leave.

TQM is a process-oriented system built on the belief that quality is a matter of conforming to a customer’s requirements. These requirements can be measured, and deviations from them can then be prevented by means of process improvements or redesigns.

The European Foundation for Quality Management (EFQM) said that TQM strategies are characterised by the following:

The excellence of all managerial, operational and administrative processes.
A culture of continuous improvement in all aspects of the business.
An understanding that quality improvement results in cost advantages and better profit potential.
The creation of more intensive relationships with customers and suppliers.
The involvement of all personnel.
Market-oriented organisational practices.

Total quality management was developed by a number of Japanese firms in the 1950s and 1960s. But it was built largely on the teachings of W. Edwards Deming and Joseph Juran, two Americans who had quietly developed the principles in the aftermath of the second world war. With the help of books and articles such as David Garvin’s 1983 description in Harvard Business Review of the way in which TQM and other techniques were putting Japanese companies streets ahead of their foreign competitors, the idea was later reclaimed by the United States and widely adopted by American business.

Europe, which has at times looked left out of this game of American-Japanese ping-pong, has also made occasional claims to be the fount of total quality. Raymond Levy, chairman of Renault, a French car company, said in the early 1990s:

Quality is representative of a culture which we Europeans have no reason to let others monopolise. The Europe of Descartes; the Europe of the Age of Reason and the Enlightenment; the Europe of the industrial and technological revolution of the last two centuries holds within itself all the elements of method and exactitude conveyed by the term “total quality”.

In the late 1990s there was something of a backlash against the implications of TQM, especially in the United States. Florida Power & Light, for example, the first American company to win the prestigious Deming Prize for quality management, cut its TQM programme because of its employees’ complaints about the excessive amount of paperwork that it required. Douglas Aircraft, a subsidiary of McDonnell Douglas, cut its programme to next to nothing. Newsweek colourfully described the aircraft company’s action: “At Douglas, TQM appeared to be just one more hothouse Japanese flower never meant to grow on rocky American ground.”

Source: Economist.com

Flexible Working

2010-06-29T20:08:00.002+01:00

The idea that employees should have the freedom (within limits) to work at times which suit them caught on in the last decades of the 20th century. The “9 to 5” mentality, that employees worked only between those eight hours of the day, with one hour off for lunch, was still prevalent in the early 1980s when a famous film was made with that title. The office-based staff in the film clocked in and out of work much as assembly-line workers had done in pre-war car factories. The working practices of the three main actresses in the film look as out of date today as the clothes that they wear.

Three things in particular changed that practice:

A shift from manufacturing to service industries (at least in developed economies). While production-line workers have to be physically present at one spot at more or less the same time, service workers are much less constrained. An insurance clerk, for example, can process claims at almost any hour of the day, and many creative types (in advertising, say, or graphic design) would claim to work better between the hours of 9pm and 5am than between 9am and 5pm. As services came to account for a larger and larger percentage of economic activity, so the opportunities to work more flexibly increased. This took pressure off the fabled urban rush-hour. Rush-hours did not disappear altogether, but they did become less intense and more extended.

The growing number of women in the workforce forced employers to be more flexible. Women needed time off to collect children from school, to take family members for hospital visits, and to do all the other tasks that had been expected of them before they entered the workforce in bulk. They did not expect to work fewer hours than men; they merely expected them to be less rigidly predetermined. They also wanted to take longer periods of leave—to have their children or to care for elderly relatives. If employers wanted to benefit from women’s skills (and the generally lower price of their labour), they would have to accommodate these requirements.

While workers wanted more flexibility, technology enabled them to have it. The PC, cheaper telecommunications and broadband internet enabled the creation of near-virtual firms whose employees were flexible in both the time and the place that they worked. Some of them worked at home, but others worked out of the back of a van or the company car, keeping themselves in touch with their office via wireless internet access and mobile telecommunications. Another chunk of service workers—consultants and the like—spent much of their time in offices provided by their clients. A company as big as IBM can say that today only 60% of its employees actually work on company premises. The other 40% are elsewhere.

For some, this flexibility was a source of freedom, but for others it was, perversely, a burden. Several surveys found that flexible working could mean working all hours of the day. Afraid that their bosses would assume (as surprisingly many still do) that absence meant skiving, they felt under pressure to work ever harder and to overcompensate. What’s more, they feared that being out of sight meant they were out of mind when it was time to be considered for promotion.

Source: Economist.com

Entrepreneurship

2010-06-29T20:06:00.002+01:00

Jean-Baptiste Say, a French economist who first coined the word entrepreneur in about 1800, said: “The entrepreneur shifts economic resources out of an area of lower and into an area of higher productivity and greater yield.” One dictionary says an entrepreneur is “one who undertakes an enterprise, especially a contractor acting as the intermediary between capital and labour”.

Entrepreneurship is the special collection of skills possessed by an entrepreneur. They include a propensity to take risks over and above the normal, and a desire to create wealth. Entrepreneurs are people who find ways round business difficulties; they persevere with a business plan at times when others run for the shelter of full-time employment elsewhere.

They are also opportunistic, sometimes ruthless to a fault. Abraham Zaleznik, a Harvard Business School professor, once said, “I think if we want to understand the entrepreneur, we should look at the juvenile delinquent”.

Until recently, there was a general feeling that entrepreneurs were born not made. The skills they required were, it was thought, either learned at the dinner table when young, or they were instinctive, a “seat of the pants” thing. The Economist once wrote, “Entrepreneurs—the most successful, though not the only, practitioners of innovation—rarely stop to examine how they do it.”

The main constraint on entrepreneurs has traditionally been a shortage of finance, not of ideas. The old picture was of the entrepreneur, brimming with bright ideas, beating a path to the closed doors of one bank after another. In recent years, however, a whole industry has grown up—the venture-capital industry—to meet the financial needs of entrepreneurs and to share in the fruits of their endeavour.

Those fruits are usually gathered through a listing on a quoted stock exchange. A number of small exchanges have been set up especially to encourage small entrepreneurial firms to follow this route.

Some management writers have tried to take the idea of entrepreneurship into big organisations, encouraging full-time employees (on monthly salaries and the promise of a pension) to think like entrepreneurs. The idea has been dubbed “intrapreneurship”. One definition says that intrapreneurship is “the introduction and implementation of a significant innovation for the firm by one or more employees working within an established organisation”.

The selling of the Post-It note by Spence Silver, an employee of 3M, is one of the classic and most quoted examples of intrapreneurship. 3M has been particularly successful at encouraging intrapreneurs. It maintains that the first thing you have to do is to create a corporate culture which permits ideas to blossom. “You have to kiss a lot of frogs to find the prince,” the company told The Economist. “But remember, one prince can pay for a lot of frogs.”

Source: Economist.com

Tipping Point

2010-06-29T20:05:00.002+01:00

The tipping point is an expression used in epidemiology that was taken by Malcolm Gladwell, a New York Times writer, and applied to other areas of life - including business - in his 2000 book “The Tipping Point”. The subtitle, “How Little Things Can Make a Big Difference”, explains more clearly what the whole thing is about.

In epidemiology the tipping point is that moment when a small change tips the balance of a system and brings about a large change; for example, when the normal spread of influenza throughout a population suddenly turns into an epidemic. In recent years the language of epidemiology has spread (like a virus?) within business. Managers talk about viral marketing, the infectious enthusiasm of their teams, and “outbreaks” of corporate greed - and even, as was reported once about JetBlue, an American low-cost airline, an “outbreak of passenger abuse”. A lot of this language owes its spread to the influence of the internet, where viruses are common and where dormant information can sometimes erupt suddenly and infect us all.

Ideas and behaviour and messages and products sometimes behave just like outbreaks of infectious disease. They are social epidemics. “The Tipping Point” is an examination of the social epidemics that surround us.

He says he first came across the idea when, as a reporter on the Washington Post, he was covering the AIDS outbreak which, as he put it, “tipped in 1982, when it went from a rare disease affecting a few gay men to a worldwide epidemic”.

A similar phenomenon occurs with films (”The Blair Witch Project” is a classic example, but it has worked also for both low- and big-budget movies) and books (think of “The Kite Runner” or “Eats, Shoots and Leaves”). And it happens with products and brands—the Hermes headscarf and the Prada handbag, for instance—but more particularly with techy ones such as the Apple Mac computer, the iPod or the BlackBerry.

Every marketing manager dreams that it will happen to his or her next product launch. Success in reaching a tipping point depends partly on the people who are spreading the epidemic (are they good spreaders? do they sneeze a lot when they have flu?); the nature of the epidemic itself (how easy is it to catch? can you breathe it in, or is it only transmitted through unprotected sex?); and finally the context in which it is spread (among people who are in frequent close contact with others, or in the backwoods of Saskatchewan?)

Although a huge bestseller, Gladwell’s book was described by Publishers Weekly as a “facile piece of pop sociology”, and there is little in it of real value to managers, except perhaps for the message “don’t be surprised”. We always expect everyday change to happen slowly and steadily, says Gladwell. But, he adds:

When crime drops dramatically in New York for no apparent reason, or when a movie made on a shoestring budget ends up making hundreds of millions of dollars, we’re surprised. I’m saying, don’t be surprised. This is the way social epidemics work.

Source: Economist.com

Capello’s Management: Where it Went Wrong

2010-06-29T17:11:00.001+01:00

England’s World Cup defeat has devastated football fans around the country, with many questioning Fabio Capello’s management tactics and his ability to lead a team.

A man renowned for ruling with an iron fist, he put in place a strict regime which promised to whip the England squad into shape, putting an end to persistent rumours of the team’s bad behaviour, both on and off the pitch.

But England’s poor performance in the World Cup has brought about a sense of doubt, with fans questioning whether “the Squadfather’s” no-nonsense approach has quashed the team’s spirit, creativity and its ability to perform.

There is a fine line between instilling a sense of purpose and squashing creativity and individualism - a dilemma faced by business managers every day.

The spotlight now is on Capello’s future as England coach, but managers around the world should take the opportunity to look at their own leadership style and consider how they can tailor it to create a team that always wins:

An element of fear: There is no doubt that Capello was ultra-strict in preparing the squad for the World Cup, his ultimate aim being to get the absolute best out of his team. Capello’s strict rule, however, did not kickstart the team’s talents. Instead, it seems to have spread a wave of fear and uncertainty which led to nervousness and mistakes on the pitch. It’s worth remembering that professionals, whatever their talent, will only perform to the best of their abilities if they feel confident and comfortable enough to do so.

Laying down the law: Capello is an experienced manager and with experience comes the confidence to make decisions and delegate. His line-up strategies, however, have invited complaints both on and off the pitch about his positioning of players in unfamiliar territory. As the leader, you will often feel that you know best and have the right to lay down the law. But bear in mind that being too prescriptive can kill creativity.

The issue of trust: It’s important as a manager to give team members the opportunity to play to their strengths. You might feel responsible for the end result, but trust your team members to know how they’re feeling. More often than not, the team’s captain will have a better sense of team spirit sooner than the manager, largely due to their proximity and day to day work with other team members.

Taking on feedback: The worst thing you can do as a manager is to not listen to what your team is telling you. Capello experienced this after England’s disastrous second match. Failing to hear his team led to mutiny in the camp, with senior players making a public stand against him. You won’t always be expected to act on every bit of feedback you get from your team, but they do need to feel that you’re listening and taking it all on board. Otherwise frustration can lead to rash decisions and dire consequences.

Top 10 Marketing Strategies for SME’s in a Slow Economy

2010-06-25T09:52:00.003+01:00

How to Attain, Retain and Maintain Customers

1) Think big and audit your time
No matter the size of your business, place a mental image in your mind as if you are the largest and most successful person in your industry. How much time is consumed by routine office work which someone else should be doing? Spend more time on more important tasks such as marketing strategies, improving relationships with customers, and implementing new strategies to expand your services.

2) Be different and stand out from the competition
To offer, or at least appear to offer, better products and/or services than your competitors, you need to innovate continually. So, keep your approach fresh by finding out what your customers need, and then find solutions to those problems. How do you make this happen? Talk to your existing customers. Conduct a survey of current major issues they face. This will give you a starting point around which to construct new ideas. Do this regularly and you will build up an ever-growing pool of new ideas. You’ll also stay at the cutting edge of your industry because you will be tackling current problems.

3) Build relationships with your customers
As each month goes by, you lose contact with up to 10% of your customers. Create a customer database and keep in contact with them on a regular basis. Send a postcard, a birthday card, a promotional flyer, a newsletter etc. to keep your name, phone number, and service at the top of their mind when they consider purchasing in your category.

4) Collect E-Mail Addresses
As part of your customer relationship process get permission from your customers to use their E-mail address. Periodically send updates and notices to your client list. As long as you have their permission and avoid overuse, e-mail can be a powerful and inexpensive marketing tool. A local pizza delivery service ran an anniversary promotion offering a pizza for the 1980’s price. To get this special price, customers had to go to their website and register their email address. A special anniversary coupon was then emailed to them. They collected 500 email addresses in just two days !

5) Avoid poisonous personalities
Negative and unfriendly employees cost you money by chasing customers away. Spend more time and money interviewing and hiring the right people, especially those who enjoy helping people. Use behaviour based interviewing and screening assessments to improve your chances for hiring success.

6) Put a shopping cart on your website
Online sales are still growing at a dramatic pace. According to IMRG/Capgemini’s e-Retail Sales Index, gross e-retail sales were estimated to be worth £4.5 billion in June 2010, up 22% compared to the same month last year. This increase is coming from people who want to save time, followed closely by avoiding crowded stores, and the ability to shop outside of store hours. Make an audit of what services and products you can offer online.

7) Pay-per-click advertising
Many business owners are cutting back on classified advertising, instead they’re using pay-per-click advertising. Pay-per-click will ensure you receive top visibility on websites driving more customers to your door. Advertisers bid on keywords and the more popular the keyword, the more expensive each click is. Prices vary between a few pence to many pounds. The most popular pay-per-click advertisers are found on Google, Yahoo, and Bing.

8) Use customer service commandments to create good habits
The Ritz-Carlton hotel chain invented the use of Customer Service Commandments, outlining specific behaviours employees are to demonstrate when dealing with customers and fellow employees. They print the commandments on a small card and employees carry it with them at work. Furthermore, supervisors reinforce good customer service by quizzing employees on one commandment each day, and reward those that respond correctly.

9) Take your message to the media
Local newspapers, magazines, television and radio stations are always looking for stories and topics of interest. If you’ve got some good news, collaborate with the media and let your customers, suppliers and everyone else know how wonderful your business is. Do you have an event planned, a new service to launch or an interesting story with a regional angle to tell? If so, let the local (or even national) media know about it through a press release.

10) Take advantage of trends
For some the economic downturn is an opportunity in disguise. A recent study by leading management consultancy Bain & Company found that twice as many companies make the leap from laggards to leaders during a recession than during periods of economic calm.

No one can predict the future with any degree of certainty, but you can get a handle on trends, which is one way to take advantage of change and convert risks into opportunities. The ability to spot trends before others is, of course, extremely difficult, however if you want to get ahead of your competition you must try to understand drivers of change to discover new opportunities. For example, you could ask your best customers how to improve their level of satisfaction with your products and/or services.

To read more from our Top 10 Series, visit www.gspconsultinguk.com

A Slick Image

2010-06-16T20:24:00.001+01:00

So, BP is rumoured to have turned to Goldman Sachs and the private equity firm Blackstone Corp for advice. I’ve had no personal experience, but I’d wager my mortgage that the services of the likes of Goldmans and Blackstone don’t come cheap. So rather than squander its increasingly scarce shareholder funds, I’ve got some tips for BP’s boss on crisis management, gleaned from some of the America’s top chief executives and PR gurus, which are offered freely in a spirit of public service:

1) Don’t get a life. Tony Hayward, BP’s chief exec, has probably figured this out for himself judging by the universal hostility to his comment that “I’d like my life back”. When you are responsible for the firm that has caused America’s worst environmental disaster, your life is no longer your own, and wishing it were otherwise will only antagonise the public further. So what if the comment was an attempt to empathise with others whose lives have been disrupted by the oil spill; when you are the most hated man in America, no one wants your empathy.

