Strategy: A Step by Step Approach to the Development and Presentation of World Class Business Strategy

STRATEGY A step-by-step approach to the development and presentation of world class business strategy

Mark Daniell

S TRATEGY

A step-by-step approach to the development and presentation of wor ld class business strategy Mark Daniell

© Mark Daniell 2004 All rights reserved. No reproduction, copy or transmission of this publication may be made without written permission. No paragraph of this publication may be reproduced, copied or transmitted save with written permission or in accordance with the provisions of the Copyright, Designs and Patents Act 1988, or under the terms of any licence permitting limited copying issued by the Copyright Licensing Agency, 90 Tottenham Court Road, London W1T 4LP. Any person who does any unauthorized act in relation to this publication may be liable to criminal prosecution and civil claims for damages. The author has asserted his right to be identified as the author of this work in accordance with the Copyright, Designs and Patents Act 1988. First published 2004 by PALGRAVE MACMILLAN Houndmills, Basingstoke, Hampshire RG21 6XS and 175 Fifth Avenue, New York, N.Y. 10010 Companies and representatives throughout the world PALGRAVE MACMILLAN is the global academic imprint of the Palgrave Macmillan division of St. Martin’s Press, LLC and of Palgrave Macmillan Ltd. Macmillan® is a registered trademark in the United States, United Kingdom and other countries. Palgrave is a registered trademark in the European Union and other countries. ISBN 1–4039–4288–9 This book is printed on paper suitable for recycling and made from fully managed and sustained forest sources. A catalogue record for this book is available from the British Library. Library of Congress Cataloging-in-Publication Data Daniell, Mark Haynes, 1955– Strategy : a step by step approach to the development and presentation of world class business strategy / Mark Haynes Daniell. p. cm. Includes bibliographical references and index. ISBN 1–4039–4288–9 (cloth) 1. Strategic planning. 2. Business planning. I. Title. HD30.28.D358 2004 658.4⬘012—dc22 10 9 13 12

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To Dr Karin Sixl-Daniell my wonderful wife and patient partner in life and on this project

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

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CONTENTS

Acknowledgements Statement of Purpose The Best of the Best What is Strategy? The Value of Strategy The Many Legacies of Andrew Carnegie STRATEGY Overview The Royal Richesse Example The Power of Seven

Book One

Chapter 1

Chapter 2

xi xiii xiii xiv xvi xvii xviii xix xx

Recovering the Lost Art of Strategy

1

More of the Same No Longer Enough A New Language of Strategy Leadership and the “Soft Side” of Strategy Unmet Expectations of Growth Stamping Out Satisfactory Underperformance The Discipline and Value of Clear Priorities Gaps in Traditional Models of Strategy Toward a Better Future

1 5 7 10 11 12 13 14

The Evolution of Business Strategy

15

The The The The The The The

16 20 22 24 26 28 29

3C’s Model 5 Forces Model 7S’s Model 3S’s “Single Shot Strategy” 8 Strategic Laws of Gravity 9S’s Model 7C’s Model

Principles of the New Paradigm

38

Globalization Complexity Dynamism Turbulence Acceleration

39 40 41 42 44

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Chapter 3

Chapter 4

Chapter 5

Chapter 6

Rationalization Obsolescence and Reinvention Connectivity Convergence Ephemeralization (Moving to the Virtual) Consolidation The Importance of a Systemic Perspective

45 46 48 49 50 51 56

Setting Priorities, Rethinking Risk

58

The 80/20 Rule Setting Priorities Preparation—A Practical Approach The Line of Demarcation Risk and Opportunity Risk Compounded A Broader Scientific View

59 59 60 64 66 69 72

Mastering the Growth Challenge

74

Bridging the Growth Gap The 7C’s Growth Framework Constant Attention to Opportunity and Creativity Understanding and Exploiting Discontinuity

74 75 79 79

Integrating Strategy and Responsibility

81

The Global Compact and Codes of Conduct Alternative Code of Corporate Conduct The Shining Star of Starbucks How and What Business Leaders can Contribute An Element of Core Strategy A Clarion Call for Help

90 92 93 95 101 105

An Alternative Model of Organization

107

A Network Model The Task Force Fast Track to Success The Network Leader as Modern Renaissance Man (or Woman) The Orpheus Process Unspoken Harmony of Excellence The Obsolete Narcissist The “Even Harder” Stuff Beliefs, Attitudes, Behaviors Winners and Losers in the Search for Strategic Excellence Four Organizational Characteristics of Winners and Losers “Guilty on All Four Counts” Creativity, Intuition, and Insight A Continuous Culture of Creativity A Balanced Approach Organizational Creativity and Intellectual Capital 3M’s Ten Commandments of Creativity Back to Basics

107 109 110 111 112 114 115 115 117 117 118 120 121 125 126 127 128 130

Contents Chapter 7

A New Approach to Leadership Of Captains and Stewards Principle 1. Empower the Vision and the STRATEGY Principle 2. Live the Values—Demonstrate Character Through Action Principle 3. Engage and Motivate Individuals—Reach the Heart of Your Organization Principle 4. Go Beyond the Conventional—Set New Standards of Excellence Principle 5. Lead from the Front—Master the Visible Aspect of Leadership Principle 6. Lead from the Center—Manage Formal and Informal Networks Principle 7. Get the Job Done—Move Seamlessly from Understanding to Execution Search for a Higher Purpose Recovering the Lost Art of Strategy

Book Two

Chapter 1

132 133 134 136 137 138 140 141 142 143

145

Three Interrelated Phases People at the Heart of Strategy Focus and Brevity New Elements of Strategy The Seven Differentiating Characteristics of STRATEGY STRATEGY and the Spirit of Transformation

146 148 148 149 150 157

Shared Elements of World Class Strategy

The Process of STRATEGY Principle 1. Ensure an Effective Process Principle 2. Ensure an Inclusive Process—Break Down the Hierarchy Principle 3. Set Long-term Objectives for Individuals and the Group Principle 4. Test the Logic and the Process Principle 5. Balance Strategic Planning with Strategic Flexibility Principle 6. Search for Nonlinearity and Creative Breakthroughs Principle 7. Embrace Risk, Action, and the Acceptance of Failure

Chapter 3

132

Developing Your Own World Class Strategy

The Rights of STRATEGY The Winner’s Circle The Model in Action The Man from Del Monte The Olam Story Gucci—A Modern Italian Renaissance The Cisco Rebound Shared Lessons

Chapter 2

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Content Phase I: Diagnosis 1.1. Point of Departure

159 159 160 161 161 166 168 171 173

174 176 177 179 180 181 182 183

189 191

Contents

x 1.2. 1.3. 1.4. 1.5. 1.6. 1.7.

Chapter 4

Portfolio Perspective Profit Pool Perspective Competitive Perspective Business Dynamics Organizational Assessment Range of Options

195 202 204 208 217 221

Content Phase II: Design

225

II.1. II.2. II.3. II.4. II.5. II.6. II.7.

Chapter 5

The Promise:Vision/Mission/Values Levers on Performance and Value Priorities and Resource Allocation Strategic Option Selection New Organizational Approach Risk Management Target Results

226 234 238 240 245 251 252

Content Phase III: Implementation

257

III.1. III.2. III.3. III.4. III.5. III.6. III.7.

Chapter 6

Imperatives, Actions, Responsibilities Tactics and Timetable Implementation Team Alignment and Integration Program Control Full Value Capture Leadership and Motivation

The Executive Summary Long and Short Versions In the Beginning is the End—Sometimes Structure of the Summary

Chapter 7

Getting Started on Your Own STRATEGY Downloading the Presentation Templates Getting Started Discretion the Better Part of Value Best Wishes on Your Own STRATEGY Exercise

Index

258 260 264 268 271 274 277

281 281 282 284

286 286 287 291 295 296

ACKNOWLEDGEMENTS

In putting together this book after a quarter of a century in the business world, I have been able to draw from a great accumulation of ideas, experiences, and guidance received over many years in a wide variety of circumstances. I would like to acknowledge and thank all of those who have shaped that business experience and thus contributed to the content of this book. In particular, while privileged to have spent time in more than one professional firm and with many fascinating clients, I would like to highlight the unique importance of my partners and colleagues at Bain & Company, whose dedication to excellence in strategy and the creation of enduring value with clients stands as a testament to what good strategy can do for almost any large company. Peter Drucker, CK Prahalad, Chris Zook, Fred Reichheld, Peter Senge and Michael Porter deserve mention as those authors who have made the greatest contributions to the literature on strategy which were relevant to the creation of the approach developed in these pages. I would also like to thank John Wiley & Sons, the publishers of my earlier book World of Risk: Next Generation Strategy for a Volatile Era for their permission to draw selectively from that work on societal challenges. In addition, a number of teachers and professors at the The Phillips Exeter Academy, Amherst College, Oxford University, and the graduate schools of law and business of Harvard University have provided views which have profoundly influenced the content and style of this book. I am indebted to all of these great sources of ideas, examples, energy, and inspiration. Finally, I would like to thank the CEOs and business leaders mentioned in these pages, for they have all contributed substantially to my understanding and appreciation of strategy in action.

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STATEMENT OF PURPOSE

Creating, communicating, and implementing strategy is one of the most important, exciting, and challenging activities you undertake as a leader and participant in a business enterprise. STRATEGY, as the specific program recommended here will be denoted, is designed to help you through the most critical stages of strategy on a step-by-step basis, drawing on the best proven approach to strategy as practised at the highest levels of business around the world. There are many weighty and worthy books on business strategy containing thousands of pages of examples, hundreds of complex formulae, and countless ideas both good and bad, but not one of these tomes to date has provided a comprehensive framework or practical approach which is of use to most business professionals. STRATEGY, on the other hand, provides exactly this practical guide to the development and presentation of strategy, describing in precise detail what you need to do to ensure that your business is on the best possible pathway to future success and prosperity. STRATEGY will set out in detail the process, structure, and content of world class strategy. By taking you through a step-by-step approach to the formulation and implementation of your own strategy, STRATEGY will ensure that your own plans are complete and consistent with the highest standards in the art and science of world class business strategy. By breaking down the strategic process into three interrelated steps of diagnosis, design, and implementation, and clarifying the seven constituent elements in each, the user of the STRATEGY approach will be able to build his or her own strategy from the ground up, integrating best practice process and content for the most powerful result. The sole purpose of STRATEGY is to allow you to set, communicate, and execute the most thoughtful and most effective strategy for your business.

The Best of the Best The STRATEGY approach will take into account external and internal perspectives on your business, and will incorporate data and ideas on past, present, and future events, trends, and influences. It will create an integrated strategic architecture for your business plans which extends from a clear and xiii

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overarching vision to the details of timing and responsibilities for successful implementation of your plans. It draws on the best of the best at the highest levels of the international business world, where trial and error over many years have allowed a clear framework of understanding and an effective approach to strategy to emerge from amongst the different models being tried and tested in different markets and businesses around the world. In many businesses, strategy has become a lost art. The need to respond to operating demands, the pressures to meet annual targets, the heavy overlay of budgeting and control systems and, ironically, even well-worn approaches to strategy itself can be costly obstacles to the setting and achievement of a practical plan of action which will realize the best possible results for your business. Part of the reason the strategic approach falls short of full potential in many companies is due to internal factors related to inherent limitations in the company’s strategy programs. Yet another part of the problem of effective strategy development and implementation can lie in the lack of a clear and simple guide on how to do strategy—a lack of understanding on how to proceed on a step-by-step basis to think about what is relevant and then act to benefit from the insights generated. In addition, even where good strategies have been crafted, their authors often struggle to present their plans in a form which can be readily shared with their colleagues or approved by their bosses. STRATEGY addresses both of these problems head on, providing an integrated approach to the development and presentation of breakthrough strategies in a clear, simple, and straightforward manner. Drawing on trillions of dollars of accumulated experience, this approach has been well proven at the highest levels of international business and is now available for your own direct application. In this book you will find useful summaries of many past strategic models and an opportunity to understand their value in the context of your own strategies. You will find explanations of some of the major themes shaping the world of strategy today. You will also find a clear and practical guide to help you to set and achieve your own unique world class strategy.

What is Strategy? There are many definitions of strategy which can be found in dictionaries, encyclopediae and books on management. Having spent over twenty years in one of the world’s leading strategic consulting firms and benefited from additional experience as a director of an international investment bank, as a startup entrepreneur, and as president of a publicly listed company, the most useful definition of business strategy derived from that experience is quite simple: Strategy is the art and science of informed action to achieve a specific vision, an overarching objective or a higher purpose for a business enterprise.

Statement of Purpose Strategy is about creating sustainable and valuable differences for your business in the real marketplace. Strategy, while always benefiting from the discipline of formulating well-articulated strategic plans, is really all about action and results, not about detailed documents and glossy presentations. Strategy is about raising and allocating resources, setting priorities, directing organizations, and demonstrating through decisive behavior what will be done—and what will not—in the pursuit of a larger vision, goal, mission, or high level set of objectives. Strategy is as much about leadership, communication, and implementation as it is about diagnosis and design of plans of action. General Carl von Clausewitz, one of the greatest of military strategists, described strategy as a process of planning and action to achieve a vision, or the object, of an overall war. He defined strategy as “… the art of the employment of battles as a means to gain the object of war. In other words strategy forms the plan of the war, maps out the proposed course of the different campaigns which compose the war, and regulates the battles to be fought in each.” As you set your own strategic plan and pursue it through action, it is important to remember that a properly constituted strategy will define which battles are to be fought and will set out a plan to win in those areas where you choose to compete. That same strategy will also lead you to decide what not to do— which areas of competition are beyond your reach or remote from the priorities which will enable you to achieve your overall vision and win your own corporate war. Informed by strategy, businesses must focus on a correct and limited set of priorities. Many wars may have been lost by generals too eager to do battle on too many fronts at the same time. By pursuing your overall vision through an effective strategy, you will be able to concentrate your resources where they will do the best for your business, allowing you to achieve your vision and enabling you to reap the rewards of success on the highly competitive battlegrounds of modern business. Practitioners of the art and science of strategy thus need to be constantly mindful of the imperative to be practical as well as thoughtful, realistic as well as analytical, and effective as well as articulate in their diagnosis, design, and implementation of strategy. Only effective action and better results—victories in the battleground for profit and superior competitive performance—can justify the effort demanded by a full strategic approach. Theory, good intentions, and even well-thought-out strategic designs are never enough. Ideas need to be implemented. As John Gardner stated: In this era of complexity, great enterprises are designed and carried forward by the kind of man who has a vision of what might be and a practical strategy for getting there, a man with an idea in his head and a monkey wrench in his hand.

These words can provide a cogent summary of the spirit and value that can be provided by adopting and implementing a STRATEGY program in your own great enterprise.

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The Value of Strategy This STRATEGY approach will provide a valuable new model of strategy and will set out a clear and simple approach to the diagnosis, design, and implementation of a unique business strategy for your own enterprise. This model and approach are relevant for all owners, managers, and planners of modern businesses operating in a competitive environment. Based on a proven approach to strategy derived from the winning strategies of some of the world’s most successful corporations, this new model of STRATEGY can lead to far better operating results for your business and many more tangible rewards for your stakeholders. Better strategy can capture many more opportunities for improvement, can help to achieve new excellence in operations, can help to reduce risk, and can help to realize new and more aspirational visions for the future. Better strategy today can also inspire your colleagues and strengthen your organization’s capabilities to respond successfully to future challenges, as well as to focus better on the present day issues and programs of change. In the process of setting strategy, it is essential to extract and apply the lessons of the past, and of the future, in a systematic manner. While there always has to be room for creative inspiration and unstructured conceptual breakthrough thinking, the analysis, design, and execution phases of strategy need to be pursued with the applied disciplines of science as well as the inspiration of an artistic and creative element of unencumbered thought. In this book, the approach described is very clear and sequential, allowing you to start at the beginning of diagnosis and finish with the successful implementation and full value capture of your own unique strategic plan. Along the way there are unlimited possibilities to improve understanding, renew your sense of purpose, create and pursue new opportunities, and reset the direction and priorities of your business. The whole of STRATEGY is worth much more than the sum of the parts and, to get the maximum benefit from your endeavors, it is recommended that you proceed systematically through all of the phases of STRATEGY to ensure that your own effort is as focused, comprehensive, thoughtful, aligned, and effective as possible. There are common themes and useful frameworks that run through STRATEGY which can be applied at multiple points along the way to create the highest return on your investment in a STRATEGY program. The process of prioritization, the 7C’s framework, an application of the principles of dynamic systems and a more scientific understanding of risk and opportunity are concepts that can lead to a more creative approach to your own business challenges at many critical points in the STRATEGY process. You should feel free to refer to these helpful constructs and any insights they generate at any time as you work through this material.

Statement of Purpose At each step in the overall process, you and your team will be able to demonstrate a constant culture of excellence which will build on itself in the most positive manner. By maximizing the quality of your input at each stage of your own STRATEGY program, you will add to the compounding value of a best practice approach to strategy. If you are able to improve your performance at each stage of the process, the overall impact will exert a powerful uplifting effect on your whole strategy, multiplying the benefits as you move with purpose from step to step as described in these pages. There is an enormous benefit in the large changes which can result from a STRATEGY program. There is also a great deal to be gained from the compounding effect of many small improvements. As you work through the STRATEGY material for your own business, it is essential to capture every opportunity for advantage and to ensure that the culture of your business does not let opportunities for improvement slip away. The value of your enterprise may be as much enhanced by an accumulation of many small positive changes as by a few large ones. Observations on the Darwinian survival of species support the same conclusion. Developed advantages such as an ability to stand upright for longer periods of time to spot potential enemies and locate alternative sources of nourishment, or the ability to consume a slightly greater variety of food types have been proven to contribute to a three to four percent greater likelihood of survival for individuals within a defined species or social group. That small advantage, allowing a slightly greater population birth and survival rate, multiplied out over generations and compounding over time, has determined the difference between survival and extinction of entire species in the early periods of man’s development. To use a simple example to illustrate the point, a company which improves its cost position by 2 percent per year more than its leading competitor over a 10-year period will have, at the end of the period, an insurmountable cost advantage of 18 percent. On the revenue side, a 3 percent per year increase above competition would add up to a 34 percent advantage over the same period. A combination of excellence in cost and revenue management can create great rewards for those who master both elements of business profitability.

The Many Legacies of Andrew Carnegie Many successful entrepreneurs have made great fortunes by exploiting this cumulative approach to excellence in strategy and operations. Andrew Carnegie, for example, was so far ahead of his rivals, technologically and as an efficient steel process manager, that he was able quietly to haul away their slag and process it into saleable steel for his own customers, thus adding incrementally to his profitable revenues.

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On the cost side, the canny Scotsman was famous for “… throwing around nickels as if they were manhole covers.” The net effect of incremental revenue enhancement at every turn and tight control of costs was the accumulation of one of the greatest entrepreneurial fortunes in American history. Despite his intensely commercial approach to business, Carnegie eventually became one of the great heroes of corporate philanthropy as well, espousing the value of contributing to the world community and acting on those values with great generosity. The global network of free lending libraries bearing his name and the Carnegie Endowment for International Peace are but two of the enduring monuments to his commitment to caring values. As captured in the approach to business set out in this book, Carnegie’s greater values were respected without dilution of an iron-willed focus on the value of successful business strategy and adherence to the virtues of continuous operating excellence. An integrated approach which embraces the highest standards of excellence in all aspects of strategy—competition, costs, revenues, and responsibility— is presented in the model of STRATEGY which is set out here for your own application.

STRATEGY Overview The overall approach to strategy set out here is divided into two related sections. In Book One, seven chapters are presented for your review and contemplation. These particular chapters are chosen to reflect the range of ideas which can influence your strategy, from organizational to ethical, and provide examples of state of the art thinking in key areas of strategy formulation. From each area may come useful thoughts, trenchant observations and current insights which can form the basis of informed action. These ideas can help you to draw out some of the deeper observations, insights, and implications that can give you a fresh perspective on the true full potential of your business. In these pages you will find examples of different approaches which may be relevant to the immediate challenges facing all businesses. You may also find in these pages the seeds of new and creative thinking about strategy which arise only in relation to your own business enterprise. The purpose of including these more general sections on a range of strategic topics is to keep your thinking fresh and to avoid a mechanistic application of formats and models in situations which could benefit from a new, nontraditional approach. This objective of fresh and creative thinking could also be advanced through the review or inclusion of other material not prescribed by STRATEGY within your own process. By all means include in your review and strategy any and all outside material you deem useful. Your STRATEGY can only benefit from the additional contribution. In Book Two, we will review the integrated nature of strategic process and content, and set out a step-by-step approach to the development of a winning

Statement of Purpose strategy. The best proven approach to develop and implement world class strategy is set out in detail, with a clear example provided throughout each stage of that process. The three-stage approach—diagnosis, design, and implementation—and reference to a “7C’s plus” model has proven to be extremely valuable in defining strategy at the highest levels of global business. This structured approach is now available to you as well to develop and apply in your own business world. In order to capture the full potential of your business, it is advised to read through both the first and second books of STRATEGY before starting on your own exercise. By mastering all of the elements addressed in the two books, you will have in hand the tools you need to design and implement the best strategy for your business. The comprehensive and professional presentation that emerges from Book Two can be used to inform an audience at any level of your organization. By incorporating all of your thoughts and proposed actions into one coherent strategic architecture, you too will be able to build and communicate a business success story of extraordinary proportion.

The Royal Richesse Example In order to provide greater clarity to the content of a STRATEGY program, each step of the three phases is clearly illustrated by the use of a practical example from the entirely fictitious Royal Richesse Watch Company of Switzerland. This example has been chosen since the watch industry is one with which most of us are familiar, and the problems facing the fictitious Royal Richesse managers are common to many real companies operating in similarly difficult and changing competitive environments. Although the business challenges as presented are realistic, any resemblance in this example to any real company or individual, alive or dead, is entirely coincidental. There is no universal example which can illustrate all aspects of successful strategy, and there are inherent limitations in any single example. In this case, it is worth noting that the nature of the industry selected, the luxury watch market, is less sensitive to relative manufacturing cost position than most other industries. As a result, you may wish to increase the amount of material in your own STRATEGY exercise dedicated to the analysis and management of costs. Second, the example selected is a private company considering a primary equity offering in the future. If your own business is already publicly quoted, you will want to include a chart on share price, analysts’ comments, and other perspectives which will shed light on the public market valuation of your business. Third, the role of technology may be of less importance in the example selected than it is to your own business. If so, extra material on the application of technology could be very much on point. Finally, the luxury watch company example developed is of

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a company which is deficient in many areas of customer understanding. Rectifying this weakness is one of the many challenges they face. There may be other differences worth highlighting to your team as you set out on your STRATEGY exercise to ensure that the material you select captures the elements necessary to address the full set of issues particular to your own situation.

The Power of Seven Each component part of the STRATEGY approach is broken down into a set of easy-to-use lists of steps, elements, principles, practical checklists and prompts. In order to provide consistency and a convenient format for communication, much of the conceptual content of this book is set out in lists of seven items. There are seven sub-steps in each of the three phases of STRATEGY, seven principles of leadership, seven testing questions on strategy, seven leading models of traditional strategy and a preferred 7C’s model (plus results) provided as a framework for business definition, strategy setting, and generation of related growth initiatives. The purpose of providing the insights of STRATEGY in such a consistent set of seven-step formats is to reduce the complexity of competing constructs and allow your strategic thinking to proceed and develop without the distraction of too many differing formats and inconsistent charts, graphics, formats, and frameworks. It has been pointed out that there is significance in the number seven beyond the simplicity of approach provided to the STRATEGY model. In addition to Steven Covey’s famed sets of seven principles, seven has been seen to be a special number for many centuries. In addition to the seven maritime seas, there are seven notes in a musical scale, seven colors in a rainbow, seven deadly sins (but also a seventh heaven and seven virtues), a dance of the seven veils, seven wonders of the world (ancient and modern), seven primary chakras or energy centers in the human body, and seven rays or energy planes in the occult system of wisdom. In the Book of Revelations in the Christian Bible there are seven seals, seven angels with seven trumpets, seven letters to the seven churches of the East, seven spirits before the throne, and a myriad of other sevens appearing. I leave a determination of the greater significance of the number seven to others far more knowledgeable than I in the areas set out above, and merely state my hopes that the harmonization of formats and approaches throughout this book can lead to the most beneficial of results for you in your business endeavors.

BOOK ONE Recovering the Lost Art of Strategy It is time to take a new approach to strategy. The business environment and the basic paradigm within which all businesses now operate have changed beyond measure in almost every dimension. Old models and status quo methods no longer work in a new world of constant turbulence, rapidly evolving global orders of competition, and accelerating market change. Customers have become more demanding. Suppliers and distributors consolidate and find new owners. New competitors emerge. Old competitors grow, evolve, merge, or disappear. Information flows through new channels and new media at the speed of light 24 hours a day, 7 days a week. Computers and the systems that connect them rapidly redefine the way we work, purchase, communicate, and compete. Global markets open and trigger even more seismic economic events. The old competitive order makes way for the new in a roiling tidal wave of dramatic change, rapid evolution, and fundamental transformation. With these vast changes taking place around us at an astonishing rate, the economy and the businesses that compete in it are redefining the needs of strategy at the most fundamental level. These changes are placing ever higher demands on the individuals who are responsible for the strategies and operations of businesses in today’s dynamic markets.

More of the Same no Longer Enough Many strategies have not kept up with the changing demands of this new paradigm. Some celebrity CEOs, once the darlings of TV talk shows and highly sought after speakers on the business conference circuit, are now struggling to 1

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STRATEGY keep their jobs, or else have already moved on from the thrones they once occupied. Study after study confirms that the main source of the high leadership turnover is failure to design and implement effective strategy, failure to achieve the results that demanding markets and boards have grown to expect, and failure to achieve the necessary return from assets employed in the unceasing battles for profit and competitive advantage. Businesses have always faced the classic challenges for performance, growth, and excellence in a world which seemed each year to become more crowded, more complex, and more competitive than ever before. At the same time, businesses are now subject to new pressures in adapting to a new set of massive changes, trends, and dynamics affecting businesses from within and without. Another reason to review the role of strategy today is the fact that so many companies have failed to adapt fully to the new paradigm or implement needed change in the face of a new order of competition. As a result, many are underperforming significantly when compared to their true full potential. Not only failing to achieve full potential, the vast majority of companies fail even to achieve their own cost of capital year after year over a decade. According to an acerbic analyst quoted in the Lex Column of London’s Financial Times, even Federal Express, a widely praised business success story, had not achieved an acceptable return on capital. According to the respected column, “On CSFB’s estimates, Fedex’s return on invested capital has not exceeded its cost of capital in living memory.” Clearly, there is an opportunity to do better, to set and achieve more ambitious targets for our businesses and for ourselves. Following great changes in the business environment, the demands placed on business strategy, and on business strategists, have only increased. Getting the right strategy in place and executing it well continues to create advantage and reward in every market around the world. Yet strategic thinking has often lagged the pace of change, leaving behind many failed plans, many outdated ideas, and many underperforming companies. In reviewing the causes and symptoms of failed strategies, it is clear that there are seven missing elements which have consistently weakened many past approaches.

Seven Missing Elements of Traditional Strategy Comprehensive nature Flexibility Creativity Integration Motivation Responsibility Effectiveness

Book One: Recovering the Lost Art of Strategy In order to respond properly to new challenges, it is necessary to identify and address all seven missing elements of traditional strategy. 1. Comprehensive nature of change required for effective strategy. In this dynamic new paradigm, pursuing a limited or outdated approach is no longer enough. Strategies that merely replicate past results or attempt to recreate yesterday’s successes are bound to miss out on valuable opportunities in a changing competitive landscape. They equally miss out on the chance to reduce new business risks before they ripen into expensive and avoidable business catastrophes. The complexity and pressure placed on businesses have now reshaped the process and content of successful strategy. Priorities need to be more clearly articulated in a world of seemingly unending choice. Real, tangible, and sustainable differentiation is essential in an ever more crowded competitive arena. “Me too” strategies are bound to fail in highly competitive markets which prize creativity and value difference. A new foundation framework of understanding needs to be built. Planning and cycle response times need to be shorter. The organizations of tomorrow may well have fewer, better people in a more technologically enabled paradigm. Yet, at the same time, a broader set of individuals within the organization, and perhaps even a broader set of organizations, may need to be involved in setting and implementing strategy. Clear and simple measures of success need to be established. The potential for technology application and the business opportunities it presents need to be thoroughly integrated into strategic diagnosis, design, and implementation. New organizational models that cut across or break down established hierarchies need to be tested and adopted where appropriate to pursue a new vision or respond to an unprecedented set of challenges and imperatives. The approach to strategy set out here addresses all of the changing needs of strategy in a modern business, addressing those elements which provide the essential building blocks of a comprehensive strategy for your own enterprise. This approach has not ignored the lessons of the past. Each element of the STRATEGY approach draws on the best of the past, yet adds a more forward-thinking element to take into account the rules of the future as well. 2. Flexibility demanded by a rapidly changing environment. With rapid changes in the environment becoming a constant, with an inexorable globalization of economies and business systems, and with changing pressures on corporate and individual capabilities, the demands placed on strategy now require far greater flexibility at all stages of the process. At the same time that it is important to pursue a path of high quality, structured analysis and inclusive procedures, it is also essential to avoid prescribing every detail of a strategy which will by necessity be played out over time. Creativity, flexibility, and success often go hand in hand. There needs to be room for creative evolution and adjustment in your strategy, to have enough clear space in your approach to respond to unexpected external and internal

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STRATEGY events and actions. Strategies are like living things and need to be able to adapt to survive and prosper. They also need to have enough flexibility and open space to evolve, grow, and shift over time. We need only to remind ourselves of a few recently discarded strategic “truths” to see the velocity of change and competitive value of clear forward thinking and rapid adaptive response. Y2K was going to cause global computer systems to implode. The new economy would swallow up the old. Technology and telecom stocks would dominate capital markets. The stand-alone Internet business model would reign supreme. Diehard adherents to these rapidly outdated ideas and passing trends soon found themselves embracing the proverbial anchor when these concepts drove business strategy and investment policies after their true value was revealed. The rise and fall of these concepts shows how fast we need to move to respond to change, how difficult it is to manage in the unknown, and how often we now must make important decisions in times of great uncertainty. 3. Creativity essential for maximum advantage. Creative breakthrough thinking needs to be encouraged throughout the strategy process. Leadership needs to be more inspirational and leaders need to encourage individuals to give their very best, even if that means challenging deeply held beliefs and changing long-established practices. Visions need to be set and maintained, but space also needs to be created for adaptation, evolution, and a constant rejuvenation of supportive activities along the way. Initiatives need to be set and priorities confirmed, but only in such a way as to allow for the inspirational and creative processes to turbocharge performance when new risks or opportunities for positive change arise. As we face the challenge of setting and achieving more ambitious strategic goals, we must not only master the lessons of the past, but we must also pick up and learn to use new tools and weapons in the battle for competitive advantage. From the lessons of the past we can shape and forge the tools of the future—tools that will sharpen our thinking, refresh our creativity, and lead us toward the definition of more exciting strategies and the achievement of more satisfying results. As we work through the stages of analysis, elaboration, and execution of strategy, it is essential to challenge ourselves constantly with new thoughts, new ways of seeing things, and new ways of pursuing our business visions. There is no longer a single valid perspective on complex events, nor any single fixed outcome in the search for more effective strategies and better corporate results. No renaissance is built on a foundation of worn out ideas, nor succeeds solely through the persistent application of long-standing approaches and attitudes. True renaissance results can only be achieved with a whole new approach to strategy and an open mind to the real potential for creative and productive change in a constantly evolving business paradigm.