2) Don’t joke. Here’s some advice Goldman Sachs could give you, but probably wouldn’t. When Lloyd Blankfein, the investment bank’s chief executive, said he was “doing God’s work”, it was said tongue-in-cheek, not, as it would have been easy to conclude from the press reports, as a serious theological observation. In a crisis, chances are that CEO humour will get lost on the way to the front page. But the bottom line, Mr Hayward: whatever else you do, resist the urge to quip “oil’s well that ends well.

3) Fly commercial; better still, walk…no, crawl. When the bosses of the small carmakers formerly known as the Big Three went to Congress to ask for taxpayer dollars to bail out their failing firms, they each flew in their private corporate jets, thereby confirming the public’s worst suspicions about their incompetence and lack of comprehension of the austerity being suffered by their customers. In a similar spirit, when Mr Hayward goes to testify before Congress on June 17th he should ideally arrive on foot—or failing that, in an energy-efficient Prius rather than a gas-guzzling SUV.

4) Don’t make big profits—or if you do, give them away rather than pay large bonuses to yourself and your staff. It was the profits that Goldman Sachs announced in early 2009, and the huge bonuses it paid out, that helped earn the investment bank the nickname “vampire squid” and made Mr Blankfein a hate figure. If only Goldman Sachs had made losses instead of profits, Mr Blankfein would have been pitied and then ignored, like Citigroup’s boss, Vikram Pandit. If Goldman had at least given away most of the profits, he might have been forgiven his joke. At the very least, he could have forsworn his bonus. If he had done so, he might have got lucky like Howard Schultz, the boss of Starbucks, who waived his bonus—only for his board to insist on paying him one anyway.

5) Become Warren Buffett. Only the Sage of Omaha could be cheered for calling derivatives “financial weapons of mass destruction” despite issuing some of the most exotic derivatives ever created and then campaigning to exempt them from the new regulatory regime being introduced by Congress. Only Mr Buffett could get away with defending Moody’s against congressional accusations over the rating agencies’ complicity in the financial crisis, when he had been a big shareholder in Moody’s at the time, and retain his reputation as a straight-shooter. No doubt BP will have to change its name as part of its post-spill damage-limitation rebranding, but maybe Mr Hayward should change his name too.

6) Quit while you are ahead. We have no reason to think that Tesco will soon be plunged into a crisis, but if it is, the plaudits heaped on Terry Leahy, its chief executive, on June 8th, when he announced his impending retirement, will provide further evidence of the wisdom of getting out before disaster strikes. Imagine how much better Mr Blankfein’s public image would be if he had retired at the end of 2008. How Mr Hayward must wish that he had retired on March 17th, one month before the oil spill, rather than merely selling one-third of his BP shares - worth around $1.2m then, but about half as much now.

7) Pray that a worse disaster strikes someone else.“Every day, Lloyd Blankfein must get down on his knees and thank God for the BP oil spill,” says one noted PR expert privately. (Maybe the spill is proof that Mr Blankfein is doing God’s work after all, then?) Being America’s most-hated boss seems to be a temporary position, the crown passing to a new troubled head each time a fresh disaster strikes. As Fake Lucas Van Praag tweeted the other day, “Even though Goldman maybe had non-consensual relations with the economy, it's not as bad as despoiling an entire coastline, right?” If it suddenly turns out that iPads are rotting their users’ brains, we will know whose prayers have been answered.

Word Clouds

2010-05-25T10:43:00.007+01:00

Just discovered this amazing tool which I saw for the first time on the BBC's coverage of election night when their presenters were reviewing what was being written/said in the blogosphere (and tweetosphere).

It takes text from a number of sources (upload a word document, RSS feed, web URL etc) and converts it into a 'word cloud'. The words which appear most often in the text are the largest in the cloud.

I tried it out on my own blog and this is the cloud that it came up with.

More impact than a Powerpoint presentation, don't you think ?

To try it out for yourself, just click on this link: www.wordle.net

Top 10 Advertising Lessons Learned by Ipsos

2010-05-20T11:35:00.002+01:00

Advertising tracking has several forms but the most powerful is continuous weekly tracking. Ipsos ASI has tracked over 2,500 campaigns in weekly time series to build a unique global database. From this data, they've made 10 general observations for lessons learned, which are not supposed to be ‘hard rules’ but simply act as best practice guidelines.

1) Creative is King!
When looking at advertising and promotion spend, it’s easy to assume that, because media comprises such a high proportion of overall spend, it must be the most important factor. In fact, creative has a disproportionate influence on the success or failure of an advertising campaign.

Ipsos ASI’s global advertising database shows that creative quality accounts for about three-quarters of variance when explaining differences in ad recall levels. Weak creative rarely earns good recall based on heavy media.

So, despite the high cost of buying media, the ‘creative’ is key for driving success. To ensure that creative is as strong as possible, it’s important to pre-test creative and consider the ad development process.

2) Ads do not wear-in
Although TV ads do have long-term brand equity-building potential, the most marked impact is in the short-term. A strong ad will achieve high levels of recall in the minds of consumers within the first burst of spend. A poor performing ad will not. It is wishful thinking to hope that an ad will “wear-in” on the flawed principle that “a bit more spend” will surely have an impact.

An ad that does not achieve good recall in the first burst of spend gestures towards the fact that creatively it is simply not engaging enough – whether because of its creative style or because of how its message is couched. Better to ditch it than hope that the media spend will lift it to success.

3) All media builds with diminishing returns
It’s not only TV that experiences this: all media appear to build with diminishing returns. The recommendation therefore is to focus your media plan on building reach quickly and not to drive recall too high in any one medium. Instead, if one can afford to maximise the medium, add a second to extend the reach.

4) Persuasion peaks quickly after airing
Persuasion also peaks quickly. 81% of all campaigns tracked peaked by 850 GRPs and within 12 weeks from start of airing.

5) Minimising ad recall decay is more important than building recall
If an ad is compelling in itself, and engages consumers in a dialogue with what the brand is all about, then it is almost certain to achieve high recall. However, to maximise marketing spend efficiency and brand impact, it is hugely important to sustain that level of recall in consumers’ minds so that the brand remains top of mind, driving visibility in the marketplace, and continuing to build positive associations.

6) Recency planning is best
Through modeling the data collected on thousands of campaigns around the world, with a wide variety of flighting patterns, we have seen that more continuous TV plans tend to maintain advertising presence more efficiently than ‘burst’ plans. This links closely to the theory of Recency Planning, which states that your ad should be the last ad seen prior to a purchasing decision. This has been demonstrated to be a successful strategy, particularly for FMCG products where purchasing occasions come along in quick succession. Burst-based Frequency Planning can be wasteful because of the rapid decay of advertising effects and the consequent long periods off air, allowing competitors the opportunity to become top of mind prior to the next purchase occasion. Recency planning works best once an advertising idea has been firmly established with an initial heavy up burst, followed by lower weights of infrequent but ongoing reminders.

7) Creative Pools should be aired sequentially, not concurrently
Often brands develop a “pool of creatives” they can call upon. The temptation might be to air multiple creative executions concurrently in the hope that the campaign will cut through more strongly and more brand messages can be conveyed. In reality the opposite is true. By airing concurrently a brand is asking the consumer to remember multiple executions and messages, with each receiving a diluted share of budget. As a result cut-through and message take-out tend to perform more weakly than when creative pools are aired sequentially. If a particular creative performs outstandingly, one can always re-air after the creative pool has run its course.

8) Share of voice is not so important
It is a common misconception that a brand can achieve strong levels of ad recall just by outspending its rivals and achieving a strong share of voice in market. Indeed, some brands/companies place specific targets on a minimum SOV believing it to be a pre requisite for strong ad performance. In truth, advertising standout is not achieved by spending more on media than your competitors. The quality of the creative idea is the main driver of ad recall and persuasion; not spend. It is better to spend time, effort and money on creating a strong creative that is engaging and relevant to your audience, than trying to outshout your rivals through massive spend.

9) Adding an additional media touch point is better than overspending on one medium
Spending money behind bad creative will never produce the desired results. That said, the role of which media channels a brand uses to impact consumers can not be underestimated. However, there is no golden bullet - what works for one brand / product, will not necessarily work for another. Are there any golden rules? Yes. Ensure each media channel has an objective and assess performance against these objectives. Pick your media channels based on their roles, rather than affordability – if you cannot see how a channel will add benefit, do not use it. Assume most consumers will experience more than one media channel, therefore maintain creative and message synergy across all channels. Extending the campaign to an additional media channel is more effective than over spending on one - this is especially pertinent for TV.

10) TV ad recall does not follow ‘media consumption’
While it is important to understand the media consumption habits of your target audience, it is also important that you do not jump to conclusions about how this might influence the response to your campaign. We know from our research that whilst older consumers watch more hours of TV, for example, that this does not necessarily correlate with increased advertising recognition among this group. In fact we see much higher recognition scores from younger people who watch less TV. The hypothesis is that younger consumers are more engaged with branded communications and therefore require fewer opportunities to see an ad and internalise it than their elders. With this in mind advertisers and their media agencies must make sure that they research and understand both the potential and actual impact of their brand campaigns rather than just making a leap of faith.

Source: Ipsos ASI, May 2010

Now that's exclusivity

2010-05-12T19:14:00.000+01:00

Can you name the iconic luxury brand that began life as an urban legend and only later became a reality?

The answer is the American Express Centurion card or, to use its more colloquial title, the Black Amex. During the 90s, a rumour spread about a fabled black Amex card that had an unlimited credit limit and was available only to an ultra-rich, uber-exclusive membership. The rumour became so prevalent and powerful that American Express eventually decided to capitalise on it. In 1999, it launched the Centurion card, by invitation only, to its highest-spending and biggest-earning customers.

To qualify for the Black Amex, customers must spend about £100,000 a year on their existing Amex, have a perfect credit record and travel extensively. If the member is offered the card and agrees to pay the annual £650 fee, they receive the titanium card in a mahogany box. The additional benefits of the Black Amex are almost as legendary as the card itself. Aside from an unlimited credit limit, cardholders can enjoy a complimentary business-class ticket for their partner whenever they fly, a personal 24-hour concierge service, free personal shoppers in many of the world's major department stores and additional free nights of accommodation at top hotels - simply by paying with their cool black card.

The card has, not surprisingly, attracted a stellar membership. Celebrities such as Nelly, Jay-Z and Paris Hilton have all recently name-checked the card in music and film. Kanye West even included his experiences with the card in a recent song: 'She was like, "Oh my God, is that a black card?" I turned around and replied "Why yes, but I prefer the term African American Express"'.

Most marketers can only dream of this kind of celebrity endorsement and buzz. But the Black Amex's ongoing success depends on it maintaining its ultra-exclusive membership and secretive profile. If the card becomes ubiquitous, it risks losing its target market and the partner companies that offer freebies in return for access to the world's elite customers.

Amex has not helped the situation. A direct marketing blunder last year saw a top-secret mailing sent to 250,000 regular Amex customers, rather than the 10,000 Black Card holders it was intended for. Amex has also got sloppy with its websites, with many openly revealing the existence of the card. Worse still, it recently featured in the most mass-marketing vehicle of all - a Bond product placement. When Daniel Craig's Bond checks into The Ocean Club in Casino Royale he pays for his room with his Black card.

The greatest strength of the card, initially at least, was that most people did not know it existed. It does not get any more exclusive than that.

Take the British Airways Black Card, for example. BA has three tiers in its frequent-flyer programme: blue, silver and gold. But above gold, and in almost complete secrecy, there is also a black card, reserved for the 200 customers BA deems to have 'status'. If you are the chief executive of a firm whose employees fly a lot with BA, a key member of parliament or a super-celebrity, the card is yours. Owning the BA black card means you no longer need to worry about customs or seat reservations; you will be whisked straight to First Class. If you are running a little late, BA can hold the plane back for you.

Unlike Amex's efforts, BA has got it right. A card with exclusive benefits, available to only the select few, and an amazingly secretive service that no one in the general market even knows about. Oops.

Shut Up and Listen

2010-05-12T19:09:00.000+01:00

I once worked for a client running a marketing training programme for its key brand managers.

Day one was all about market orientation. In the morning we talked about the barriers between a company and its customers and how, as marketers, we must remove them to build market orientation. In the afternoon I sprang a surprise. We had arranged for focus groups to be recruited at a facility nearby and the marketers had to plan, conduct and analyse some of these and report their results the next day.

It was great on paper, but we ran into a snag. The research company we had hired to run the groups was not keen on the idea of having brand managers with no formal training running their own focus-group sessions. It suggested we should use its professional moderators instead.

Worse was to follow; the head of marketing at the client company agreed. So, rather than illustrating how easy and valuable it was to listen directly to consumers, we demonstrated the exact opposite. My brand managers ended up briefing a researcher and then watching the results from behind one-way glass. Just when you think you have met the prime directive of marketing and got a marketer face to face with customers, another barrier springs up to separate them.

The idea of professional focus-group moderators is a joke. I must have sat through more than 100 groups and the only ones I have ever seen ruined by the moderator were handled by the 'professionals', not by a brand manager keen to run his or her own groups.

One of the first things PhD students learn on a research-methods course is the power of the human-research instrument in qualitative research. While we may need computer analysis to make sense of quantitative data, we can rely on a far more complex system for qual data - the mind. We all possess the fundamental ability to make sense of meaning, so anyone can make sense of a focus group, as long as they can learn to shut up and use the skills God gave us.

Even if professional moderators were superior to brand managers, I would still recommend that the manager runs the groups. Any meagre advantage of experience is greatly outweighed by being directly in touch with your customers. Sadly, in many cases, the real reason we have professional moderators is that many marketers do not have the time to run or attend focus groups. Shame on them. There is nothing more important than interacting directly and often with customers.

There is a tragic inverse relationship in most UK firms between decision-making power and degree of customer orientation. As senior marketers get promoted, their ability to influence strategy grows while their knowledge of the customer base declines. Too many of them spend their days issuing orders, and not enough time listening to customers.

Thirty years ago, Charles Saatchi used to judge the quality of his agency's creative work with one of two words: 's**t' or 'brilliant'. The same can be said for many of today's marketers, but it can be very difficult to ascertain which is which in the complex world of marketing.

One of the easiest ways to separate the excellent from the effluent is to pose a simple question: when was the last time you met with customers, shut up and listened? It is our prime directive. Long before we get to build brand or commission communications or segment markets, first we have to listen to customers. So I ask again, when was the last time you personally listened?

Market Orientation & Research

2010-05-12T19:01:00.000+01:00

New Labour taught us all a lesson

Once upon a time, in an era before New Labour, marketers had very little to learn from politicians. A couple of good slogans from the Saatchis perhaps, but nothing more. How times changed.

The success of New Labour may have been kick-started by the Party hierarchy's consultation with a number of top advertising agencies, but 10 years later it is the marketers who can learn an enormous amount from the politicians. New Labour remains well ahead of most companies when it comes to marketing.

Let's start with market orientation, the most fundamental of marketing philosophies. Many organisations continue to develop strategy based on their assumptions about the market and the existing products they want to sell. The success of New Labour was built on placing political beliefs and assumptions on hold and first going to the electorate to understand their needs and aspirations. Only then were policies formed and strategies created. If only more marketers could be bold enough to place strategy on the shelf and learn to listen to consumers as intently as Blair did back in 1996.

New Labour also offers us a key lesson on the two paradigms of market research and the need to employ both for true market understanding. Politics had been dominated by quantitative polling for half a century. It was New Labour that instigated an equal measure of qualitative research through focus groups. This revolutionised Labour's ability to connect with voters.

Too many companies are dependent on quantitative surveys and thus miss the more immediate, inductive insights that qualitative research reveals. Labour marketing guru Philip Gould acknowledged the impact of focus groups in his 1999 book The Unfinished Revolution: 'I nearly always learn something new and surprising. People do not think in traditional ways or conform to conventional prejudice. In a group it is possible to test out the strength and depth of feeling about an issue, which can be more difficult, although not impossible, in a conventional poll.'

New Labour and Gould were also ahead of the marketing curve when it came to positioning. Thanks to his regular focus groups, Gould learned quickly the power of tight, simple positioning. 'Research revealed that the public wanted smaller, more concrete pledges,' he said. Rather than complex manifestos and detailed promises, New Labour was positioned on five simple pledges. Most brands continue to develop over-complex positioning statements. New Labour's tighter approach and ensuing success provides clear evidence of the central credo of all positioning jobs: less is more.

Marketers can also learn from New Labour's emphasis on PR over and above advertising. Prior to 1997, political communication was very much about election advertising and the dreaded party political broadcast. New Labour exemplified proactive PR like no other organisation in political history thanks to a now legendary team headed by Alistair Campbell. Internally, New Labour controlled who was able to talk to the media and what was said with the totalitarian use of key messages. Externally, Campbell's team excelled at building relationships with the media and using exclusives and briefings to their full effect. The lesson for companies is not to fixate on ads and to appreciate PR for what it often is: a cheaper but far more effective form of brand communication. A great internal PR chief like Campbell is worth his weight in gold.

Tony Blair may not have had any firm principles and his legacy will probably be damaged beyond all repair by the war in Iraq and his disastrous relationship with George W Bush. As a politician, he probably will go down as a failure. But as a marketer, his legend lives on.

Culling Brands

2010-05-12T18:50:00.000+01:00

There were no surprises when Unilever announced in 2003 that it would cut 20,000 jobs, close 60 factories and divest a number of its brands over the next four years. While chief executive Patrick Cescau did not directly point the finger at the growing power of retailers when he described Unilever's decision to streamline its global operations, the power of own-label was at the heart of the announcements.

In the previous decade, retailer consolidation and the preponderance of own-label goods placed Unilever, Procter & Gamble and Nestle under extraordinary pressure. In many of the categories they competed in, own-label goods from players such as Tesco, Carrefour and Wal-Mart took a value share of between 30% and 50%. That left the big manufacturers battling each other for an ever-shrinking pool of consumers. And they realised that to win in this much more competitive context, they needed fewer brands and greater focus.

A decade ago the 80:20 rule applied particularly well to most FMCG companies: 80% of their profits were derived from about 20% of their brands. Today, bigger and more efficient retailers have forced companies such as Unilever to question this ratio and adjust their operations accordingly. Less has always meant more when it comes to brand portfolios, but thanks to own-label, less means more than it used to.

Fewer brands means less bureaucracy, which means more customer orientation. Until recently Unilever operated as two distinct companies with two boards of directors managing separate divisions in the Netherlands and the UK. Outside of its head offices the inefficiency continued, with each country split into three distinct operating divisions, each of them managing various brands.

It is an example of the dreaded matrix of marketing inefficiency: multiply 100 countries by three divisions by 20 categories by 1400 brands and you get a very poor result.

For Cescau, this structure created a strategic indolence that contrasted with Unilever's streamlined retail customers. 'If you have 250 people between the chief executive and the market, it is just like a dinosaur,' he said. 'Somebody is biting you at the tail and by the time it goes to your brain, half the body is gone. So we have considerably de-layered the structure. There is now one person between the head of Brazil and myself and one person between the head of India and myself.'
Aside from strategic focus, Unilever's brand consolidation also means that marketing investment and innovation strategies can be devoted to brands that will respond best.

There is no doubt that the global success of Dove in bodycare and Magnum in ice cream confirm the potential power of brand focus for Unilever. Both these categories were once peppered with an international smorgasbord of Unilever brands that prevented the company from investing significant resources in world-class marketing campaigns and then leveraging the results across every major global market. Today you are as likely to see the Dove 'Real Women' beaming at you from a poster in Rio, or on Oprah, as you are on a British billboard.

Unilever has already signalled that it eventually hopes to halve the number of categories it competes in from 20 to 10. So far it has demonstrated impressive discipline in exiting once-invaluable categories such as frozen foods (by selling off Birds Eye), and it is apparently set to exit another former cash cow when it divests its US detergents business.

Until recently, the gap between the slightly dusty, bureaucratic Anglo-Dutch Unilever and the tight, focused retailers that it supplied was growing ever larger.

Under Cescau, the gap is closing and he sees Unilever's path clearly: 'Now, we are trying to be as good as the best everywhere. Always. So we are being more disciplined in the way we work.'

Net Promoter Score

2010-05-12T18:46:00.000+01:00

If you are a good marketer you've already heard of the Net Promoter Score (NPS).

If you are a very good one, you know what your NPS is. If you have no idea what I am talking about, read the 30 seconds at the bottom, and then meet me at paragraph two.

NPS is a rather bold little calculation. Its inventor, Fred Reichheld, argues that a single question and its resulting score is the only metric you need to measure satisfaction. He also claims a correlation between a high NPS and future revenue growth.

And the metric has taken off. Online forums have sprung up, full of managers keen to discuss it. High-profile chief executives have publicly praised NPS and added it to their management systems. Even finance people have taken note, with several institutional investors asking for the score as part of their due diligence. But two audiences are genuinely unhappy with NPS.

The first is market research firms, which make their money from long-winded analyses of the market that are so complex they require lots of researchers to explain the findings to befuddled clients.

Clearly, one number that your mother-in-law could compute is a direct threat to market researchers and their business. As a result, many have been hell-bent on showing up NPS as being not all that it is cracked up to be. Even Nigel Hollis, one of the biggest and fairest brains at Millward Brown, concluded: 'The jury is still out. We need to see more compelling proof that NPS actually does lead business performance before we adopt it as the sole benchmark of success.'

The group even more appalled by the apparent over-simplicity and over-exposure of NPS are marketing professors - particularly those who study customer satisfaction. Publicly outraged that sloppy statistical methods and clear research bias were being accepted at face value, privately they were probably pissed off that their complex statistical analyses, which have had next to no impact on real marketers, were being superseded by a single score and percentage from an ex-management consultant who did not even have a PhD. Reichheld enraged them further by admitting his lack of interest in statistics. He calls his method 'common sense' and claims the business leaders he targets have 'little interest in advanced statistical methods'.

The top peer-reviewed marketing journals have published a slew of anti-NPS research in recent months. Most notable was the publication in July in The Journal of Marketing of a statistical analysis of Norwegian customer data. The paper, 'A Longitudinal Examination of Net Promoter and Firm Revenue Growth', shows that NPS fares no better than other measures of service satisfaction in predicting business growth. The paper tetchily concludes: 'We find no support for the claim that Net Promoter is the single most reliable indicator of a company's ability to grow.'

Who is right? Usually I conclude that everyone is completely mistaken. But, in this rare case, everyone is right. Market researchers and academics are correct to question the lazy analysis and over-selling of NPS. But I still side with Reichheld. It may not be all it's cracked up to be, but I have seen more non-marketing executives - managers with real power - quote NPS in the past 12 months than all the other marketing concepts put together. This concept is making senior people think about where the money comes from. Not balance sheets, products or sales, but what really drives the business: the customers.

And anything that gets managers to think about customers and their needs is a step in the right direction. Even if that step is a little sloppy and its effectiveness exaggerated.

About the Net Promoter Score

The concept was developed by Fred Reichheld, a consultant, strategist and author on loyalty. His books include The Loyalty Effect, Loyalty Rules! and The Ultimate Question.

Introduced in December 2003, Net Promoter is a metric derived from survey responses to a 'how likely are you to recommend ...' question. Respondents who provide a rating of nine-10 are 'promoters'; those who give ratings of six or lower are 'detractors'. The NPS is found by subtracting the proportion of detractors from the proportion of promoters.

Reichheld's research among 4000 companies showed NPS to be 100% accurate in indicating whether a firm would grow (more consumers championed its service or product) or shrink (more were denigrating it).

NPS has been adopted by companies including Microsoft and American Express; many report their score to investors.

Definition of Marketing

2010-05-12T18:42:00.000+01:00

The current CIM definition of marketing is: 'The management process responsible for identifying, anticipating and satisfying customer requirements profitably.'

The new CIM one is: 'The strategic business function that creates value by stimulating, facilitating and fulfilling customer demand. It does this by building brands, nurturing innovation, developing relationships, creating good customer service and communicating benefits. By operating customer-centrically, marketing brings positive return on investment, satisfies shareholders and stakeholders from business and the community, and contributes to positive behavioural change and a sustainable business future.'

The Marketing Society's definition is: 'The creation of customer demand, which is the only sustainable form of growth in business.'

The American Marketing Association (AMA), the US equivalent to the CIM, definition reads: 'Marketing is an organisational function and a set of processes for creating, communicating and delivering value to customers and for managing customer relationships in ways that benefit the organisation and its stakeholders.'

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What is marketing? Not what it used to be, according to the Chartered Institute of Marketing (CIM), which has unveiled a new definition of the business function to replace one that has served for more than 30 years.

Marketing, it seems, needs a little more explaining than in the past. The CIM wants to replace the current definition, created in 1976, with the lengthier version it unveiled last week (see box). The proposed fresh wording was put together by the CIM's research and information team with contributions from marketing luminaries. 'We want the definition to reflect the reality of marketing today,' says David Thorp, the body's director of research and information.

In support of the change, the CIM put together 'Tomorrow's Word: Re-evaluating the Role of Marketing', a 3000-word treatise outlining the problems of the current definition and solutions. The study involves some serious soul-searching; not only are the definitions examined, but the aim of the paper is to encourage debate into what the role of marketing should be and how it can move forward as a profession. It certainly pulls no punches; on the first page it claims that although marketing has become more sophisticated, 'its status with the customer and the rest of the business has never been lower'.

The paper acknowledges that the world has changed significantly since the drafting of that single sentence back in the 70s. In the pre-internet, pre-globalisation age, marketing was much easier as there were fewer channels to market and less of a focus on relationships or service marketing.

There were also fewer professionals who saw themselves as marketers. According to the CIM, over the past 10 years, the marketing profession has grown by about 80% and there are now more than half a million Britons working within the broad function.

Disaffection with rampant commercialisation and capitalism is highlighted as a challenge, as consumers increasingly consider marketing as a pejorative term associated with the process of making people buy things that they neither need nor want. The present definition, with its mention of the word 'profitably', feeds into this belief, as does 'management', which alludes to a one-way process whereby a passive malleable consumer is manipulated by marketing executives.
These aspects also sit uncomfortably with the growing band of so-called 'social marketers'. A CIM survey of marketing practitioners revealed that while the majority of those polled felt the existing definition still covers the complexity of modern marketing, 37% felt it was insufficient when it came to the activities of the public sector and not-for-profit organisations. The new nod to sustainability confirms that being touchy-feely is the order of the day.

All these factors, argues the CIM, mean the current definition is an anachronism no longer 'fit for purpose'. But the new wording has received a lukewarm response from marketing gurus.

Its length has come in for particular criticism. Hugh Burkitt, chief executive of The Marketing Society, says: 'The new definition is absurdly long and has clearly been written by a committee. A definition that long is unworkable.'

Although Mark Ritson, associate professor at Melbourne Business School, says the proposed wording is superior to the current version, he also wonders why the CIM did not err on the side of brevity. 'In the age of clutter and demising attention spans it is questionable whether progress is really made by going from 12 words to 60 words,' he says.

Commentators also question how the wording deals with marketing as both a function and a process. While Burkitt favours the current wording as he argues that it refers to the whole process, Emeritus professor of management and marketing Patrick Barwise criticises both versions for failing to make the distinction between marketing as a function and its role as the voice of the customer through the organisation. 'I think they are about as good as each other,' is his downbeat conclusion.

Burkett offers the Marketing Society's definition, 'The creation of customer demand, which is the only sustainable form of growth in business', as an alternative, while Ritson calls for the CIM to draw inspiration from the US, reasoning that whether the British like it or not, the Americans invented marketing.

The definition from the American Marketing Association (AMA), the US equivalent to the CIM, reads: 'Marketing is an organisational function and a set of processes for creating, communicating and delivering value to customers and for managing customer relationships in ways that benefit the organisation and its stakeholders.' 'The idea that the CIM can do a better job at defining the field of marketing is laughable,' says Ritson.

The CIM now plans to tour the UK to canvass opinion on the proposed change among its membership before unveiling the final definition in a year's time. If the initial reactions are anything to go by, the Institute will need to use all its marketing skills to win over its members.

No miniskirts? But hotpants were OK ..

2010-05-12T18:34:00.000+01:00

It was a blazing hot day when 23-year-old student and part-time waitress Kyla Ebbert left her San Diego campus for the airport. She had a doctor's appointment in nearby Tucson and had a flight reservation with Southwest Airlines.

Ebbert handed her stub to the flight attendant and took her seat. But as the crew started the safety announcements she was approached by a safety officer, who asked her to follow him off the plane and onto the connecting skyway. Once outside the officer told her she was dressed in an inappropriate manner and would have to return home to change before she could take her flight.

Ebbert, who was wearing a tight turquoise sweater and white denim mini-skirt, was dumbfounded. 'What part of my outfit is offensive?' she asked the attendant. 'The shirt? The skirt?' The attendant frowned and said 'The whole thing.' The passenger stood her ground and eventually was allowed back on the plane on condition that she pulled down her skirt, pulled up her sweater and wore a blanket over her lap during the journey.

If you work in PR, the beads of sweat have probably already started to form on your forehead; this is, of course, a brand crisis in the making. Ebbert complained first to her mother, then the local radio station and finally the story started to make the national press. The final circle of media hell was achieved last week when Ebbert, clad in her now-infamous outfit, did the Today show followed by Dr Phil. Then a second woman, Setara Qassim, came forward, claiming she had been forced to fly Southwest wrapped in a blanket after her halter-neck dress was deemed too low-cut by flight attendants.

The problem for Southwest was threefold. First, it had treated two women who were dressed normally by current standards extremely badly. Second, Southwest has a strong reputation in the US as the fun and approachable airline. Its treatment of the women was not just inconsistent but directly contradictory to its positioning. Third, and perhaps worst of all, the airline looked hypocritical. In the 70s it used the strapline 'Sex sells seats' and dressed its stewardesses in hotpants that made Ebbert look like Auntie Edna at Christmas. Blogs began to erupt and the media to circle; a strong brand was in trouble.

There is an almost legendary move in marketing called the Tylenol 180. It happens when a company handles a crisis in a manner so consistent with its brand that it not only recovers from the crisis, it builds brand equity and market share as a result. The move was named after painkiller brand Tylenol's ability to not only survive a tampering incident but emerge more trusted due to the way it handled the situation.

In the nick of time Southwest chief executive Gary Kelly executed this very move. Live on Dr Phil, an upset Ebbert was read a statement that apologised to her and offered her two free tickets. But the manner of the apology won the day. Kelly declared: 'From a company who really loves PR, touche to you, Kyla. Some have said we've gone from wearing our famous hotpants to having hot flashes at Southwest, but nothing could be further from the truth. As we both know, this story has great legs, but the true issue here is that you are a valued customer, and you did not get an adequate apology. Kyla, we could have handled this better, and on behalf of Southwest Airlines, I am truly sorry.' The same day, Kelly recorded national radio ads announcing extra-low 'miniskirt' fares.

Crisis averted, brand restored and sales increased. A fully executed Tylenol 180 is a rare, but beautiful, thing.

The ice cream man cometh

2010-05-12T18:30:00.000+01:00

Perhaps the biggest shock in the history of luxury brands.

Pinault Printemps-Redoute (PPR), the French conglomerate that had taken control of the Gucci Group two years earlier, announced in 2003 that it had been unable to agree new contracts with Tom Ford, Gucci's creative director, and Domenico De Sole, its chief executive.

De Sole had negotiated for both himself and Ford. His case was simple: we have made you billions and you cannot live without us. Give us control or we leave and Gucci will struggle. The fashion world agreed. 'It would be a catastrophe,' said Vogue editor Anna Wintour. Claire Kent, Morgan Stanley's luxury goods analyst, was even more blunt: 'The intrinsic value of Gucci is difficult to evaluate if the current management leaves.'