Book One: Recovering the Lost Art of Strategy A New Language of Strategy One of the common reasons for the systematic underperformance of the strategy process in attempting to set a business or corporation on a new path is a legacy of old strategies and strategic approaches that hold back the forces for needed change. It may even be worth reviewing the very language that has been used as well as the approach adopted in the past. New language can come from a new approach or from a richer set of concepts underlying a better understanding of strategy. Such terms as “industry profit pool” and “business process portfolio” reflect new and deeper concepts of understanding. The creative titles adopted by business leaders and pioneers today also reflect the value of fresh and creative conceptual thinking. Bill Gates is now the Chairman and Chief Software Architect at Microsoft. His counterpart at Infosys, Narayana Murthy, is Chairman and Chief Mentor. Some changes in strategic language can be initiated by a desire to discard outdated approaches that can blur issues requiring far greater clarity. Some companies even deliberately avoid the use of the word profit, favoring the use of internal terms such as “intermediate contribution” or “notional result” that are never tied back to actual reported profits. This kind of confusing language muddles the profit motive, scrambles the understanding of systemic economics and takes the eye of the group off the true sources of profitability. Restoring the real edge of analysis, action and economic performance may require the adoption of new and more meaningful terms and ratios which can accurately measure a company’s true financial performance. On the other hand, the creation of a new strategic vocabulary within an organization can help to advance the strategic development of a business in many ways. The management team in one large European company found that its accounts had been inflated in the past by aggressive accounting policies which, while legal, did not give the market an accurate reflection of current business performance. As a result, suspicious investors marked the value of the business down to a third of its actual value. In addition, the dedicated management team was constantly pushing the business beyond reasonable limits to achieve expectations created by the accounting policies chosen many years before. The result was an exhausted and stressed set of managers constantly operating on the verge of burnout. In order to fix the problem, the Chairman announced that he was “rebasing” the accounts—an invented term employed in the situation which removed the internal stigma from writing off any and all assets which were no longer relevant for the pursuit of his new vision. He also set out a more reasonable set of accounting procedures for the future, changing the company’s financial year, restating the historic accounts and taking a large one-time write down on the balance sheet. Within days of his announcement the market had

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STRATEGY begun to re-rate the business, with the shares rising 20 percent in less than a week on renewed faith in the business and in the more transparent approach adopted by the management team. The management team, no longer tied to unrealistic goals, were able to turn their attention to the creation of future value and contributed to a dramatic turnaround success story. 4. Necessary integration of process and content. Perhaps one of the most important reasons that the traditional tools of strategy have lost their cutting edge is that management too often severs process and content, allowing strategies to be set through processes or using models and forms that have worn dull over time. By reintegrating the two in a better approach to strategy, managers will be able to overcome many of the limitations of the past. Discarding old, static, or linear approaches can free our minds to see from different perspectives—to understand the higher order flow of events better, to see trends and risks we did not see before, and to anticipate change—and then to move faster, smarter, and more profitably than our competitors to position ourselves for tomorrow’s opportunities. Given the long list of challenges management teams must overcome to achieve excellence in strategy and performance today, it would be easy for even the best-intentioned and most capable individuals to feel occasionally overwhelmed. But good leaders will be able to ensure that a fully integrated approach will surface all issues in a manner which can lead to their resolution. The final output of STRATEGY leads to a full set of positive individual actions, all aligned behind a single, shared vision and fully supporting an agreed strategic plan. This outcome, only possible through an approach which integrates process and content, can add enormously to the force and spirit for profitable change across an entire business. 5. Missing motivation—the necessary human dimension to strategy. Another element of weakness in past models of strategy and their application has been insufficient attention paid to the human aspect of a business. As a result, both process and content often failed to address the aspirational and motivational aspects of strategy. By neglecting the human emotions and personalities that lie at the heart of every business, many strategies failed to create the energy for change which could make all the difference in a world of intense competition, in a world where all competitors need to seek out and exploit every possible source of competitive advantage. Given the need for expert and flexible application of strategy, the skills and capabilities of the most talented individuals and organizations will move even more visibly to the center stage of strategy. It has always been demeaning to say “people are our greatest asset.” People are much more than that. Only strategies that take into account a fuller human dimension of the individuals making up an organization will be able to realize the full strategic

Book One: Recovering the Lost Art of Strategy potential of those individuals and of the whole enterprise. Investing to involve, motivate, and instill a sense of purpose and accomplishment in each individual involved, and of the entire organization, are essential elements in STRATEGY. Understanding the true beliefs, attitudes, aspirations and capabilities of his or her colleagues, and responding properly, may be the most positive contribution a leader can make to a business. As we design our organizational structures, make staffing decisions, and clarify necessary operating principles, we are making some of the most important strategic decisions possible. Inextricably intertwined with the elements of values, culture, compensation, and leadership style, these decisions can determine how successful your strategy can be—or will not be—independent of how much you have invested in comprehensive diagnosis or thorough implementation planning.

Leadership and the “Soft Side” of Strategy To cite the successful Asian entrepreneur and statesman Tony Chew Leong Chee, “you don’t employ people any more, you need to engage them.” In a world of easy availability of information, more educated staff and industry colleagues, more demanding customers, more complex technology, more public scrutiny, more global competition, and more critical investors, the role of leadership is under constant pressure to evolve and adapt to the demands of internal participants of an enterprise as well as the traditional external stakeholders of the business. Leadership has never been easy to dissect, explain, and prescribe. It is in some ways as undefinable as it is important. Yet, a proper approach to strategy, and a full and sensitive understanding of the element of leadership in designing and executing strategy, can help to illuminate the pathway forward to a leadership model to suit your business ambitions. Perhaps the most difficult internal system to analyze and understand surrounds the soft issues captured in the human area of organizational behavior and capability. People issues—such as hiring and firing, retention, job specification, capability building, knowledge management, teamwork, culture, skills development, organization, performance measurements, incentives, motivation, recognition, and reward—are now clearly resident at the heart of modern strategy. As a business leader, you now need to address the integrated issues of strategy, structure, style, capabilities, operating principles, incentives, and culture, and all at the same time! In each organization an explicit approach needs to assess and develop individual and team skills, address the quality of individuals, prepare individuals and teams to operate effectively together, and to interact with other organizations. These organizations can now include customers,

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STRATEGY suppliers, regulators, and community leaders as well as colleagues, staff members of acquired companies, partners in alliances and even competitors seeking to create new win/win cooperations and combinations in selected areas. It is easy to aspire to the creation of a highly capable organization characterized by widely acknowledged values, populated by outstanding people with industry leading skills, and capable of rapid and effective decision-making. Most companies, however, struggle with a diffuse organization which is internally focused, slow to adopt change, and led by a corporate center that often adds little value to the independent business entities. A precise plan to address these real and sensitive issues, and to achieve better performance, is a critical element in STRATEGY. Addressing the needs of staffing, structuring, training, developing, directing, and running an organization effectively may be of the highest priority in strategy, yet the tendency of too many senior managers is to gloss over the human challenges of business. In so doing, they provide a major disservice to employees, customers, and shareholders. Only by addressing issues of organizational weakness directly and as an integral part of your STRATEGY can your business develop the full strength and commitment necessary to achieve ambitious goals. Calling on deeper resources and drawing out greater creativity from an organization is particularly challenging where an organization is worn out from a long series of mergers, crises, or change programs. Whether due to the exertions to achieve growth in the past, the efforts to respond to recessions or the stresses related to mergers or downsizing, the employees of many companies today are tired of the increasing demands placed on them, and their families, by heavy business obligations. Greater travel, later nights, less job security, shorter vacations, and ever more projects seem to be the order of the day from Chairman and CEO down through all levels of the organization in many companies. Any strategy that requires greater commitment from this type of worn out organization will need to take into account this fatigue factor and address all opportunities to increase the energy and motivation available to support a new and more demanding program of change. Often, corporate fatigue results from excessive stress over an extended period of time, not solely longer hours worked. It is useful to remember that stress is most often caused by what we don’t do—the pressure of unfulfilled obligations—and low job satisfaction rather than the greater commitment of hours and energy required to achieve an ambitious, shared goal. In many cases, a clarification of the purpose of strategy, a prioritization of activity, and an open process of communication and recognition of achievement can help to reduce organizational stress and fatigue. In defining and setting a proper strategy, the leaders of a business enterprise will have the opportunity to

Book One: Recovering the Lost Art of Strategy re-energize their businesses and re-motivate the people whose individual best efforts will be required to achieve the full potential of the collective enterprise. 6. Responsibility not integrated into core strategy. Failure to act in a responsible manner, or to think through the best approach to corporate social responsibility and build it into a core strategy, can be a costly mistake. Unnecessary risks can ripen into avoidable environmental, legal, or reputational catastrophes. Failure to build a more responsible corporate brand and business system will miss revenues which could have been attracted by a more esteemed brand and enterprise reputation. A reputation as an uncaring company can repel some of the most promising young employees and can increase the eventual costs of penalties or rectification as adverse events unfold in the future. Unfortunately, to date, most businessmen and commentators, with Milton Friedman and his Chicago colleagues in the intellectual lead and backed by writers at such highly regarded journals as The Economist, believe that the business of business is to make a profit on behalf of shareholders. Nothing else. Adherents to this school of thought believe that the laws and limitations imposed by governments and other regulatory bodies comprise the full set of the rules by which the game is played. There is no other obligation, engagement, or contribution to be considered. By attempting to blend social and economic roles, they maintain, companies would end up at being weak in both. By focusing on what they know how to do, which is to make money, companies adequately fulfill their role in the world and can leave other concerns to other more expert players in civil society and the broader institutional landscape. In another camp are those who believe that companies should maximize profits on behalf of shareholders, with those shareholders distributing a selected portion of corporate profits to worthy causes through intermediary organizations. These intermediary organizations, such as NGOs and charitable trusts, are specialized in the skills needed for social amelioration and can work more effectively than a commercial business organization to reduce poverty, eliminate disease, and achieve other worthy objectives. In this camp can be found the likes of Ted Turner, George Soros, and Bill Gates, philanthropists on a grand scale who have made a noticeable impact on the $200 billion a year given to charitable causes by Americans. STRATEGY argues for a third way, where companies like yours integrate the concepts of responsibility with cutting edge competitive strategy, pressing constantly to maximize profits and create competitive advantage while operating in a manner which is sensitive to the environment, the workplace, and the communities in which businesses operate. This model embeds the values and practices of a more engaged business model within the core strategies and operating principles of a business. More enlightened managers will also be aware that the notion of responsibility can extend to their full business system,

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STRATEGY encouraging suppliers, partners and even customers to operate in a manner consistent with a more responsible and engaged approach to business. STRATEGY is built on the belief that this middle way is in the best economic interest of the company concerned and serves the broader interests of the various communities in which those businesses operate. Massive investments by HSBC, Coca-Cola, Anglo-American and other companies to broaden their engagement with such problems as AIDS, education, clean drinking water, and disease control reflect the growing awareness that more responsible business is better business in a world where the rules of the game, and the penalties for losing, evolve by the day. 7. Unacceptable results from ineffective strategies. Finally, and most importantly, a rethink of strategy is needed because the application of an older generation of models has frequently not led to the creation of the results desired. Far too often, the adoption and application of traditional strategy models have failed to create differentiated performance in the real world. Implementation may lag behind plans, and many plans written up were never truly capable of being executed in the marketplace. The poor record of creating business success stories may be enough, by itself, to question the foundations of many historic approaches to strategy. In the military sphere, the results of battle are usually not difficult to ascertain. Winners and losers are clearly recorded in the history books. While military victors are easy to identify in either battle or war, in the business arena all too often the real results of strategy are lost from view. It is ironic that in all of the famous business models propounded by strategy gurus, business sages and professors, made up of the 9S’s, the 3C’s, and other combinations of catchy letters and numerals, the “R” word—Results—is rarely mentioned. Providing a lengthy and well-presented summary of a strategy that merely gathers dust on the CEO’s desk (or even worse, on his or her untouched bookshelves) is not a measure of success in any real sense of the word. Only by ensuring that winning strategies are fully implemented and that tangible results are achieved is the strategic process justified and the rewards of strategic victory properly bestowed.

Unmet Expectations of Growth Almost every business is competing in a cold climate when it comes to achieving growth targets. Analysis provided by Bain & Company showed that less than 10 percent of companies grow profitably at a sustainable rate over a ten year period. Nearly 90 percent of companies fail to meet their own growth targets or to meet market growth expectations on a consistent basis. Focusing on growth,

Book One: Recovering the Lost Art of Strategy rewarding growth and setting effective strategies for growth is an essential element of differentiation in a world short of easy growth opportunities. Every STRATEGY needs to provide the full set of insights and initiatives that can maximize profitable growth. Customer segmentation, a key axis of the product/market matrix, external trends, the 7C’s growth model, alliances, acquisitions, and a host of other sources of profitable growth are embedded in the STRATEGY approach. One of the greatest benefits of a comprehensive approach to strategy is the surfacing and exploitation of multiple sources of attractive growth opportunities.

Stamping Out Satisfactory Underperformance Satisfactory underperformance is the notion that there are, in our businesses, many results, standards, and levels of performance that are truly not acceptable. However, over time, these unacceptable standards have become accepted through a lack of challenge or plain old inertia. While difficult to address at an industrial level, satisfactory underperformance can be easy to spot in an individual business if we are willing to look afresh at what we do and how well we really do it. Strategic, financial, or operating growth targets can be compared relative to competitors, to similar companies, or to entire industry sectors. Absolute measures are also readily available. Return on equity, return on assets, market share, product quality, real unit costs, time variables, and other standard measures can be used to test and record performance. More sophisticated multivariable measures are also now available, such as single summary scores that weigh many factors of performance and add them up to create a clear single-digit scorecard of performance. Yet satisfactory underperformance does not reside solely in hard measures of performance overtime. Organizational and individual behaviors also can contribute to an unsatisfactory overall state of affairs, and may even lie at the heart of a problem of collective underperformance. Weakness in approach or process, as well as in the result achieved, can be considered as a causal element of a continuing state of satisfactory underperformance. In understanding the sources and symptoms of those unacceptable internal aspects of business, we can find the seeds of hope for a far more effective alternative to an unsatisfactory status quo. By looking honestly at the current state of our businesses we can begin to surface and eliminate the unsatisfactory aspects of the past and move forward to a more profitable future. The STRATEGY approach requires us constantly to reassess our approaches, results, and achievements, and to set tangible goals we would be proud to accomplish. The application of the STRATEGY approach will uncover and eliminate satisfactory underperformance in all of its forms.

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STRATEGY The Discipline and Value of Clear Priorities In a military context, fragmentation of resources and scattering of troops along an excessively broad front creates a vulnerability to a more focused adversary which concentrates troops and material in a strategically sound approach. The same principles of engagement and focus apply in the business world as well. Identifying and acting on an appropriately focused set of priorities can make all the difference for a business. It is not too dramatic to say that the very survival of your enterprise, in the long term, will depend upon an appropriate focus of effort and resource. Good strategy is clear and unambiguous on the priorities and trade-offs that need to be made. Resources are finite and enterprises cannot move in all directions at the same time. It has been said that strategy is as much about deciding what not to do as it is about which areas of opportunity to pursue. By evaluating and setting priorities on risks and opportunities, an organization can be both efficient and effective, focusing resources on the highest value opportunities at lowest possible cost. Establishing a disciplined focus on a limited set of priorities is one of the sure signs of a winning company, and one of the salient characteristics of the STRATEGY program. All too often, in a failure of leadership, good ideas and essential activities get jumbled up with the bad and the peripheral in complex, fast paced modern businesses. Potentially high impact initiatives do not receive the full attention and resource they deserve due to the unhappy fact that they are lost in a sea of less important and less attractive initiatives. Scarce resources, human and financial, can be scattered across a long list of programs, actions and ideas, rather than focused on the few programs or initiatives that can really make a difference. Lack of priorities and excessively long lists of unfocused “strategic” initiatives can even create a costly distraction for managers and employees that have demanding jobs to do getting products manufactured, services delivered, and logistics managed. Unfortunately, many businesses do not have a structured and reliable process to set priorities. In a system where strategic process and content have become severed, it may be very difficult to achieve an acceptable outcome from an ungrounded program of identification and prioritization of initiatives. Adherence to a simple and effective approach to set and maintain priorities, as here integrated into STRATEGY, can yield big dividends for those participating in this more efffective process. In every business today there is no shortage of opportunities, risks, and potential actions to which an organization can turn its attention. Yet to be successful, the leadership of an organization will need to identify the highestimpact initiatives, and then pursue them on a clearly differentiated basis. This means deciding how to focus the resources and energy of an organization, and

Book One: Recovering the Lost Art of Strategy communicating in an unambiguous way which activities are not priorities as well as highlighting those which are.

Gaps in Traditional Models of Strategy In looking for the best model to provide a framework for strategy, it is clear that each past model will be lacking in one or more areas. As we shall see in the following sections, none has risen to the challenge of providing a useable framework or guide for setting out a comprehensive approach to determining and implementing world-class strategy. Some are too simple. Others may be valuable only in describing the past at a high level, but provide little in the way of practical advice in setting out a strategically sound pathway for the future. The older models tend to be simplistic and rigid, confining thought to a limited number of independent conceptual components. These constraints inevitably lead to a more linear and constricted approach at a time when strategy needs to be more systemic, more flexible, more open to discontinuity, and better able to adapt to a fast-moving world. Due to an exclusive focus on content and a resulting lack of attention to the value of process, there is often little room for creativity built into a strategic program which is likely to emerge from the rote application of old models. How you organize your company, and how you organize the process of setting strategy, can have a major impact on the amount of creativity and differentiated performance resident in your strategic and corporate future. Almost all static models are purely content-specific, and do not describe how to go about setting or implementing strategy. None provide a comprehensive model to integrate the process and content of strategy. They thus leave out a great and critical part of the knowledge available on how to determine the best possible strategy to master your own business challenges. Strategic exercises predicated upon merely filling out the content of static, complex, and often poorly understood planning models do not encourage a full and engaged involvement of all parties to the process. Multiple perspectives are essential to understand the whole of a situation, especially when the phenomena we observe on a daily business are often the result of multiple, longer term patterns playing out in different dynamic situations. A full understanding of the underlying trends, patterns and systems of behavior can only come from encouraging the incorporation of multiple sources of understanding, insight and action. Further, the sheer complexity of older models, and a long-standing lack of precision in understanding the terminology related to their content, has often resulted in confusion, and has even generated more than one entirely disfunctional approach to strategy. In order to be effective, the strategy process and the content model both need to reflect all seven characteristics of

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SMARTER goals: Simple, Meaningful, Actionable, Realistic, Total, Effective, and Results-driven.

Toward a Better Future It is clear that a new approach to strategy is needed. The unsatisfactory results from past strategic approaches need dramatic improvement, and the game is getting even more challenging as business and economic systems continue to evolve and become ever more global, more complex, more consolidated, and more dynamic with each passing year. Although each of the historic models described later advanced our understanding of strategy in the business world at the time of promulgation, their collective failure to generate consistently acceptable results in real world application creates a need for us to question their efficiency. To turn the lessons of the past into a more comprehensive set of insights for the future, we need a better approach to defining the process and content of strategy than these models have provided. Most important, we need to extract more value, generate better results, and create a more rewarding personal experience for those involved in filling out the missing elements of strategy. That new model of strategy needs to forge a seamless link between strategic analysis, strategy formulation, implementation, and the creation of tangible results. Addressing these gaps is exactly what the STRATEGY approach is designed to accomplish.

CHAPTER 1

The Evolution of Business Strategy

Often, business strategies in the past have been based on rigid, structured models and approaches to strategic analysis and policy setting. Many corporate strategies and strategic budgets today are still set and executed through an approach that is essentially mechanical and uninspired. The past is extrapolated into the future, with little change from the status quo expected or planned. That traditional approach is frequently formulaic, occasionally repetitive, and usually tedious. The major problem with the historic models most often used in strategy is that they are too simplistic in content or application. They thus fail to address the full set of dynamic challenges or opportunities facing an enterprise. Even more critically, companies using these limited approaches rarely achieve anything remotely approaching their true full potential. Both process and content of traditional planning exercises are seldom inspiring. As a result, they seldom engage the individuals who make up the modern organization in a mission they feel is meaningful. Instead, historic approaches to strategy often perpetuate only the continuing state of satisfactory underperformance which preceded the strategy exercise. Part of the blame lies with the overly structured models of strategy developed, packaged, and sold in the past to management teams with an insufficient grounding in their origins or applications. The traditional linear models such as the 3C’s, 5 Forces, 7S’s, and all the other odd- and even-numbered approaches to the unbundling of strategy can serve as useful checklists for review. They may even stimulate useful strategic thinking and generate creative tactical ideas. But only rarely do most of them lead management teams to satisfactory results, to say nothing of exceptional performance or breakthrough strategy. These foundation stones of traditional business strategy can provide useful input or contribution in forming more valuable and more complete strategies. But to unlock the full potential of your business, you need to go well beyond the demonstrated limitations of these past approaches to the structure of strategy. 15

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Seven Leading Historical Models of Strategy The 3C’s The 5 Forces The 7S’s The 3S’s The 8 Strategic Laws of Gravity The 9S’s The 7C’s

It is important to summarize and consider the content of each of the leading traditional models to understand the lessons of the past. Each of them, containing inherent strengths and weaknesses, represents a state of strategic insight and modeling at a particular point in time. There is potential value to be derived from an understanding of their sources, applications, intentions, and purpose in a more modern approach to strategy. Their application may even lead to powerful insights in some situations if properly applied. Most importantly, an understanding of their strengths and weaknesses may provide valuable knowledge to move forward with your own unique strategy.

The 3C’s Model A simple model of business definition drove much strategic thinking in the 1970s and early 1980s. Following the expansion of the 1960s, and in the wake of the 1973 oil shock, many companies needed to redefine their businesses, make bold strategic decisions on their portfolios, cut costs, and restructure investments. As a result, the strategy process needed to define more sharply the borders of businesses in order to make decisions for each separate strategic business unit on strategy, investment, restructuring and competitive management. The model generated to serve that purpose was the 3C’s model, designed to shape understanding of the borders of independent strategic business units and support portfolio restructuring, amongst other activities. The 3C’s Model Costs Customers Competitors

The first of the 3C’s is Costs, which reflect the nature and proportion of economic activity within an organization.

The Evolution of Business Strategy The second C represents Customers, whose needs are served by the entire business system of a company. The third and final C stands for Competitors, the relevant set of companies operating in the same space who are pursuing the same opportunities within a defined geographic or product market. Although the 3C’s model is relatively simple, the reasons for its derivation are more complex. Capital became more expensive in the inflationary period following the first oil shock, and the adverse operating conditions of the 1981 recession further stressed business performance. Deregulation and privatization in Europe and the United States removed some of the artificial borders on business definition and competing geographic ambitions. Globalization opened the doors to new markets around the world. As a result, complex and international businesses stepped quickly into an entirely new order of global, industrial, and intercompany competition. In this new order many businesses, especially diversified conglomerates, discovered that their excessively broad business portfolios needed greater focus, requiring an active program of restructuring and redirection. In some countries, notably the United States, the competitive dynamic had further intensified under pressure from a Japanese onslaught in steel, automobiles, machine tools, construction equipment, farming equipment, and other core industrial sectors. A more selective US market put pressure on suppliers for improvements in prices and terms of delivery, applied technology, product quality, service levels, design aesthetics, and customer management, which had all been pushed to new levels by the invading Asians.

A Lost World Many senior managers of large corporations saw the business world they knew disappear entirely. The strategic ground under their feet had changed dramatically and the clocks could not be turned back. Competitors were now global. Old business practices, and historically acceptable cost and service performance, led to failure and bankruptcy. Faced with wider choices, customers became more demanding. Comfortable relationships and established procedures respected for decades between customer and supplier vanished forever. Senior managers suddenly needed to clarify their understanding of the shifting business borders in this new world in order to redefine their businesses, reset strategies, adjust management objectives and clarify investment priorities. Those who did not adapt to the new paradigm swiftly fell prey to more agile traditional competitors and hungry new entrants from the domestic market and foreign countries. Better understanding the shifting borders of business—the art and science of business definition—was a starting point to develop a response to seemingly endless performance pressures and demand for comprehensive change.

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The approach most commonly used to define or redefine the borders of a business was the 3C’s model, which captured the bulk of the economics and operations of a business on an 80/20 basis. An analysis of these three elements would properly define the borders of a business and identify the competitors and customer groups central to strategy in a single business system. A high degree of sharing in all three categories meant that apparently divergent businesses could be considered one strategic unit and managed accordingly. A lack of sharing in all or many of the categories meant that the businesses were essentially separate entities and probably could—and should—be managed as separate strategic units. In many cases, the clarity provided by the application of a 3C’s business definition exercise allowed large conglomerates to reshape their portfolios, focus their activities, and strengthen a set of less numerous but more successful business units. Airlines, hotels, and car rental agencies, for example, are different businesses (different costs and competitors) despite a high sharing of customers. The Allegis Corporation discovered this lack of sharing to its great cost many years ago when it unsuccessfully tried to manage the three within one coordinated group. With a better definition of their businesses, a new generation of strategic managers was able to unbundle the unwieldy combination and design separate strategies based on a clear understanding of the competitive arena and the operative rules of the game in three very separate businesses. Business definition sounds very basic, even slightly academic. But its application can drive significant change in a business portfolio where the strategies of separate businesses have been insufficiently differentiated. The lack of clear business borders often arose in businesses where corporate development had been primarily driven for too long by geography, by a founder’s personal capabilities, by a particular set of customer relationships, or by a defined set of core skills. These historical sources of business value had become, in many cases, no longer a sufficiently strong rationale to bind together disparate businesses, or no longer valid as a unifying consideration in portfolio strategy. The proper exercise of 3C’s business definition should not be static. The value created in application increases dramatically as the dynamic aspects of business evolution are fully considered. Forward-looking business definitions can identify emerging changes in the environment which may not have been taken fully into account in operating business plans. The application of business definition can provide greater clarity to business portfolios and can, if applied with sufficient foresight, lead to more efficient allocations of staff, capital, and other corporate resources for future advantage.