The frenzied negotiations faltered over how much autonomy Ford and De Sole would retain after Gucci became a fully owned unit of PPR and the dream team left. Even more surprising news was to follow with the announcement of their replacement. Robert Polet became the new chief executive of the Gucci Group. Incredibly, the 49-year-old Dutchman had no experience in luxury goods, having spent the previous 26 years at Unilever - most recently managing its ice cream business. The world of luxury was stunned: De Sole and Ford were being replaced by an unknown ice cream salesman from Holland. Women's Wear Daily gave a sarcastic summary of the situation: 'What do frozen fish and ice cream have to do with $8000 crocodile handbags?'

Polet told his wife that he would not be joining her on vacation in 2004. Instead, he spent the next month travelling around his new empire. He delved into 80 years of Gucci archives and began to plot the future for the great house. After visiting 168 stores and talking to more than 2500 staff, Polet returned to his London office confident that most of the principles he had learned at Unilever equally applied to his new role. At the time he was perhaps the only person who thought so.

Early reports from insiders within Gucci suggested an impeding disaster. Polet shocked his team at an initial meeting when he expressed his admiration for Zara and challenged the group to learn from the Spanish retailer. Worse was to follow when he brought in management consultants Bain & Co to analyse Gucci's internal operations. Bain's report, which concluded that Gucci's eight-month production cycle was unnecessarily long, was too much for senior executive Giacomo Santucci, who reportedly stormed out of the meeting unable to accept instruction on luxury from outsiders. Despite the resistance, Polet unveiled a three-year plan to double sales at Gucci and stem losses elsewhere, most notably at the group's ailing Yves Saint Laurent label.

Polet also challenged the traditional notion that customer orientation had no place in luxury goods. He commissioned regular research briefings and set up an international focus group panel of 600 Gucci consumers. When challenged, Polet cited founder Guccio Gucci and the customer-centric approach he had used to build his small business back in the 20s. 'The whole organisation has to be outward focused, including with customers. We need to know how they want it and when,' concluded Polet.

Three years on and, against almost everyone's expectations, Polet has pulled it off. Profits and sales targets have been exceeded and, according to Millward Brown Optimor's Brandz valuation, Gucci's brand value rose an astonishing 49% in 2006 while many of the smaller brands in the group, such as Boucheron and Bottega Veneto, are growing rapidly. The ice cream man has done the business and in doing so has changed not only Gucci, but also the way that luxury brands are managed.
What do frozen fish and ice cream have to do with $8000 crocodile handbags? A lot more than you might think.

Mobile Churn

2010-05-12T18:22:00.001+01:00

Mobile brands make poor call on value

Marketing has always been about more than just sales. Getting the customer to sign on the dotted line is merely the opening volley in the battle, not the victory salute. Getting that consumer to stay with you longer and spend more are the real drivers of a company's success.

It is an obvious point, but one frequently missed by marketers. Take mobile phone operators, for example. For years, the four big operators in the UK have been fighting a war of acquisition intended to lure subscribers from their rivals and onto their network. But while O2, Orange, Vodafone and T-Mobile have succeeded in acquiring customers by the busload, they have all failed in the more lucrative challenge of retention.

With no new consumers entering the market and annual churn levels hovering around 25%, the operators remain engaged in a multimillion-pound game of musical chairs. Price reductions and special offers lure a consumer to one network just in time to replace the one heading across the road for the new handset and special tariff being offered by a competitor.

In 2006, T-Mobile slashed tariffs in its infamous Flext offering. UK managing director Jim Hyde was unequivocal about his acquisitory motives. 'We intend to grow our market share, and simple, fair value for our customers is at the heart of this,' he said. Vodafone's UK chief executive Nick Read, however, was having none of it. 'With Flext, (T-Mobile) came in, dropped the price and thought we would not respond. We responded. They didn't gain market share and took a hit on margins. If anyone thinks that just by dropping prices they will take share from us, I will respond. I will compete, so they won't be getting an advantage on pure price,' he hit back.

Aside from hurting profits, this also restricts brand equity. Rather than investing in building this, operators have no choice but to maintain mass awareness, communicate commodifying tariffs and promote generic handsets. Meanwhile, consumers are actively incentivised to break any nascent brand loyalty they may have, and switch.

If you measure branding success by the size of the marketing budget, then mobile operators come top of the list. But if your criteria are the amount of differentiation, loyalty and price premium created, they come last. Hundreds of millions in marketing spend have resulted in distinctive logos and unaided recall but little else. Rarely has so much money been spent so badly and for so long in the name of marketing.

The biggest casualty in this war of acquisition has been use. Despite networks and most handsets now offering the capability to access the web, check email or send photos, the vast majority of consumers have steadfastly continued to use their phones just to make calls. This is the most damaging implication of an industry intent on acquiring consumers rather than helping existing subscribers get more from their phones (and, as a result, generate bigger bills).

Within the mobile industry, many executives concluded that the iPhone, with only 190,000 unit sales in the first 6 months after launch, had been a big disappointment. But usage figures gave a different perspective. Of the iPhone users contracted to O2, 60% used more than 25mb of data a month, compared with less than 2% of O2's other contract subscribers. This is even more impressive when you consider that the iPhone relied on WiFi locations rather than the faster 3G network.

Apple has now sold millions of iPhones. It has entered the British market and achieved things beyond the wildest imaginations of the big four operators: differentiation, price premium, loyalty, and usage.

Pointless Positioning Statements

2010-05-12T18:19:00.000+01:00

Choose your words carefully

I had a depressingly familiar experience last week. A brand manager took me through their fresh brand strategy, and it was terrible. It was, like most brand positioning, pointless.

About eight out of every 10 brand strategies have no impact whatsoever on brand equity. And this was going to be another addition to that big book of pointless branding for two reasons.

First, there were too many words in the positioning statement. Three concentric circles confronted me. The central red circle was called the brand essence. In the middle was a blue circle called brand personality. And then around the edge was a circle in yellow, called brand identity. Too much.

I have never seen a great brand positioning strategy that needed more than three words to define the brand. Any more than that and the probability of achieving any kind of impact on the market turns almost immediately to zero.

Remember the game of Chinese whispers. A line of children would whisper a word from one to the other. When the whispering reached the end of the line, the final child would shout out the word. If the first child had picked a simple word, such as orange, then orange would be the word at the end. But if they picked a complicated word, such as Afghanistan, at the end of the line it would sound nothing like the original.

That is the real game of branding. It is not about the brand manager at the start of the line, or the marketing manager or ad agency or salesperson or retailer that follows them. The only place that matters is the final person in the line - the consumer. If you use concentric circles or keyholes or triangles or anything more than about three words, then you will fail to have any impact on consumers or brand equity. You will feel great because you have a PowerPoint presentation that looks very complex and seems to justify the money and time you spent developing it. But it won't work. The minute you send it down the line, it will be too complex for others to remember, activate and ultimately execute.

If you don't believe me, go and talk to some of your consumers. Not a representative sample of target consumers, but a smaller tighter group of brand advocates, and ask them why they love your brand. They will be able to tell you because they are advocates. What is more, they won't need concentric circles or a PowerPoint presentation to explain it. They will tell you in about three words. All you have to do is be as efficient, focused and simple as the consumers you aim to understand and influence.

The other reason the strategy was bound to fail were the words that occupied the circles. All the usual, pointless suspects were there: integrity, excellence, trust, innovation. Any of these words in your brand positioning tells you two things. First, that your brand positioning won't work because it looks exactly like everyone else's. Second, whoever developed it for you was lazy, and should not have been trusted with the job.

Great branding focuses on the two or three things that mark the brand out as different. Great positioning always consists of unexpected words born from research, forged through heritage and destined to differentiate. I cannot tell you what those words should be, but I can tell you that if you are claiming innovation or excellence in your positioning, you will achieve the opposite.

'So what do you think?' asked my eager brand manager keen for feedback. I took a long, deep breath and said: 'There are two reasons why this is not going to work ...'

Want brand authenticity? Be authentic

2010-05-12T18:07:00.001+01:00

We don't know the name of the first brand. What we do know is that up a grassy mountainside a few millennia ago, a big Norse farmer was getting a bit annoyed about having his cows stolen. In a fit of Viking desperation, he started to burn his initials into his cows to stop them being nicked. Brandr, the Norse word for fire, became our operative verb. An industry that would dominate marketing was born not from the desire to differentiate or connect with consumers, but from the simple need to mark ownership and origin.

Unfortunately, a great number of British marketers operate under the mistaken impression that brands are built purely around consumers. This is partly true, but brands must also represent their origins. A brand is not a malleable product that can be moved willy-nilly around a perceptual map to follow consumer needs and drive sales. Brands are anchored in provenance, founders and heritage.

The Citroen C5 work is a case in point. A blond male whizzes around Germany in his car to the strains of Wagner. A German-accented voiceover describes the car as 'unmistakably German' before revealing it is a Citroen made in France. It's a smashing ad that agency Euro RSCG should take pride in. But it is entirely inappropriate for the brand, and Citroen should hang its head in shame.

This ad will drive awareness in the short term, but over the long term it will damage the brand associations of Citroen and leave it in no man's land. If consumers want German-made, there are several exceptional, authentically German brands. It is a message lost on Citroen's UK marketers - the way to build brand is to focus on Citroen, not your competitors.

An equally worrying picture is emerging at Diageo. Its leading gin brand, Gordon's, has responded to losses to stores' own-label products by spending the past year hitching its brand to celebrity chef Gordon Ramsay. The campaign shows a close-up of the chef's face next to the gin, accompanied by a bold statement in true Ramsay style. The inference is that this is his gin and comes with all the personality one expects from such a provenance.

Except, of course, it isn't Ramsay's gin at all. It's Alexander Gordon's gin, and was invented 200 years before Ramsay was born. There is enormous brand equity here. Gordon's has survived and prospered because it has something that makes it special. Diageo's challenge is to find out what this something is, define it and offer a contemporary execution of it. Don't just give up on a quarter of a millennium of heritage and hire a chef who is simultaneously endorsing about 400 other products, has nothing to do with your gin and will soon dim in the public consciousness.

Again, no shame should be attached to its agency, Bartle Bogle Hegarty, for creating these ads. It is an ad agency and, while most agencies will tell you that they are in the business of brands, they are, of course, in the completely different business of advertising. Ramsay will generate short-term awareness and arrest the brand's losses, but over the long term Diageo is eroding one of its most valuable brands with an inappropriate, short-term fix that will cause long-term damage to its brand equity.

Consumer-insight companies say consumers have started seeking 'authenticity'. That's rubbish. They always wanted it. Most consumers are a lot smarter and more genuine than the marketers who target them. They want brands burned with the mark of their founders, not artificially engineered by agencies. They want to know who made this brand, where and why. It's time for marketers to get back to the authentic meaning of brand.

The six core skills needed to be a great marketer

2010-05-12T17:59:00.000+01:00

The best marketers have a handful of core attributes and skills at their disposal.

Here is my list, born from experience and forged from interactions with the minority of marketers I regard as proficient, and the majority who fall short.

Let's start with a basic but key criterion. They have to be comfortable spending time with and listening to consumers. A significant proportion of marketers cannot find the time or the humility to spend time in the market. They are happy briefing research agencies and reviewing the results, but miss the fundamental starting point for any great marketer: get out of your office and spend time in the places and spaces where your consumers experience the product, no matter how senior or 'important' you consider yourself.

Next, behavioural segmentation. Too many marketers think segments are people who have similar demographic characteristics. Rubbish. Segments are groups of consumers who want the same things - the fact that they might share an age range, gender or postcode is relevant only after we first use our market research to show specific clusters of shared needs. Segments built from survey data, with good behavioural names and a tight portrait to capture their identity, is a hallmark of a good marketer. The usual '18-35 male' crap indicates the opposite.

Then comes targeting. A good marketer has made the leap of faith and accepted that fewer target consumers will deliver a better overall result. Usually, that means stepping back from the segmentation and only going after 10% or 20% of the potential market. Tight target segments mean the marketing has a chance to succeed. Too many marketers lose faith at this stage and end up targeting pretty much everyone.

Which leads nicely to the next feature of a great marketer: being entirely comfortable devoting time and marketing money to excluding the wrong kinds of consumers from your brand. Most marketers, when asked, still don't know the difference between marketing and sales. Marketing is as much about stopping the wrong people buying a product as ensuring that the right ones do. Usually, the majority of potential consumers in any market will cost you money if you serve them. A good marketer knows this and uses his or her skills to ensure they are avoided.

Next: positioning. A great marketer can create perceptual maps and uses them to derive a clear, tight, three-word positioning for their brand. No wheels or triangles here, just a clear articulation of what the brand stands for. If ever there was a question that sorts the wheat from the chaff, it's: 'What is your positioning?' Too often this is met with a stream of generic crap about integrity and innovation or a ridiculously over-complex, six-slide presentation that attempts to capture the 'essence' of the brand. A good marketer answers with a confident smile and few words.

Lastly, brand tracking. Think about what you need in place to successfully conduct this. You have to have a clear positioning statement, know that ultimately brands exist in the consumer's consciousness, and commit 5%-10% of your marketing budget to research to collect this data on a continual basis.

How did you do?

Shareholders v Stakeholders

2010-04-25T21:22:00.000+01:00

THE era of “Jack Welch capitalism” may be drawing to a close, predicted Richard Lambert, the head of the Confederation of British Industry (CBI), in a speech last month. When “Neutron Jack” (so nicknamed for his readiness to fire employees) ran GE, he was regarded as the incarnation of the idea that a firm’s sole aim should be maximising returns to its shareholders. This idea has dominated American business for the past 25 years, and was spreading rapidly around the world until the financial crisis hit, calling its wisdom into question. Even Mr Welch has expressed doubts: “On the face of it, shareholder value is the dumbest idea in the world,” he said last year.

In an article in a recent issue of the Harvard Business Review, Roger Martin, dean of the University of Toronto’s Rotman School of Management, charts the rise of what he calls the “tragically flawed premise” that firms should focus on maximising shareholder value, and argues that “it is time we abandoned it.” The obsession with shareholder value began in 1976, he says, when Michael Jensen and William Meckling, two economists, published an article, “Theory of the Firm: Managerial Behaviour, Agency Costs and Ownership Structure”, which argued that the owners of companies were getting short shift from professional managers. The most cited academic article about business to this day, it inspired a seemingly irresistible movement to get managers to focus on value for shareholders. Converts to the creed had little time for other “stakeholders”: customers, employees, suppliers, society at large and so forth. American and British value-maximisers reserved particular disdain for the “stakeholder capitalism” practised in continental Europe.

Now, Mr Martin argues, shareholder value should give way to “customer-driven capitalism” in which firms “should instead aim to maximise customer satisfaction.” This idea is winning some converts. Paul Polman, who last year became boss of Unilever, a consumer-goods giant, recently said to the Financial Times, “I do not work for the shareholder, to be honest; I work for the consumer, the customer…I’m not driven and I don’t drive this business model by driving shareholder value.”

Nor is it just customers who are expected to benefit from a backlash against the cult of shareholder value. Mr Lambert reports that a recent survey of the CBI’s members found that most expected that a “more collaborative approach would emerge with various different groups of stakeholders”, including suppliers and the institutions that educate workers. And a forthcoming book by Vineet Nayar, the chief executive of HCL Technologies, a fast-growing Indian business-process outsourcing firm, takes a quite different position to Mr Martin, as is evident from its title: “Employees First, Customers Second”.

Has the shareholder-value model really failed, however? The financial meltdown has certainly undermined two of the big ideas inspired by Messrs Jensen and Meckling: that senior managers’ pay should be closely linked to their firm’s share price, and that private equity, backed by mountains of debt, would do a better job of getting managers to maximise value than the public equity markets. The bubbles during the past decade in both stockmarkets and, later, the market for corporate debt highlighted serious flaws with both of these ideas, or at least with the way they were implemented.

A firm’s share price on any given day, needless to say, can be a very poor guide to long-term shareholder value. Yet bosses typically had their pay linked to short-term movements in share prices, which encouraged them to take measures to push the share price up quickly, rather than to maximise shareholder value in the long run (by when they would probably have departed). Similarly, private-equity firms took on too much debt during the credit bubble, when it was available on absurdly generous terms, and are now having to make value-destroying cuts at many of the companies in their portfolios as a result.