Painful Application The application of a 3C’s model can have deep, painful and lasting consequences. One major manufacturing business in Europe, for example, had

The Evolution of Business Strategy developed a long list of apparently related businesses built around historical competences in metal forming, cutting, and molding. It had grouped together all of the businesses with these characteristics into one large and fully consolidated manufacturing business. The business operated from a single site in the English Midlands, employing over 8,000 people in one massive and imposing Victorian facility. Over time, its once highly profitable business performance eroded, turning the enterprise into a seemingly unending and intractable stream of financial losses. The enormous red brick complex appeared to have turned into a black hole for capital and management time, absorbing more and more of each with less and less to show for the investment. Upon applying the 3C’s model, it became apparent that this facility, once considered as a single business unit by its managers, actually housed 22 separate businesses of varying sizes, strategic positions, and financial performance. A small minority of businesses were competitive and profitable. All others were not. After 22 separate strategic reviews, more than half the businesses were closed, freeing capital and management to focus on and develop the more promising units. Applying the 3C’s model had transformed an apparently unmanageable cost and profit problem into a manageable portfolio challenge, resulting in a dramatic refocusing of a troubled business group. Without the insight of business definition, millions of dollars and years of painful and expensive effort would have been wasted without any hope of achieving meaningful order, focus, or profitability in the division undergoing the strategic review. Business definition, even in its most classic form, is a dynamic exercise. Failure to understand the dynamic nature and relevant evolution of business definition has led to disaster for many businesses—and for the careers of many dedicated and hard-working managers. Lucas Industries, for example, was once an independent, world-famous engineering firm headquartered in the heart of the United Kingdom. For more than a century it developed and manufactured leading products in lighting, aviation controls, engine components, electronics, and other technologyrelated engineering sectors. It operated this diverse portfolio under a single corporate structure and board direction. But not all changes had been well mastered. One senior manager, having started as a shop floor apprentice and risen to divisional managing director over a long and successful career, oversaw a business with nearly half a billion pounds in annual sales. In a discussion on the use of business definition in determining strategy, he ruefully concluded that he had seen the definition of his business change along all 3C’s in less than a decade. He succinctly summarized his perspectives of accelerated change as a lesson in changing business definition. When I took this job, we were a dominant British components business. After a while, we were a middle-sized European supplier of components and subsystems. By the end of the decade, we were a subscale global systems, subsystems, and

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components supplier. In the beginning, we were the leading, and often only, supplier to successful British car manufacturers. By the end, we were supplying European, Japanese, and American customers in a highly competitive market. Our costs and quality levels, which were essentially component-driven in the early days, became uncompetitive and absorbed into larger systems assemblies. The margin in our business was increasingly taken over by the bigger systems designers and assemblers. As the borders of our business changed, our returns dropped. So we went from being a highly profitable British supplier of components to an unprofitable global supplier of components and systems. To be honest, it took us too long to realize what was happening, and by the time we did it was too late for some of our product groups.

Lucas Industries went on to streamline its operations, refocusing on sustainable businesses in a new and more competitive global order. It now continues to produce many leading products and technologies as part of a global scale entity bulked up by merger and alliances around the world. What about the senior manager, unable to foresee the fundamental changes taking place around him and unable to adapt quickly enough to the new world of competition? Despite his admirable work ethic, his devotion to a company that spanned 40 successful years in various operating units, and his detailed knowledge of every product in his division, this dejected executive opted for early retirement and left behind a diminished, but much wiser, set of colleagues and operating business units.

The 5 Forces Model In his best-selling book, Competitive Strategy, Michael Porter outlined the 5 Forces that drive competitive strategies within a properly defined industry, domestic or international. An understanding of these forces, and an enlightened management approach reflecting that understanding, was intended to lead to superior competitive performance in the market. It could also lead to higher and more sustainable financial returns to stakeholders in the enterprise. With its roots in industrial economics, the 5 Forces model combined perspectives on structure and content into a coordinated view on the rules of competition and the forces for change in an industry. In applying this model, the effective strategist was also able to draw out lessons which could inform strategic action in the defined market. The 5 Forces Model Entry of new competitors Threat of substitutes Bargaining power of buyers Bargaining power of suppliers Rivalry among existing competitors

The Evolution of Business Strategy The first of the five competitive forces is the entry of new competitors in an industry. Destabilizing and costly, market entry of a powerful competitor usually requires a response that will absorb scarce resources and reduce overall returns. A critical element in effective strategy is to dissuade competitors from entry, so long as a cost-benefit calculation justifies the investment. The full costs of competitive entry, over the long term, usually justify a significant investment in competitor contra-strategy early on to preempt the potential entry. The second force is the threat of substitutes. Pricing, and therefore profitability, is influenced by both actual and potential substitutes. Buyers face a range of choices and the cost-value balance, the other side of the threat of substitutes, has a significant impact on decisions. Competitive gaming will thus be influenced by an understanding of the full set of products available to buyers, not just an internal perspective on value delivery. The third is the bargaining power of buyers. The ability of customers to change supplier behavior, primarily through pricing and terms that change the supplier’s cost base, has a big effect on the economics of all firms in an industry. The relative power of supplier and buyer can make some industries more attractive, and others far less interesting. Major differences can appear in the same industry across geographies. In some industries, this force is clearly the dominant driver of industry profitability and attractiveness. The “balance of terror” between grocery retailers and suppliers, for example, differs between Europe and the United States. In European countries such as the United Kingdom, Germany, and the Netherlands, the top five retailers dominate the grocery retail distribution market. Own-label sales are high. Retailers set price and delivery terms, decide on new products and packages, and also determine inventory requirements, delivery schedules, credit terms, take-backs and other operating terms and policies. The dominance of a small set of retailers is increasing, as retail chains develop whose relative power far outweighs the strength of almost all of their more fragmented suppliers. Even mighty Nestlé, Unilever, and other international food giants struggle in Europe against Tesco, Aldi, and Carrefour, testing the limits of the bargaining power of buyers against a set of smaller competing sellers. The same is true of a few emerging US giants, such as Wal-Mart, now expanding to Europe and Asia through active acquisition and investment initiatives. In the United States, by contrast, suppliers in many sectors are more consolidated than distributors. Category management, the integrated management of an entire section of the supermarket to maximize the profit per square foot, is more heavily influenced by forward-thinking national scale suppliers than by fragmented regional supermarket chains. As a result, future margins and opportunities for most food companies are much brighter in the United States than in Europe. The relative profitability and strategic future for many food manufacturers in the US is now determined by an ability to understand and exploit all sources of competitive advantage compared to their weaker customers.

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Fourth is the bargaining power of suppliers. Just as buyers will use their influence to drive supplier behavior, suppliers will do the same when and where possible, exploiting the benefits of their own strengths and strategic position. Microsoft, Intel, and other tough-minded suppliers can often dictate individual terms and even influence the nature and evolution of an entire industry. Differing concentrations of the supplier base, scarcity of supply, substitutability, and other factors can drive a competitive industrial dynamic to very different outcomes. The last of the 5 Forces is rivalry among existing competitors. This rivalry will set the competitive rules which shape firm behavior, investment policies, and return patterns across an industry. Investments in capacity, technology, new product development, price reductions, capital plant, marketing, research and development, and all other elements of the business value chain are directly and profoundly influenced by the nature and intensity of competition among firms in an industry. These 5 Forces, which shape an industry’s economic performance and attractiveness, can also shape firm strategic decisions within the defined borders of an industry. Originally seen as descriptive, or as primarily indicative of industry potential to earn returns above the cost of capital, these 5 Forces can also be understood and integrated into a winning strategy for a competitor within an industry. Although Professor Porter did not specifically link the 5 Forces to a predetermined set of firm strategies, he did map out three generic strategies for successful competitive strategy: differentiation, cost-based leadership, and focus. Differentiation is a strategy driven by superior value added to customers. Cost-based strategies offer superior value to customers through low costs and prices. Achieving business objectives through focus on a limited set of the elements of a business system also could create a superior business model. According to Porter, being caught outside these three generic models traps a business in a highly unsatisfactory no-man’s-land—“caught in the middle,” as he described it—in a position very likely to generate substandard returns.

The 7S’s Model The 7S’s model, associated primarily with the consulting company McKinsey and Company, resulted from a fusion of insights that emerged from working sessions between a group of strategic consultants and academics. Each member brought experiences, ideas, and draft models to a joint brainstorming and drafting session. The final 7S’s—Strategy, Structure, Systems, Staff, Skills, Style, and Shared values—have been a staple of most strategic diets for a long time, and still inform many approaches to organizational design and strategic review.

The Evolution of Business Strategy The 7S’s Model Strategy Structure Systems Staff Skills Style Shared values

The 7S’s are made up of the following elements: Strategy—the coherent decisions and actions taken to create relative advantage against competitors and improved relations with customers. Resource allocation is a key part of this process. Structure—the organizational structure and operating approach that clarify tasks, responsibilities, and roles in the corporate hierarchy. Systems—the procedures, processes, and flows of activity that allow an organization to operate daily. Some systems are common to all businesses, including information systems, capital allocation procedures, control systems, compensation and promotional systems, and other ingredients in the operating mix. Staff—the people who make up the organization, individually and collectively. Skills—the capacities and capabilities of an organization and its ability to get things done. Style—the behavior of the leadership, and therefore usually also of the body of an organization. The decisions, priorities, behaviors, and symbolic aspects of an organization’s culture frame the way a business acts under different circumstances. Shared values—the mix of explicit and implied values and goals. Not confined to mission or value statements, shared values are internalized in a business and guide its behavior. While providing the background for many discussions of strategy, the 7S’s model is associated with many failed strategies at a high level. Perhaps because of its general nature and broad conceptual coverage, the framework has not been able to generate a consistently better set of competitive results for many who have attempted to use it in the definition and implementation of a winning strategic plan.

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STRATEGY The 3S’s “Single Shot Strategy” In an attempt to improve popularity or to stand out from a crowded field, many new ideas and conceptual models purport to capture the essence of strategy in a single word, concept, or theme. This reductive approach, which characterizes many popular strategy fads heralded by a growing crop of wannabe strategy gurus, can be called “single shot strategy.” A single shot strategy is an overly simplified approach which attempts to reduce the complex nature of strategy to an artificially narrow concept. In the process, much value is lost, leaving an inadequate approach to strategy with inevitably unacceptable long-term results if taken as a sole source of strategic direction.

The 3S’s “Single Shot Strategy” Model (examples) Reengineering Total quality management Time to market Target return on capital Six Sigma

In fact, not all new ideas and single-shot prescriptions are as fresh as their purported creators would like us to think. Reengineering. Total Quality Management. Time to market. Target Return on Capital. Six Sigma. Many of these buzzwords and standards are, to some extent, old wine in a new bottle. They can describe valuable initiatives and focus operating plans. They may contribute to significant improvements in manufacturing quality and overall business performance. But their application does not fulfill the full needs of a complete strategy. Most single shot strategies are focused solely on changes in internal operations and do not address such essential strategic issues as competition or industrial evolution, thereby missing out on key elements of business risk and opportunity. Nor does their content link to other aspects of a complete strategy program, such as visionary leadership for the organization. These focused themes may be worth considering in some cases, but only as a part of a larger and more complete strategic formulation. There is also a great risk in pursuing these approaches with excessive ardor. Too often, these internally focused tools or techniques can push real strategy off the agenda. They inadvertently sacrifice long-term growth, ignore competitive threats, and miss opportunities for industry structural optimization. They do not take into account the relevant set of trends and influences that will drive future business performance. The full development of organizational capabilities

The Evolution of Business Strategy can be lost in favor of an all-consuming short-term, internally focused set of initiatives. In some cases, overzealous pursuit of a limited set of objectives can even damage the fabric of an organization, discourage key staff, and put future profits and growth at risk.

Risk of a Single ROC Sinking the Ship One common error in unsophisticated businesses is the pursuit of a standard, across-the-board, preset Return On Capital (“ROC”) for all units. A large Asian conglomerate recently announced the appointment of a new CEO, who fell into this trap rather publicly. Respected for its technical competence in many fields, the company, whose leadership role the CEO had taken over, had fallen to a low standard of financial performance for almost a decade. The new CEO had a long history with the company, which had operations ranging from finance to property to metal-forming and engineering subsidiaries. He announced boldly that his new strategy was to achieve an 8 percent return on capital in every business. Unfortunately, the portfolio was extraordinarily diverse and complex, and the organization so unschooled in strategic management, that the simple “strategy” proved disastrous. Businesses in a dreadful competitive position that should have been divested received investment capital to raise operating performance. New targets for cost reduction and revenue enhancement were set unrealistically to justify new investment, funds which were immediately doomed to an eternally low or even negative return. By contrast, some attractive businesses already operating at a 12 to 15 percent return on capital, which could have increased their return by a further 5 percent, were not pushed by a standard they had already comfortably exceeded. The drive to achieve the 8 percent target also obscured a deeper truth about some parts of the portfolio. Some businesses that had been operating on an integrated basis were in fact multiple businesses. In one engineering business, for example, a major unit was actually comprised of two entirely separate businesses. One was a capital-intensive, low-return manufacturing enterprise and the other a high-growth, high-margin service business with diminishing links to the core manufacturing operations. The combined goal of 8 percent return on shareholder funds made it less likely that the divisional manager would agree to spin off the attractive business, deferring and even reducing the ultimate potential to create significant shareholder value. This unsophisticated CEO chose a dangerously blunt instrument to try to drive his organization to higher performance. By confusing an operating target imposed on a top-down basis (and a rather unambitious one at that) with a truly insightful strategy, he set his organization on a path to suboptimal shareholder wealth creation and continuing financial and operating underperformance.

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STRATEGY The 8 Strategic Laws of Gravity Reflecting the development of more sophisticated models of competitive economics in complex international markets, the 8 Strategic Laws of Gravity also traced its origins back to the diagnostic models and databases on corporate profitability which evolved in the 1970s and 1980s. Driven by experience curves, growth-share matrices, brand-portfolio analyses, relative market share/return on sales frameworks, market share modeling, and other micro-economic analytical templates, the 8 Strategic Laws of Gravity went further than predecessor models in specifying the content of competitive strategy.

The 8 Strategic Laws of Gravity Model Correct business definition Market control and leadership Incremental share to the leader Relative competitive position, performance, and investment Declining costs and prices Discouraging competitor investment Industry value chain and profit pool Organization investment

Each of the 8 Laws contained both a descriptive and prescriptive element, describing what needed to be considered and indicating the logical implications of each Strategic Law. Correct business definition—understanding the true borders of a business, now and in the future, is critical in setting strategy. As business definition evolves, strategy needs to follow or even lead the process of change. Market control and leadership—when properly defined, a market-leading position can drive shareholder value to the highest possible level. Niche or scale leadership can each provide an avenue to superior financial performance. The value of incremental share to the leader—the financial strength of the leader builds on the advantages of leadership and drives the economics of followers. Incremental share gain can be of great value, reinforcing leadership, adding to profits, and building market power and influence. Given an industry-leading cost base and the potential to contribute to real differentiation, incremental market share has a particularly high value to market leaders. Relative competitive position, performance, and investment—historical analyses from the early PIMS database to more modern studies of industrial

The Evolution of Business Strategy economics show that, in aggregate, relative share of a market usually determines financial return. An absolute revenue share of 30 percent in a market has enormously different strategic and financial characteristics if the 30 percent share creates a strong leadership position against a second largest competitor with only 1 percent, or if a larger competitor has the other 70 percent and the 30 percent reflects a weak trailing position. Relative performance is also critical in investment and strategic initiatives. Analytical models show strong correlations between relative market share and return on sales or equity, and confirm the fundamental value and strategic implications of this perspective. Declining “experience curve” costs and prices—originally uncovered in the analysis of input, cost and time efficiencies in the production of military aircraft during the Second World War, the normative trend of a predictable decline in real unit costs and prices with accumulated experience has proven to be a universal micro-economic truth. From pencils to computing power, this same phenomenon is consistently visible across industries, countries, and time. Although the roots of this insight are old, understanding and managing it continue to be critical elements of modern strategy. Discouraging competitor investment—through cost management, investment, service excellence, brand and channel power, customer management, and technological application, competitors may be dissuaded from costly entry into a firm’s core markets and most profitable market segments. The cost of dissuasion is usually far lower than the future cost to stakeholders of intensified competition over the long term. The industry value chain and profit pool—mapping out the industry profit pool, the sum of profits across an industry or along a business value chain, is a critical element in the determination of effective strategy. Originally set out in a pair of articles in the Harvard Business Review by Bain & Company Chairman Orit Gadiesh and James Gilbert, a director in the same firm, the profit pool has already become a core concept in modern strategy. Organizational investment—all of the preceding laws of gravity can best be pursued to the advantage of each competitor through superior capabilities, more effective organizational structures, and more efficient operating systems. Failure to invest in and compensate individuals and teams for profitable growth, effective operation, and motivation of colleagues ensures underperformance in one of the most critical areas of potential strategic value. More substantial and prescriptive than most strategic models, this approach has allowed many leaders of companies to set out a successful strategy along the axes presented, and to understand better where the shortfalls lie in their own strategic efforts.

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The 9S’s Model Two extensions to the 7S’s model, added by Japanese strategic consultant Shintaro Hori, are Steering pattern and Syndication.

The 9S’s Model Strategy Structure Systems Style Staff Skills Shared values ⫹ Steering pattern Syndication

The Steering Pattern, the approach to management leadership and principles of direction that communicate how leadership can expect to achieve results within a business, adds a new dimension to the systems and shared values of an organization. Derived from years of observation of failed multinational strategies in Japan, Hori’s extra element reflects the universal need to develop and to implement a consistent model of leadership and operating culture at all levels of an organization and across all locations. The final new S, Syndication, captures a whole wave of change and the potential for creative alliances across old business borders. Syndication parcels out risk to more than one company, redefining the value chain and creatively combining and recombining business assets and processes. The principle of syndication reflects new shared competitive initiatives, as well as collaborative associations in many areas. Complex cross-competitor alliances in the airline and software sectors are now commonplace, as are more traditional cross-border joint ventures, franchises, dual branding initiatives, outsourcing programs, and other forms of sharing of costs, brands, assets, capital risks, and other essential activities. Technology and channel evolution has brought businesses together in creative horizontal and vertical syndications never considered before. Modern companies are constantly searching for new avenues to create competitive advantage, reduce costs, improve return on capital, and share risk burdens where individual scale will not allow any one company to shoulder the entire responsibility for a significant operation or investment. Adding syndication to the classical 7S’s model captures this new area of shared initiatives, which did not fit neatly into pre-existing categories of structure or systems.

The Evolution of Business Strategy The 7C’s Model The 7C’s model of strategy is an enhanced version of the 3C’s model of business definition. In addition to defining better the borders of an existing business, the 7C’s model expands the list of C elements to create a more precise definitional model and to create a more useable set of strategic building blocks. Although the 7C’s approach has been available for many years, it is only in the context of STRATEGY that the full application and business value can be extracted. The added elements to its 3C’s predecessor can help to identify critical trends and illuminate the defining characteristics of a business. The model can provide a powerful framework to define and evaluate core strategic options, and identify and prioritize adjacent growth opportunities. The broader set of seven conceptual categories can also identify more potential opportunities for beneficial discontinuities which, if properly exploited, can provide essential content for a winning breakthrough strategy. The 7C’s ⫹ Results Model Costs Customers Competitors ⫹ Context Capabilities Channels Capital ⫹ Results

The first three C’s are described earlier in the 3C’s model and operate here much as they do as described in that model. The Context of a business describes the overall architecture of a market, including regulatory structure, licensing regime, political influences, product/ market combinations, technological environment, trade and quota arrangements, patent limitations, and other defining characteristics of the industrial environment. Active management of these key elements is one of the biggest challenges in the creation of transnational business success. In some of the most dynamic and complex industries—such as telecommunications, financial services and utilities—changes in the regulatory and other contextual elements are often a primary focus of senior management as they reshape the competitive landscape. Capitalizing on that change ahead of competitors can also be a major source of stakeholder value creation.

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The Capabilities of individuals and the organization are a critical source of incremental revenue, profit, and competitive advantage in both manufacturing and service businesses. Much of strategy is about identifying, improving and employing as effectively as possible the human and competitive capabilities resident in a business. In industry sector after industry sector, these capabilities are being tested more than ever before. The entire manufacturing sector has long been undergoing enormous disruption and change. Competition from China, Mexico, and other low-cost centers has turned up the heat on the capabilities of western manufacturing organizations. This in turn has put pressure on all suppliers and supporting businesses to these manufacturing entities. In the services sector, India rather than China has emerged as the leading source country of serious competitors to Western service providers, and as viable rivals to the internal service and IT departments of businesses seeking to reduce cost and improve performance simultaneously. Channels and their evolution increase in strategic significance as businesses develop rapidly in new geographical areas, attack new customer segments, create new e-commerce offerings, launch new retail formats, develop new models of integrated logistics, and pursue other areas essential to successful business development. The ability to access, share, dominate or own delivery and distribution channels allows competitors both to control the customer and restructure the value chain by reducing the time and cost involved in value delivery. The ability to bypass intermediaries and go directly to the market, shortening the distance between producer and customer, creates enormous advantage over trailing competitors encumbered with older, less flexible channel structures and systems. This is the source of the success of the Dell direct delivery model. In addition, channels and customers are often tightly linked, with new channels providing access to new customers, as well as reducing costs and improving service to the existing client base. Effective use of all sources of Capital advantage, including a restructuring of the capital base and leveraging the balance sheet of an organization, is an oftenoverlooked element of strategy. Too often, strategy is focused exclusively on the operations, market, cash flow, and profit and loss account aspects of a business. Even before the Asian crisis decapitalized many Asian corporations and set off intense competition for scarce equity capital, the use of capital and the integration of operating strategies with capital-market initiatives was a growing area of interest for forward-looking CEO in that region and around the world. No longer seen as merely a source of funds at market prices, the effective management of capital has become a source of competitive advantage and creator of shareholder wealth.

Beyond the 7C’s Other C’s that have cropped up for potential inclusion in the expanding ocean of “C” concepts include Compensation, Core technologies, Communications, Compassion and Cooperation, along with other variations on the theme that

The Evolution of Business Strategy could not be forced neatly into the “C” format. In order to get the best possible results, however, the extra C of Creativity does need to be applied at each and every part of the model. As indicated earlier, it is striking that none of the models developed over decades of industrial development, evolution, and application is explicitly anchored to the core notion of achieving tangible results. Elaborate structures and extensions of the classic models were developed and proselytized by various gurus for years without explicitly linking strategy and results. In STRATEGY, the adoption and application of the 7C’s ⫹ Results model addresses this weakness and explicitly integrates the creation of results as a fundamental element of the strategy model.

The STRATEGY 7C’s + Results Framework Customers

Competitors

Costs

Channels

Capabilities

Context

Capital

Results

In this 7C’s ⫹ Results model, there is an explicit linking of a strategy model with results, causing strategists to be constantly mindful of practicality, the need to implement ideas, and the value of a process to assure the effectiveness of both the process and content of programs leading to strategic conclusions, recommendations, and actions. Especially in a world where Fortune magazine estimated that 70 percent of CEOs who lost their jobs were seen to do so because of a failure to execute strategy and get results, the inclusion of implementation in the core three-phase approach to strategy, and the specific inclusion of the “R” word in the core conceptual model, are important elements in strategic success, and perhaps even in continuing employment!

Low Standards and Satisfactory Underperformance In the decades when the traditional models were developed and applied without a clear linkage and focus on results, the general track record of industry leaves much to be desired.

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STRATEGY Taking a step back, and looking at the 10-year returns of U.S. companies collectively, the picture gets more complex but no more positive. The average company from a sample of Standard & Poor’s 500 companies had annual sales growth of 5 percent and financial performance a full percentage point below the fully loaded cost of capital. Objectively, these low profit growth and performance patterns should be entirely unacceptable, but over time they have become accepted as the prevailing norm. Some of the largest business organizations in the world often achieve results that reflect a return on capital that is consistently and predictably less than its cost. The long-term consequences of this established underperformance call into question the strategies, the systems of management and control, and the strategic models which have led to these results. Any new approach to strategy would need to move beyond the limitations of this unsatisfactory past and address the legacy of underperforming strategies with a clear and concise response visible in its results. The application of the 7C’s ⫹ Results model in the context of a comprehensive STRATEGY program will achieve exactly this objective.

Focused Application of the Supermodel As we shall see in the section entitled The Winner’s Circle at the beginning of Book Two, there are competitors who have applied virtually all elements of the 7C’s ⫹ Results model successfully, while others have navigated their route to strategic success by focusing tightly on one element only. These success stories were created by bearing down selectively on a single breakthrough element in the model in order to break out of the pack of “me too” or less focussed competitors. These competitors have often broken new strategic ground and reaped the benefits of their understanding, focus, and sustained application of effort. A few of these selected winning companies are now very large and very well known. Others are equally successful but smaller in scale and less renowned in their achievements. Each of the companies selected for profiling shares the same secret of success, which is to pursue a clear, correct, and differentiated strategy in the marketplace. The companies below all developed very successful strategies which followed the structure and pursued the elements of a 7C’s ⫹ Results model. Costs. Southwest Airlines, RyanAir and a new generation of value carriers around the world have reset the bar on cost-efficient air travel. By pursuing every opportunity to streamline operations, to harmonize fleet configurations, and to minimize the cost of service, these new low-cost competitors are the profitable victors in an industry where the total cumulative historical

The Evolution of Business Strategy profits of the entire industry, from the Wright brothers to the present day, would add up to less than zero. A second group of companies driven by cost arbitrage against entrenched competitors are the new businesses arising in China and India. Great chunks of the world’s manufacturing businesses are now passing into the hands of successful Chinese manufacturing operations. High-cost Western companies are also increasingly shifting to outsource expensive IT and other business processes to lower cost Indian companies like Wipro, Scandent and Tata Consultancy. Customers. Few companies have as clearly differentiated a strategy with regard to customer understanding as American Express and MBNA. The clearly distinguished charge card tiers of green, gold, platinum, and black at American Express have come to stand for customer segments adopted as a hallmark in other industries. The plethora of Visa and Mastercard gold, platinum, and black card competition only confirms how effective American Express have been at defining their strategies, products, and services by their customer segments. Imitation is indeed the highest form of flattery. Creativity as well has played a key role in defining success for American Express. Pioneering the Membership Rewards concept has created even higher levels of customer loyalty, providing effective personal incentives for customers to remain loyal to American Express, and to maximize spend on their charge and credit cards of various hues. Customer knowledge and delivery of what the discerning customer wants in the way of products and services has allowed American Express to lock in some of the world’s most valuable customer franchises for many years to come. Lesser known, but even more focused in some areas of credit card customer differentiation is MBNA, once a small division of the Maryland National Bank. MBNA, whose company vision is simply stated as “acquiring the right customers and keeping them,” are masters of the science of micro-marketing. Better than anyone, MBNA understand in fine detail how individuated segments of the card business behave and then act to profit from their knowledge. Competitors. Perhaps no company more exemplifies the spirit of hard-nosed competition than GE. Jack Welch’s famed dictat to “become number one, number two or get out” encapsulates the culture of competition which permeates one of the world’s most successful companies. Not only do GE executives compete against external foes, they are exhorted to battle constantly against internal inefficiency as well. During the peak of the dot com era, Jack Welch reportedly sent out a memo which urged his management team to brainstorm how the Internet revolution would change their businesses. In an exercise internally labeled “destroyyour-business-model-dot-com,” GE managers were asked to set out a plan of how an Internet-enabled business competitor could take over GE’s leading

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STRATEGY business positions. Managers were then told to implement the model themselves in order not to fall prey to more forward-thinking competitors! Another company which defines its strategy through competitive focus is Komatsu, whose short vision statement “encircle Caterpillar” reflected a desire to win out against the giant US competitor around the world. Channels. Although fast-moving consumer goods companies have long sought the advantage of dominating or owning distribution channels as an element of a winning strategy, channel strategy is relevant to other sectors of the economy as well. Along with brands, distribution is a key factor to success in automobiles, soft drinks, food, beer, whiskey, and household products. Now the central importance of channel strategy extends as well to book publishers, computer manufacturers, media content providers, real estate developers, tour companies and online education suppliers, to name but a few. In today’s more global and more technologically advanced markets, new approaches focused on channel strategy have arisen, creating a whole generation of exciting new business models. Dell, for example, now dominates the directto-consumer PC channel and has become the world’s leading PC company as a result. Amazon.com is a strong leader in the online book channel, building a new business model that has changed the way books are bought and sold. Ebay has a dominant presence in most countries in the ascendant online auction channel. Distribution control is often a key element of strategy, and business models built on a strong leadership position in channel management are often well positioned for long-term success. Capital. Over recent decades, the providers of private capital—including buyout funds, hedge funds, intermediate capital providers and venture capital firms—have added an extra edge to the capital efficiency of the industries in which they compete, or even in which they are seen to be considering investment. KKR, The Carlyle Group, Investcorp, 3i, the Texas Pacific Group, Blackstone, Bain Capital, and the private equity arms of such banks as Morgan Stanley and Goldman Sachs have redefined the ownership and operating landscape of American, and even global business. In friendly and hostile transactions alike, the high return expectations of the limited partner investors in these private capital firms have driven many businesses into a more efficient operating mode and to ever higher levels of return on equity. It is interesting to note that The Carlyle Group, now operating on a global basis from its headquarters in Washington DC, derive their company’s name from a high-end hotel in New York which the early partners in the firm liked to frequent. Given the world class caliber and membership of the Carlyle operating team and original Advisory Board, thoughts also run to the historian Thomas Carlyle, whose world view was driven by the idea that the significant events of history were driven by the appearance and actions of a few “heroes,” or great men around whom history revolved.

The Evolution of Business Strategy In some ways the entire industrial landscape of the United States was restructured by the appearance and actions of a few highly capable individuals at the top of a very few private equity houses and privately dominated businesses. With a constant focus on asset efficiency and pursuit of value arbitrage opportunities, the private equity houses have shown that there are indeed powerful lessons and great benefits to be harvested from a focus on the capital element of strategy for all companies, private and public alike. Capabilities. Not all successful companies are young, nor operate from major centers of industrial or political power. The Liechtenstein Global Trust, better known by its initials LGT, has operated quietly but extremely successfully from the tiny Principality of Liechtenstein, located in the heart of Europe, for nearly a century. LGT is owned entirely by the Prince of Liechtenstein Foundation, an investment vehicle associated with the ruling family of the country whose noble history stretches back over a thousand years. The current LGT businesses are ably chaired by Prince Philipp von und zu Liechtenstein himself. These businesses, and the Princely family, have built carefully on a long established reputation of managing client funds, and the Princely family’s own, with discretion, reliability, and continuously superior performance. With family wealth now mounting into many billions of dollars, the extraordinary wealth management expertise of this low-profile aristocratic family has grown steadily across many generations, and now even spans many centuries. Although the success of the private banking business has been driven by a well-proven capability to structure and manage client and family funds on a discrete basis, a strong dedication to achieving the highest return for LGT’s clients also contributes to the service capability of the organization. When performance of a third-party portfolio manager fails to stand up to rigorous and systematic scrutiny of total net return from a client’s perspective, after an accurate determination of all associated operating fees and charges, the experienced management team has not hesitated to terminate money management mandates. When falling short of benchmark performance, even some of the world’s leading investment banks have lost fund management responsibilities. The funds are then immediately placed with better performing fund managers to raise overall portfolio performance. As a result of this rigorous approach to money management, LGT funds outperformed the MSCI index by nearly 30 percent over a recent 5-year period. Now extending the successful business model from its traditional private banking origins in Europe to include private capital funds and private client wealth management in more markets around the world, LGT has shown that a relentless long-term focus on a core set of capabilities can win out, even in the rarified world of providing discrete financial services to the world’s wealthiest individuals.

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Context. Although Olam International will be described in more detail later as a fascinating new supply-chain manager with a differentiating approach in almost every element of the 7C’s model, perhaps their greatest concentration lies in exploiting changes in the context in which the company operates. While focused on serving the logistical and product needs of modern multinational food and industrial companies in the United States, Europe, and Asia, Olam has successfully ridden a global wave of deregulation in the origin markets of their key product areas. Following the decertification of commodity boards in numerous origin markets, Olam was able to capitalize swiftly on the opportunity created by the change of context. Managers were able to develop highly profitable businesses and top global competitive positions in most of their product areas, from a world number one position in cashews to top three positions in other agricultural and industrial product areas. By providing a low cost and highly reliable supply-chain service “from farm gate to factory gate” in 39 jurisdictions with increasing value-added that provides margins double those of most competitors, Olam has been able to convert a change in the public regulatory system into a great commercial success story in the private sector.

Results In all of these cases, the companies selected consistently demonstrated a desire to set and achieve the highest standards of performance. The successful Results element of the model has been proven to be common to the strategies of all of these companies, no matter how different their strategies, how varied their origins, or how diverse the industrial sectors in which they compete. Dell has become the acknowledged world leader in the highly competitive global PC market. Southwest Airlines have been the most imitated of airlines. American Express has become the model of service and customer focus on a segmented basis for many competitors, and a valued corporate partner for many of the world’s leading business enterprises. GE has often topped the Fortune 100 list as America’s most valuable company and is acknowledged as providing many of the world’s best managers. Carlyle has achieved high double digit returns on capital for many years and attracted some of the most powerful world leaders to their advisory board. LGT has moved from strength to strength, with Tier I capital and earnings momentum two to three times that of less successful competitors. The strength of the LGT business was formally recognized recently as both Moody’s and Standard & Poor’s awarded the bank a “double A” rating—their highest ratings in the relevant category. Olam, with sales in 2003 of nearly US$1.5 billion and profit margins twice those of their most comparable competitor, have built a successful business from startup to the present day purely on an organic basis, without the need for a single acquisition.

The Evolution of Business Strategy In these consistently superior results, across a rich variety of business sectors and environments, one can see the value of focus and the benefit to be gained from strategies which created unambiguous differentiation where it really mattered. By mastering all elements of strategy and focusing resources on the most critical areas of differentiated competitive performance, these winning companies stand as testament to the value of designing and implementing thoughtful and effective strategies. This STRATEGY package will take you through a process to set and implement a strategy which draws on the lessons from these winning companies and allows you to create your own unique business success story.

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CHAPTER 2

Principles of the New Paradigm

One of the reasons why traditional models have failed to keep up with the pace of change in the business world is that most are, in essence, static snapshots of businesses and industries which are constantly in a flowing process of change, redefinition and evolution. The old models simply do not work for businesses which operate within a new and incessantly dynamic paradigm which requires decisions and investments aimed at creating results in a future which is different from both the past and the present. Business and economic scholars are now becoming much more aware of the fact that business systems are evolving more like flowing “biological” entities with a dynamic interconnected nature than like static building blocks or components of a rigid or isolated strategic architecture. Business systems are neither static nor simple, and they can only be addressed on a more holistic and “living” basis. Strategy, reflecting this realization, is also becoming more flowing, more vital, and, in the end, far more capable of managing amid complexity and constant change. Modern authors use the language of a corporate “ecosystem,” where all processes in a business are seen as interrelated in a coherent, dynamic, and living system. Data flows, product or manufacturing chains, social systems and cultures, value-added chains, and all other moving components of the modern organization are similarly (and validly) described as independent dynamic systems and as interdependent subsystems within an overall flow. Strategy now needs to take these observations more fully into account, to understand better the relevant patterns created, and to know in greater depth what they will mean in the future for designing and executing strategies. In order to understand better, and to profit from that improved understanding, the principles of this new paradigm require deeper analysis and more informed action. Many of the principles of the new paradigm share the universal characteristics of dynamic systems and as such can be analyzed, predicted, and managed. For each systemic characteristic described below, and for each common pattern, there is a need to determine future direction and define strategic imperatives to drive change to the benefit of the informed strategist. 38

Principles of the New Paradigm Principles of the New Paradigm Globalization Complexity Dynamism Turbulence Acceleration Rationalization

Obsolescence and reinvention Connectivity Convergence Ephemeralization Consolidation

While not unique to the business world, there are 11 recurring patterns in global, social, and economic systems that may provide useable input for a more informed approach to business understanding and strategic action. Taken together, these principles combine to create an entirely new business paradigm. Mastering the elements of any new paradigm is an essential element in developing a winning strategy in the markets of tomorrow and creating valuable sources of competitive advantage today.

Globalization Globalization redefines many of the major sources of business risk and opportunity today. It is no longer just business entities—suppliers, customers, and competitors—that are “going global.” Voice messages, data and information, products, people, capital, images, ideas, hazardous waste, pollution, drugs, obsolete factories, vehicles, careers, families, friends, and almost anything else you can think of can now be transported between the major centers and remote corners of the world with increasing speed and efficiency. Ships, aircraft, trains, automobiles, trucks, telephones, faxes, satellite relays, interbank networks, express delivery companies, the Internet, and intranets provide delivery, distribution and communication systems that efficiently span the world. The new principle of globalization, perhaps the most commonly cited element in the evolution of complex modern businesses and economic systems, constantly creates new management and human challenges. Looking back, economic data shows that the world was actually more global a hundred years ago, based upon trade and investment flows. Yet the business world today has evolved in an entirely new and different global order of competition and operation. Unlike periods in the past of high global interconnection, businesses and trading systems around the world now work around the clock as well, seeking opportunities and managing risk in more than 200 countries spanning 24 time zones, 24 hours a day, 7 days a week. Global enterprises employ technology and modern business practices to

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overcome barriers of different histories, languages, cultures, communication standards, regulatory systems, and economic structures. Money moves freely and virtually instantly between destinations, seeking the highest available return from the most attractive markets, wherever they may be. The microeconomic laws of supply and demand, which once applied principally to local geographic markets and set prices in independent currencies, now apply at a global level as goods, services, money, people, jobs, and other elements of the global business mix flow smoothly from one country or currency zone to another with little interference, interdiction, or control. With their highly visible signs, McDonald’s, Burger King, Domino’s Pizza, and other fast-food franchises are transforming eating habits around the world. Other brands are establishing new standards of global social status and aspirations. The long-term growth in export sales of Rolex watches from Switzerland, Mercedes-Benz cars from Germany, Louis Vuitton luggage from France, Gucci handbags and shoes from Italy, and Ralph Lauren sports apparel from the United States reflect the growing global nature of luxury brands, high level consumer taste, and socially aspirational values. Less visible companies such as Air Liquide and British Oxygen serve the world’s industrial gas markets. International airlines have gone from operating national hubs and spokes to creating vast networks of international routes, sharing codes, establishing international alliances, and funding powerful, computer-driven global reservation systems. Even in businesses once considered local, the world is opening as never before. Financial services businesses such as Citigroup, HSBC, Goldman Sachs, and GE Capital, law firms, and even once sleepy local utilities are spreading their wings in new models of international expansion. As with all other paradigm principles, each observation of dynamic systems behavior can lead directly to insights which can inform business decisions, lead to beneficial action, and contribute to profitable change. In this case, an understanding of the global nature of future competition can identify the scale or nature of operations necessary to compete successfully, identify new opportunities, and highlight the strategies, alliances, acquisitions and operating targets which can lead to overall victory in competitions fought on a global battleground.

Complexity Modern business is rapidly getting more complex. Companies are multinational and transnational. Product and service options proliferate. Logistics, technologies, and manufacturing systems flex and evolve globally. Competitors, suppliers, distributors, owners, and managers all operate amid perpetual change and growing complexity.

Principles of the New Paradigm The challenge of this complexity is both practical and theoretical. The more complex a system, the more opportunities there are for growth—and also for systemic failure. The more numerous and dynamic the variables, the greater is the chance for a catastrophe in both the mathematical and real-world senses of the term. Catastrophes could appear as an unexpected event or a series of related events, apparent discontinuities in the operating paradigm not anticipated by most participants in the market. The 1997 and 1998 emerging market crises would fall into this category, as would the 1987 Black Tuesday, Marlboro Friday, the “tech wreck” of April 2000, and other business, capitalmarket and macro-economic headaches of recent years. Complexity is not purely the province of capital market or global enterprises. Internal or product complexity is also growing apace. Vehicle manufacturer BMW famously suggested that there is now more computing power in its 7-Series automobile than in the rocket that put a man on the moon 35 years earlier. Major German universal banks spent more than 1 billion euros a year on information technology alone to support ever more complex and costly universal banking models. The Internet can now link hundreds of millions of personal and mainframe computers and users around the world. The Star Alliance, which links some of the world’s leading airlines, now flies thousands of flights every day from many of the world’s major cities. Its reservation system books seats for millions of passengers a year from more than 100 countries and cities with countless variations and special instructions. The number of countries in which companies compete, the wide range of products and services they provide, and the needs of managing a global network of suppliers, partners, and customers inject complexity at all stages of the business system. In dealing with complexity, perhaps the most important element of an effective response is to set a clear and compelling vision to guide the organization and to pursue that simple vision through a limited set of highly effective priority actions. Constant focus, up to date information, effective communication, and uninterrupted effort of sufficient magnitude can bring about constructive change in any complex dynamic system.

Dynamism Constant development and change is the order of the day in finance, telecommunications, consumer goods, manufacturing enterprises, services, and every other area of endeavor for modern enterprises. In some cases, the driver of accelerated change has been a lifting of restraints on the natural evolution of micro- and macro-economic systems. The removal of Regulation Y in the US financial services business, for example, which previously capped

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passbook savings rates at an artificially low level, unleashed a dynamic storm of competition, consolidation, and change. Removing this artificial constraint on the development of financial systems led to the creation of money market certificates, launched waves of new non-bank competitors in the financial services market, and led to vastly more fluid capital markets. It triggered a process of dynamic development and global consolidation still being played out more than two decades after the regulation was abolished. A similar impact was seen in the United Kingdom following the “Big Bang” in the national financial services sector, ushered in by the revolutionary Financial Services Act of 1986. Privatization and the removal of trade and capital barriers also initiated major change as they too released pent-up forces which soon drove many industries into entirely different competitive configurations. A second dynamic driver is the impact of new enabling systems, often created by advances in technology and telecommunications. A third driver is the removal of conceptual inhibitions to business development, as new business models from various sources opened the minds of executives to new possibilities, and reset industry standards of excellence. The key to managing a dynamic system is foresight based on an understanding of the basic trends and their implications, coupled with rapid and effective response. There is more need for constant monitoring and setting of pre-established trigger points to activate responses. Advanced scenario planning, shorter strategic planning cycles, greater planning flexibility, increased investment in organizational capabilities, and real time strategy monitoring can lead to effective responses to environmental change. Adhering to a common and enduring set of values can also be essential to guide an organization steadily through periods of destabilization, dynamism, and change.

Turbulence Turbulence creates or reflects greater than average discontinuity in a dynamic system. It occurs where there is dramatic change in the external environment or in the critical variables and functions of an internal system. It can occur predictably, periodically, or irregularly in the evolution of any business. Characterizing turbulence in business are rapid changes in the regulatory or competitive order, fundamental changes in business definition, or dramatic changes in the nature of products, services, or distribution systems. The majority of the world’s industries now consider themselves in a period of extended and redefining turbulence. Destabilizing turbulence has become the new normal operating environment for modern businesses. The computer, financial services, automotive, steel, retail, food, tobacco, alcohol, accounting, defense, and airline industries, to name but a few, are all in a period of destabilizing change and highly visible turbulent transition.

Principles of the New Paradigm New leadership in an organization can also create internal turbulence in even the most stable of external environments. Recent analyses show that the arrival of new leadership is often associated with the onset of a constructive period of turbulence leading to significant change and visible increase in value to shareholders in an enterprise. Turbulence creates deep opportunity— and even perhaps the necessity—for positive redefining change. Necessary changes can be made without the constraints of personal association with old strategies, traditional solutions, or an ingrained predilection to accept satisfactory underperformance as the accepted status quo. According to a Bain & Company survey on turbulence spanning 8,000 companies in 17 industry sectors over more than a decade, environmental or external turbulence and catastrophe created significant competitive volatility and opportunity for strategic change. New leaders emerged in two-thirds of the sectors surveyed. The winners had returns to shareholders of more than 20 percent a year. Losers in the same sectors had returns of less than 5 percent a year. Former leaders, saddled with the high operating costs of industry leadership, but not the benefits, dropped to less than half the return levels (measured in total shareholder return) of their replacements at the top of the industry league. What can we learn from this experience? The winning formula in turbulence was found to be driven by four key factors, all organizational. First, the winners were externally focused and able to track and respond swiftly to changing events around them. Second, they were fast and flexible in response, not slow and bureaucratic. Third, they were long term in outlook rather than preoccupied with the immediate—navigating, as one winning executive stated, by the horizon, not the headlines. And fourth, they were constantly dissatisfied with the status quo, constantly searching for opportunities to improve future performance, no matter how successful they had been in the past. Organizations need to measure themselves accurately against these four winning characteristics and change how they operate when they fail to measure up to requisite standards of excellence. New capabilities can and should be built to profit from inevitable destabilization of the old order, but these new capabilities can only be successfully deployed in an environment where the surrounding organization supports, rather than hinders, their effective deployment. Turbulence primarily occurs around significantly changed circumstances, major events, and at critical points where different business systems come into contact. The strategic management imperative is thus to predict and respond to the causes and effects of turbulence promptly, preferably well ahead of competitors, and certainly well in advance of catastrophe! For a predictable period of turbulence, a counterbalancing organizational capability can be well prepared in advance and quickly deployed to manage or benefit from the onset of inevitable change, even if the precise timing, content, and nature of the future challenge are not yet known.

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Acceleration Not only is change now constant, the pace of change is accelerating in almost every dimension. The unprecedented pace of technological change and its spreading influence only accelerate overall change in an already rapidly evolving set of global economic systems. Even Moore’s Law, which forecast a doubling of processor power every 18 months, is already long out of date. Each doubling of power has now accelerated to a rate exceeding a 100 percent increase in capability every 12 months. In some cases, great investments in business and in military projects are made deliberately to speed the pace of change to develop new products, new channels, new weapons systems, and new delivery capabilities ahead of competition. This accelerating pace of change shows no sign of relenting. In business, time is increasingly a key success factor in competition. Toyota Motors recently announced that it could make a car in 5 days from the time of order to delivery, a dramatic reduction from the previous average of 30 to 60 days. The pace of product development, logistics chains, and other elements of competition are now driven by competitors and technologies investing to accelerate change in order to create competitive advantage. In many cases, globally accessible technology and adoption of global best practices from all available sources are key factors in this acceleration. A fast-moving cyber-world of interconnected networks of individuals, content providers, distributors, and manufacturers is another reflection, and source, of acceleration in the rate of change. The rapid rise of the Internet and its real-time responses to ever-more-demanding customers is only one of the rapidly evolving sources of technologically driven change. There are many views of the future of the Internet, but all of them share the expectation that the system will change radically and quickly, and in ways that will stretch the capabilities of even the most seasoned and intelligent systems experts. John Chambers, Cisco’s fast-talking CEO, admitted years ago: “[the technology] industry is moving so fast that it is almost impossible to keep up with it.” Going back in time, the early study of factory worker time and motion spawned the efficiency consulting industry, whose genesis lay in accelerating task execution. Reducing task time on a fixed cost base created lower unit costs, greater profits, and relative competitive advantage. The Second World War production example cited above confirmed that the efficiency of producing aircraft was accelerating and that each accumulated unit of experience produced a predictable decline in the time and cost required to assemble an aircraft. The experience curve was born, setting out a predictable trend of declining unit cost as an organization gained scale, accumulated experience, and built its internal knowledge base. As individual and organizational knowledge rose up the

Principles of the New Paradigm learning curve, costs and time to produce slid down the experience curve at a parallel rate. More recently, the competitive value of superior time management has been rediscovered, and accelerating the “time to market” has joined reducing the “time to produce” as a critical success factor in the modern business world. For some, the winning strategy in an environment of accelerating change may be to accelerate change even faster, leaving less capable competitors wallowing in the leader’s wake. In the words of Intel’s former CEO Andy Grove, strategies in the technology sector should be mindful of an exhortation to “accelerate the pace of change and amplify the magnitude of your impact.” These words underscore his powerful view that the combined mastery of speed and impact is a critical strategic tool in the fast-paced new economy.

Rationalization The objective of every business enterprise is to achieve the most efficient means to the desired ends. Customer needs should be met at lowest cost and maximum extraction of available revenue. Managers use information, technology, experience, and judgment to allocate capital, staff, and other assets to produce the highest available return consistent with the creation of substantial competitive advantage and long-term shareholder value. The result: a system in constant evolution toward a desired end on the most efficient and effective basis possible. It is an essential aspect of management and STRATEGY to ensure that both the end goal, the vision of an enterprise, and the pursuit of that goal are in full alignment. Confusion, contradictory effort, or resistance can only absorb scarce resource without positive effect. Over time, economic systems tend toward a more efficient relation of means to ends, as do other dynamic systems. Forces will seek paths of least resistance. Energy-efficient behavior consistent with achieving a prescribed objective at lowest cost will be visible, with human behavior no exception. One critical aspect of systems management is to understand and, if necessary, redefine the end goal that drives the rational behavior of the overall system and its individual elements. That goal is the end point that determines all supporting decisions and determines actions within the whole system. The goal of an enterprise— cash flow, earnings performance, shareholder value, profitable growth, social impact, or other—will determine how an organization defines success and to which end its decisions and actions should rationally be aligned. A key element of success in guiding systemic behavior is to assure that the perceived end for each person within the system is in fact the same end as for the whole group. Multiple agendae and dissimilar objectives can create discordant behavior due to a conflict of objectives, and therefore a conflicting set

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of “rational” behaviors. Aligning strategies to pursue identical objectives in the most rational manner, for both individual and collective effort, is a key element in the mastery of this paradigm principle. Acting on a consistent and clear set of priorities is a key step in making your operation as rational as possible, achieving the desired ends of your business with the relevant means deployed as efficiently and effectively as possible.

Obsolescence and Reinvention Systems change over time. Understanding historical rules and rates of change is thus necessary for taking effective action, but may no longer be sufficient as a knowledge base for strategy. New paradigms have redefined competition and reset challenges for modern managers by demonstrating “discontinuous change,” presenting an entirely new state of the market and generating responses to action within it in a manner not predicted by straight-line interpolations of the past. Some changes are so profound that they do not just shift a business incrementally. They require discarding old models entirely, rethinking the business and adopting an entirely new approach for the future. Perhaps the most famous characterization of a misguided adherence to outdated perceptions and strategies is the military adage that “today’s generals are always fully prepared to fight and win yesterday’s wars.” The same is true of many failed strategies in the business world. Computerization, the Internet, genetically modified organisms, and other life science breakthroughs are just a few of the most visible changes rendering old models obsolete and new approaches necessary. Nowhere is this paradigm principle clearer than in the music retailing business. Once dominated by small record shops, the business of retailing records, eight tracks, cassettes and now CDs, VCDs, and DVDs has gone through very public waves of obsolescence and reinvention. The small shop gave way to medium size chains like Tower Records, Musicland, and HMV. These medium size chains, once enormously valuable, are now shrinking, closing or changing hands for relatively paltry sums of money. Large chains like Wal-Mart, coupled with the powerful new business model at Amazon and other on-line distributors, have changed the face of music distribution. But even as these giants were emerging, the on-line community of Napster rose and fell, leaving in its wake the seeds for new models of legal on-line music file downloads presented by iTunes and Soundbuzz. Obsolescence of the old, successful innovation of the new, and necessary reinvention to profit from future change continue to flicker past in this industry at great velocity. Companies that fail to adapt to new standards and paradigms are often condemned to highly visible failures. Long ago, IBM missed the opportunity to dominate the emerging market shift to personal computers, eventually losing billions of dollars trying to catch up. The obsolete approach of overreliance on

Principles of the New Paradigm a mainframe product base, no matter how strong that base, locked IBM out of a highly profitable market segment for many years. It should be noted that IBM’s successful turnaround and reemergence as a world leading services provider has proven that even once obsolete approaches can be reinvented on a profitable basis. American carmakers, pursuing outdated concepts valuing extravagant design and size, were decimated in the 1970s by Japanese competitors more in tune with a new need for smaller, cheaper, and more efficient vehicles of higher quality and greater reliability. Ironically, much of the success of Japanese penetration in the US market with superior products and product quality was underpinned by their adherence to the quality concepts of American statistician W. Edwards Deming. His integrated understanding of manufacturing, quality, cost, and statistical control created a new paradigm that enabled a whole new generation of automotive and industrial leaders, many of them Japanese, to rise from the ashes of the Second World War and reinvent themselves as leaders in some of the world’s largest industries. Unbundling formerly integrated value chains in the airline business also led to a new and more focused model of competition for the leading airlines of the world. The sale of non-core catering operations and ground handling units, the outsourcing of jet engine and airframe maintenance, and the sharing of costs of expensive reservations systems allowed the more advanced airlines to focus scarce resources on differentiating characteristics in cost, customer service and network management. The once successful fully integrated business model was proven obsolete over time and left behind by more thoughtful, and more profitable, operators. Successful companies adopted a whole new approach to airline competition and to their own business systems. The best have now reinvented themselves as lean, focused players with extremely low operating costs, an ultra efficient route structure, a harmonized fleet configuration and as little asset exposure as possible. Airline industry consolidation, driven by sequential waves of mergers, acquisitions, and alliances, has and will continue to contribute to redefining that industry for many years to come. Where a system is constantly changing and redefining its content and its boundaries, the strategic imperative is to develop a capability to anticipate change and reinvent a business model as appropriate. Constant monitoring and interpretation of factors triggering obsolescence are required. This in turn places a high value on breakthrough strategies that take advantage of, or even create, positive change in the basic model. Creativity and capability are at a constant premium. Attracting, retaining, and motivating the right people who can master discontinuity and reinvention become more than ever differentiating factors and key success factors, in a sea of change. Without the benefit of high quality managers and fresh thinking, companies and leaders

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playing by yesterday’s rules, or clinging to obsolete models, may find themselves leading businesses to make wrong decisions that will cost them dearly in tomorrow’s markets.

Connectivity The new state of interconnectedness of the business and personal worlds has been neatly summarized by one of the leading experts and more eloquent spokesmen on the evolution of technology: We’re talking about connecting everything in the world to everything else. That means that every artifact that we make will be embedded with some chip, some little sliver of dim intelligence, maybe only as smart as a bee or an ant. But all of those pieces, some of them moving around and some stationary, will be connected, and will be communicating with each other. So, the graph of the number of things that we make, and the graph of the numbers of things that are connected, will in the near future converge and meet, and everything we make will be connected to everything else. And that is the network. That is the Net, in the large sense that we talk about.

Connectivity and interconnectivity are not just about computerization and the global Net. It is a phenomenon of the weather, trading systems, the global energy grid, cultural norms, and behavior in old and new dynamic systems. With the push of technological advance, the interconnected world is becoming more visible and links more subject to deliberate understanding and management. Even the remote Himalayan Buddhist Kingdom of Bhutan is now wired to the Internet and receives satellite television after centuries of isolation and near absolute cultural independence. New value-managed relationships, which integrate supplier and customer economics in new win–win combinations, break down barriers between formerly separate stages of the value chain and connect previously competitive enterprises through coordinated logistics and formal alliances. Cisco’s early view of the development of the Internet still captures the flows guiding the future of that brave new world. The Cisco view of the future of technology was broken down into seven related stages, capturing a vision of consolidation, connection, and convergence of activities in a leading edge technology-driven industry: 1. Consolidation of data networking companies. 2. All-in-one data-voice-video networks. 3. Consolidation of phone companies.

Principles of the New Paradigm 4. Availability of free voice services over data networks. 5. Consolidation of data and voice companies. 6. Optical internetworking, with broadband available everywhere for the cost of POTS (plain old telephone service). 7. Ultimate interconnection of systems—getting everything connected is everything. A corollary to connectivity and interconnectedness is interdependence. As all things become more visibly interconnected, they will depend more on each other. The holistic nature of individual systems and the “system of systems” is an inevitable construct that emerges from an understanding of accelerated and universal connectivity. From a commercial standpoint, realization of this more interconnected nature of the business world raises a whole new set of challenges. It is more essential than ever to understand and react to external trends and influences, developing future-oriented strategies which take into account the full consequences, internal and external, of present and future changes affecting a commercial enterprise. All of the principles of the new paradigm are interrelated and the most relevant results of this new paradigm will need to be incorporated into a comprehensive and thoughtful approach to strategy.

Convergence Convergence occurs when two or more different systems move toward a common end point or pattern without merging or fully consolidating into one single entity. Parts of their systems, but not all, will blend, integrate, and mirror each other. There will be more points of contact. Converging businesses, for example, will look more alike and act more similarly over time. The borders between systems will further break down over time as incentives and influences drive systems with similar objectives and technologies toward a similar set of operating characteristics. This paradigm principle is, as one wag put it, “as clear as the Palm in your hand.” With mobile telephones integrating organizer functions and cameras, PDAs adding telephony capability, and portable e-mail devices like Blackberry integrating both, the world of handheld devices reflects an underlying trend of technological and functional convergence. Although business systems can diverge or collide as well as converge, the majority of systems relevant to the leaders of businesses today are more likely to be on some converging paths toward a greater sharing of characteristics in a more interconnected future.

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STRATEGY The trend toward greater convergence can be seen clearly in the institutional evolution of financial services. Banks, insurance companies, stock brokers, investment banks, private banks, financial planners, and private wealth managers are converging with competitive service offers to capture the profit pool available in serving high-net-worth individuals. All of these competing businesses are offering to take over lucrative wealth management functions that can last for a customer’s lifetime, or even beyond. The manufacture and distribution of asset management products is a convergent hunting ground for all these players, with bewildered customers facing a dizzying world of choice that deregulation and globalization have recently thrust upon them. In another example of convergent global customer behavior, the consumption of beer, wine, and spirits in countries with differing traditions has now evolved toward a common global pattern. Over the past 60 years such winedrinking countries as France and Italy have demonstrated a long-term decline in the liters of pure alcohol consumed in wine, while relative beer and spirits consumption has increased. Traditional beer-drinking countries, such as Germany and Austria, have been consuming less beer and more wine and spirits. Similarly, spirits-led countries are heading toward higher consumption of the softer alcoholic beverages of wine and beer. Eventually, there could well be a roughly even mix of drinks in most countries, as measured by liters of pure alcohol, unless taxes or other artificial interventions disrupt the natural convergence of the industry. As patterns and systems converge, the critical factor for management success is to develop a strategic response to profit from the end-state toward which the systems are converging and to benefit from opportunities created by the movement to convergence along the way. If that end-state carries with it high costs or risks to an existing business model, the model needs to change—and well before it becomes obsolete.

Ephemeralization (Moving to the Virtual) Awareness of the phenomenon of increasing ephemeralization, or the process of becoming less physical and more virtual in manifestation, is one of the many fascinating legacies left by R. Buckminster Fuller almost half a century ago. In his view, many systems and connected networks were becoming less present, even as their functionality increased. The tracked becomes trackless. The wired becomes wireless. The fixed becomes mobile. The drawn out becomes instant. The large becomes small. The assisted becomes independent. The present becomes remote. The visible becomes invisible. The physical

Principles of the New Paradigm becomes virtual. Systems, services, and products seem to vanish into a virtual background over time. Ephemeralization is an unending process in multiple dimensions. Expounded by Fuller in the 1960s, this paradigm principle can be seen in system after system in the modern business world, years after its prescient identification. This set of systems characterized by ephemeralization would notably include modern telecommunications (with small, mobile, wireless handsets operating virtually instantaneously on an unassisted basis), finance (who goes into a branch for assisted cash withdrawal transactions any more), retail (with online shopping), computers (ever more portable, smaller and more powerful), and other technologically transformed systems. One expert described the development of the computer-based cyber-world as one that was progressively “dissolving into the environment” as intelligence becomes embedded invisibly in everything from appliances to clothing. One leading researcher talked of software/hardware combinations in the computer world becoming so miniaturized that the future would see the development of “smart dust,” which could be placed invisibly almost anywhere in a working environment. The rapid growth of nano-technology is another proof of this pattern in the shrinking world of robots, sensors, and actuators. In this ephemeral world, it is essential to see how this trend will affect products, services, and organizations ahead of competition. It is essential to anticipate change, seeing future trends, and investing to stay ahead of required adaptation and transformation in a manner which creates the maximum competitive advantage.