In some ways the current travails of Goldman Sachs (see article) epitomise the problem. The investment bank embraced the maximisation of shareholder value when it went public in 1999. Although it insists that it does not live quarter to quarter, senior figures from its previous incarnation as a partnership, when it naturally championed the long-term interests of its employees (the partners), argue that it would have been much more wary in those days of any deals that made a quick buck at the risk of alienating customers. But, as Mr Lambert points out, “It wasn’t just the banks which had a rush of blood to the head. For a few years, a fair number of other companies seemed to put almost as much effort into managing their balance-sheets as into wooing their customers.” In his view, “If you concentrate on maximising value to shareholders over the short term, you put at risk the relationships that will determine your longer-term success.”

Yet this need not mean that the veneration of shareholder value is wrong, and should be replaced by worship at the altar of some other business deity. Most of those preaching reverence for other stakeholders concede that the two are usually not mutually exclusive, and indeed, often mutually reinforcing. Mr Martin, for example, admits that “increased shareholder value is one of the by-products of a focus on customer satisfaction.” Likewise, in India’s technology industry, where retaining talented staff is arguably managers’ hardest task, Mr Nayar’s devotion to employees, which he says has helped increase revenues and profits, may be the best way to maximise long-term shareholder value.

In other words, the problem is not the emphasis on shareholder value, but the use of short-term increases in a firm’s share price as a proxy for it. Ironically, shareholders themselves have helped spread this confusion. Along with activist hedge funds, many institutional investors have idolised short-term profits and share-price increases rather than engaging recalcitrant managers in discussions about corporate governance or executive pay.

Giving shareholders more power to influence management (especially in America) and encouraging them to use it should prompt them and the managers they employ to take a longer view. In America, Congress is considering several measures to bolster shareholders at managers’ expense. In Britain, the Financial Reporting Council has proposed a “stewardship code” to invigorate institutional investors. “This is a phoney war between shareholder capitalism and stakeholder capitalism, as we haven’t really tried shareholder capitalism,” says Anne Simpson, who oversees corporate-governance activism for CalPERS, America’s biggest public pension fund. “Rather than give up on shareholder value, let’s have a real go at setting up shareholder capitalism.”

Economist, April 22 2010

Cultural Intelligence

2010-04-07T20:09:00.000+01:00

IN THE Oscar-nominated satire on modern business life, “Up In The Air”, an earnest young executive at an outplacement firm horrifies her older colleagues by introducing them to the word “glocal”. This combination of global and local, she explains, means that the firm can now fire people (and offer them superficial advice on what to do next) using a standardised script, delivering the message through an internet link so there is no longer any need to fly long distances to deliver the bad news face-to-face.

Hollywood did not invent the word, which has been around since the 1980s. It was coined in Germany, then popularised around the world by various sociologists in the 1990s—though it has also been traced to a Japanese management concept, dochakuka, meaning global localisation. “Glocals” has also become a popular term to describe expat workers who move home often as their job takes them around the world.

But as is so often the case when Hollywood tries to portray the world of business, it gets the concept wrong. In “Up In The Air”, glocal is used to embody unthinking, top-down standardisation, neglecting the human interaction and understanding that are needed to be effective at the local level. In all its uses up until Hollywood distorted it, the word glocal had been used to direct firms away from a crude one-size-fits-all (or “the world is flat”) version of globalisation to one which takes seriously the need to comprehend and adapt to local differences.

A new book, “Leading with Cultural Intelligence”, by David Livermore, a management guru, explains why modern multinational organisations need to be glocal in the original sense, and why they must understand that “There’s really no such thing as a uniform global culture”. This message, he says, applies not just to marketing but to recruiting and managing teams of workers in different parts of the world.

Drawing on academic research and his consulting experience, Mr Livermore argues that managing effectively across multiple cultures is one of the toughest tasks facing multinational companies, not least American ones that are increasingly relying on emerging economies for their workers and future sales growth. According to a survey of senior executives from 68 countries quoted in the book, around 90% see “cross-cultural leadership” as the biggest management challenge of this century.

Different studies have found that 16-40% of all managers sent on foreign assignments end them early. The cost to employers of each early return has been estimated at between $250,000 and $1.25m, when moving expenses, downtime and other factors are taken into account. In almost every case, the reason things do not work out is cultural problems rather than job skills.

Mr Livermore sums up his solution to this problem with a new piece of management jargon, “cultural intelligence”, and a new measure, CQ, the cultural-intelligence quotient. He says it is about far more than knowing how long to look at someone’s business card or where to point your feet in different countries. He defines it as the “capability to function effectively across national, ethnic and organisational cultures”.

Mr Livermore believes firms need to make a priority of developing cultural intelligence, in the same way that some of the best have already embraced the idea that their managers needed “emotional intelligence” as measured by their emotional-intelligence quotient, “EQ”. Indeed one could question whether there is much difference between CQ and EQ: perhaps CQ is, essentially, an adaptation of EQ to apply to the specific problems raised by corporate globalisation.
Intelligent questions

Almost a century after William Stern, a German psychologist, proposed that people can be graded according to an impartial measure of “intelligence”, a debate still rages on whether such tests are reliable and whether people can do much to improve their IQ. The idea that emotional wisdom and cultural savvy can be consistently and impartially measured, or that people can be taught to improve them, is even more open to question.

Mr Livermore argues that his book is more academically rigorous than the rapidly growing library of books on managing cultural differences. It must be said, though, that some of the advice he offers seems rather obvious: for example, that it would help executives' cultural understanding if they took holidays abroad, learned a foreign language, watched films about other societies, and so on. Of more general application is the list of five factors the book says are key to understanding a country’s national culture: they include the importance that is given to punctuality, and attitudes toward uncertainty.

The author admits, however, that many firms’ attempts to train staff to understand cultural issues fail, because they do not go beyond vague and overarching homilies about respecting diversity. To overcome this, he says they must create structures to identify and deal with specific cultural problems the company faces. When recruiting for jobs that involve working abroad or with people from other cultures, they should try to identify candidates who already have high CQ. And they should incorporate CQ into their training and pay schemes.

These issues are being grappled with by most big multinationals, and increasingly by smaller firms which are tapping foreign markets through the internet. Mr Livermore’s approach is one of several being tried by different firms. Yum! Brands, for example, the owner of KFC and Pizza Hut, has used a model called ABR (achieving breakthrough results) developed by John O’Keeffe, another management guru, in an effort both to unify and localise its corporate culture.

Even the Obama administration is starting to realise that to achieve the president’s goal of doubling the value of its exports within five years, American business people need to improve their understanding of other cultures quickly. The Department of Commerce has hired Mr Livermore’s Global Learning Centre to develop CQ training programmes. As Mr Livermore puts it, many small and medium-sized businesses are trying to boost their exports, but “are doomed to fail” unless they improve their cultural intelligence. Currently, he says, “most are focusing heavily upon legal trade policies and neglecting the overall need to think through negotiation, marketing, distribution and so on in the light of cultural dynamics.”

That the government is now taking seriously the need for American firms to improve their cultural understanding is a sign of progress. Maybe the next time a Hollywood film uses the word “glocal”, it will get its meaning right.

Source: The Economist, Apr 6th 2010

The Mark of a Great Leader

2010-02-24T09:51:00.000Z

Years ago, when most organizations were based on the hierarchical business model of the Industrial Age, great leaders were those who were unemotional, rational, even mechanistic. Those days are gone. Today's leader, especially one who is in charge of a dynamic, global organization, finds himself or herself in desperate need of one key trait — self-awareness.

An organization's success today depends on such a variety of talents and skills that no one leader could possibly be gifted in simultaneously. There are technological issues, global issues, financial issues, human resource issues, leadership issues, employee issues, legal issues, and more. A leader who is self-aware enough to know that he or she is not adept at everything is one who has taken the first step toward being a great leader.

This sort of personal mastery entails having a heightened understanding of one's own behavior, motivators, and competencies — and having "emotional intelligence" — to monitor and manage one's emotional responses in a variety of situations. This variety of situations is not limited to the home office, or the boardroom. It is of a global nature, across cultures which are very different and can be difficult to navigate, especially for those who are not comfortable, knowledgeable, or willing to admit their individual strengths and weaknesses. Everyone has a shortcoming or two — leaders who are willing to admit these, who strive to improve, and who seek out a consulting team to fill in the gaps will 1) encourage followers to do the same and 2) make room for others whose talents lie where theirs don't.

Have you ever worked with a micro-manager? This is someone who thinks he or she needs to be involved in everything that happens within the company. These leaders are closing out the talents of others by not divesting themselves from the day-to-day problem-solving activities of the company. Great leaders let go of the day-to-day, problem-solving activities of the company. Rather, they choose to maximize strategic and relationship-building efforts. These contribute to the forward momentum of the company rather than causing a "bottleneck" at the leader's desk. No one person should do it all — and if they are self-aware, most people will realize that they really aren't capable nor knowledgeable enough to do it all.

Do you recognize the difference between what you need to do versus what you should pass along to your team? Does your boss?

Following is a short list of things you can do to achieve self-awareness and personal mastery in leadership.

- Monitor your performance. Note areas in which you excel and need improvement. Communicate these to your team.
- Realize that failures and mistakes are just one step on the road to success.
- Recognize that being aware of the impact that your behavior has on other people is a critical leadership skill.
- Remember that when criticism is difficult to accept, there is probably some truth to it.
- And, finally, learn to give yourself and others credit for improving.

Talent

2009-11-17T10:01:00.003Z

Talent is not patient, and it is not faithful

No one word demonstrated the shift in corporations’ attention in the mid-1990s from processes to people more vividly than the single word “talent”. Spurred on by a book called “The War for Talent”, written by three McKinsey consultants in the late 1990s, the word became common in management speak. “We need to cultivate the talent”; “Where are we going to find the talent essential to our future success?” Talent is a subset of what used to be called human resources, the people who work in organisations. It is, essentially, those individuals among that group who have the potential to add most value.

Behind the word lies the idea that more and more corporate value is going to be created by knowledge and by so-called “knowledge workers”. Manual labour is worth less; knowledge (and the right use of it) is worth more. And people with such knowledge are (so the theory goes) in short supply. One CEO was reported as saying that not only did he not have enough talent to carry out the company’s strategy, but he did not even have “the talent needed in HR to hire the missing managers”. Moreover, the situation is likely to stay that way (and may even get worse) for some time to come.

This has significantly shifted the balance of power in the recruitment process. Companies used to be relaxed about finding enough qualified people to run their operations. What they could not find they would train, was the usual attitude. That might take some time, but in a world where people sought jobs for life (and the pensions that went with them) time was in the company’s favour. But talent is not patient, and it is not faithful. Many companies found themselves training employees only for them to go on and sell their acquired skills to their rivals. So now they look for talent that is ready-made.

In their eagerness to please this talent, companies have gone to considerable lengths to appear especially attractive. They have, for instance, devoted a great deal of effort to the design of their websites, often the first port of call these days for bright young potential recruits. They have in many cases reconstructed their HR departments, in part so that they can tailor their remuneration packages more finely for the individuals that they really require. And they have altered their approach to issues such as governance and environmental responsibility because they know that many of the talented people they are seeking want to work for ethical and responsible employers—almost more than they want a hefty pay packet.

Talented people increasingly want to work in places where they can feel good about what they do for most of the day. What’s more, in today’s knowledge-based businesses, these young people are far more aware of their working environment, of “what’s going on around here”, than were their grandparents, who were hired for their brawn rather than their brain. It is harder for today’s businesses to disguise from their employees what they are up to—even when, as in cases such as Enron and WorldCom, they put a lot of effort into it.

Further reading

Bloom, B., “Developing Talent in Young People”, Ballantine Books, 1985

Michaels, E., Handfield-Jones, H. and Axelrod, B., “The War for Talent”, Harvard Business School Press, 2001

Source: Economist.com

Management By Objectives (MBO)

2009-11-13T01:00:00.000Z

It may seem obvious that managers must have somewhere to go before they set out on a journey

The idea of management by objectives (MBO), first outlined by Peter Drucker and then developed by George Odiorne, his student, was popular in the 1960s and 1970s. In his book “The Practice of Management”, published in 1954, Drucker outlined a number of priorities for the manager of the future. Top of the list was that he or she “must manage by objectives”. John Tarrant, Drucker’s biographer, reported in 1976 that Drucker once said he had first heard the term MBO used by Alfred Sloan, author of the influential “My Years with General Motors”.

With the benefit of hindsight, it may seem obvious that managers must have somewhere to go before they set out on a journey. But Drucker pointed out that managers often lose sight of their objectives because of something he called “the activity trap”. They get so involved in their current activities that they forget their original purpose. In some cases it may be that they become engrossed in this activity as a means of avoiding the uncomfortable truth about their organisation’s condition.

MBO received a boost when it was declared to be an integral part of “The HP Way”, the widely acclaimed management style of Hewlett-Packard, a computer company. At every level within Hewlett-Packard, managers had to develop objectives and integrate them with those of other managers and of the company as a whole. This was done by producing written plans showing what people needed to achieve if they were to reach those objectives. The plans were then shared with others in the corporation and coordinated.

Bill Packard, one of the two founders of Hewlett-Packard, said of MBO:
No operating policy has contributed more to Hewlett-Packard’s success … MBO … is the antithesis of management by control. The latter refers to a tightly controlled system of management of the military type … Management by objectives, on the other hand, refers to a system in which overall objectives are clearly stated and agreed upon, and which gives people the flexibility to work toward those goals in ways they determine best for their own areas of responsibility.

MBO urged that the planning process, traditionally done by a handful of high-level managers, should be delegated to all members of the organisation. The plan, when it finally emerged, would then have the commitment of all of them. As the plan is implemented, MBO demands that the organisation monitor a range of performance measures, designed to help it stay on the right path towards its objectives. The plan must be modified when this monitoring suggests that it is no longer leading to the desired objective.

One critic claimed that MBO encouraged organisations to tamper with their plans all the time, as and when they seemed no longer to be heading towards their latest objective. Many firms came to prefer the vague overall objectives of a mission statement to the firm, rigid ones demanded by MBO.

After a while, Drucker himself downplayed the significance of MBO. He said:
MBO is just another tool. It is not the great cure for management inefficiency … Management by objectives works if you know the objectives: 90% of the time you don’t.

Management by objectives is now largely ignored. Its once widely used abbreviation, MBO, has been taken over by management buy-out, the purchasing of a company by a group of its managers with the aim of making as much money for themselves as possible.

Further reading

Drucker, P., “The Practice of Management”, Harper, New York, 1954; Heinemann, London, 1955; revised edn, Butterworth-Heinemann, 2007
Levinson, H., “Management by Whose Objectives?”, Harvard Business Review, July–August 1970
Odiorne, G.S., “Management by Objectives: a System of Managerial Leadership”, Pitman Publishing, 1965

Source: Economist.com

Segmentation

2009-11-13T00:56:00.000Z

The idea of segmentation has spread beyond its consumer origins

Segmentation is the process of slicing a market for a particular product or service into a number of different segments. The segments are usually based on factors such as demographics, beliefs or the occasion of use of the product. One segment of the market for video cameras, for instance, might be the group of people who have new-born babies. Another could be the group of people visiting relatives who live abroad.

In their book “Breakthrough Imperatives”, Mark Gottfredson and Steven Schaubert say:
The goal of customer segmentation analysis is to identify the most attractive segments of a company’s customer base (existing or potential) by comparing the segments’ size, growth and profitability.

The idea of segmentation has spread beyond its consumer origins. Human-resources departments now talk about segmenting their “customers”—that is, the different groups of employees within their own organisation. In a bank, for example, three such segments might be retail bank tellers, investment bank advisers and money-market traders.

Once different segments of a market have been identified, suppliers to that market can target their advertising and promotional efforts more accurately and more profitably. Different segments can be reached through the most appropriate channel: parents of new-borns through ante-natal clinics, for instance, and foreign travellers through airlines’ websites.