Consolidation In many businesses today there is a visible trend toward consolidation of formerly independent suppliers, competitors, and customers into larger unified blocks. This can be seen within countries and at a global level as mergers and acquisitions combine ever-larger players into single units. The end of the twentieth century saw the first $100 billion merger and the proposed combination of three banks in Japan to create the first $1 trillion (in assets) financial institution. In the beginning of 2004, with the acquisition of Banc One by J.P. Morgan for $58 billion, America’s second trillion-dollar bank was formed. The scale of these institutions, and the transactions which created them, were both unimaginable only a few short years ago. While the scale of the current wave of consolidation is unprecedented in financial terms, the phenomenon itself is nothing new. A hundred years ago, a similar wave of mergers and acquisitions in the United States consolidated

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STRATEGY small city, state, and regional players into national enterprises for the first time. Now we are seeing the same phenomenon at a global level as smaller national or regional players in telecoms, banking, airlines, pharmaceuticals, energy, chemicals, automotive components, software services, and other sectors are gobbled up in a race for synergy, global scale operation, and sustainable economic advantage. Where industrial consolidation is not fast enough for some national leaders, the pace has been deliberately accelerated. Malaysia’s announcement in 1999 of the proposed consolidation of 21 commercial banks, 25 finance companies, and 12 merchant banks into 10 large anchor banking groups reflected the government’s sense of urgency and the importance of consolidating fragmented financial services players into fewer, stronger, and larger entities in that ambitious Asian economy. The implications in most industries are clear—to set and implement strategies which take into account the full implications of this paradigm principle as it plays out in a specific industry. This trend may profoundly affect competitors, customers, or suppliers. You may have to consider participating in industry-defining mergers and acquisitions yourself, or face the prospect of a competitive future contending constantly against bigger and more powerful rivals who participated more actively in an era of consolidation. The organizational implications are also significant. In order to effect a successful merger or acquisition, and thereby become one of the happy few in the minority of transactions that actually add shareholder value, your team will need to develop the skill of acquiring and integrating other corporate entities and organizations. This integration skill has been proven to be even more important in transaction success than evaluating or negotiating the financial details of a merger or acquisition. Because of its significance for many strategists today, it is worth expanding on this broad consolidation phenomenon a bit further to see in greater detail how it is unfolding, and to understand better how it can best be managed.

Consolidation Across the Business World Virtually every month a major merger or acquisition redefines the financial services landscape, further consolidating the sector and creating ever larger enterprises. Although it now seems like ancient history, only recently Citicorp and Travelers, each with a market capitalization of around $80 billion, merged as a step toward the creation of a financial juggernaut capable of reaching a stated goal of serving a billion customers worldwide. On announcing their merger, the value of their combined shares rose $30 billion, creating shareholder value equal to the then full equity market capitalization of

Principles of the New Paradigm Merrill Lynch. In Europe, following years of growth through merger and acquisition, the top five banks each now exceeds $400 billion in assets. Consolidation is not confined to recent events, nor to the financial services industry. When Henry Ford launched his automotive enterprise in Detroit, there were more than 100 independent automobile manufacturers in America. Many of these were new businesses started to take advantage of the coming wave of horseless transportation. Floundering on the increasing costs of competition, challenged by the increasing demands of technological evolution, or unable to survive the passing of the founding entrepreneurs, many small companies gradually consolidated to become a few (and today increasingly fewer) large ones. Technology, opportunity, cyclicality, globalization, complexity, and a host of other factors drove a pattern of consolidation from entrepreneurial fragmentation to world-scale concentration and massive efficient scale. The British automobile industry, once a pillar of the global industry, has no more independent global scale vehicle manufacturers. The Rolls Royce and Bentley marques are in the hands of BMW and Volkswagen. Jaguar and Aston Martin are now part of Ford. British Leyland, itself an agglomeration of great motoring names, was once swallowed, with some indigestion, by BMW. Outside the United Kingdom, Saab and Volvo have seen part of their businesses absorbed by GM and Ford. Daimler-Benz, the parent corporation of Mercedes-Benz, has merged with Chrysler and tried to integrate, albeit unsuccessfully, with Mitsubishi. Renault and Nissan came together with a creative and enormously successful approach to create more value from Nissan’s troubled assets. Ferrari is part of Fiat, which in turn may one day be swallowed up by GM, its large American shareholder. The long list of recent consolidations goes on at an accelerating pace, despite the difficulties with many individual transactions. The same trend toward consolidation is true for suppliers of automotive components. The old approach to fragmented supply has long been rejected in favor of larger and more consolidated supply systems. No longer do companies supply individual pieces of fabric for automotive interiors or ship seat upholstery directly to giant automotive companies like Ford, Fiat, BMW, or Mercedes-Benz. Now, suppliers contribute to a highly specified integrated interior system, delivered to the customer for last-minute assembly as a single package. The same is true for headlights and lighting systems, electronic and electrical systems, shock absorbers and suspension systems. The impact on the automotive suppliers of giant, consolidated vehicle manufacturers has been striking. One Ford vice president summarized it when he said, “We used to deal with 1,500 suppliers. Now we deal with 200. In the future, we are aiming at 50 key suppliers only. Those companies which cannot keep pace with these changing demands will not survive.”

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Different Visions, Same Result There are different reasons for consolidation initiatives in different industrial sectors, but the result is the same. Domestic consolidation of retail banks, for example, accelerating through the 1970s and beyond, has been one major factor triggering the consolidation of global financial services today. Seventy percent of banking acquisitions over $1 billion through most of the 1990s were retail banks acquiring other retail banks. Half these transactions were in the United States. Interestingly, all the cross-border deals over this time frame were driven by non-US competitors attempting to create access to global scale, something only American institutions can do on their own turf. The reasons for consolidation have consistently been to reduce fixed costs, increase distribution scale, eliminate duplication, increase cross-selling opportunities (primarily in the retail and commercial sectors), provide a larger customer base to amortize brand investment, and reap the benefits of technology spending. The last two points will be even more important to mid-size companies aspiring to a scale of operation where their investments can be spread across a sufficiently large base to compete with the leaders in their industry, leaders who may already surpass the trillion dollar asset threshold. Competing at this level will not come cheap. The information technology spending of the top five banks over the last decade has reached nearly $20 billion. Brand development is also expensive. Four US branded retail businesses alone—American Express, Visa, Citicorp, and JP Morgan Chase—spend a combined total exceeding $500 million a year just on advertising. It has been estimated by industry experts that any retail mutual fund in the United States needs to spend $50 million a year or more on media to make a meaningful impact on the national market. The scale of operation necessary to compete at this level is increasing all the time.

No End in Sight Neither of the two major acquisition trends highlighted earlier, domestic consolidation driven by the potential for cost reduction and the revenue-driven combination of manufacturing and distribution assets, contain a natural limitation on application. Cost-driven consolidations are unlikely to stop at national borders. Nextdoor markets and high-value customer segments will lure acquirers across borders when the marginal return on attacking an adjacent market is higher than the return on investment in further deals in the home market. Eventually, regulators will limit acquisition-led growth within the boundaries of a defined market for competitive reasons. This will push

Principles of the New Paradigm consolidating companies with a growth imperative into adjacent or remote markets, and contribute to the accelerating pace of consolidation in those markets as well. The unrelenting waves of consolidation are particularly striking since, on average, a merger or acquisition fails to create value for shareholders. The acquisitions of Snapple by Quaker and NCR by AT&T were spectacular failures that cost shareholders billions of dollars. BMW and Daimler-Benz soon ran into trouble with their overseas mergers, alliances and acquisitions with British Leyland, Chrysler and Mitsubishi. Although there is a proven approach to effective mergers and acquisitions, most companies, particularly those unfamiliar with the skills necessary to make mergers or acquisitions work, fail to learn or apply best practices. The result is a destruction of shareholder value in the majority of transactions and a very large group of disgruntled investors. During 2002, according to Bloomberg News, the cost to shareholders of failed transactions, as reflected in adjustments to the balance sheets of acquiring companies, was $750 billion. This was the amount required to be written off by changes in accounting rules in order to bring balance sheet values in line with real market values following acquisition. As Bloomberg noted at the time, this amount of write-off exceeded the GDP of the entire country of Canada by 10 percent. An additional $200 billion may need to be written off at a later date, bringing the balance sheet impact of failed American acquisitions to nearly $1 trillion. Shareholders are not the only group to be disappointed with the results of merger and acquisition activity. In one study, 91 percent of CEOs who had recently acquired a business were disappointed by the first year’s results. Despite this dismal record, the consolidation wave rolls on, with each year bringing ever-larger mergers creating ever-larger multinational and domestic corporations. Since there will be no apparent end in our business lifetime to the waves of merger, acquisition and alliance which will continue to consolidate most of the world’s industries, it is incumbent upon management teams to learn how to go about joining the small elite who have established a successful track record in this high-risk set of activities. The successful “serial acquirers” like GE, the private equity companies like Carlyle, KKR, Investcorp, and the Texas Pacific Group, the Hutchinson group in Hong Kong, Diageo in the United Kingdom and Novartis in Switzerland have built business empires on the back of successful transactions. Not all of their transactions work out, but an informed approach which takes into account the lessons they have learned and the approach they practice—including effective negotiation, pre-transaction organizational planning, swift and efficient integration, rapid realization of synergy and operating benefits, a focus on operations, and the pursuit of beneficial cultural change—will guide a less experienced team to a successful result from their consolidation strategy.

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STRATEGY The Importance of a Systemic Perspective Identifying and mastering all 11 of these paradigm principles creates a major opportunity to create long term sustainable competitive advantage and commensurate financial returns for a business. All of these principles of the new paradigm are, at some level, observations of repetitive and predictable patterns in dynamic systems. In order to understand and benefit from insights in this area, it is essential to adopt a more systemic view of our business world and build a greater capability to act effectively on that view. The value of a systemic perspective to drive to new levels of creative understanding and informed action provided the foundation for Peter Senge’s famous Fifth Discipline. That discipline, of developing a learning organization capable of effective systemic understanding and action, underpinned a new and higher level approach to management and organizational behavior. Organizations and individuals that have mastered the challenge of understanding and mastering complex systems have a real ability to influence the content, direction, and momentum of those systems to their enduring advantage. Systemic knowledge, according to Senge, requires different thought processes, new paradigms of conceptualization (called “mental models”) and new behaviors. Like other intellectual disciplines, systemic mastery can be learned and applied. The resulting mastery of complex systems and paradigm principles can create enormous relative and absolute advantage for the knowledge-effective corporation. In applying ourselves to this new model of systemic understanding, it may be essential to open our minds further, even to rely on intuition and experience without being able to explain each and every step in the process by which we arrive at our thoughts and conclusions. Some of the more advanced software packages now available attempt to model out complex interconnectedness and simulate “soft factors” in complex social and human behavioral systems, but none can capture the full range of observation, assimilation, insight and implications for action like the human brain. The holistic capabilities of the human mind may be better than any of its inventions to master complex challenges. Our 100 billion cerebral neurons, each one connected to hundreds of others in shifting patterns of interconnectedness, can sense, process, understand, feel, and generate thoughts and strategies like no machine ever invented by man. The implications for strategy of these 11 paradigm principles, and a more systemic perspective, are extremely important and are built into the STRATEGY program from the first diagnostic stage onward. Understanding and managing these patterns as they are reflected in trends, influences, and

Principles of the New Paradigm dynamic events better than competitors will be a key success factor in the marketplace. It is through a deep understanding of the characteristics and consequences of these dynamic principles, trends, systems, and influences that we can best see what the future will look like. By developing an ability to act today to anticipate the shape and nature of the markets of tommorrow, a business can both see the future with greater clarity and understand the risks and opportunities that are yet to come. That understanding, coupled with a mastery of the required management capabilities, can contribute enormously to capture insights and turn them into valuable actions in the implementation phase of your own STRATEGY.

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CHAPTER 3

Setting Priorities, Rethinking Risk

In the process of setting and implementing STRATEGY, there is no discipline more important than paying full attention to priorities. In the complex flows of events and change that make up the new paradigm in which all businesses now operate, it is absolutely essential to identify those select actions and investments that can truly differentiate your business from competitors, and focus on those priorities with great energy. This will require a visibly greater focus of resources of all kinds on a more limited set of goals and activities. This will also mean cutting out non-priority activities entirely and reducing investment, human and financial, in others. The value of priorities is well captured by an unattributed story circulating on the Internet. Adapted for the purposes of highlighting its application here, the story goes as follows: A business school Professor stood before his class. When the class began, wordlessly he picked up a large empty jar and proceeded to fill it with pieces of rock. He then asked the students if the jar was full. They agreed that it was. Then the professor picked up a box of sand and poured it into the jar. Naturally, the sand went into whatever spaces that had remained between the rocks and filled them up. “Now,” said the professor, “I want you to visualize this jar as a way to think about your business priorities. The rocks are the really important things, those priorities that can make a big difference in the future of your business. The sand is all the little stuff that can get in the way, taking away space and opportunity for the more important priorities. If you only make room for the sand—small items which fill the space but do not make the biggest impact on your overall goals—then there is no room for the bigger items you really need to focus on. If you start your professional day with the small stuff, you may end up by filling up your day with sand and never have room for the truly important ideas and actions that can really create a big difference.”

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Setting Priorities, Rethinking Risk It is essential to think through the relative impact of the choices you face and to allocate resources only where they will have the greatest impact on results and value. Strategy, in many ways, is simply the science and art of resource allocation between contending claims on scarce resources. Conscious decisions to set priorities, reduce business risk, or capture business opportunity are taken on a daily basis. The allocation of resources to specific initiatives on a clearly differentiated basis is the implementation of priorities in action.

The 80/20 Rule One of the best-known rules of microeconomic efficiency is the 80/20 rule. This rule of Pareto efficiency states that 20 percent of any set of customers, businesses, actions, products, or services will generate 80 percent of the benefit. This rule is proven in virtually every industry and company around the world. Most useful may be the observation that 20 percent of customers represent 80 percent of the profit of any enterprise. The value in understanding customer profitability by segment, and in acting on that knowledge to attract and retain more of the most profitable business, is enormous. In some cases the ratio may be 30 : 70, or even 10 : 200, in which case 10 per cent of customers make up 200 percent of profit, and many customers make negative contributions to the overall result. In all cases, the rule of disproportionate contribution holds true and can be acted upon to great competitive and financial advantage. By understanding the greatest sources of current and future profit, and understanding how best to apply the levers of your business to address those high priority areas, scarce resources can be deployed to yield the greatest return for all stakeholders in the enterprise. By focusing those scarce corporate resources on the areas of investment which can yield disproportionately high returns, you will be able to focus your entire business system on those select initiatives which can make the greatest economic difference.

Setting Priorities Like strategy itself, setting priorities is both a science and an art form, drawing on all relevant sources of data, experience, intuition, and creativity to decide what must be done to achieve the full potential of an enterprise. A detailed description of a process of prioritization is set out below, with appropriate forms and examples. A simple version of the final prioritization matrix shows that the approach is fundamentally quite simple and merely requires potential priorities to be arrayed on a 2 ⫻ 2 matrix which compares the value of each initiative with the degree of difficulty, risk-adjusted, expected in the implementation of that initiative.

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This matrix provides a simple visual summary of the relative value of a full set of initiatives and allows a management team to see all potential actions at the same time in a single value-added framework:

Ease of implementation

Prioritization 2x2 Matrix

High

Low

Low High Value of initiative

In essence, the relative value of each priority can be seen as a function of the potential value of an initiative, adjusted by the degree of difficulty in executing the initiative. A highly valuable initiative which is nearly impossible to implement may be of less real value than an alternative of slightly less potential value which is far easier to implement. The first step in the process of effective prioritization lies in valuing, as accurately as possible, each item on a full list of potential initiatives. A second lies in assessing the ease of implementation of each initiative. By accurately assessing both, you will be able to array for discussion with your group the risk adjusted value of each initiative, and begin to make more informed resource allocation decisions between contending options and claims on scarce strategic resources.

Preparation—A Practical Approach One of the most effective exercises conducted in a STRATEGY program can be a group approach to the review and setting of priorities. Following the determination of a corporate vision and preparation by all attendees of their own proposed set of initiatives which could contribute to the realization of the vision, placement of an agreed set of priorities on the indicated 2 ⫻ 2 prioritization matrix in a group setting is an engaging, instructive, and often highly motivating exercise. As for all steps in the STRATEGY program, a simple approach is often the best. Two flip charts, a thick black board marker and a pack of yellow 3M Post-Its (or their equivalent) are all that are needed.

Setting Priorities, Rethinking Risk One large flip chart is prepared in advance with headings to capture proposed initiatives written along the top of the columns. These column headings should correspond to the highest value levers on profitability, performance, and value for the business and can include cost reduction, organic growth, mergers, acquisitions, divestitives, and organizational change programs. The group can work together under the leadership of a single animateur or discussion leader whose role it is to ensure that each initiative over a certain value is raised, properly described in a few words on a Post-It and attached to the flip chart under the appropriate heading. It is worth highlighting that the identification and briefing of the best possible animateur, who may come from inside or outside the company, is an important part of the preparation phase. The other large flip chart is prepared in advance to set out a large empty version of the above 2 ⫻ 2 matrix. This blank matrix can be stood in front of the group next to the chart containing the longer list of initiatives. Following the completion of the relevant list of initiatives and attachment under the appropriate headings, the animateur must be prepared to take the initiative Post-Its off the columns one by one and reattach them, guided by group input, to the appropriate place on the 2 ⫻ 2 matrix. In advising on the placement of each Post-It, the group should bear in mind all elements of value and all issues relevant to implementation. It is essential that participants are reminded that discussions at all times are open, honest, and transparent. It should be noted that these sessions, which lead to the allocation of resources, may become quite heated. The implications of the prioritization exercise can be extremely important for individual careers and corporate direction. Priority-setting sessions are always very lively, to say the least. Some very big business decisions have been reached by a senior group’s real-time determination of the appropriate location on the priority matrix of small yellow Post-Its. The full seven step process unfolds as follows:

Seven Steps of Effective Prioritization Set the vision List potential actions Complete the matrix Select priorities Allocate resources Clarify the choices Implement the strategy

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Step 1: Set the Vision Before setting out the list of potential strategic actions for a business, it is necessary to agree what vision is being pursued. Without a clearly stated larger goal, it is impossible to be sure that strategic priorities are going to align all aspects of a business in the correct direction. To ensure that rational choices are made, the ultimate end goal of the enterprise needs to be understood by all participants in the priority-setting stage.

Step 2: List Potential Actions Before imposing the discipline of a framework to identify the priorities in a list of potential actions, it is useful to ensure that you have in fact listed all of the ideas, actions, or potential opportunities which you wish to prioritize. Although everyone should come prepared with his or her preferred list, setting out a long list is best done in a group setting, with one idea or comment building upon another. The interaction between group members, facilitated by an effective moderator, can draw out ideas from the individual and collective experiences of the group, can stimulate more creative thinking, and can contribute to the overall motivation and esprit de corps of a team. In this discussion, there should be a non-critical atmosphere. One expert moderator describes this as a “no such thing as a bad idea” forum. Evaluating, criticizing, and eliminating the lower priority items can come later. It may be useful to have a minimum threshold on the value of suggested initiatives. The actual cutoff level will depend upon the size and nature of the organization. The cutoff may be on initiatives which have a minimum potential annual impact on profit, NPV or market capitalization. The actual amount will vary by business, and a cutoff could be $10 thousand, $10 million, or even more. What matters is that you identify and act in a focused manner on the most valuable initiatives which can lift your business to its highest possible operating and strategic performance. There are many frameworks which can lead to a comprehensive listing of potential priorities. The 7C’s model is one such framework, allowing your team to think through initiatives related to each element of the model. A second is to elicit lists of ideas by department, geographic region, or headquarters staff group. A third is to set out lists of potential initiatives under the headings of the most powerful levers on profit and value or imperatives to create competitive advantage as described in Book Two. This is the approach selected for inclusion in the basic model of STRATEGY. The example below is selected from the full strategic presentation developed

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in Book Two: Priorities and Resource Allocation Long list Key Levers:

Relative market share

Potential Action

Restore growth in core

Brand values

Add sports range or Acquire Sportius Relaunch ladies' range

Distribution presence

Customer segmentation

New ad campaign to reinforce brand

Grow points of sale to 700 in third party retail

Market research to identify key customers

Redesign/ evolve classic Richesse models

Add 39 new owned outlets

Interactive relationship program with customers

New approach to values / responsibility

Build presence in India

Focus sales effort Richesse Collection roll out

Repackage product B

Portfolio focus

Cost reduction

Sell Perso Leather Goods

Reduce overheads by 20% by year end

Exit all property holdings Add service and restoration division Consider finance and insurance (for watches only)

Outsource non critical administrative functions Merge plants C and D

Step 3: Complete the Matrix Following the generation of the full list, individual items can be placed on the 2 ⫻ 2 matrix to reflect the relative attractiveness of each idea. The matrix captures the value of each initiative, measured in either annual profit or longer term impact, along the bottom axis. This requires the group to have a rough sense of the benefit and cost of each idea. The second axis, the vertical, estimates how difficult it will be to implement each of the initiatives described. The final matrix will both help to decide upon priorities and to make strategic decisions which are based on a more scientific understanding of relative risk-adjusted value of each proposed action, and a consideration of the appropriate strategic imperative for each quadrant in the matrix: Priority Framework Implied Imperatives

Ease of Implementation

High

Low Hanging Fruit

Key Initiatives

Low Value Easy to Implement = Be Selective

High Value Easy to Implement = Essential to pursue

Avoid

Low

Low Value Hard to Implement = Avoid

Long Term

High Value Hard to Implement = Be Selective

Low Value of Initiative

High

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Step 4: Select Priorities Once the full list of potential priorities has been placed in the appropriate positions on the matrix, there will in all likelihood be an excessively long list of potential actions and investments. The final phase of setting priorities requires you to decide how many of the proposed items you can pursue well, and which items are better deferred or cancelled altogether. The selection process will require the group to assess the limiting factors on action. Funds for investment may be limited, or the organization may have only a limited capacity for new programs due to the demands of running the daily operations of the business. Requirements or policies imposed by a parent company may inhibit the actions possible. These elements of limitation need to be considered individually and together to decide where to draw the line (literally) on the priority matrix. Usually, all high-value/easy to implement initiatives should be pursued as the highest priority items. All low-value/difficult to implement items should be avoided. The crunch quadrants are those which have high-value/difficult to implement items and low-value/easy to implement items. In these two quadrants, selection criteria need to be applied most sharply. Further analysis and discussion may be necessary to decide on the finer differences in value to make trade-offs between initiatives. In all cases the priorities selected must be fully aligned with the overall vision and internally coherent as a set of actions.

The Line of Demarcation A final priority matrix would look like the example below, which has also been brought forward from the full STRATEGY example developed in Book Two.

Priorities and Resource Allocation Selection Matrix Key Initiatives

Ease of Implementation

Low Hanging Fruit

Sell Perso Responsibility program

High

Cut overhead

IPO

Launch sports range

Build in India

Buy Sportius

Establish service division

Repackage product B

Grow in emerging markets

Fix Perso

Merge plants C and D

Low

Status Quo

Long Term

Avoid

Low

Fix/grow core business

Launch ladies' range

Value of Initiative

High

Focus

Breakthrough

Setting Priorities, Rethinking Risk The line separating priorities and non-priorities has been drawn based upon the overall strategic option selected, which is informed by all relevant factors on available resources. Drawing this line is a mix of art and science, with input from a range of sources, including finance and HR. These lines, technically known as indifference curves, reflect an equal value for each initiative which falls on the line itself. The further to the right and the higher up on the matrix, the more valuable the item. All items above and to the right of an option line would be selected for inclusion in the strategy if the indicated option is chosen.

Step 5: Allocate Resources Acting differentially upon priorities and allocating resources in line with the agreed priority list are essential parts of the process of realizing full value from a STRATEGY exercise. Having completed the matrix of priorities, managers can allocate resources as appropriate between those selected initiatives which are high priorities, and can avoid funding activities which are low yield, and should perhaps even be discontinued. Even within the selected list of priorities there may need to be further analysis of resources required, based upon a comparison of the needs and benefits of each item.

Step 6: Clarify the Choices Failure to differentiate in action between selected priorities and non-priority items will significantly reduce the impact of your investments and the value of your overall strategic effort. Perhaps the best way to lock in the value of your thinking is to set out very specifically on a separate three-column chart those actions, programs or initiatives which your organization will start, those which should be stopped, and those which should be continued. A chart of this type, which can be communicated throughout a business, is included in the example provided in Book Two.

Step 7: Implement the Strategy This focus on priorities will enable you to exert the maximum force on the must powerful levels of change, avoid a diffusion of effort and maximize the impact of your choices on business profit and value. But only by fully implementing a plan of action to realise the value identified, based on the selected priorities, can you create satisfactory results and realise your overall vision.

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All aspects of STRATEGY, including the process of priority setting, need to lead to full implementation and the creation of measurable results in order to justify the effort invested.

Risk and Opportunity In some cases, the high-level approach to priorities set out above will require even greater rigor in selecting between contending claims on resources. In particular, there may be specific risks and opportunities which would benefit from deeper analysis and understanding for review before setting out a final list of priorities leading to action. In this case, it is essential to clarify further the individual elements of risk and opportunity to achieve full clarity on overall priorities. These definitions can provide insights to guide the allocation of resources to the correct set of priorities. The unbundling of the concepts of risk and opportunity into four specific elements that can be weighed and analyzed gives us the ability to make a more scientific, and hence more informed, choice between dissimilar initiatives. This could help to clarify tradeoffs between such different choices as launching a new product family, shoring up a distribution system against a new competitive threat, or investing in a new technology. There is a definite utilitarian flavor to this application of a more quantified approach to the assessment of business priorities, and that practical approach can improve the quality of overall decision-making enormously.

Rethinking the Elements of Risk and Opportunity It is essential for good strategy, and certainly for breakthrough strategy, to capture and process the content of high level systemic thinking and the detailed content of the constituent elements of risk and opportunity. Both require an ability to clarify the essence of what is going on, and employ that knowledge to the development of better strategic thinking and more informed action. A more refined approach to risk management should not be seen to be the province solely of large corporations. All businesses, regardless of size, need to consider risk management as an essential part of strategy. In addition to clarifying priorities, full risk analysis—environmental, strategic, and financial—can identify even further areas for immediate beneficial action.

The Net Risk Calculus The quantification of any type of risk can be described as a function of four interrelated variables. The quantum of actual total risk can most simply and

Setting Priorities, Rethinking Risk accurately be described in a single formula:

The Net Risk Calculus The scale of the potential harm adjusted by The likelihood of that harm occurring net of The capability to respond adjusted by The probability of that response being deployed effectively

The result of the application of the two halves of the equation—risk and response—will yield a net risk calculus that can be used to evaluate business risk and set priorities on a more informed basis. Scale of potential harm. The scale of potential harm can range from the overwhelming to the negligible. At the upper end of the scale are true cataclysms and tragedies: deep global economic recessions, bankruptcies or loss of key suppliers or customers, theft of essential business property, major staff defections, ethical or stock market regulatory violations, industrial accidents or environmental problems of a major scale related to the operations, past or present, of a business. At the lower end of the scale of potential harm are events of less negative impact. Examples would include lower economic growth, single staff member resignations, delay in product launch, loss of a limited number of customers, or events with a lesser impact on operating results or firm value. Likelihood of occurrence. This scale of potential harm will need to be adjusted for the likelihood of that risk actually occurring to lead to an accurate risk calculus. Where precise risk analysis is available, likelihood of occurrence can be expressed as a percentage, and sometimes even to a decimal fraction of a percentage. In the financial world, for example, components of risk probabilities in some derivative instruments are very carefully disaggregated, analyzed, weighted, and then reintegrated into a single risk coefficient that captures issuer risk, interest-rate risk, market risk, currency risk, counterparty risk, and other risk elements. In the absence of such refined (and expensive) analysis, cruder scales of probability, with broad categories of high, medium, and low, can act as reasonable surrogates for quantitative analysis of the likelihood of certain events transpiring. The probability of harm occurring may be difficult to pinpoint in areas where there is no easy reference table or formula to set an accurate percentage on the probability of occurrence of a particular event or series of events.