Each market segment represents a group of potential customers with common characteristics. In consumer markets, segmentation is usually based on the following:

• Demographic factors. Gender, age, family size, and so on.

• Geography. In most countries there are marked differences in the consumer preferences of different regions. The consumption of wine in the north of England, for example, is very different from that in the south.

• Social factors. One classic segmentation is by income and occupation, but this is proving to be less and less useful. There are a lot of extremely wealthy people who do not spend much, and vice versa. So the focus is shifting to lifestyle. In recent years, marketers have become more interested in categorising consumers as “generation Xers” or “the millennial generation” rather than by the size of their bank accounts. Consumers are thought to have more in common with people from the same generation than with any other grouping.

Industrial markets have been notoriously more difficult to segment than consumer markets. Firms find it hard to decide which factors are most useful for categorising their corporate clients. Should it be size, industry sector, or geography? Computer-maker Hewlett-Packard segmented its big industrial customers into five categories based on the value of their purchases and the complexity of their IT systems.

Segmentation was in part a reaction against the mass-marketing tactics sparked off by Henry Ford when he said that customers could buy his Model T car “in any colour as long as it’s black”. Many of its classifications, however, have proved to be of little use. Baby boomers have been found to have little more in common than their defining characteristic: a birthdate in the years following the second world war. John Forsyth, a consultant, wrote in McKinsey Quarterly in 1999:
Unfortunately, easy cases permitting marketers to establish meaningful differences among groups of customers and then to identify them—a phenomenon we call “actionable segmentation”— are rare.

The internet promises to provide new opportunities for segmentation. It offers continuous opportunities to capture information about customer behaviour. Consumers identify themselves and their characteristics by their electronic participation in particular interest groups, and by their general online behaviour.

Further reading

Coupland, Douglas, “Generation X”, St Martin’s Press, 1991
Howe, N. and Strauss, W., “Millennials Rising: The Next Great Generation”, Vintage, 2000

From Economist.com

Strategic Alliances

2009-11-13T00:54:00.000Z

Alliances are often said to be like marriages

A strategic alliance is a relationship between two or more organisations that falls somewhere between the extremes of an arm’s-length sourcing arrangement on the one hand, and a full-blown acquisition on the other. It embraces things such as franchising, licensing and joint ventures.

Booz Allen & Hamilton, a firm of management consultants and an acknowledged expert in the field, defines a strategic alliance as:
A cooperative arrangement between two or more companies in which:
• a common strategy is developed in unison and a win-win attitude is adopted by all parties;
• the relationship is reciprocal, with each partner prepared to share specific strengths with the other, thus lending power to the enterprise;
• a pooling of resources, investment and risks occurs for mutual gain.

In general, there are two types of strategic alliance: a bilateral alliance (between two organisations) and a network alliance (between several organisations). The alliance between Royal Bank of Scotland and Tesco, whereby the British supermarket chain provided the Scottish bank’s services throughout its stores, is an example of the former; the Airbus consortium and the Visa card network are examples of the latter.

Strategic alliances have many advantages: they require little immediate financial commitment; they allow companies to put their toes into new markets before they get soaked; and they offer a quiet retreat should a venture not work out as the partners had hoped. However, going into something knowing that it is (literally) not a big deal, and that there is a face-saving exit route, may not be the best way to make those charged with running it hungry for success.

The most popular use for alliances is as a means to try out a foreign market. Not surprisingly, therefore, there are more alliances in Europe and Asia (where there are more foreign markets nearby) than in the United States. In some cases, alliances are used by companies because other means of entering a market are closed to them. Hence there have been many in the airline industry, where governments are sensitive about domestic carriers falling into foreign hands.

One thing crucial to a successful alliance is a degree of cultural compatibility. Companies are advised, for example, to pick on someone their own size. Alliances between the very big and the very small are hard to operate not least because of the different significance that the alliance assumes in each organisation’s scale of things.

Alliances are often said to be like marriages. The partners have to understand each other’s expectations, be sensitive to each other’s changes of mood and not be too surprised if their partnership ends in divorce. Indeed, many companies build into their alliances a sort of prenuptial contract, an agreement as to what is to happen to their joint property in the event of a subsequent divorce.

Strategic alliances grew at a phenomenal rate in the 1990s. Some companies, such as General Electric and AT&T, set up several hundred. On one estimate, IBM cemented almost 1,000 strategic alliances during the decade. Booz Allen & Hamilton reckons that more than 20,000 were formed worldwide in the period 1996–98. Accenture says that Fortune 500 companies have an average of 50–70 alliances each.

Alliances have not always been successful. In 1998 BT and AT&T agreed to bundle their international assets into a single joint venture that started off with annual revenues of $11 billion, annual operating profits of $1 billion and some 5,000 employees. In 2001 the two companies agreed to unwind the alliance—at considerable cost.

Further reading

Bamford, J. and Ernst, D., “Managing an Alliance Portfolio”, McKinsey Quarterly, No. 3, 2002
Doz, Y. and Hamel, G., “Alliance Advantage: The Art of Creating Value Through Partnering”, Harvard Business School Press, 1998

Source: Economist.com

SWOT Analysis

2009-11-13T00:52:00.000Z

Strengths, Weaknesses, Opportunities and Threats

SWOT is a handy mnemonic to help corporate planners think about strategy. It stands for Strengths, Weaknesses, Opportunities and Threats. What are an organisation’s SWOTs? How can it manage them in a way that will optimise its performance? A second four-letter acronym is sometimes brought into play here: USED. How can the Strengths be Used; the Weaknesses be Stopped, the Opportunities be Exploited; and the Threats be Defended against?

Wikipedia credits the technique to Albert Humphrey, an academic at Stanford University, who based it on an analysis of Fortune 500 companies that he carried out in the 1960s and 1970s.

The process starts by listing a firm’s attributes under the four headings; a particular strength, for example, might be a dedicated workforce or some currently valuable patent. These are then given scores according to what is seen as likely to be the company’s business environment over the next few years. If a recession is beginning and employees have to be laid off, a dedicated workforce might be a weakness. If a boom is about to begin, however, it will be a strength.

The four features can be divided along two main dimensions:

• Internal/external. The internal features are the company’s own strengths and weaknesses. Analysing them is a matter of analysing the state of the company. They are things that already exist. The external features are the organisation’s opportunities and the threats to its future performance. These exist only on the horizon, and they are less easy to assess and measure. They arise from things like changes in technology, demography or government policy.

• Positive/negative. The positive things are the strengths and opportunities; the negative ones are the threats and weaknesses.

A SWOT analysis can be applied to different aspects of a company’s business, such as its it capability or its skills. The simplicity and intuitive wholeness of the framework have helped to make it extremely popular with both corporations and governments. An analysis of the competitive advantages and disadvantages of Germany in 1999 found that the country’s strengths lay in its educated and skilled workforce. Among its weaknesses were its high labour and social costs.

Nevertheless, there has been no shortage of critics. One of the main criticisms is that, in the end, such an analysis invariably relies on subjective judgments. Objective measures of all the ingredients in the balance simply do not exist. Some say that this does not matter, because the process of doing the analysis is more important and revealing than the results of the analysis themselves. The journey is more important than the destination.

Further reading
Hill, T. and Westbrook, R., “SWOT analysis: it’s time for a product recall”, Long Range Planning, February 1997
Pickton, D.W. and Wright, S.W., “What’s SWOT in strategic analysis?”, Strategic Change, Vol. 7, No. 2, March–April 1998

From Economist.com

Synergy

2009-11-13T00:51:00.000Z

Used as part of the justification for almost every takeover since Alexander moved into Egypt

The word comes from ancient Greek: synergia means working together. Andrew Campbell and Michael Goold, two British academics, define it as “links between business units that result in additional value creation”. It is, they go on to say, “a Holy Grail for large multi-unit companies”. It is something akin to the philosopher’s stone: seeming to create extra value without consuming resources.

Synergy has been used as part of the justification for almost every takeover since Alexander moved into Egypt. In the 20th century the idea was refreshed by Ruth Benedict, an anthropologist. She used the word when writing during the second world war about communities where cooperation was rewarded and proved advantageous to all. The idea was picked up and transferred to the business world by Abraham Maslow. It fitted well with Maslow’s non-authoritarian model of organisational structure.

The business gains from synergy are often not distinguished sufficiently well from those that come from combining two businesses in such a way as to create value. Synergy is passive; it happens when two things come together regardless of what else they do. If a company buys one of its major suppliers, the synergy comes from the fact that it is now a preferred customer, not from the subsequent reorganisation of the supplier’s warehouses so that they are more conveniently located for their new owner.

Promises of synergy are rarely fulfilled. Campbell and Goold say: “Synergy initiatives often fall short of management’s expectations.” They quote the example of a firm of consultants where, to gain synergy, the IT specialists were merged with the strategy specialists, until the day when the it people found that the strategy people were on a completely different scale of pay and perks. All the synergy gains were lost in an instant. The authors end their article by quoting the physicians’ creed: “First ensure you do no harm.”

The synergy from mergers and acquisitions (M&A) is particularly elusive. Leon Cooperman, a senior executive at Goldman Sachs, a big investment banking adviser on M&A, when asked to name one big merger that had lived up to expectations, said: “I’m sure that there are success stories out there. But at this moment I draw a blank.”

Michael Porter, who looked closely at the activities of 33 large American companies between 1950 and 1986, found that 55% of their acquisitions were later divested. Of their forays into unrelated industries (the fashion at the time was for conglomerates), 74% were later divested.

Synergy fails to materialise in M&A for two main reasons:

• Managers give too much attention to financial and strategic aspects during the negotiation of the deal. All eyes are focused on striking the right price (whatever it is), not on extracting the full value.

• Managers underestimate the cultural differences between organisations. These can be particularly significant in deals that cross borders. An Anglo-French merger between packaging companies Metal Box and Carnaud, for instance, was notorious for the refusal of managers from different cultures to work with each other. It has been said that cross-border deals work well in the airline industry because people have gone into that particular business to meet and understand people from other cultures. The same cannot be said of people who go into packaging.

The unbundling of organisations, which often occurs after a prolonged period of mergers and acquisitions, involves a sort of reverse synergy. In this, three minus two equals more than one. This greater value is realised either through a capital gain from the sale of previously bundled assets (a process often referred to as asset stripping), or through an improvement in the margins on the unbundled businesses.

Further reading

Eisenhardt, K.M. and Galunic, D.C., “Co-Evolving: At Last a Way to Make Synergies Work”, Harvard Business Review, January–February 2000
Goold, M. and Campbell, A., “Desperately Seeking Synergy”, Harvard Business Review, September–October 1998
Hagel, J. III and Singer, M., “Unbundling the Corporation”, Harvard Business Review, March–April 1999

Source: Economist.com

Game Theory

2009-11-13T00:37:00.000Z

The idea of business as a game, in the sense that a move by one player sparks off moves by others, runs through much strategic thinking. It is borrowed from a branch of economics (game theory) in which no economic agent (individual or corporate) is an island, living and acting independently of others.

In sectors where firms compete fiercely for market share and customer loyalty, this stylised progression of moves closely parallels actual behaviour. Few firms nowadays think about strategy without adding a bit of game theory. For John von Neumann and Oskar Morgenstern, the two economists who developed the idea, strategy was “a complete plan: a plan which specifies what choices [the player] will make in every possible situation”.

Seeing business life as a never-ending series of games, each of which has a winner and a loser, can be a handicap. In business negotiations, for example, with external suppliers or customers, or with trade unions or colleagues, it can be unhelpful if participants see it only in terms of a victory or a loss. For that way one party has to walk away feeling bad about the outcome. In some non-western cultures the aim is different. The negotiation process is steered towards a win-win outcome, one with which both parties can be reasonably content.

The language of business is scattered with references to games. Regulators try to make sure that companies operate on a “level playing field”, and competition is, according to at least one dictionary, “a series of games”. Business games that have enjoyed (sometimes brief) popularity include the following:

• The end game. This is a strategy for a product that seems to be on its last legs. Should the company bleed it for all it is worth before it dies? Or should it introduce an aggressive pricing policy aimed at forcing its competitors out of business and allowing it to continue in a much reduced niche market? In her book “Managing Maturing Businesses”, Kathryn Harrigan, a professor at Columbia Business School, argues that end games can be highly profitable. She writes: “The last surviving player makes money serving the last bit of demand, when the competitors drop away.”

• The croquet game. In “The Change Masters”, Rosabeth Moss Kanter (see article) wrote:
I think the game that best describes most businesses today is the croquet game in “Alice in Wonderland”. In that game nothing remains stable for very long. Everything is changing around the players. Alice goes to hit a ball, but her mallet is a flamingo. Just as she’s about to hit the ball, the flamingo lifts its head and looks in another direction. That’s just like technology and the tools that we use.

• The win-win game. This is a game where both parties end up as winners; for example, a merger between two companies where synergy genuinely allows them to become more than the sum of their parts.

• The zero-sum game. This is shorthand for the idea that in every game, whether in business or on the sports field, the value of the winner’s gains and the loser’s losses is equal. In such games there is no incentive to co-operate with opponents because every inch given to them is an inch lost. The idea of the zero-sum game is modified by the introduction of the possibility of change in the nature of the game while it is being played. Hence, for instance, companies that are fighting for market share are playing a zero-sum game if they see that market as fixed. But if the market is continually expanding (or if the companies redefine it so that it is), the players are playing a game in which they can have a declining share of a bigger cake and still see their businesses grow.

Further reading
Berne, E., “Games People Play: The Psychology of Human Relationships”, Grove Press, New York, 1964; Penguin, 1968
Friedman, S.D., Christensen, P. and DeGroot, J., “Work and Life: the End of the Zero Sum Game”, Harvard Business Review, November–December 1998
McDonald, J., “Strategy in Poker, Business and War”, W.W. Norton, 1st edn, 1950; 1996
Shubik, M., “Games for Society, Business and War: Towards a Theory of Gaming”, Elsevier, 1975
Sun Tzu, “The Art of War”, 500 BC (Oxford University Press, 1963)
Von Neumann, J. and Morgenstern, O., “Theory of Games and Economic Behaviour”, Princeton University Press, 1944; 60th anniversary edn, 2004

From Economist.com

Champion

2009-11-13T00:34:00.000Z

To champion something is to support it, to defend it. We champion the cause of liberty. Hugh Grant, an actor, champions the right of old people to die in their own homes.

The word was given a management twist in the late 20th century when companies came to believe that a new project, to gain success, needed a champion, a specific individual within the organisation who would defend it and nurture it through its early days. Without such a person, it was suggested, new projects would wither from lack of devotion.

Donald Schon, a consultant before becoming a professor at the Massachusetts Institute of Technology (MIT), once wrote:

"The new idea either finds a champion or dies … No ordinary involvement with a new idea provides the energy required to cope with the indifference and resistance that major technological change provokes … Champions of new inventions display persistence and courage of heroic quality."

Championing is often applied to people as well: bright, young, talented people within an organisation are deemed to need a champion, someone higher up the corporate ladder who will support them and fight their corner. Many chief executives have risen to the top largely because they have been nurtured through their careers by people in high places.

In their book “In Search of Excellence”, Tom Peters and Robert Waterman argued that successfully innovative companies revolve around “fired-up champions”. 3M, the American inventor of the Post-It note, is quoted as saying: “We expect our champions to be irrational.”

Champions are not easy people to work and live with. James Brian Quinn, a professor at Tuck School of Business at Dartmouth, has spelt out a paradox associated with the type:

The champion is obnoxious, impatient, egotistic, and perhaps a bit irrational in organisational terms. As a consequence, he is not hired. If hired, he is not promoted or rewarded. He is regarded as not a serious person, as embarrassing or disruptive.

Peters and Waterman maintained that companies need to set up special systems to support and encourage these disruptive people if they are to benefit from their extreme persistence with new ideas (which need not necessarily be their own).
History is spattered with innovations that would never have been successful if they had not been stubbornly supported by one (often rather cranky) individual. Moreover, such support often needs to be for the long term. The Economist once wrote (see article), “All big innovations need to be championed and nurtured for long periods, sometimes up to 25 years.”

A widely reported case of championing was that of Spence Silver, an employee of 3M who became unnaturally fond of a glue that was not very good at sticking. “I was just absolutely convinced that it had some potential,” Silver is reported as saying. But for many years he was unable to persuade anybody within the organisation to agree with him. He persisted, however, in championing his pet product. As he put it:

You have to be a zealot at times in order to keep interest alive, because it will die off. It seems like the pattern always goes like this. In the fat times, these groups appear and do a lot of interesting research. And then the lean times come just about at the point when you’ve developed your first goody, your gizmo. And then you’ve got to go out and try to sell it. Well, everybody in the division is so busy that they don’t want to touch it. They don’t have time to look at new product ideas with no end-product already in mind.

Silver’s persistence with his “glue that doesn’t glue” eventually led to the invention of the Post-It note. The rest, as they say, is history.

Further reading
Nayak, P. Ranganath and Ketteringham, J.M., “Breakthroughs!”, Mercury, Didcot, 1993; Pfeiffer & Co, San Diego, 1994
Peters, T.J. and Waterman, R.H., “In Search of Excellence: Lessons from America’s Best-run Companies”, Harper & Row, New York, 1982; Profile Books, London, 2004

From Economist.com

Competitive Advantage

2009-11-13T00:32:00.002Z

“Competitive Advantage” is the title of a book by Michael Porter (see article) which became a bible of business thinkers in the late 1980s. With its echo of the ideas of comparative advantage expounded by David Ricardo, a 19th-century economist, it provided managers with a framework for strategic thinking about how to beat their rivals.

Porter argued that:

"Competitive advantage is a function of either providing comparable buyer value more efficiently than competitors (low cost), or performing activities at comparable cost but in unique ways that create more buyer value than competitors and, hence, command a premium price (differentiation).

You win either by being cheaper or by being different (which means being perceived by the customer as better or more relevant). There are no other ways.
Few management ideas have been so clear or so intuitively right. Although there were business and management books that sold more copies in the last two decades of the 20th century, none was as influential as 'Competitive Advantage'."

Behind Porter’s idea lay a novel way of looking at the firm as a series of activities which link together into what he called “a value chain”. For many, this was the theory’s eureka moment. Writers since have developed further concepts based on the metaphor of a linked chain of activities or groups of activities (or their close equivalent, processes). Each of the links in the chain adds value—that is, something that a customer is prepared to pay for. Even a company’s support activities, such as its training and compensation systems, can be links in the chain and sources of competitive advantage in their own right.

“Competitive Advantage” was published in 1985 as “the essential companion” to Porter’s earlier work, “Competitive Strategy” (1980). “Competitive Strategy” considered competition at the industry level, whereas “Competitive Advantage” looked at it from a firm’s-eye view. “My quest”, said Porter, “was to find a way to conceptualise the firm that would expose the underpinnings of competitive advantage and its sustainability.”

“Competitive Strategy” (subtitled “Techniques for Analysing Industries and Competitors”) was an aide for ambitious young executives in the planning department to help them come up with grand ideas about what to do next. The book identified five factors that have an impact on a company’s profitability: customers, suppliers, substitutes, potential entrants into the industry, and competitors. “Competitive Advantage”, however, was a book for chief executives. Its subtitle was “Creating and Sustaining Superior Performance”. Not only did it promise to enable senior managers to get ahead of the competition, it also promised to help them stay there.

The ideas in “Competitive Advantage” persuaded corporate chiefs to undertake more internal reflection. Previously their firm’s identity had been largely described in terms of its relationship to others: its market share, for instance, or its relative size. Porter made corporate navel-gazing respectable. In practice, many firms had difficulty in identifying all the discrete Porterian activities in their organisation, even in cases where they were confident that they knew what they were looking for—and many were not.

In a later book, “The Competitive Advantage of Nations”, Porter looked at how the choice of location by an internationalising business might be a source of competitive advantage. From this issue of location he was drawn on to consider clustering and how business clusters are nowadays “critical to competition”.

Further reading
Porter, M., “How Competitive Forces Shape Strategy”, Harvard Business Review, March–April 1979
Porter, M., “Competitive Strategy: Techniques for Analysing Industries and Competitors”, Free Press, New York, 1980; 2nd edn, Free Press, New York and London, 1998
Porter, M., “Competitive Advantage: Creating and Sustaining Superior Performance”, Collier Macmillan, London, 1985; 2nd edn, Free Press, New York and London, 1998
Porter, M., “The Competitive Advantage of Nations”, Macmillan 1990; 2nd edn, Macmillan Business, 1998
Stalk, G., “Time: The Next Source of Competitive Advantage”, Harvard Business Review, July–August 1988

Source: Economist.com

The Balanced Scorecard

2009-11-13T00:29:00.001Z

Robert Kaplan seems to come up with one big idea per decade. In the 1980s it was activity-based costing; in the 1990s it was the balanced scorecard.

The idea was first set out in an article that Kaplan wrote in 1992 for Harvard Business Review, along with David Norton, president of a consulting firm. The article, entitled “The Balanced Scorecard—Measures that Drive Performance”, began with the principle that what you measure is what you get. Or, as the great 19th century English physicist Lord Kelvin put it: “If you cannot measure it, you cannot improve it.”

If you measure only financial performance, then you can hope only for improvement in financial performance. If you take a wider view, and measure things from other perspectives, then (and only then) do you stand a chance of achieving goals other than purely financial ones.

In particular, Kaplan and Norton suggested that companies should consider the following:
• The customer’s perspective. How does the customer see the organisation, and what should the organisation do to remain that customer’s valued supplier?
• The company’s internal perspective. What are the internal processes that the company must improve if it is to achieve its objectives vis-à-vis customers, shareholders and others?
• Innovation and improvement. How can the company continue to improve and to create value in the future? What should it be measuring to make this happen?

The idea of the balanced scorecard was embraced with enthusiasm when it first appeared. Companies were frustrated with traditional measures of performance that related only to the shareholders’ point of view. That view was seen as unduly short-termist and too concerned with stockmarket twitches; it prevented boardrooms and managers from considering longer-term opportunities. The balanced scorecard not only broadens the organisation’s perception of where it stands today, but it also helps it to identify things that might guarantee its success in the future.

Kaplan and Norton saw the benefits of the balanced scorecard as follows:
• It helps companies to focus on what needs to be done to create a “breakthrough performance”.
• It acts as an integrating device for a variety of often disconnected corporate programmes, such as quality, re-engineering, process redesign and customer service.
• It translates strategy into performance measures and targets.
• It helps break down corporate-wide measures so that local managers and employees can see what they need to do to improve organisational effectiveness.
• It provides a comprehensive view that overturns the traditional idea of the organisation as a collection of isolated, independent functions and departments.

Further reading
Kaplan, R.S. and Norton, D.P., “The Balanced Scorecard—Measures that Drive Performance”, Harvard Business Review, January–February 1992
Kaplan, R.S. and Norton, D.P., “The Balanced Scorecard: Translating Strategy into Action”, Harvard Business School Press, 1996
Kaplan, R.S. and Norton, D.P., “Using the Balanced Scorecard as a Strategic Management System”, Harvard Business Review, 1996, reproduced July/August 2007
Niven, P.R., “Balanced Scorecard Step-by-Step: Maximising Performance and Maintaining Results”, John Wiley & Sons, 2002; 2nd edn, 2006

From Economist.com

The 10 biggest lies entrepreneurs tell themselves

2009-11-13T00:06:00.000Z

Entrepreneurs by their very nature are typically optimists. You sort of have to be an optimist to start a new business, for obvious reasons.

Unfortunately, the odds are against you when creating a new company and there are many challenges that easily deter the cynical. For optimistic entrepreneurs, it's real easy to lie about the challenges and the state of a business.

Here are the 10 biggest lies entrepreneurs tell themselves:

We Have a Great Idea

It's hard for entrepreneurs to look at their business concepts objectively. And it's hard for the people they surround themselves with to do the same because friends, family and business associates rarely have the incentive or heart to tell them that their ideas are mediocre or need to be refined. If you believe implicitly that you have a great idea, when things don't seem to be going your way it's hard to take a step back and evaluate whether or not your idea was lacking in the first place.

We Don't Have Any Competition

I haven't yet run across a company without a competitor yet I've met plenty of entrepreneurs who will state with a straight face "We don't really have any competition". They really believe it. To their detriment, of course. Bottom line: if you don't think you have any competition, 99.9999% of the time you haven't looked hard enough.

The Competition Sucks

"We don't have any competition" is the first stage of competition denial. The second: that your competition sucks. That may be so but more often than not, this is simply an easy way of dismissing the risk posed by your competitors. Even in cases where the competition has an inferior offering, entrepreneurs don't like to grapple with the notion that capable competitors with inferior offerings could still potentially eat their lunch.

If We Build It, They Will Come

Marketing a new business is extremely hard. Getting customers, clients, users, etc. is something that even experienced entrepreneurs can struggle with. So instead of really focusing in on how they'll realistically acquire customers/clients/users, many entrepreneurs lie to themselves and put their faith in the idea that marketing will take care of itself. Today, this belief is often shrouded in talk of 'viral marketing'. If you're relying on 'viral marketing' to drive your business, beware.

Time Isn't of the Essence

Entrepreneurs often think that their window of opportunity is far greater than it really is. In reality, new businesses usually have a relatively short period of time to establish themselves. Even if you have all of the money in the world, in today's fast-paced economy, you can be sure that competitors, industry change and the dreaded 'business cycle' will eventually catch up. That's why you need to wake up every morning with a sense of urgency.

We're In Control

There are a lot of things entrepreneurs can't control. While you can't downplay skill, talent and relationships, I think there's a good argument to be made the success of most new companies actually boils down to things that entrepreneurs have little control over, such as timing. This shouldn't deter you when starting a business but pretending that everything is within your control can be very damaging.

It's Not the Product

You're having a hard time getting that first customer. Or maybe users aren't signing up for your new website. What's the reason? It could be a lot of things. Maybe you're not positioning your product correctly. Maybe you're not making the value proposition clear enough. Or maybe there's a flaw in your product. Most entrepreneurs don't like to consider that last possibility because it's the hardest problem for a business to fix. But if you're not doing as well as you had expected, ignoring the possibility that there's a problem with your product could be the beginning of the end.

We Project That...

It's important to project certain things when starting a new business. How much money will you need? How long will it take to break even? Important stuff to consider. But too many entrepreneurs come to look at their projections as fact when in reality, projections are usually way off. As a rule, you'll almost always underestimate the amount of money you need and the time it will take to break even and you'll overestimate how quickly you'll get your product built and acquire your first customer.

Somebody Will Want to Buy Us

When times are good, it's easy for entrepreneurs to convince themselves that they're working on something revolutionary that all of the big boys will want to acquire. But most new companies don't get scooped up for boatloads of cash so if you're not in it to win it on your own, you're playing to lose and might as well head to Las Vegas.

We Only Need More Money

If your company isn't doing as well as expected, it's easy to convince yourself that more money is the cure. But that's rarely the case. Just take a look at the shockingly-high failure rate for VC-backed startups. Millions of dollars of financing usually don't save them from the harsh truth: most new businesses fail and that isn't because all of them lacked financing.
Most good entrepreneurs are optimistic people. They need to be. But if your optimism leads you to look in the mirror and lie to yourself about the state of your business, it's time for a reality check. The truth shall set you free.

Scenario Planning

2009-11-11T14:57:00.000Z

Scenario planning (sometimes called “scenario and contingency planning”) is a structured way for organisations to think about the future. A group of executives sets out to develop a small number of scenarios—stories about how the future might unfold and how this might affect an issue that confronts them. The issue could be a narrow one: whether to make a particular investment, for example. Should a supermarket put millions into more out-of-town megastores and their attendant car parks, or should it invest in secure websites and a fleet of vans to make door-to-door deliveries? Or it could be much wider: an American education authority, for instance, contemplating the impact of demographic change on the need for new schools. Will the ageing of the existing population be counterbalanced by the rising level of immigration?

In Peter Schwartz’s book “The Art of the Long View”, scenarios are described as:
Stories that can help us recognise and adapt to changing aspects of our present environment. They form a method for articulating the different pathways that might exist for you tomorrow, and finding your appropriate movements down each of those possible paths.

Scenario planning has been used by some of the world’s largest corporations, including Royal Dutch Shell, Motorola, Disney and Accenture. Two things lay behind its rapid growth in the 1970s:
• Widespread dissatisfaction with existing ways of planning. Many organisations realised how misleading were predictions based on straight-line extrapolations from the past. The oil price hikes of 1973 and 1978 dramatically and painfully brought home how vulnerable businesses were to sudden discontinuities. The unusually smooth path of economic progress since the second world war had lulled them into a false sense of continuity.
• Growing attachment to the idea that business can make better use of the non-rational side of human nature. At the head of Royal Dutch Shell’s planning department at the time was Pierre Wack (see article), a Belgian who had been persuaded to give up the editorship of a Franco-German philosophy magazine and join the company.

The appeal of scenario planning increased further in the wake of the September 11th 2001 terrorist attacks in the United States and the greater perceived uncertainty of the 21st century. According to Bain & Company’s annual survey of management tools, fewer than 40% of companies used scenario planning in 1999. But by 2006 its usage had risen to 70%. As a result of its scenario planning, the New York Board of Trade decided in the 1990s to build a second trading floor outside the World Trade Centre, a decision that kept it going after September 11th 2001.

In an article in Harvard Business Review in 1985, Wack wrote:

"Scenarios deal with two worlds; the world of facts and the world of perceptions. They explore for facts but they aim at perceptions inside the heads of decision-makers. Their purpose is to gather and transform information of strategic significance into fresh perceptions."

The process of scenario planning usually begins with a long discussion about how the participants think that big shifts in society, economics, politics and technology might affect a particular issue. From this the group aims to draw up a list of priorities, including things that will have the most impact on the issue under discussion and those whose outcome is the most uncertain. These priorities then form the basis for sketching out rough pictures of the future.

Scenario planning draws on a wide range of disciplines and interests, including economics, psychology, politics and demographics. The recommended reading list of Global Business Network, a leading adviser on scenario planning, includes Alexis de Tocqueville’s “Democracy in America” as well as Peter Senge’s “The Fifth Discipline” and “The Leopard”, Giuseppe Tomasi’s sweeping tale of Sicilian family life.

Further reading
Schwartz, P., “The Art of the Long View”, Doubleday/Currency, 1991; John Wiley & Sons, 1998
Wack, P., “The Gentle Art of Re-perceiving”, Harvard Business Review, September–October 1985

Source: Economist.com

The Hawthorne Effect

2009-11-11T14:55:00.002Z

The Hawthorne effect is named after what was one of the most famous experiments (or, more accurately, series of experiments) in industrial history. It marked a sea change in thinking about work and productivity. Previous studies, in particular Frederick Taylor’s influential ideas, had focused on the individual and on ways in which an individual’s performance could be improved. Hawthorne set the individual in a social context, establishing that the performance of employees is influenced by their surroundings and by the people that they are working with as much as by their own innate abilities.

The experiments took place at Western Electric’s factory at Hawthorne, a suburb of Chicago, in the late 1920s and early 1930s. They were conducted for the most part under the supervision of Elton Mayo, an Australian-born sociologist who eventually became a professor of industrial research at Harvard.

The original purpose of the experiments was to study the effects of physical conditions on productivity. Two groups of workers in the Hawthorne factory were used as guinea pigs. One day the lighting in the work area for one group was improved dramatically while the other group’s lighting remained unchanged. The researchers were surprised to find that the productivity of the more highly illuminated workers increased much more than that of the control group.

The employees’ working conditions were changed in other ways too (their working hours, rest breaks and so on), and in all cases their productivity improved when a change was made. Indeed, their productivity even improved when the lights were dimmed again. By the time everything had been returned to the way it was before the changes had begun, productivity at the factory was at its highest level.

Absenteeism had plummeted.