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STRATEGY History and a detailed analysis of past and present data trends, which could influence the realization of the risk event, are often useful proxies for a more precise predictor. The combination of the two elements, scale of potential harm and likelihood of occurrence, will yield a result that is significant in its own right and can also serve as a key input to comparative risk analysis. It is obvious that an event of potentially great harm with a high likelihood of occurrence poses a greater threat than an event of little potential harm with a low likelihood of occurrence. Similarly, it is obviously easier to make comparisons within a single system or between similar systems than across dissimilar systems. For example, the potential harm, risk-adjusted, of a major natural disaster or client bankruptcy is difficult to assess relative to the risk of a new product failure. While more difficult to analyze than a comparison of two client credit risks, it is important to value and respond to both on an informed basis. Cross-category comparative risk equations are complex and may well be less than perfect, but they can provide a broad guideline for assessment of priorities and can guide decisions on preventive investment or responsive action where appropriate. Capability to respond. The second half of the risk calculus is the capability to respond to business risk once realized, adjusted by the probability of that capability being deployed. Response can be defined as actions taken to confine or limit the damage caused to business value, or as a capability to repair the full financial damage caused by a realized risk event once it transpires. The calculation of capability to respond to risk is most accurate where there is a proven and documented track record of success or failure in responding to different events. Tests or drills performed in the real world are second best. Intelligent computer simulations may also be valuable. Rough assessments of capability are of the lowest precision, but may be the only available input on response capabilities. In some cases, a range of outcomes based on different assumptions may be the only realistic product of the diagnostic effort. Response capability may need to be specified by stage in the unfolding of a particular risk event. For example, the consolidation of competitors through mergers can trigger a sequenced program with differing responses along the way. It is possible, for example, that the best response to a competitive merger is to attack the customers of the combined enterprise with better product and service offers while the two businesses are preoccupied with the merger, and client concerns are not fully addressed. Simultaneously, you may hire an executive search expert to surface the star performers in either company who are likely to move for one reason or another, and open discussions with selected individuals. At a later date, you may even want to launch your own merger or acquisition initiative, even including the newly merged entity as and when it (probably) encounters difficulties in its own integration and

Setting Priorities, Rethinking Risk development programs. Each of these responses requires a different capability and thus reflects a different probability of success. Probability of capability being effectively deployed. The probability of the response capability being deployed effectively, and on a timely basis, is the fourth and final element in the net risk calculation. Powerful fire engines and sophisticated firehoses are of little value if trucks remain parked in the station house or cut off from a supply of water. Excessive delay in deploying resources can also reduce the impact and results of response initiatives. Delayed deployment may be equally as damaging as non-deployment of resources in a time-sensitive situation. If corporate firemen are delayed at the start or on their way to a fire scene, they may only find a smoldering ruin upon arrival. This would be true of delayed response to a competitor’s new product launch, pricing change, advertising blitz, acquisition bid or other similar urgent demand. The total response capability is thus a combination of two main elements: the actual capability to respond to the realized risk event and the probability of effective deployment of that capability. Net risk assessment. By combining all four of these elements, a calculation of real net risk can be assessed. Net risk assessments in different business situations will vary as a result of different inputs on scale of potential harm, probability of that harm occurring, ability to respond, and probability of effective deployment of that capability. A more quantified understanding of risk will be critical for decisions on strategic resource allocation, deployment planning, and on other investments related to risk management.

Risk Compounded One new and particularly troubling risk in the new paradigm is the risk of a compounded effect at the points of intersection and interaction of interdependent systems. This could increase the potential for damage on an exponential basis. An example of this compounding of risk is the interconnection of the computer web with business operations and the global capital system. A catastrophe in one area can now easily spill over directly and immediately into another. A virus or a catastrophic computer failure could have a major impact on the capital markets or on vulnerable business operating and control systems. Just as old-fashioned power shortages would have a direct negative impact on dependent factory operations or hospital operating theaters, a computer virus can now attack the central nervous system of factories, hospitals, and emergency mobile dispatch systems. A single virus can trigger catastrophes at thousands of new points of contact and intersection. The relevance of

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catastrophe and chaos theory is plain to see, since the complex dynamic nature of any one system can mean that a small change elsewhere in just one element can trigger a catastrophe and cause dramatic change elsewhere on an apparently discontinuous basis. Management and reduction of the potential for these compounding risks to have a major impact on your business needs to be considered. Physical, data, and commercial assets need to be reviewed for vulnerability to these kinds of compounded risks. A more complex view of risk, and the need to identify priority opportunities for risk reduction, cannot be forgotten in the search for the most effective STRATEGY. The output of a more sophisticated analysis of risk and opportunity will help to set priorities and will supply content for the risk management step in your STRATEGY program set out in Book Two.

The Opportunity Calculus A full understanding of business opportunity starts by unbundling and evaluating the constituent elements in a business opportunity in a parallel fashion to the understanding of risk set out above. The actual content of an opportunity can also be divided into four interdependent parts. The first two—value of the opportunity and likelihood of it arising—make up the content and potential scale of the opportunity. The last two—capability to capture the opportunity and probability of effective deployment of that capability—operate to assess how likely it is that the potential opportunity can be realized. The combination of the two yields a net opportunity calculus which defines precisely the value of a potential opportunity and allows it to be compared to other opportunities (and to net risk assessments). The net opportunity calculus thus emerges from an assessment of four variables similar in structure to a risk assessment. Net opportunity can be calculated as: The Net Opportunity Calculus The value of the opportunity adjusted by The likelihood of that opportunity arising net of The capability to capture the opportunity adjusted by The probability of that capability being deployed effectively

Value of opportunity. The value of the opportunity captures the full value of the potential business opportunity, regardless of the likelihood of occurrence.

Setting Priorities, Rethinking Risk Opportunity may be presented through external developments, such as the emergence of a new technology, or created by deliberate action, such as establishing a direct sales force. Some opportunities are straightforward positive initiatives, for example acquiring a profitable customer, developing a new strategic alliance, or rolling out a new business model. These will have a specific quantifiable value. Other types of opportunities can be categorized as offsets to risk, such as efforts to retain valuable customers or increase investment in programs of corporate social responsibility. Other opportunities may allow individuals or organizations to build capabilities to respond to risk or to capture opportunity. To each a specific value can be attached. Likelihood of opportunity arising. As for risk, the value of the full opportunity needs to be adjusted for the likelihood of the potential opportunity actually arising. The adjusted real value of the opportunity may change the perceived value quite dramatically. A highly attractive opportunity with a low likelihood of occurrence may be less valuable than a lesser opportunity with a higher likelihood of occurrence. Winning the national lottery may be, in the end, a less valuable (probability adjusted) opportunity than a lesser, but more likely, prize. A combination of scale and likelihood yields an initial assessment of the adjusted value of the opportunity. But that value cannot exist in a vacuum. The adjusted value of the opportunity on a stand-alone basis needs to be further clarified by assessing the capability to seize the opportunity and the probability of that capability actually being deployed. Capability to capture opportunity. Many opportunities of apparently high value have, in the real world, a nil value due to an individual’s or an organization’s inability to convert the potential opportunity into actual results. A gap in the market is of no value to a company without the marketing or distribution skills to fill it. Synergies between two companies may never be realized if neither has the funds nor the management resources to make the acquisition or integrate the two businesses effectively. Major investment opportunities or other initiatives may not be captured if an organization lacks resources or other requisite capabilities to capture the available opportunity. Many shortfalls in capability can be addressed directly. Investments in capability building are always a key part of successful strategy in a more people- and capability-dependent world. These investments in capability enhancement can be best targeted through the use of a more detailed definition of risk, opportunity, and the capability element in both. Probability of capability being deployed. Even the most capable of organizations and individuals will not be able to capture opportunities if the capability

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is, voluntarily or involuntarily, not deployed. For reasons of prioritization, regulation, distraction, or limitation, attractive business opportunities may be entirely passed over due to constraint or inertia. The entire net opportunity calculus, and the real value of the opportunity to your business, is then reduced to zero and the opportunity not worth pursuing. This overall zero value inevitably results if there is a zero at any one of the four elements of either risk or opportunity. Net opportunity calculus. The four elements of opportunity combine to create a single net opportunity assessment that sums up the fully adjusted value of the opportunity. Based on this calculus, relative values and priorities can be set among opportunities contending for the allocation of scarce financial and human resources in your business. In addition, comparative values can be set on fully analyzed net risks and net opportunities to target investment polices and programs on the elements of each. This calculation can play a critical role in setting priorities. By understanding better the value of opportunities, a management team will be for more capable of placing initiatives accurately on the priority matrix, and far more likely to select those of highest value and impact for implementation.

A Broader Scientific View It is not only a more scientific definition and calculation of risk and opportunity that can give greater precision to strategy. The principles of dynamic systems also underlie a more evolved approach to the development and implementation of the most insightful strategy. If change is desired to be made across a large organization characterized more by inertia or misaligned efforts than momentum in the right direction, managers must take into account the amount of energy required to get the whole system moving in the right direction at the right speed. Similarly, if a business is way off track, its leaders will need to invest a sufficiently large quantum of energy—human, financial, and operational—for a sufficient period of time to get the business back on the correct pathway and moving forward at an acceptable rate. Newtonian principles which require a pre-determined amount of energy to be applied in a particular direction to move a dynamic system from its current position or trajectory need to be understood and applied. Organizational resistance needs to be reduced to maximize efficiency. The amount of effort and energy required for any meaningful change may be enormous, and any resistance will make systemic change even more difficult and costly to achieve. Scientific principles also apply in business relating to the value of focus, the need to prioritize, and the need to make sufficient investment to overcome a

Setting Priorities, Rethinking Risk particular obstacle or achieve a certain objective. The implications for business management to reduce resistance, focus forces, and avoid scattered, contrary, or misaligned efforts are clear. It is essential, in a world of scarce supply and infinite demand for critical resources, that resource allocation decisions be made on the basis of clear priorities. By allowing priorities to determine resource allocation, the impact of investment and action should be as rational, as effective, and as efficient as possible.

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CHAPTER 4

Mastering the Growth Challenge

In today’s markets, mastering the growth challenge is one of the highest priority elements in most strategies. Quarterly reports of publicly listed companies are monitored and scrutinized in minute detail by equity analysts and investors alike to ascertain growth data and attach the appropriate growth (or ex-growth) multiple to current and forecast earnings. Small deviations from expected growth targets, even if substantially above past performance, can have a catastrophic impact on share price and the careers of those involved in the companies falling short of expectation. Although the pressures on business leaders to achieve profitable growth targets may be more acutely felt today than in the past, the underlying issues are not new. In fact, the challenge of sustaining a profitable growth track has been an extremely difficult task for many decades. The companies which have achieved a long and consistent level of growth and profitability are few and far between. A recent spate of books and papers in learned journals have well documented the difficulty in achieving profitable growth, or even in just sustaining profitability, on a continuing basis. Adrian Slywotzky, author of How To Grow When Markets Don’t, points out that only 7 percent of US public companies achieved eight or more years of growth in revenue and operating profits in excess of 10 percent. Chris Zook, in a book entitled Profit from the Core, cites a similarly grim set of relevant findings. He concludes that less than one in five public companies was able to increase both revenue and profits at an average real rate exceeding 5.5 percent.

Bridging the Growth Gap These two intelligent authors have set out specific prescriptions to bridge the growth gap, which are clearer and more proven in application than most other prior strategic monographs. Many of the better known academics and management gurus have identified the same issue, but have discussed an approach 74

Mastering the Growth Challenge to growth strategy in such a way that their growth prescriptions may be difficult to understand, and even more difficult to translate into effective action in a real marketplace. This is particularly true where the company seeking growth is small to medium in size. In order to provide a simple but useful framework for growth, it is essential to review the foundation elements of corporate operation and business definition. It is then possible to transform that understanding into a solid platform for growth. There is no alchemy involved. The approach is very simply driven by developing a firm understanding of all elements of your business model, and then using that understanding to identify growth opportunities which can reasonably be built on that existing foundation. Perhaps the best model for the generation of growth opportunities in a systematic and rational manner is the 7C’s model of business definition and strategic analysis. In its first incarnation, the 7C’s model enabled managers to understand better what businesses they were in, assess the prospects for each, and pursue strategic excellence in selected areas of the model’s application. In this second incarnation, as a framework for growth, the 7C’s model can provide a valuable checklist of areas related to your current business system to consider for growth on a priority basis. Growth initiatives are always risky, but by anchoring each new initiative to an existing element of your business, the risk is reduced considerably. By staying close to your existing business, not only are you more likely to be operating in an area of shared costs or known capabilities, the requisite intellectual capital to grow in the area should be, at least in part, already resident in your organization.

The 7C’s Growth Framework

The 7C’s + Creativity Framework External sources of growth

Customers

Competitors

Internal sources of growth Costs

Channels

Capabilities

Context

Capital

Creativity

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STRATEGY The well-established 7C’s model is here augmented by a reminder that all growth initiatives cannot ignore the fundamental value of creativity as applied to all other elements of the model. A creative attitude and approach must be encouraged at all phases of the effort. Results continue to be important, as is a process of prioritization of growth ideas generated. But managers seeking growth should remind their colleagues of the importance of unfettered creativity as well as disciplined analysis. This understanding has led to Creativity being added as an eighth element that, like customers, spans both internal and external sources of growth opportunities. It is essential to remind ourselves as well that growth strategy cannot just be pursued formulaically. Frameworks and checklists are tools to stimulate thought, capture the benefit of past knowledge, and focus the discussions on the creation of a better future. Yet none of these mechanical approaches, by itself, will lead to the real breakthrough insights you need to distance your organization from its competitors. For truly great strategies to emerge, you must apply the element of creativity to each of the other elements of the growth framework and allow a full array of thoughts to be presented in the discussions. Confining your efforts solely to the prescribed framework would place an artificial limitation on the free thought process, which can only reduce the value of your efforts. Some observations on the 7C’s growth framework point out how each element can provide a source of ideas and act as a stimulus for growth. Customers. Academic research confirms that over 80 percent of organizational learning takes place at the customer interface. Understanding fully what customers want and need, now and in the future, is a great source of growth initiatives. By definition, your current customers already represent opportunities to share a high proportion of your existing business system’s costs, channels, capabilities, and capital use. As such, they represent the best source of low risk and profitable growth to your business. Starting with a fully understood model of sales by segment, coupled with an analysis of profitability by customer and by customer segment, is the most effective initial approach to growth for most companies. Segmentation of the customer base into actionable groupings is often the key step in developing a successful organic growth strategy. By dividing customers into definably different groups with different wants, needs, and purchasing behaviors, you can set out a differentiated program of products and services—and combinations of the two—to serve them better. By looking beyond established definitions and traditions, and taking a segment-specific customer perspective, you may well surface large opportunities in which to sell more products and services both new and old. The airline business, with its evolving variations on economy, business and first-class accommodation on the same aircraft is but one industry where segment-specific strategies to drive growth and profitability are clear for all to see.

Mastering the Growth Challenge Other academic and professional research has indicated that existing customers are more likely to buy another product or service from an existing supplier than a cold-called non-customer who may well be fully satisfied with his or her existing arrangements. In fact, according to experience in the financial services sector, your best current customer is your best potential customer. Analysis of a leading UK bank’s customers showed that those customers who had purchased more than seven products or services from the bank had a 75 percent chance of purchasing further products and services—four times the likelihood of less penetrated customers in the same bank. Retaining and building on valuable customer relations as a source of growth is a logical first step in seeking the most promising growth opportunities for your enterprise. Costs. Finding opportunities to build on existing investments and cost bases is one of the highest yield areas for growth initiatives. The greater the degree of cost sharing between an existing product or service and the proposed growth initiative, the greater the chances of achieving profitability in the area. The relevant knowledge base and organizational capability are already present to some degree, and expensive new experimental efforts in these areas can be avoided. Incremental costs to research, design, manufacture, distribute and market products and services are all lower, and carry less risk cost as well. It is obvious that the pursuit of the women’s razor market is far more likely to succeed for a men’s razor manufacturer than a diversification into ethical pharmaceuticals or other foreign product category for that same company. Channels. Particularly for the media sector, automotive companies, fastmoving consumer goods, financial services, and other businesses where the product or service provider may not own or control the distribution channel, the role of distribution and access to customers through effective channels is a key element in strategy. It also presents a key opportunity for growth. Related in part to cost sharing, the ability to build upon expertise, presence, and relationships across various channels, traditional and new, can be a critical factor in any growth strategy. For high-volume transactional businesses, such as consumer banking, channel strategies can offer opportunities to improve service, promote growth, and reduce costs. The rapid change in bank infrastructure to include ATMs, kiosks, on-line banking services, premium banking facilities, banks in stores, alliance ventures, points and membership rewards program partnerships, international networks, credit and charge cards with increasing functionality, and dedicated personal banking representatives and services all reflect the value of differentiated channel strategies in attracting, keeping, and penetrating selected customer segments better than competitors. For a large capital goods manufacturer, the delivery or distribution channel may be less important than the ability to sell effectively, work on site or deliver

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STRATEGY on time and to specification, but for many businesses the channel is king in getting to target customers on a timely and cost-effective basis. Often, certain channels are associated with different customer segments and will have radically different volume and profit characteristics. In generating a list of potential areas for growth investment, channels and customer segments may go hand in hand to provide exciting growth opportunities for your business. Capabilities. In an era where people lie more and more at the heart of strategy, especially in the service sector, the abilities of a team or group within a business may provide unexplored and unexploited growth opportunities. An expert trader in coffee may have a team capable of trading cocoa or sugar as well. The same team may be able to spot opportunities to participate more directly in the valueadded chain and fill gaps left open by other, less insightful competitors in the commodities arena. A manufacturer of oil rigs may be able to move into rig operating leases and platform repair. Sports shoe companies long ago spotted the opportunities that were available in the adjacent sports and casual apparel market and made billions of dollars of sales around the world as a result. Competitors. By examining what your competitors have done and will do to exploit their own growth opportunities may provide valuable insight into opportunities for your own growth initiatives and in-market strategy. No one company has a lock on creativity and effective strategy. By extracting the benefits of your competitors’ intellectual capital, you may well be able to avoid their mistakes and profit from their successes. Each company is different, and the insights on competitor actions and intentions always need to be filtered through an understanding of your own business model, but a thorough watch on competitor activity may yield surprising dividends. Context. In some businesses a license, patent regime, special relationship, regulatory regime, or unique role in an industry may contribute to the generation of profitable growth opportunities. Microsoft is the master at developing additional products and services to add on to its strength in operating systems in the PC world. In many emerging markets, access to decision-makers and an ability to obtain operating licenses may open doors to similar opportunities in diverse sectors. Capital. In some cases, your balance sheet or capital structure can create opportunities for profitable income growth. GE has built a successful financial operation from its original business in financing the white goods purchases of its customers. Originally profiting from the difference between the corporation’s lower cost of capital and the high market rate for consumer finance, GE Capital now reaches into credit card operations on a global scale and embraces debt portfolios acquired in many attractive markets. For some car manufacturing companies, 100 percent, or even more, of the value in the sale of an automobile may be made in the service agreement or

Mastering the Growth Challenge finance package for the vehicle purchased. Opportunities such as these to build on a strong balance sheet may be a creative way to stimulate profitable growth in your own business.

Constant Attention to Opportunity and Creativity For many companies, growth planning is an annual event. Yet markets, customers and competitors are acting and evolving every day of the year. By building a culture which is constantly attuned to receiving and acting upon signals of growth opportunity, your business will be able to generate ideas ahead of competitors, act more swiftly to deliver more value to customers, motivate teams through a shared pride in superior performance, and capture the benefits of that capability for your stakeholders. Seeking out and exploiting growth opportunities between planning cycles is one of the most important areas of competitive advantage, and an important element of winning strategy for a fast and flexible company.

Understanding and Exploiting Discontinuity Much of success in an unpredictable situation revolves around reacting faster than competitors to exploit or adapt to changes in the environment. New technologies, new channels, and new regulations all create commercial opportunities for the fleet of foot. Yet for the truly gifted forward-thinking company, the apparently unpredictable event or environmental change may in fact be entirely predictable and subject to informed action even before the discontinuity or nonlinear change emerges. One expert claims that major “unexpected” nonlinear changes are often predicted by better infomed competitors by for as much as 5 years in advance of the change actually occurring! What may appear to be a discontinuity from a two-dimensional or other simplified perspective may in fact be an entirely predictable and understandable event or set of changes when viewed from a more complex, and more accurate, perspective. A more comprehensive view can give a three-dimensional (or even more) view of the behavior of a defined business system and its interacting variables. This ability to predict upcoming changes in the business or its environment is one of the reasons why the diagnostic phase of STRATEGY addresses the same business from so many different perspectives. Understanding the nature of apparently unpredictable discontinuities may be best pursued through the application of catastrophe theory. Although the most advanced versions of the theory are complex and obtuse for most senior executives, the basics are simple and can serve to describe why the apparently unexplainable may be far more easily predicted and acted upon than one might think.

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STRATEGY The theory works as follows to describe why there are large and abrupt changes in a given system. When we look at a moving point as it moves through space from a three-dimensional perspective, the moving point establishes a line that moves understandably in three dimensions, as if following the contours of a piece of rumpled or folded cloth. The line moves up, down, under, over and along the surface shapes created by the three-dimensional folds of a piece of cloth. However, when viewed only from a top-down perspective in two dimensions, the line “disappears” as it moves into a fold in the cloth or along the underside of a piece of the fabric and then “reappears” somewhere else in an apparently random pattern of movement. This apparently unpredictable shift in the pattern of seemingly stable events is known as a nonlinear, discontinuous or “catastrophic” event. While not predictable and discontinuous from a limited top-down perspective, the real complete flow of the line—which can represent the evolution of a customer segment as seen from a multiple-variable perspective, or the development of a new technology or delivery channel—can be easily understood in its full complexity, and its moves clearly forecast, if a multi-dimensional perspective is taken. This more perceptive and comprehensive view can inform and trigger action well ahead of less intellectually agile competitors. Adding dimensions of time, speed, and future influences on direction can indeed prepare you to move in anticipation of what were once unpredictable changes, and are now clear opportunities to create competitive advantage and superior business results. By taking a fuller view of your business, STRATEGY allows you to see how it is developing from multiple perspectives. By combining the separate perspectives into an integrated view, you may well be able to spot upcoming changes of a very fundamental nature—and profit enormously from your insight.

CHAPTER 5

Integrating Strategy and Responsibility

A pure focus on profit, looking forward, will no longer be enough to satisfy the demands of the wider range of constituencies already affecting businesses. A rising trend of scrutiny of non-financial performance will provide both risk and opportunity and will need to be firmly embedded in your STRATEGY approach. A broader notion of what a corporation is and a thoughtful program to pursue its broader objectives could respond to the need to address issues of social concern, broaden the definition of success, and protect and grow the economic value of your firm. Corporate governance, improved communication, and a more active role in the area of corporate social responsibility need addressing thoughtfully and on a timely basis if the full value of a business is not to be reduced. For many years, business has been losing its position as a respected and admired member in most communities, global and local alike. In a 2004 survey, businessmen were ranked in respect by the general public in the bottom quartile of professions, just one percentage point above used car salesmen. Corporate scandals, corruption, mismanagement, wave after wave of layoffs, job insecurity, massive salary and bonus packages for executives, a growing gap between the compensation packages of senior executives and factory floor workers, an increasing awareness of business-associated product risk, environmental damage, and a lack of customer care by ever larger consolidated entities have all contributed to the sharp drop in esteem for business and businessmen. Failing to understand or to act on that understanding can only deepen the impact of the costly catastrophe that may result from prolonged ignorance or indifference to this problem. Preserving and growing corporate value will require an approach which continues to pursue profit and competitive advantage, but which also sets and measures performance against other indicators as well. In fact, there is nothing inherent in a broader notion of corporate responsibility which requires a business to reduce its profit targets or to sacrifice practices which can sharpen the edge of its commercial capabilities. 81

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STRATEGY Companies with a more enlightened approach to overall purpose and vision may actually improve their profitability and value through strengthened brands, a better community reputation, a more motivated business organization and an ability to attract and keep better people. All of these benefits can add to a company’s bottom line while improving its comportment in the areas of engagement and responsibility. By adopting a more enlightened attitude toward corporate responsibility, and by seeing it as a core element of strategy rather than as an isolated set of public relations activities, forward-thinking leaders can create opportunities to motivate staff, give a greater purpose to the enterprise, and create a new network of beneficial relationships outside the walls of the corporation as once defined. Since the era of truly responsible strategy is just dawning, there is much room still to innovate, to experiment and to create something new and special for the future. John G. Ruggie—once a political scientist at Columbia University, later United Nations assistant secretary general and chief advisor for strategic planning to Kofi Annan—once investigated the historical reasons for the end of past periods of great prosperity to extract the lessons for the current economic era. His conclusions were surprising. The current system, he maintains, is “unsustainable,” and for capitalist prosperity to survive, “it must be embedded in broader social concerns.” Failure to address issues in a broader context may lead to difficulties at a macro level, but can also create significant risk for an individual enterprise as well. Although recent textbooks on corporate governance, responsibility, and values list many more subcategories within the overall notion of responsibility, a common list of seven areas for consideration covers most of the areas of concern which need to be addressed by a management team. Seven Core Elements of Corporate Responsibility Workplace Business system Reporting Governance Customer rights Environment Community

The individual elements of greater corporate responsibility can be developed separately, but ultimately all rest on a common platform of corporate values and initiatives. Both should be explicitly included in your STRATEGY. These areas of responsibility are both internal (workplace, business system, reporting and

Integrating Strategy and Responsibility governance) and external (customers, environment and community). Both internal and external areas of responsibility need to be addressed in order to ensure that your strategy has fully and properly dealt with one of the most significant, and growing, areas requiring top-level management attention. Workplace. Ensuring that a company has as a clean, safe, and fair working environment for employees is one of the most basic aspects of corporate responsibility. Safety, diversity, lack of sexual, religious, or racial discrimination, and other programs that will ensure a proper workplace are all necessary elements of a thoroughly designed strategy. Business system. In a world where business processes are increasingly outsourced and relations between different organizations becoming deeper and more complex, the notion of responsibility is being extended to all of those businesses which directly touch another. Partners, franchisees, suppliers, and other participants in a business system in breach of acceptable standards of responsibility can call into question the ethics and standards of all companies using their products or services. Even customers of private banks must now be scrutinized in great detail by the bank staff to ensure that they do not bring to the bank any funds from criminal, money laundering, or terrorist activities. Suppliers as well as customers are subject to scrutiny as the responsibility of the buyer of their goods or services is now seen to extend back up the value chain. It is no longer acceptable to claim that a cosmetic product has not been tested on animals if suppliers to the ultimate manufacturer have been engaging in just such practices. Similarly, shoe companies cannot credibly claim that their shoes are made without enforced or child labor if their suppliers are breaking the rules the main company is claiming to uphold. Reporting. Many of the recent corporate scandals dragging down the reputation of business as a whole are related to deceptive reporting, poor reporting procedures and lack of oversight. Both the quality of reports and their content are increasingly being called into question. Worldcom, Global Crossing, ENRON, Tyco, Parmalat, Cirio, Shell, Ahold, and others have all fallen short in the quality and value of their reported accounts. While FASB and similar global accounting standards bodies will continue to evolve the general standards and policies to be applied to corporate accounts, the quality of the data presented needs to be consistently accurate in each individual case. Extended definitions of what should be reported, such as the triple bottom line initiative requiring companies to report on their financial results and their environmental and community record, will continue to stretch the capabilities of accounting and control departments for some time to come. Governance. Major policy recommendations by the Cadbury Committee in the United Kingdom and the Sarbanes–Oxley Act in the United States have

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STRATEGY called into question the most appropriate structure for senior management and the constitution of boards of directors. Transparency, distributed power, and independence from inappropriate influence are all issues which have come up regularly, and will continue to be topical as business leaders design and populate board and committee memberships, outline board and committee procedures, and establish the quality of overall information flows. High quality standards also apply to set out an acceptable approach to Chairmanship, the CEO role, succession planning, and all other elements of good governance. Customer rights. Numerous consumer advocacy groups and sympathetic legislators have been slowly turning up the heat on the disclosure and service levels required by product and service providers. Information on product contents, packaging standards, return policies, product safety, and other elements of burgeoning consumer rights all need to be fully understood and built into strategic plans as both risks and opportunities. Already, greater corporate responsibility for the long-term effects of product use is emerging, even in product areas where sales are primarily to informed adult customers. This movement is led by actions against pharmaceutical companies, arms manufacturers, tobacco companies and alcoholic beverage providers. The movement to attach legal liability to business activities is now proposed to be extended by American trial lawyers and mass tort litigators to include restaurant chains and purveyors of food products relatively high in fat, carbonation, sugar, or caffeine. These providers, and other participants in industries seen to be contributing to an unhealthy lifestyle or dangerous activities, will increasingly attract the attention and incur the costs of litigation from consumer advocacy groups capable of inflicting great economic or reputational damage on an individual company, or even an entire industry. Environment. In no other area of business responsibility is there more attention being paid than to the various aspects of environmental regulation. It is abundantly clear that there are a number of areas such as global warming, toxic waste management, industrial effluent treatment, pollution of air, water, and land, deforestation leading to land quality erosion and river silting, fish and mammal population depletion, loss of rain forest cover and a whole host of other environmental concerns which are increasingly focused on the business community. Taking into account those areas of environmental responsibility which impact most directly on your business, and responding properly, has to be a key piece of any strategic plan. In some areas, such as the response to global warming, the business community is already far more involved than governments have mandated, underscoring how important these societal issues are to the long-term interests of the broader business community. Community. Contribution to and participation within the communities in which businesses operate have always been good business. The United Way in the United States, and the many activities which MNCs have supported in

Integrating Strategy and Responsibility local communities internationally, reflect the acknowledged benefit of being a good corporate citizen. As corporate reporting standards broaden to include community involvement, being more precise and more rational about the overall approach to community involvement can pay dividends in many ways. Benefits range from brand enhancement to attracting better quality applicants, enjoying the staff benefits of better local educational programs, and improving relations with regulators, suppliers and local authorities. Although not as essential as the seven highlighted elements, participation in the business community may be an attractive avenue for your business to join with others to pursue the areas listed above. While not an end in itself, participation in a Rotary Club initiative, an industry environmental forum, or a global organization like the International Chamber of Commerce can open doors to actions which are more powerful and effective than a lone initiative in any one of the areas listed above. In the matrix of responsibility provided in STRATEGY, participation as a member of the larger business community is added as a final element as a reminder that initiatives here could be very appropriate for business leaders to take in concert with like-minded colleagues. The benefits of taking an approach which is more positive have been spelt out above. But there is a negative or risk side to the issue as well. For failure to bring an organization up to an acceptable level of responsible behavior carries with it increasing costs and risk. Some of the largest and most respected companies in the world—Shell, Coca-Cola, Microsoft, Ford, major pharmaceutical companies and others—have all suffered from negative public attention and the impact of events which were partly beyond their control. By understanding and responding to the pressures to achieve a higher standard of engagement in selected areas, businesses will be able to mitigate the risks, costs, and potential value destruction which ignorance of these new demands can generate. Failure to respond now in each of these eight areas will ensure that attention will soon be brought to these issues at a political level, perhaps in response to the highly visible activities of NGOs in a number of international fora. The anti-globalization demonstrations in Seattle, Davos, Genoa, Bangkok and Sydney, have already raised these critical issues to a level of board concern. For some targeted companies, dealing with these issues has become a necessary and prominent corporate initiative. With global consolidation continuing apace, these same demonstrators will inevitably have fewer, but larger, corporate targets upon which to focus their attacks in the future. Failure to self-regulate, or to contribute more actively to a program of social amelioration, creates a risk that vote-seeking politicians will translate popular anti-business sentiments into costly and uninformed economic programs and operating controls. This need not happen. Businesses are indeed often the source or contributor to problems, and can therefore contribute significantly to the pursuit of solutions to these problems if they so choose. The sources or distribution

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STRATEGY systems for pollutants leading to global warming, air quality deterioration, deforestation, species extinction, software piracy, smoking-related health issues, cultural or value erosion, and community health issues often lie squarely in the lap of the business world. Failure to become part of a solution will contribute to the view that corporations are the unrepentant source of the problem, ensuring that rectification and penalty costs are borne by future generations of shareholders. Eventually these future costs could well lead to discounts in present day market valuations. The anti-business perspective has many antecedents, but is reaching more deeply into the hearts and minds of even traditionally free market capitalist Americans. In a Business Week survey of September 11, 2000, 72 percent of Americans surveyed said business has too much power over too many aspects of American life. Al Gore’s Democratic convention attack in the Presidential campaign in the year 2000 on, “big tobacco, big oil, the big polluters, the pharmaceutical companies, and the HMOs” was positively received by 74 percent of respondents in the same survey. Even higher concurrence on an issue of responsibility came from the same survey in calibrating support for the statement: “U.S. corporations should have more than one purpose. They also owe something to their workers and the communities in which they operate, and they should sometimes sacrifice some profit for the sake of making things better for their workers and their communities.” Ninety-five percent of survey respondents agreed with these words. Action to support an expanded notion of corporate responsibility and engagement in societal initiatives is in the enlightened and rational self-interest of all modern business leaders. The societal and economic risks, left unmanaged, will have a significant negative impact on future business performance and the careers of all leaders of businesses, especially the large and visible. There is a long and growing list of reasons why a more proactive approach to responsibility will be in the long-term best interests of all stakeholders in an enterprise. At least seven of these are worth highlighting:

Seven Reasons Favoring Greater Corporate Responsibility Legal systems Regulators and accounts Financial results Relative organizational capability Brand and business risk Team spirit and motivation Risk of backlash against business

Integrating Strategy and Responsibility Legal systems will demand it. Already the United States has become the forum of choice for legal action against international actors operating far from American shores. It is only a matter of time before US litigation brings more corporations from the US and beyond before American judges and juries to account for foreign activities and actions that are detrimental to employees, suppliers, communities, countries, and the global environment. For some time, various other courts around the world have attempted to impose the doctrine of universal jurisdiction in order to drag Latin American dictators and other unsavory characters into European Courts. This doctrine, created to ensure that crimes on the high seas against slavers and other miscreants were not allowed to lie unpunished, is being discouraged as a justification for trials against defendants who may never have had any direct contact with the prosecuting jurisdiction. Despite this discouragement, the trend of extending jurisdictional coverage is far from over. Perhaps the greatest risk to international business are the American mass tort lawyers, specialists in large and enormously expensive class action suits taken out against international plaintiffs in local court systems. The mass tort specialists, many of whom have attained celebrity status in the global media and acquired lifestyles to match, are constantly seeking to use the American legal system to bring causes of action against deep pocketed defendants, claiming enormous damages and pursuing cases on a large success fee basis. The potential to reach settlements with defendants that can lead to fees reaching into the hundreds of millions of dollars for the lawyers involved will ensure the risks to business in this area do not go away for years to come. Regulators and accounts will require it. With the clarifying potential of “triple bottom-line accounting,” which takes into account community and environmental impact as well as financial performance, companies can set out a broader and more engaging set of goals for their enterprise that will be in the long-term best interest of all of its stakeholders—employees, customers, suppliers, and shareholders alike. The Global Reporting Initiative, established in 1997, has begun to address many of the technical issues facing the task. Models of socially responsible accounting have already been tested at British Airways, the Body Shop, Shell, and TYU Empire at a practical operating level. Financial results will be diminished. Ignoring the more critical public attitude toward business can be very expensive indeed. Lost sales, loss of licenses to operate, increased litigation, a greater tax burden, and other direct economic costs can result from allowing businesses to continue to be negatively positioned. Both revenues and costs can move adversely through a failure to anticipate the flow of attitudes and events in this area. At an indirect level, especially in the emerging markets, allowing social problems to fester unchecked in areas in which a business may operate can result in higher overall costs through increased health care contributions, more expensive scarce resources, increasing staff turnover, rising security expenses, more frequent business

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STRATEGY interruption, and a growing tax burden as the state is forced to spend more in each area of risk management and response to avoidable catastrophe. Developing countries, for example, which provide much of some multinational corporations’ expectations of volume growth, all face diminished economic prospects due to expanding populations, poverty, AIDS, recurring patterns of disease, and spiraling environmental, crime, and health care burdens. Relative organizational capability will suffer. More and more, shareholder value is created by executing successful strategies in a new economic order. These strategies are driven by individuals who may be more motivated by personal engagement rather than outdated notions of paternalistic employment or relative compensation. Personal lifestyle, the nature of the enterprise, existing relationships, individual networks, and technological challenges often outweigh old job selection factors of salary, title, and security. There are too many attractive opportunities with extraordinary salaries to distinguish one high-level package from another. Titles are often meaningless. No rational member of the I-generation values a promise of lifetime job security. Many of the most talented individuals will be positively influenced by a working environment sensitive to the full range of issues inherent in a program of corporate social responsibility. Participation in an enterprise with a greater sense of purpose and more laudable values will help to attract the brightest of young managers in the war for talented contributors to a firm’s future. Enterprises that demonstrate sensitivity to personal lifestyle, community development, and environmental impact will have a greater ability to attract, retain, and motivate the best of a small pool of talented future leaders. By doing good in a broad sense, managers will be serving shareholders well by attracting and retaining those people who can really make a difference in the performance and value of a specific business enterprise. Brand and business risk will increase. These same caring companies also will enhance the attractive core values of their branded products as well as burnishing their overall corporate image. This will enable farsighted enterprises to build more enduring, and therefore more valuable, relations with their customers. Many CEOs of leading branded companies have already adopted a more activist stance toward responsible global corporate citizenship. The Coca-Cola Corporation now lists maintaining its status as a leading responsible corporate global citizen as one of its six global priorities. Nokia has sponsored an entire advertising campaign communicating concerns over social issues. Benetton has long made edgy social and human issues a core focus of their advertising and brand. These initiatives are not only aimed at corporate image-building, but are also designed to impact positively on all corporate products and brands. In a world where the discovery of environmental abuses, sweat shop labor in emerging markets or animal testing on cosmetics products can reduce the

Integrating Strategy and Responsibility attractiveness and value of a brand significantly, an investment in social caring will provide a reputational and economic buffer should something unexpected and out of the control of a management team go wrong in the marketplace. Missteps in product quality, criminal tampering with product safety, errors in regulatory compliance, rogue employee behavior, or an accident in an outlet or factory can all put great pressure on business reputation. Not all of these risks can be foreseen or managed in advance by even the most caring and correct of management teams. An investment in building the image of a caring company in advance can be seen as a kind of insurance against the public relations costs of such inadvertent disasters. An ethics failure can also result in a catastrophic destruction in shareholder value, as Enron, TYCO, Worldcom, Parmalat, Cirio, Ahold, Asian Pulp and Paper, and other global scale corporate disasters attest. Failing to set and monitor a responsible attitude toward governance in particular can create a problem of epic proportions which can even be fatal to a business enterprise. Given the sensitivity of global capital markets to risk associated with corporate misfeasance, a more proactive risk management approach could even save the life or independence of your company in a future moment of adversity. Team spirit and motivation will increase. Perhaps the greatest challenge today in attracting, keeping, motivating, and engaging employees is the need to create and communicate an overarching purpose of the organization. By giving employees a broader sense of contribution and value, enlightened business leaders can discover a higher sense of purpose and inspire a greater level of performance, both individual and collective. Engagement with worthwhile causes can make the workplace more a part of an individual’s personal, even spiritual, fulfillment. Businesses are, on the whole, made up of good people with good values. Reaching into the deep sources of this motivating set of values will increase the pride, performance, and value of almost any enterprise. Risk of a possible backlash against business. A general backlash against ever-larger businesses is far from impossible. Annual corporate meetings, company events and facilities, international trade organizations, and high profile international institutions and conferences have already been attacked, disrupted, and besieged. This growing anti-business sentiment could be partially checked by visible actions to promote worthy causes, emphasizing business objectives that extend beyond maximizing the next quarter’s earnings. In part, the risk of a potential backlash is motivated by a misunderstanding of how businesses operate and how profitable they are. Even in the usually pro-business United States, according to a survey completed by DecisionQuest/ MCAA, three out of four males distrust US businesses. The Kaiser Family Foundation and Washington Post combined to test why Americans thought the economy was not doing better than it was in 2003. Nearly

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STRATEGY half of the respondents stated that the economy was not doing as well as it could because businesses were making too much money. Popular understanding of business economics put the expected average business operating profit percentage at just below 50 percent, more than six times the true figure of around eight percent. With such a lack of understanding and smoldering resentment in one of the world’s most commercial societies, one can only infer how volatile anti-business sentiment must be, and how little it would take to trigger an anti-big business backlash, in less welcoming and less wealthy nations.

The Global Compact and Codes of Conduct The world of business has now arrived at a point where it may be essential to establish a set of principles to guide enterprises and to clarify the standards to which they hold themselves accountable. It could be a timely exercise to set forth the shared values and common approaches a corporation shall respect and observe as it pursues its business objectives. In so doing, a company would commit to uphold a set of clearly articulated principles and aspire, by virtue of its commitments and actions, to be welcome in every country and community in which the company chose to pursue its various business activities. Further, in order to realize the full promise of a free and open global economy, it may also now be incumbent upon individual companies in the broader business community to support more actively the system protecting free and open global trade, and to engage more visibly in pursuing the goals of economic development and community engagement. Role of codes of conduct. There is no shortage of codes of conduct available for companies to adopt to crystallize their adherence to a higher standard of corporate ethics and engagement. In addition to the UN Global Compact set out below, there have been other collections of principles promulgated by various institutions over the past. The Caux Round Table Principles for Business were launched in 1994, the OECD Guidelines for Multinational Enterprises were developed in 1976 and revised in 2000. The Global Reporting Initiative was begun in 1997, The World Business Council for Sustainable Development launched its own statement in 2000, and the Reverend Sullivan has extended the principled approach to apartheid which bears his name to the international business arena as well. Some of the world’s largest companies have adopted, adapted, and applied these various codes over time with differing degrees of seriousness and effect. GM, for example, invested significantly to support the Sullivan principles under Jack Smith. Other companies have followed suit, or developed their own custom tailored approaches. In order to achieve the objectives of a more responsible approach to business most efficiently, many companies have adopted the UN principles of

Integrating Strategy and Responsibility the Global Compact as a wholesale solution to the challenge of setting out on a path of greater corporate social responsibility. The principles of that approach are derived from multiple sources of input, notably The Universal Declaration of Human Rights, The International Labour Organization’s Declaration of Fundamental Principles and Rights at Work, and The Rio Declaration on Environment and Development. Pushed hard by the UN, the World Economic Forum and other large organizations, the UN Global Compact has been able to enrol many (but not all) of the world’s largest companies in its program. The nine principles set out in the Global Compact are: Human Rights Principle 1: Businesses should support and respect the protection of internationally proclaimed human rights within their sphere of influence; and Principle 2: make sure they are not complicit in human rights abuses. Labour Standards Principle 3: Businesses should uphold the freedom of association and the effective recognition of the right to collective bargaining; Principle 4: the elimination of all forms of forced or compulsory labour; and Principle 5: the effective abolition of child labour; and Principle 6: eliminate discrimination in respect of employment and occupation. Environment Principle 7: Businesses should support a precautionary approach to environmental challenges; Principle 8: undertake initiatives to promote greater environmental responsibility; and Principle 9: encourage development and diffusion of environmentally friendly technologies. Many companies have adopted the Global Compact, even while admitting it is not a full and perfect answer to the issues of corporate social responsibility. Others, while embracing the spirit of the Compact, have shied away from its full and formal adoption for various reasons, most often associated with a lack of precision in the content of the Compact, or over concerns with regard to the seemingly broad sweep of the labor provisions. For others, a list of derivative principles from different UN institutions does not carry with it a comprehensive set of content, nor is it framed in a sufficiently resonant tone to be an inspiring guide to better corporate

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practice. For those wishing to adopt or to adapt a different version, below is set out an alternative to the Global Compact which was prepared for the International Business Advisory Council. This code could be included or adapted for inclusion in business plans and communications, should one be desired for your own STRATEGY.

Alternative Code of Corporate Conduct Preamble We believe in the value of business, the dignity of work and the duty to honor our obligations to all stakeholders in our enterprises—customers, employees, owners, suppliers, partners, fellow citizens in our communities and the host governments of countries where we are present. We recognize that we now live and work in a world more interdependent than ever before, a world in which the actions of a few can touch the lives of many. We also recognize that the economic freedom to pursue our business aspirations in this interdependent world carries with it responsibilities as well. By setting forth these principles, we acknowledge those responsibilities and commit ourselves to develop our businesses in a manner consistent with the following principles:

The Principles I. Environment: We hold the environment in trust for all future generations and realize that many current environmental trends are not sustainable. We commit to monitoring the impact our businesses have on the environment and shall contribute to the protection and preservation of the quality of all elements of the environment—air, water, land, forest, flora and fauna. We shall specify the standards to which we operate and the principles we observe with regard to the environment. II. Non-discrimination: We shall not tolerate any form of discrimination on the grounds of race, gender, religion, or ethnic origin in decisions relating to hiring, promoting, and rewarding individuals within our businesses. III. Corporate governance: We commit to the establishment of a governance structure and reporting system which facilitates transparency and good management, and which fosters a culture of compliance across our organization. IV. Customers: Our businesses exist to serve the needs of our customers. We shall respect their rights to safe products and packaging, access to required information on products and services, truthful labeling, and accurate advertising.

Integrating Strategy and Responsibility V. Workplace quality: We shall provide a safe and healthy workplace and will invest in the welfare and development of our employees. We will report on the extent and nature of that investment and on the safety record of our operations on a consistent and regular basis. VI. Labor practices: We shall not tolerate the use of child labor or forced labor within our enterprises, nor tolerate such practices by our subcontractors and direct suppliers in the communities where we work. We further agree to respect all relevant laws and regulations, and will specify our policies with regard to organized labor and work within those guidelines. VII. Corruption: We shall not tolerate bribery in any form within or by our organizations, or from organizations and representatives working on our behalf. We shall strive to eradicate dishonest business practices. VIII. Free trade: We shall support the development of an open and free global trading system which is multilateral in scope and rules-based in operation. We shall contribute to the maintenance and development of an open global economy which is clear, simple, fair, efficient, and open to all who wish to compete. IX. Politics: We shall not engage in partisan politics in the countries in which we operate and will honor all obligations with regard to the laws and policies of those host nations. X. Community: We shall engage and invest in the communities in which we operate. We shall report regularly on our local involvement, including employment created, taxes paid and other contributions to the welfare and development of the local community. It is our individual responsibility to ensure that these shared principles are embedded in our core strategies, operations, and daily business practices. We commit to integrating our reporting on these principles into our annual reports, and to committing sufficient resource to ensure that we live up to the promises and principles set out above. In adopting this code of conduct, or a similar code of your own, a management team may be able to make an immediate step forward in clarifying its commitment to the various communities in which it operates, and set a standard for corporate behavior which will have multiple benefits for many years to come.

The Shining Star of Starbucks While some companies will have adopted one or more initiatives mentioned above as part of their corporate responsibility and sustainability programs,

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Starbucks Coffee stands out as a uniquely responsible corporation actively pursuing an agenda of responsibility at virtually all points of their business model. Starbucks are well known for their spacious and comfortable premises and clearly displayed commitments to fair trade, suppliers, employees, and customers in well drafted and broadly circulated codes of conduct. The Starbucks specific “Commitment to Origins” is directed at its involvement in the poor countries which produce the vast majority of the world’s coffee beans. The company specifically promises to its customers that they “can help to make a difference,” and that each time a customer purchases a Starbucks coffee, they are “making a difference, helping to improve people’s lives, and encouraging conservation where [the Starbucks] coffee is grown.” The company makes a specific pledge which is directly communicated to customers in its various outlets that the company will “always provide the highest-quality coffee while contributing to the social, economic and environmental sustainability of coffee production.” There are four underlying commitments specified: Fair Trade: A certification system that seeks to help to improve the lives of coffee farmers by ensuring they receive a fair price for their harvest. Farm Direct: Coffee purchased directly from the farmers who grow it, on an agreed fair price. Conservation: Working with coffee producers to promote cultivation methods that protect biodiversity. Organic: Coffee grown without the use of synthetic pesticides, herbicides or chemical fertilizers. (Source: Company literature) The business has made a clear and unambiguous commitment to fair trade across its entire business system to ensure that the poor growers of the coffee used in their expensive cappuccinos, lattes, and espressos are fairly compensated for their crops. The responsible foundations of the company’s operations also extend to activities with its own business system in developed markets as well. In part due to the painful personal experience of a founder whose father fell ill without health care coverage, the company, unlike most employers, provides health care benefits to thousands of part-time employees as well as to the fulltime members of the organization. While the Starbucks business model has a number of well thought through corporate initiatives, it was in response to an unexpected tragedy that the true caring values of the company were most visibly demonstrated. When disaster struck in a Washington DC outlet and three employees were murdered in an armed robbery attempt gone wrong, group founder and Chairman

Integrating Strategy and Responsibility Howard Schultz personally took charge of the situation. Staying in Washington for a week to ensure that all aspects of the tragedy were taken care of, Schultz dedicated all future profits from the outlet to the cause of victims of crime. Such a caring attitude has not had a chilling impact on the performance or value of the hot Seattle-based coffee giant. Demonstrating that a company can indeed have a heart and a soul without hurting its pocket book, the results achieved by Starbucks are equal to any. Sales in 2003 exceeded $4 billion a year. Profits, achieved without franchising the name or premises to others, exceed $250 million. Stock value by the end of 2003 had increased more than 3,000 percent since its IPO in June of 1992. Opening more than 1,000 outlets in 2003, the Starbucks unique approach to business, and business caring, has created one of the world’s best known and most successful branded business sagas which looks set to percolate and prosper well into the future.

How and What Business Leaders can Contribute The private sector can make an enormous difference in the areas addressed above through many different approaches. In addition to supporting the content of a code of conduct, there are at least seven areas in which enlightened leadership in the private sector can make a major difference in improving the state of the world in which it operates, and benefit from that contribution. Restricting potential contribution and compartmentalizing our best capabilities in the area of transnational strategy will only perpetuate the unsatisfactory status quo. This will ensure that the private sector remains, and is increasingly seen to be, part of a problem when it could easily become part of a valuable set of solutions. The business community could contribute substantially in the seven critical areas set out below, and could provide far better leadership and much-needed resources in the most critical areas.

Seven Potential Societal Contributions from Business Leaders Strategic capability Implementation and organizational skills Political savvy and credibility Resources and distribution Mastery of technology Performance measures Entrepreneurial energy and leadership

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Seven of the areas of greatest potential private sector contribution to societal problems and challenges are set out below.

Strategic Capability Honed in the rough and tumble markets of free competition, the skills necessary to define and execute transnational strategy are far more developed in the private sector than in most public sector institutions. One study completed by a panel of independent businessmen and businesswomen reached the following conclusion on strategy and operations in one of the world’s most prestigious multinational institutions. ■

Vision and strategy: there is a need to reconfirm vision, strategy and the meaning thereof.

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Leadership: there appear to be serious leadership gaps at all levels.

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Management processes: there are no clear and commonly agreed upon procedures for decision-making and there is a perception that decisions are not based on merit.

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Organizational structure: the group of teams is not working together as a unified whole. The current organizational matrix has led to a lack of role clarity and, as a consequence, there are multiple levels of fragmentation.

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Organizational control systems: current operational systems and absence of control mechanisms are major barriers to provide necessary services. Current performance metrics do not measure or reinforce quality performance and results.

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Skills and knowledge: there are major shortcomings in middle-level managers’ skills to motivate and manage staff.

These are exactly the kind of issues for which winning businesses have a ready response. Winning businesses have an established process to set vision, clarify and police priorities, allocate resources to the highest priority actions and investments, measure progress accurately, and follow up as needed to ensure that the highest return possible is extracted from each investment or initiative. The result is a culture and operating approach that is informed, meritocratic, rational, effective, and efficient, ensuring that all available existing resources are well used. In addition, efficient use of resources begets more resources, ensuring that future resource allocations are applied to a greater pool of available assets of all kinds.

Implementation and Organizational Skills One of the most valuable skills in strategy is the ability to implement a well thought through strategic plan. It is thus not surprising that the business

Integrating Strategy and Responsibility community values highly those executives who can create economic value through high quality strategy development and implementation. That same key skill and ability would be highly valued in the societal area as well. The impact of a structured and integrated approach will be to ensure that all strategies of an organization are fully understood, aligned, and implemented. No element of strategy should be isolated or pursued in a vacuum. An expert approach to the determination and execution of all elements of a strategy— including implementation—will lead to the achievement of the full potential inherent in an initiative. Only the adoption of a best-practice approach will lead to the realization of the shared vision of the leaders and participants in the overall effort. Old solutions often do not apply to modern problems. Implementation plans need to be equally different, and far more creative than they have been to date. Nonlinear or breakthrough strategy is the order of the day in global competition. Accessing the creativity and creative cultures of a 3M, Kodak, Microsoft, or Cisco could contribute to the design and implementation of vastly more effective societal strategies. The development and implementation of any effective strategy will need to be driven by a new approach to leadership, founded on a clear and common vision. That vision is now often realized through creative new combinations of historically separate resources. These new integrated approaches are led by individuals equipped with a broader skill set than before. Renaissance men have been described not as masters of any single craft, but as gifted individuals capable of mastering and integrating the disciplines of their time. That skill, and the cooperative approach it requires, are now more critical than ever to the successful design and execution of global strategies. As the world economy evolves and grows, consolidations, alliances, and combinations of resources and organizational strengths have become increasingly important in strategy. The skills to link historically adversarial suppliers and customers, or even competitors, in new win–win combinations could be well used in linking disparate public and private sector bodies in a shared initiative of common purpose. The same skill would be valuable in linking public and private sector in a series of issue-specific task forces. A number of recent public and private sector initiatives, most notably the Global Alliance for Vaccines and Immunization (GAVI), funded primarily by a $750 million gift from the Bill and Melinda Gates Foundation, are examples of the application of this new set of STRATEGY business principles to areas outside of the purely commercial.

Political Savvy and Credibility Global business, as is the management of global affairs outside the commercial sphere, is as much about process and politics as it is about substance. The

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resolution of major challenges in the business world also has to do with scarce resource allocation, governmental relations, the politics of large and numerous organizations, and the oversight of a complex process of change and transformation. In all cases there is now a large premium placed upon effective communication skills in both worlds of all aspects of problem, progress, and solution. Capital markets, enterprise development, and implementation of strategy are all well served by effective communication programs, internal and external. As a result, private sector expertise in crafting message architecture, mastering channel usage, and designing for impact could help in the creation of a positive and motivating media campaign to support societal challenges as well. It is not only the great corporate philanthropists like George Soros, Bill Gates, Ted Turner and others of that ilk who could bring extended credibility to the initiatives for greater social responsibility. Accessing the personalities, drive, and capabilities of respected individuals such as Jack Welch, Robert Rubin, John Reed, or Li Kai Sheng could dramatically upgrade the efforts, and results, from an expanded set of initiatives and approaches to more engaged business behavior.

Resources and Distribution Multinational corporations increasingly control the channels of global distribution, the flows of global information, and a vast proportion of global human talent and technology. Businesses employ the majority of the world’s working population and oversee the deployment of a great proportion of the world’s capital resources. Within and across these pools of resource and capability, there is an enormous potential to contribute knowledge, people, access to distribution channels, and capital of all kinds to the implementation of global strategy. Global systems of the economy, the environment, disease, crime, poverty, corruption, illiteracy (particularly among women in developing economies), and others are developing momentum in the wrong direction. As the laws of science and nature dictate, only an equal or superior force can halt or change that momentum. Private sector resources can both increase the amount of force applied and, through focus and intellect, improve the effectiveness and efficiency of that scarce resource investment. Accessing a wider range of existing distribution systems is essential to many global societal initiatives in education, health care, population control, and environmental amelioration. The GAVI initiative is such an effort, a program developed to realize an ambitious vision of protecting the lives of many of the 3 million children who die every year from vaccinable causes. By the beginning of 2004, the initiative had already provided basic vaccine to more than 8 million children. The GAVI initiative will make major progress as vaccines are paid for, distributed, and administered throughout the world by

Integrating Strategy and Responsibility a coordinated network of public and private enterprises. It will focus these resources on a task force basis to achieve precise operating targets and ensure pre-set operating standards are observed. The network characteristics of the effort, and the new alliances operating within it, set a new benchmark for effective global cooperation and creative use of distributive capability. Other programs, for example the AIDS initiatives in Africa led by corporate giants such as HSBC, Coca-Cola, Heineken, and Anglo-American, also benefit from the global resources, reach and capability of these businesses. Effective action need not be the province only of the individual enterprise in the private sector. The Rotary Club’s Polio Plus program made a major contribution over many years to the near total eradication of polio in both emerging and fully developed countries around the entire world.

Mastery of Technology Perhaps the greatest gap between current public and private sector capabilities lies in the application of relevant technologies. This technology resource gap is visible whether one is looking at state-of-the-art Internet exchanges of carbon and pollution units, or application of pharmaceutical products to reduce diseases, or new supply chain logistics to transport food or other essential supplies to areas that risk or suffer from starvation. It is a well known fact that that mass starvation is never due to a lack of food. The reasons that millions of people, many of them children, die needlessly every year are in fact usually due to problems of conflict, politics, corruption and logistics, which includes transportation, storage, distribution, and coordination. Many of these problems have a ready solution in the technologies and distribution asset bases of many large companies. Some of these same problems, and therefore potential solutions, could be attributed to health protection and medical care as well. Technological advantage lies at the heart of many winning business strategies. Statistics, logistics, segmentation, prioritization, rapid deployment, time to market, and other advanced management technologies are joined by hardware, software, and research benefits in creating lasting advantage in the competitive workplace for ideas, actions, and ultimate results. These same resources could equally contribute on a broader range of social issues as well.

Performance Measures Many efforts at social change flag because there is no meaningful scorecard of performance. It is a long established truth in the commercial world that “what

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STRATEGY gets measured gets done.” Even complex performance such as car dealership service levels or broker’s investment performance can be broken into components, weighted, evaluated, and a single summary service score reported and acted upon. Priorities can be set and the impact of investments measured appropriately. Similar summary measures, such as Singapore’s nine-element weighted Pollution Standard Index to measure atmospheric purity, can help to target actions and measure results outside of the commercial sphere. Importing the measurement discipline to areas of public concern would improve focus and increase the intensity of investment where it would be most valuable. For all corporations, triple-bottom-line accounting—measuring and reporting on the full financial, environmental, and community impact of a business—would be a major step toward better practice and renewed faith in the values of business enterprises. A related area of valuable transfer is the private sector’s culture which values, and is driven by, creating demonstrable results. In the private sector there is generally a lower level of tolerance for delay and a higher value placed on measurable progress than in many bureaucratic public institutions. A linking of results, culture, and compensation practices would further enhance the value of a private-public sector alliance.