The experimenters concluded that it was not the changes in physical conditions that were affecting the workers’ productivity. Rather, it was the fact that someone was actually concerned about their workplace, and the opportunities this gave them to discuss changes before they took place.

A crucial element in Mayo’s findings was the effect that working in groups had on the individual. At one time he wrote:

"The desire to stand well with one’s fellows, the so-called human instinct of association, easily outweighs the merely individual interest and the logic of reasoning upon which so many spurious principles of management are based."

Later in life he added:

"The working group as a whole actually determined the output of individual workers by reference to a standard that represented the group conception (rather than management’s) of a fair day’s work. This standard was rarely, if ever, in accord with the standards of the efficiency engineers."

Fritz Roethlisberger, a leading member of the research team, wrote:

"The Hawthorne researchers became more and more interested in the informal employee groups, which tend to form within the formal organisation of the company, and which are not likely to be represented in the organisation chart. They became interested in the beliefs and creeds which have the effect of making each individual feel an integral part of the group."

Further reading
Gillespie, G., “Manufacturing Knowledge, A History of the Hawthorne Experiments”, Cambridge University Press, 1991
Mayo, E., “The Human Problems of an Industrial Civilisation”, Macmillan, 1933; 2nd edn Harvard University, 1946
Mayo, E., “The Social Problems of an Industrial Civilisation”, Routledge and Kegan Paul, 1949; later edn with appendix, 1975
Roethlisberger, F.J. and Dickson, W.J., “Management and the Worker: An Account of a Research Program Conducted by the Western Electric Company, Hawthorne Works, Chicago”, Harvard University Press, 1939

Source: Economist.com

Viral Marketing

2009-11-11T14:53:00.000Z

Viral marketing involves choosing a small group of well-connected individuals to launch a product or service via the internet or their mobile phones. The idea is that their approval will spread rapidly via their online network of connections, create a buzz around the product being marketed and result in millions of sales.

The most desirable individuals for viral marketing are those with what is known as high social networking potential (SNP). People’s SNP is a combination of the size of their online social network and their power to influence that network.

Viral marketing is meant to work like the spread of an epidemic. If every infected person infects, in turn, more than one other, the epidemic spreads rapidly. If every prospect reaches more than one other, sales rise rapidly. At the height of the dotcom boom there were few business plans that did not include viral marketing as a central part of their strategy.

Viral marketing moved into a new phase with the growth of online social networks such as YouTube and Facebook. On such networks information gets sucked out by the participants instead of being pushed out via e-mail. It gives the virus greater potential to multiply. But as the internet grows more diffuse and more commonplace, most people’s SNP seems bound to decline.

Few marketing viruses are known to have succeeded on anything like the scale of Hotmail, commonly considered to be the father of viral marketing. Hotmail’s success was based partly on the fact that it was free—viral marketing seems to work well when there is a free element to what is being marketed (as there often is with online services). Whenever someone sent a Hotmail e-mail message, for example, there was a note at the bottom saying, “Get your private, free e-mail at www.hotmail.com”.

Viral marketing also works well with products and services that peer groups want to be associated with. That was the case, for example, with “The Blair Witch Project”, a film that became a box-office success in America largely through viral marketing among university students. And it worked well for the launch of a British pop group called the Arctic Monkeys, whose first record went to the top of the British charts in 2005 largely thanks to being marketed by fans on the internet.

The term viral marketing is said to have been first coined by Jeffrey Rayport, a Harvard Business School academic, in a 1996 article for the magazine Fast Company. The idea really took off with the growth of the internet and e-commerce. Word-of-mouth has long been recognised as a powerful marketing tool; e-word of mouth seemed to have the potential to be so much more so.

But word-of-mouth marketing works a lot better among young chatterboxes than it does among middle-aged recluses. Likewise, if web surfers don’t pass on information, weary perhaps from too many messages that threaten all sorts of awfulness if they are not passed to at least ten people in less than ten minutes, or just web-weary in general, then the effect of viral marketing soon fizzles out. The virus can quickly lose its power to infect.

Source: Economist.com

Theory X and Y

2009-11-11T14:51:00.000Z

Theory X and Theory Y was an idea devised by Douglas McGregor in his 1960 book “The Human Side of Enterprise”. It encapsulated a fundamental distinction between management styles and has formed the basis for much subsequent writing on the subject.

Theory X is an authoritarian style where the emphasis is on “productivity, on the concept of a fair day’s work, on the evils of feather-bedding and restriction of output, on rewards for performance … [it] reflects an underlying belief that management must counteract an inherent human tendency to avoid work”. Theory X is the style that predominated in business after the mechanistic system of scientific management had swept everything before it in the first few decades of the 20th century.

Theory Y is a participative style of management which “assumes that people will exercise self-direction and self-control in the achievement of organisational objectives to the degree that they are committed to those objectives”. It is management’s main task in such a system to maximise that commitment.

Theory X assumes that individuals are base, work-shy and constantly in need of a good prod. It always has a ready-made excuse for failure—the innate limitations of all human resources. Theory Y, however, assumes that individuals go to work of their own accord, because work is the only way in which they have a chance of satisfying their (high-level) need for achievement and self-respect. People will work without prodding; it has been their fate since Adam and Eve were banished from the Garden of Eden.

Theory Y gives management no easy excuses for failure. It challenges them “to innovate, to discover new ways of organising and directing human effort, even though we recognise that the perfect organisation, like the perfect vacuum, is practically out of reach”. McGregor urged companies to adopt Theory Y. Only it, he believed, could motivate human beings to the highest levels of achievement. Theory X merely satisfied their lower-level physical needs and could not hope to be as productive. “Man is a wanting animal,” wrote McGregor, “as soon as one of his needs is satisfied another appears in its place.”

There are parallels with Abraham Maslow’s hierarchy of needs, and Maslow was indeed greatly influenced by McGregor. So much so that he tried to introduce Theory Y into a Californian electronics business, but found that the idea in its extreme form did not work well. All individuals, he concluded, however independent and mature, need some form of structure around them and some direction from others. Maslow also criticised Theory Y for its “inhumanity” to the weak, and to those not capable of a high level of self-motivation.

In his comic classic “Up the Organisation”, Robert Townsend wrote powerfully in support of Theory Y:

People don’t hate work. It’s as natural as rest or play. They don’t have to be forced or threatened. If they commit themselves to mutual objectives, they’ll drive themselves more effectively than you can drive them. But they’ll commit themselves only to the extent they can see ways of satisfying their ego and development needs.

Further reading
Lorsch, J. and Morse, J., “Beyond Theory Y”, Harvard Business Review, May–June 1970
McGregor, D., “Leadership and Motivation: Essays”, MIT Press, 1966; 1969
McGregor, D., “The Human Side of Enterprise”, McGraw-Hill, 1960; annotated edn, McGraw-Hill, 2006
Townsend, R., “Up the Organisation”, Michael Joseph, 1970; reprinted as “Further Up the Organisation”, Coronet, 1985

Source: Economist.com

Maslow Classic - Hierarchy of Needs

2009-11-11T11:34:00.003Z

The hierarchy of needs is an idea associated with one man, Abraham Maslow (see article), the most influential anthropologist ever to have worked in industry. It is a theory about the way in which people are motivated. First presented in a paper (“A Theory of Human Motivation”) published in the Psychological Review in 1943, it postulated that human needs fall into five different categories. Needs in the lower categories have to be satisfied before needs in the higher ones can act as motivators. Thus a violinist who is starving cannot be motivated to play Mozart, and a shop worker without a lunch break is less productive in the afternoon than one who has had a break.

The theory arose out of a sense that classic economics was not giving managers much help because it failed to take into account the complexity of human motivation.

Maslow divided needs into five:
• Physiological needs: hunger, thirst, sex and sleep. Food and drinks manufacturers operate to satisfy needs in this area, as do prostitutes and tobacco growers.
• Safety needs: job security, protection from harm and the avoidance of risk. At this level an individual’s thoughts turn to insurance, burglar alarms and savings deposits.
• Social needs: the affection of family and friendship. These are satisfied by such things as weddings, sophisticated restaurants and telecommunications.
• Esteem needs (also called ego needs), divided into internal needs, such as self-respect and sense of achievement, and external needs, such as status and recognition. Industries focused on this level include the sports industry and activity holidays.
• Self-actualisation, famously described by Maslow: “A musician must make music, an artist must paint, a poet must write, if he is to be ultimately happy. What a man can be, he must be. This need we may call self-actualisation.” This involves doing things such as going to art galleries, climbing mountains and writing novels. The theatre, cinema and music industries are all focused on this level. Self-actualisation is different from the other levels of need in at least one important respect. It is never finished, never fully satisfied. It is, as Shakespeare put it, “as if increase of appetite grows by what it feeds on”.

An individual’s position in the hierarchy is constantly shifting and any single act may satisfy needs at different levels. Thus having a drink at a bar with a friend may be satisfying both a thirst and a need for friendship (levels one and three). Single industries can be aimed at satisfying needs at different levels. For example, a hotel may provide food to satisfy level one, a nearby restaurant to satisfy level three, and special weekend tours of interesting sites to satisfy level five.

The hierarchy is not absolute. It is affected by the general environment in which the individual lives. The extent to which social needs are met in the workplace, for instance, varies according to culture. In Japan the corporate organisation is an important source of a man’s sense of belonging (although not of a woman’s); in the West it is much less so.

Peter Drucker took issue with the hierarchy of needs. He wrote:

What Maslow did not see is that a want changes in the act of being satisfied … as a want approaches satiety, its capacity to reward, and with it its power as an incentive, diminishes fast. But its capacity to deter, to create dissatisfaction, to act as a disincentive, rapidly increases.

One of Maslow’s early disciples was a Californian company called NLS (Non-Linear Systems). In the early 1960s it dismantled its assembly line and replaced it with production teams of six or seven workers in order to increase their motivation. Each team was responsible for the entire production process, and they worked in areas that they decorated according to their own taste. A host of other innovations (such as dispensing with time cards) revolutionised the company. Profits and productivity soared, but Maslow remained sceptical. He worried that his ideas were being too easily “taken as gospel truth, without any real examination of their reliability”.

Further reading
Maslow, A., “A Theory of Human Motivation”, Psychological Review, Vol. 50, 1943
Maslow, A., “Motivation and Personality”, Harper New York 1954; 3rd edn revised Frager, R. et al., Harper & Row, 1987
Hoffman, E., “The Right to be Human: a Biography of Abraham Maslow”, McGraw-Hill, 1999
Kaplan, A. (ed.), “Maslow on Management”, John Wiley & Sons, 1998

Source: Economist.com

Business Modelling

2009-11-11T11:03:00.011Z

The use of computer models to simulate different business activities and to assist in decision-making processes is almost as old as IBM itself. Most business modelling nowadays is based on widely available software that allows non-technical general managers to try out different options on (electronic) paper before deciding which one to follow. A retailer, for instance, might have a model to help it choose where to locate a new store. Based on data about the size of the catchment area, the local road networks, parking facilities, demographics and local competitors, the model would come up with the optimal location.

Consultants KPMG say that “to take major [business] decisions without first testing their consequences in a safe environment can be likened to training an airline pilot by having him fly a 747 without first having spent months in the simulator”.
Business modelling also helps to democratise decision-making when it is diffused throughout the organisation. In “Reengineering the Corporation”, Michael Hammer wrote:

When accessible data is combined with easy-to-use analysis and modelling tools, frontline workers—when properly trained—suddenly have sophisticated decision-making capabilities. Decisions can be made more quickly and problems resolved as soon as they crop up.

Coincidentally, large airlines are among the biggest users of sophisticated business models. They have to juggle a multitude of different fare structures and handle tricky things like stand-by tickets. Modelling such variables saves them millions of dollars a year.

Other common uses of business modelling include the following:

• Financial planning, with the help of spreadsheets. This quantifies the impact of a business decision on the balance sheet and the income statement.
• Forecasting. Analysing historical data and using it to predict future trends.
• Mapping processes in a visual representation of the resources required for a task and the steps to be taken to perform it.
• Data mining. Analysing vast quantities of data in order to dig out unpredictable relationships between variables.
• “Monte Carlo” simulation. Putting in random data to measure the impact of uncertainty on the outcome of a project.

The idea of using computer models to support decision-making was given a boost by a popular book published in 1990. “The Fifth Discipline”, written by MIT academic Peter Senge, argued that the ability to use models to experiment with corporate structure and behaviour would be a key skill in the future. Senge described computer simulation as “a tool for creating”.

Senge also promoted the idea of using modelling to create what he called “Microworlds”. These are simplified simulation models packaged as management games. They allow managers to “play” with an issue in safety rather than playing with it first in the real world.

Source: Economist.com

Core Competence

2009-11-11T11:03:00.010Z

The idea of core competence was introduced into management literature in 1990 by C.K. Prahalad and Gary Hamel. The two business academics wrote:

Core competencies are the collective learning in the organisation, especially how to co-ordinate diverse production skills and integrate multiple streams of technologies...core competence is communication, involvement and a deep commitment to working across organisational boundaries...core competence does not diminish with use. Unlike physical assets, which do deteriorate over time, competencies are enhanced as they are applied and shared.

Prahalad and Hamel went on to outline three tests to be applied to determine whether something is a core competence:
• First, a core competence provides potential access to a wide variety of markets.
• Second, a core competence makes a significant contribution to the perceived customer benefits of the end product.
• Third, a core competence is difficult for competitors to imitate because it is a complex harmonisation of individual technologies and production skills.

The two academics painted a picture of the corporation as a tree whose roots are its particular competencies. Out of these roots grow the organisation’s “core products” which, in turn, nourish a number of separate business units. Lastly, out of these business units come “end products”.

It was Prahalad and Hamel’s contention that if a company could “maintain world manufacturing dominance in core products”, it would “reserve the power to shape the evolution of end products”. Many of the examples on which they based their theories were large, successful Japanese companies. Before the end of the century, however, the performance of many of these companies had become distinctly less exemplary.
The core competence idea was useful to managers not only for focusing them on the essentials, but also for identifying those things that were not “at the core”. Why, management might ask, were these non-essential things being allowed to consume valuable resources?

Prahalad and Hamel succeeded in persuading managers to look at strategy as something fluid and imprecise. Their writing is spattered with references to things like “strategic intent”, “strategy as stretch and leverage”, “competitive space” and “expeditionary markets”. It was a switch from the more modular approach of Michael Porter (see article) and of the tradition of scientific management. Porter had turned strategic thinking back in the direction of Frederick Taylor; Prahalad and Hamel changed that direction by several degrees.

The drive to identify core competencies moved in line with the growing popularity of outsourcing. When companies were suddenly able to outsource almost any process that came under their corporate umbrella, they needed to know what lay in the hard core of activities that they were uniquely well qualified to carry out, the activities that it made no sense for them to hand over to a third party. In some cases the answer was very few.

The idea spread from core competencies to core everything—core processes, core businesses—everything that constituted the essence of what a company was and did. Management consultants encouraged companies to focus on their core as a source of untapped potential in a time of rapid change and unpredictability.
Chris Zook, a strategy consultant, has written a trilogy around the idea of getting more growth from core businesses. His second book, “Beyond the Core”, was subtitled “Expand Your Market Without Abandoning Your Roots”.

Further reading
Goddard, J., “The Architecture of Core Competence”, Business Strategy Review, Vol. 1, 1997
Prahalad, C.K. and Hamel, G., “The Core Competence of the Corporation”, Harvard Business Review, May–June 1990
Hamel, G. and Prahalad, C.K., “Competing for the Future”, Harvard Business School Press, 1994
Zook, C. with Allen, J., “Profit from the Core: Growth Strategy in an Era of Turbulence”, Harvard Business School Press, 2001
Zook, C., “Beyond the Core: Expand Your Market Without Abandoning Your Roots”, Harvard Business School Press, 2004

Source: Economist.com

GSP Consulting's New Blog

2009-10-24T12:25:00.006+01:00

This blog aims to provide sharp and incisive commentary on contemporary marketing issues among SME's, illuminating great practices and delivering real results.

Please share your experiences with us. Socialising insights and pearls of wisdom will benefit us all as marketers strive to make an impact on the organisations marketing performance.