Entrepreneurial Drive and Leadership Not all activities from the private sector with positive societal or environmental benefits need to be pursued on a pro bono publico basis. Reforestation, energy trading, pollution credit systems, water management equipment, and other socially beneficial activities may also be developed purely for profit reasons. Such activities are not only likely to perpetuate beneficial activities, but are able to increase the amount of energy dedicated to improving the overall state of affairs since they make no claim on available public and private sector “social” resources. It is a long-standing truism that “all politics is local.” On the other hand, today’s corporate leaders, and certainly the heads of large and successful multinational corporations, are citizens of the world and global strategists day in and day out. Tapping into this knowledge base and a desire to improve the reputation of international business may help to bridge the gap, allowing a select few to realize that there is here no difference between local and global when it comes to the politics of welfare and survival. Recent initiatives on the part of the business community to provide leadership in climate change, in recycling, and in other areas shows the potential for change when business leaders act in their longer term enlightened self-interest. Without leadership from the business community on solutions to other societally challenged areas, the business community will soon be even further

Integrating Strategy and Responsibility tarred with the brush of failed responsibility. Failure to self-discipline today could well result in enforced disciplines and penalties later, forcing the unwilling to incur a far greater cost for lack of attention to an escalating risk at an earlier, and more manageable, stage of development.

An Element of Core Strategy Broader notions of responsibility are not yet, for many companies, part of their core strategy. But times are changing fast. Responsibility, sustainability, and engagement on a broader set of issues is now emerging as a key element of competition and differentiation for all types of businesses. In all programs of broader social and corporate responsibility, as for ordinary commercial business initiatives, the same disciplining questions need to be answered. What is the objective? What are the measures of success? Is the proposed funding sufficient? Is it necessary? Is the timing right? Are there more efficient, or more effective, alternative approaches? Who should be involved? What interdependencies are there with other organizational initiatives or activities? Is this better done alone or with partners? How can shareholder benefit be maximized from the investments being made? The application of rigorous business logic provides focus and discipline to resource planning, increasing the benefit from the resources dedicated to the effort. A businesslike approach will magnify the impact of the funds invested in the first instance and increase the likelihood of their continuation into the future. Seven Lessons of a Winning Approach to Responsibility Take a practical approach Link to your core business Start where you are Organize effectively Set goals and achieve tangible results Communicate effectively Provide leadership

Take a Practical Approach Experience suggests two principles can be applied to make your approach more practical. First, it may be more effective to group or to harmonize social

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investments across a more limited range of activities which are relevant to your operating business than to fragment effort. Despite good intentions, and usually driven by a desire or policy at headquarters to let local operations decide the list of their own social activities and investments, fragmentation across a broad range of unrelated activities may reduce the return on total corporate investment. A shorter list of activities linked to a business system and organizational capabilities—such as employing construction skills to build local educational infrastructure, adapting corporate health facilities to reach out to the disadvantaged in the community, applying operating skills to improve health or child care infrastructure, addressing environmental issues—may allow for greater learning, valuable synergies between projects, greater media value, and better morale within the organization. Clarity and simplicity of purpose can make a program more understandable and more motivating, promoting greater progress toward the goals of the programs selected, and yielding a higher and faster payback on investment.

Link to Your Core Business It may be more effective to link the programs selected to the core skills, products, services, and strategic assets of the sponsoring business. The organization can bring greater expertise to bear on the specific challenges, thus improving results. It can also increase the external and communications benefits. Association with the effort is more easily remembered and understood by both internal and external constituencies. A clean drinking water initiative, for example, may make more sense for a beverage company than for a clothing company. An Indian poverty relief or educational program may make more sense for a multinational company operating in India than it does for a domestic US utility. Providing disposable syringes to impoverished African health care centers may be more the province of a medical products company than an engineering firm, which would be better placed to advise third world municipal authorities on sanitation and infrastructure. Investment to bring Internet access to third world countries, bridging the digital divide, may make more sense for a computer hardware or software company than for a financial services company. All synergies between a sponsoring business and the program selected for participation can create extra value in a program of social responsibility, and none should be ignored. In a more associative program, where the initiative selected for societal engagement has a higher degree of sharing with a core business, brand impact can be greater and more positive since the created benefits are closer, conceptually, to the core operations and brands of the participating enterprise.

Integrating Strategy and Responsibility Start Where You Are Change starts most easily at home, and each company can begin to develop an appropriate strategy for involvement by focusing on the most important societal risks and opportunities in its business system and current operating activities. Addressing issues related to product safety, manufacturing effluent, employment practices or staff education can be a great starting place. For each element of strategy, integrating the content of a broader societal agenda with the current strategic and operating objectives that businesses pursue in their daily operations can have great impact. That integration can be easier if there is a common model of strategy, and a common language of values and objectives. A common strategic approach can serve two objectives. First, the full set of skills and disciplines developed by private enterprises can be applied to make more effective societal investments and achieve far better results. At the same time, the common approach will make it easier to integrate the elements of a strategy of responsibility and engagement into the core operating strategies of the participating businesses.

Organize Effectively As results can vary as dramatically in the pursuit of a societal program as they can in commercial activities, the right organizational approach needs to be set with an individual company’s circumstances fully considered in each case. Board involvement may be essential to draw on deeper experience and knowledge of the relevant communities, both financial and social. Although very much a part of modern business strategy, engagement in programs of social and corporate responsibility may still be seen by some as a distraction from core financial or operating objectives. From a purely practical view, board endorsement may be essential to gain in advance of the launch of any initiative. In the words of one newly appointed chairman in America: I want to do the right thing, but I also don’t want to be toast if we miss one quarter’s earnings expectations and people associate me too much with these broader issues. I have to bring the board along on this thing.

In a harsh world of ever-shorter CEO tenure and ever-increasing earnings pressure, building the most appropriate program content needs to be, and needs to be seen to be, consistent with the long-term goals of the organization. Board understanding and support for a Code of Conduct or matrix of responsibility as set out in Book Two, perhaps even worked through a dedicated board committee on governance and responsibility, would be well advised.

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A second organizational need is to ensure that program ownership is sufficiently senior and integrated with the main line functions of an organization. Just as any strategic program can be fully integrated or considered marginal in relevance and impact, strategies and initiatives of greater responsibility can be effectively “hardwired” into an organization or considered a distraction. Ensuring that the right level of engagement within an organization is achieved early on by designating the right leadership team may determine the ultimate value of the effort. This broader involvement would also be enhanced through a more creative approach to the sourcing and structuring of the organizational resources allocated to the effort. Task forces, effective in bringing together a diverse set of individual skills, personalities, and experiences for commercial initiatives, may be the best approach in this area.

Set Goals and Achieve Tangible Results Consistent with the theme of applying the full disciplines and values of a business approach to corporate involvement in a program of broader engagement and responsibility, each individual initiative, each individual’s involvement, and each investment should have an associated set of targeted results. The same is true of the program as a whole. The major weakness of most strategies, and of most strategic models, is their failure to lead to tangible results in the real world. By setting goals and targeting results early on, this weakness can be avoided, and even expensive investments can be fully justified by the results they create. By monitoring progress against pre-set milestones, the program can be kept on track more easily, with necessary small adjustments made earlier in the process.

Communicate Effectively One of the most important components of an effort of broader engagement and social responsibility by corporations, and by the individuals involved in the effort, is communication. A significant part of the value created will depend on an effective communication program. Both internal and external constituencies need to be considered. Channels and content need to be carefully selected, and a single approach crafted. A thoughtful architecture of message content is important to be worked out in advance. What needs to be communicated to whom, by whom, and on what schedule needs to be determined and built into strategic, organizational, and tactical discussions. Those decisions need to be developed and coordinated within an overall program of corporate activity and communication.

Integrating Strategy and Responsibility All media need to be considered such as internal journals, intranets, Internet sites, and electronic and print media. Even informal internal communications channels need to be considered—the famous tea breaks, conversations at the water cooler and the exchanges between members of various e-communities—to ensure that full support is rallied and full potential realized. Another feature of best-practice communications programs is that they are interactive. They allow for feedback, contribution, and involvement by a range of individuals and groups. Broadcasting of intention and results without listening to related feedback diminishes the potential of the effort and should be avoided wherever possible. Only through an interactive and comprehensive program of communication and feedback can the investment be connected with external communities that might contribute to the program. And only through that approach can the full benefits in the broader community be realized.

Provide Leadership Consistent with the broader principles of leadership in a modern organization, the program of social responsibility should be led from the front and from the center. Visible, motivating leadership is essential. But for the program to be successful, leadership must also operate behind the scenes, encouraging, adjusting, refocusing, and ensuring that the strategies are well resourced and key tactics well executed. In a network organization, leadership does not always need to come from the most senior ranks. Often, the younger generation of managers and colleagues can provide effort, inspiration, and examples of personal dedication. Passion, even more than position, can make for a good leader and role model in the effort to participate more fully in programs of societal improvement.

A Clarion Call for Help Proposing a broader role for the private sector is not intended to usurp or override the role of the state, nor to reduce the importance of relevant international institutions. Kofi Annan, writing on his proposal for a Global Compact with business, was clear on his desire to see a more engaged private sector: We cannot wait for governments to do it all . . . Business, labor, and civil society organizations have distinct skills and resources that are vital in helping to build a more robust global community.

Annan stated in no uncertain terms that in asking companies to sign up to the UN’s Global Compact he was sending out “a clarion call for others to join us”,

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STRATEGY and that joining in the program would not result merely in theoretical discussions. In language reminiscent of the implementation challenges in the business world, he concluded: Our new coalition for universal values must move swiftly to translate good intentions into concrete action. The success of the Global Compact will be measured by its ability to make a real difference in the lives of real people.

Whether or not a company decides to embrace the principles of the Global Compact, the benefit and need for a greater engagement by the business community in programs of social responsibility is clear, as is the risk of non-participation in a world of instantaneous global communication and potentially concerted action by unhappy customers, regulators, shareholders, or opinion-forming NGOs. The STRATEGY approach to corporate responsibility provides the support needed to design and implement a more thoughtful model ahead of competitors, a model which will be the most motivating and the most valuable for all of the stakeholders in a business enterprise. This forward thinking approach to societal responsibility is another reason that your own STRATEGY will truly be world class in every dimension and achievement.

CHAPTER 6

An Alternative Model of Organization

To be successful at the highest levels of business, organizations will need to be designed and operate to a set of guiding principles that allow a business to master the full set of challenges of the new paradigm. The most successful companies will be those that adapt how they work as well as what they address in order to stay ahead of competitors. In order to pursue these new challenges, many organizations are discarding older centralized approaches or inefficient matrix models in favor of a new and alternative approach. The old model of command and control may not fit well in a complex and dynamic international business environment. The associated bureaucracy is too slow, the center too remote from fast-moving markets, and the internal environment often considered too stifling for young, ambitious managers. Decentralized organizations, which have swung in and out of fashion over the past 30 years, may also be poorly suited to identify and focus the full weight of institutional expertise and resource on high priority international problems and opportunities. Adapting to local market realities is essential, as is developing and harvesting the value of global positions. Transnational businesses need both to optimize the performance of global-scale assets and processes and remain fast and flexible in local markets, often competing against more focused local players. Organizations now need to be designed and operated to achieve a multiplicity of objectives.

A Network Model As businesses refocus on a limited set of priority actions, organizations must bring to bear their full capabilities in these areas, intensifying all efforts and operating more effectively on both local and coordinated global bases. A new approach to organization, which in many ways resembles a distributed information or technology network, can respond well to this dual challenge, optimizing the value added from the center while enabling business units to respond swiftly and effectively to local market demands. 107

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The model works so that every local business unit serves local demand, communicates extensively with other units and is guided by a shared vision, defined operating protocols, group or corporate priorities, and investment rules set down at the center. The center provides a more limited range of valueadded services, and also acts as an intelligent switch to deploy resources around the business. The network is truly interdependent, drawing on the capabilities of each unit and the center to strengthen collective performance. First described in 1989 in the article, “The Webs We Weave,” which appeared in the United Kingdom magazine Management Today, the network model has today become a proven source of value and advantage in many transnational enterprises. Organizations that adopt this model can expect a radical shift in the structure and functioning of the organization. Costs at the center can be reduced. Information will be more thoroughly processed and more widely available. Hierarchies will break down. Key problems will be studied by managers, often from different disciplines, on a task force basis. The transparency of business units will accelerate the need for greater exchange of performance-related information. Travel and communication may increase as well. And the range of skills demanded of management will broaden to accommodate the demands of an interdependent organization. A graphic example of such an organization is set out below.

New Organizational Approach Network Model Europe

Operating principles

• • • • •

Close to customer

• •

Less hierarchical

•

More people in markets Fewer people at HQ

Retail outlet/ distribution

USA

Greater global presence Headquarters

High sharing of information Access expertise and data on single data base available 24/7 Supports competitive superiority in key levers of performance and value

Emerging markets

Asia

New product group

Designing and implementing a network model will not be easy. Old habits die hard and an entirely new set of values and operating principles may be required for your organization to adapt to the new model. The values migration

An Alternative Model of Organization required is set out below, with examples of the kind of supporting changes highlighted in the right hand column on the illustration.

New Organizational Approach Management / Motivational Matrix Point of arrival (1 year from now)

Satisfied

Content of Migration Plan All managers to participate in STRATEGY Program VP discretion to manage +/–5% of budget categories Monthly management meetings of two hours instead of weekly control meetings of one hour Mandatory retirement age at 70 I

I

I

Dissatisfied

I

Point of departure (now) Centralized Top down Orders only No freedom to interpret

I

Disciplined Freedom Top down and bottom up Clear vision/direction Freedom in execution

I

Revision of performance review system Reduce ad hoc queries requiring written responses by 75%

A key unit of analysis and execution of specific initiatives in the network model will be the task force, a multidisciplinary team with a focused objective, a preset timeframe for its existence, and a high degree of freedom and autonomy in responding swiftly, effectively, and creatively to challenging situations.

The Task Force Faster, more effective solutions can often come from more creative approaches to resource management. These approaches can consolidate similar elements within systems, create purpose-built task forces, establish formal or informal associations, and combine apparently different operating entities effectively without creating expensive new organizations or standalone legal entities. The scarcity of resources, the time demands of the marketplace, and the rigors of competition have all shaped this approach which can be applied to many transnational challenges without building in permanent costs. The key organizational unit dedicated to designing and implementing global strategy and to managing major events such as a regional economic crisis or merger initiative is often a transnational task force, involving managers from more than one geography and from more than one discipline. For many years the public and private sectors have been moving away from the monolithic command-and-control organizations whose rise predated the

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Second World War. The costs, inefficiencies, and ineffective responsive capability of these headquarters-led structures were too limiting for most modern business enterprises. More than half of multinational corporations now use cross-border task forces as a regular weapon in their problem-solving armory. An integral part of military history, task forces can be extremely effective in the business world if they stay focused on what they are: goal-specific assemblies of individuals from one or more institutions brought together for a specific time to achieve a specific goal. Task forces are the opposite of permanent, established bureaucracies weighed down by history, burdened by tradition, or encumbered by entrenched political interests. Drawing on the resources of multiple institutions, task forces can be particularly effective in combining the strengths and capabilities of different organizations or departments. They are well suited to set out new and more creative solutions. Multiparty task forces can be the most effective and efficient approach to provide complementary skills and resources without duplication of cost or effort. This kind of focused organizational model can also provide a new, rich, and varied experience for its members, adding an element of novelty, education, and enthusiasm often lacking in a normal daily occupation. It is not just more efficient structures and operating principles that can be brought to bear by joint task force exercises. Properly managed, task forces can foster a culture of rapid and focused activity, flexible organization, measurable results, compensation for targeted performance, creative alliances, modern network management, free information flows, organized transnational initiatives, and new models of global leadership.

Fast Track to Success One very low profile but exceptionally insightful CEO has long recognized the value of a network approach to organization as a key element of global strategy. Pat Lupo, the former Chairman and CEO of express delivery company DHL, presided over a global network company that established and defended a leadership position across more than 100 individual national markets in a high-growth global business for more than a decade. By designing and implementing a new approach to organization at the end of the 1980s, he was able to generate visible success in the express delivery market and create a unique and enduring source of competitive advantage against more traditional rivals for more than a decade. The challenges were formidable. The DHL business had grown from a small team of entrepreneurial employees in a handful of countries to a highly sophisticated network of air and ground operations and information systems to support an on-the-ground presence in more than 200 countries. The supporting technology infrastructure rivals that underpinning any

An Alternative Model of Organization complex global business and can track products and services in each part of a complicated international network ranging from Albania to Zimbabwe, from Saigon to Santiago and from New York to Tokyo. Founding his organizational approach on a state of the art view of both the emerging principles of transnational organizational development from the latest academic research and proven practical experience, the resulting organizational structure and approach were truly world class. Pat Lupo often said that a great part of his business strategy was to build the best organization he could and let his management team make as many decisions as possible, so long as these decisions and initiatives were within the bounds of group vision and strategies. The organization was designed and operated entirely in line with the principles of a modern network organization from structure to staffing to operating principles to adherence to full and open access to a single global database. Although building an advanced organization around the principles of a transnational network organization was not the only strategic initiative underlying DHL’s success, it was one of the major factors in a great business success story which saw the value of the DHL business grow 1,500 percent over a single decade. Said Lupo at the time: In a high-growth complex international business and within such a dynamic industry, I can’t foresee every issue that will arise, nor can we always predict when a crisis emerges. All we can do is to build a highly capable organization, enabled by technology, and let them get on with it.To the extent possible we focus on enabling our front line organization to outperform our competition in every aspect of service delivery. We also know we can’t foresee every change coming in the market. We manage what we can, but recognize the need to be prepared for the unexpected as well. And in that area the DHL organization is our best source of advantage against competition.

Leadership in this kind of fast-moving network model is often more about influencing than directing, inspiring more than commanding, and integrating rather than building alone. As the network model is implemented, many aspects of organizational hierarchy will become obsolete, with outdated structures and approaches in need of fundamental reinvention. The result will be a transformation from a fixed set of patterns and responsibilities to a less rigid and more natural flow of systems, people, communication, ideas, and actions in a more open construct.

The Network Leader as Modern Renaissance Man (or Woman) At the center of it all, the most effective operators within this new model will need to reinvent themselves as charismatic coordinators, value added switches, and systemic facilitators rather than domineering commanders or dictatorial controllers. As such, the CEO or other network leader will need to understand and be able to add value in marketing, distribution, logistics, manufacturing,

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operations, outsourcing, IT, tax structuring, mergers and acquisitions, alliances, and compensation systems, to name but a few of the multiple disciplines called to the fore by a more comprehensive approach to strategy. Modern leaders will also need to master all aspects of leadership in the network world. This distributed approach will require leaders to master more skills ranging from personal motivation to wide-scale layoffs, add a different kind of value in a wider range of situations and environments, and ensure that all of the complex elements of strategy function well and are properly integrated. In that more integrated role, the leader must operate at all times as a modern Renaissance Man (or Woman), mastering and integrating the arts, sciences, and disciplines of his or her time and providing focused and practical guidance across all elements of a complex business world.

The Orpheus Process The models of modern business organization in some ways have paralleled the development of organizations in other areas of high-level collective endeavor. One of these parallel areas to business organization has been, surprisingly, the world of orchestral music. In the past, most businesses operated under a command and control system, similar to the authoritarian approach taken by dictatorial continental maestros such as the fabled Toscanini, who insisted on absolute adherence to his personal direction in all aspects of rehearsal and performance. In the 1970s, Peter Drucker was already describing the future business organization as drawing from alternative sources of knowledge, including his observations on how the best organizations were already operating more like a university or modern orchestra than resembling a top-down military model. In the orchestral paradigm, the CEO listens and leads as an inspiring conductor for colleagues playing together harmoniously within an agreed score and according to an agreed understanding of each player’s role. The Orpheus Chamber Orchestra has pushed the leadership model to the next stage of development, operating without any conductor at all. In so doing, the Orpheus approach may be the harbinger of leadership trends to come in the business world. Established in 1972 by Julian Fifer and a group of fellow musicians, the Orpheus Orchestra was founded to pursue an orchestral repertoire with a chamber orchestra approach, establishing a flowing style of organization and a rotating model of leadership without any conductor on a central podium in rehearsal or during a performance. This “active team” approach is formally known as the Orpheus Process. Up to thirty individual musicians perform flawlessly without any one leader standing in front of the group with a baton or any one musician providing visible central direction. The group plays together, flowing with the music and proceeding through each piece as agreed in highly animated rehearsal sessions.

An Alternative Model of Organization The success of The Orpheus Orchestra is undisputed, with millions of fans buying their CDs, attending their concerts, and calling the group back for countless encores after performances in most major countries around the world. Orpheus have made more than 70 recordings, many with the prestigious Deutsche Grammophon label, and count among their many accolades the Grammy award, the music industry’s highest honor. Even in rehearsal there is no single leader, with each member of the group providing thoughts and suggestions for group decision-making on musical tempo, interpretation, and attitude. This process ensures that more ideas are presented for consideration and that the group determines direction rather than any one individual. The result is a fresh and uplifting set of performances which imbue many classical pieces with new life and energy. Members of the orchestra are quick to point out that there is not a lack of leadership, but that there are many leaders in the group, with leadership shifting seamlessly from one to the other over time within a performance, and even within a single piece of music. Each member of the orchestra contributes to the overall flow of the performance. As one member of the orchestra summarized: “ . . . the music is the leader and we all share responsibility for our results.” In pursuing the Orpheus Process, the concept of shared and shifting leadership requires a foundation of individual selfless strength to create group results. In a discussion with members of an audience during one recent public rehearsal, the members of the orchestra listed out seven principles that were critical to their success.

Seven Principles of The Orpheus Process Leave your insecurities at home Communicate Know how and when to let go Understand “power with” and not “power over” Share in the leadership model Invest responsibility in others Admit we don’t know everything

Leave your insecurities at home. While ego is seen as important to give an individual the courage to put forward his or her own ideas to the group and to motivate individuals to achieve excellence in individual musical craftsmanship, fragile egos were seen as counterproductive. As one orchestra member put it bluntly: “You have to deal with rejection; it’s part of the process.”

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STRATEGY Communicate. Even in a process which has a highly intuitive element, it is important to communicate effectively, including developing the skill of “active listening.” Know how and when to let go. Although the spirit of the Orpheus Process encourages all opinions to be heard, not all ideas are adopted by the group. The process works at multiple levels to generate ideas on musical interpretation and performance and to weigh and select the ideas presented. Members of the group who have originated ideas not adopted by the broader orchestra need to learn to move on even if unhappy with the result. Understand “power with” not “power over.” Perhaps the neatest summary of the fundamental philosophy of Orpheus, this phrase captures the sentiment of shared empowerment and rejects the older notion of top down leadership. Share in the leadership model. At the same time that there are extended rights under the distributed authority in Orpheus, there are also expanded responsibilities. Everyone needs to participate to make the approach work. It was also noted by members in the group that, while very participative, the group was not really open to any major shift in the basic model. Some of the most experienced Orpheus musicians, who had been with the group since its founding, pointed out that it is very difficult to change a culture as strong and as essential to a group’s functioning. Invest responsibility in others. The shared approach to leadership required an ability to trust fellow musicians and the group as a whole. The broader group was seen as the source of greater capability and wisdom than any one individual leader, and also the source of a greater collective emotional intelligence which contributed to the creation of better musical performances. Admit we don’t know everything. There was no room for a sense of infallibility in either the individual or the group in the Orpheus Process. The group and its presentations were constantly evolving through challenge, renewal, and change. An admission that not all is ever known keeps the group fresh, open to new ideas, and ensures that there is always room for constructive change. Obviously, the Orpheus Process operates at the high end of the emotional quotient spectrum and requires members to be comfortable working through the intuitive and experiential rather than just the articulated and studied. Members of the orchestra admit freely that the process can be more chaotic and frustrating at times than a traditional top-down approach to orchestral performances, but also agree that out of the occasional chaos came a consistently better and more profoundly satisfying approach to music.

Unspoken Harmony of Excellence While the Orpheus Orchestra stands as proof that a network model can work in a musical context as well as in a business environment, there are other examples

An Alternative Model of Organization of excellence which contribute another, even more subtle message. In a fascinating analysis of great performances by world-class teams, Fortune magazine concluded that there was a deeply intuitive sense of the flow of performance that allowed members of the best performing teams to achieve the highest levels of accomplishment without specific verbal or documented direction. In other studies, great sports teams, medical emergency teams, SWAT teams, and a chamber orchestra were highlighted as benefiting from a mutual operation in a kind of deep, unspoken harmony—an arrival of the entire group in “the zone” of shared understanding and group excellence which few can reach. In building management teams, this potential for highly productive harmony should not be overlooked, no matter how impossible to document or how elusive to describe.

The Obsolete Narcissist It is worth noting that no model of executive behavior is less adapted to the leadership of a modern approach to organization than the narcissistic, manipulative, deceitful, or selfish executive. Narcissists, in business and outside their jobs, are independent, self-referring, egotistical, and in dire need of external confirmation of their value. A narcissist manipulates, employs, and objectifies others as part of a scheme of constant self-reference and self aggrandizement to the cost of others. The new model of leadership and organization described here, on the other hand, values teams, connectivity, selflessness, consideration, and development of others. While less egotistical leaders may be equally demanding of performance, their approach and style engage and integrate others in a shared vision of the enterprise, emphasizing humanity rather than objectification. People are indeed far more than corporate assets or pawns on someone else’s chessboard. The alternative organizational model described here is fully aligned with this realization. A broader view of humanity may be far more valuable than individual ego in a networked corporation. The new model of organization and group endeavor values a sense of business-as-community connected to the outside world in countless ways rather than business-as-empire where all roads lead to Rome and incalculably large rewards are granted by right to the Roman emperor and a few selected acolytes. Although narcissistic CEOs can be effective to a point, they will have great difficulty in realizing the full longterm potential of their business in the new global paradigm.

The “Even Harder” Stuff The organizational and human element, the “soft” side of strategy that addresses the hearts as well as the minds of members of an organization, is more and more the focus of thoughtful strategists and managers. Intellectual

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capital, the learning organization, the knowledge corporation, and their conceptual brethren are the watchwords of many modern books on strategy. These books are now joined by a growing body of work on spirituality in the workplace focused on the value of awakening the full human potential of each individual and the overall group. Although the soft side of strategy is broadly agreed to be of fundamental and increasing importance, many senior managers struggle to find the right approach to build the best organization within their current structure and system of human resource principles and policies. Respected business leaders consistently name culture, teamwork, and motivation as sources of great value addition. These issues also carry a high degree of difficulty to analyze and to prescribe effectively on a general basis. One battle-weary CEO facing these issues in a tough post-merger integration program quipped, “Perhaps we should not call this the ‘soft’ stuff any longer—perhaps we should call it the ‘even harder’ stuff.” The net impact of these observations is the need to create an opportunity to address organizational issues with a fresh perspective and a wider range of options. There is no approach to people or organizations which is generically correct or universally applicable. Only by understanding the true nature of strategy and organization can leaders select the principles and ultimate approach which can maximize the return, financial and otherwise, to all stakeholders in an enterprise. One display which captures what can be done in evolving an organization toward a better balance of hard and soft skills is a matrix which captures both and sets out a concrete list of actions necessary to achieve a better future state of organizational capability:

New Organizational Approach Skills/Capability Matrix People -led

Fully capable

Add soft skills to performance reviews in year 2

High Soft Skills Coaching Teamwork

Content of Migration Plan

X Point of Arrival

Technical

Low

At risk

Point of Departure

High Hard Skills Technical training Finance

Add internal communication skills to annual training programs in Year 1 Increase CAD/CAM training budget

X Low

Increase spend on statistical quality control

Start DISC profiling and use of output in Year 1

An Alternative Model of Organization Beliefs, Attitudes, Behaviors It is not an exaggeration to say that even effective leaders will need to reach deeper into the hearts and minds of their colleagues to inspire better performance and to encourage more positive behaviors. Change in behavior is most meaningful and most enduring when it is the result of a deeper change in underlying belief and attitude. Crude incentives to drive change in behavior without addressing the deeper sources and causes of the behavior are likely to be both short-lived and superficial. Human behavior is, in fact, the product of response to external situations or internal motivations as processed by a complex individual and collective system. At the base of human behavioral systems lie beliefs, those fundamental building blocks of psychology which inform and guide the formation of attitudes. Attitudes, in turn, provide a consistent platform for action and reaction in the form of visible behaviors. Attitudes will lead to a consistent set of behaviors, both desired and undesired. Both beliefs and attitudes are invisible and can usually only be seen on a derivative basis through patterns of overt behavior, or lack of behavior, which can be seen and interpreted. Motivating changes in behavior may be possible through direct intervention at a behavioral level, motivated by either praise or sanction. But enduring and committed change requires a fundamental change in deeper beliefs and attitudes, which will automatically reset the behaviors to align with a more desirable pathway forward. In designing and implementing a new approach to organization and culture through STRATEGY, it is essential to reach the basic level of individual and group belief to motivate fully the individual and to drive the collective performance of the business to its highest possible level.

Winners and Losers in the Search for Strategic Excellence In clarifying the challenges of strategy and organization, it is valuable to understand what proven characteristics separate winners from losers. Surprisingly, despite the piles of hard data on performance and results, it is a consistent set of soft factors that drive the best performers to the heights of their accomplishment. Every industry, no matter how difficult or turbulent, has winners and losers. The shoe industry has hundreds of defunct manufacturers as well as the triumphant Nike and Reebok. For every McDonnell Douglas or Fokker there is a Boeing or an Airbus. For every RCA or Bull, there is a Dell or Microsoft. New business models replace the old. New winners emerge and reap the benefits of their success. Old leaders and lagging followers decline, are taken over, broken up, or become insolvent. Weak survivors drag along with operating performance and financial return well below the leaders, contributing to industrial underperformance, and consuming space in the global industrial landscape.

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STRATEGY Other companies have also broken out of old limitations to reach new heights of operating performance and strategic excellence. Ryanair redefined the nature of competition in the European airline industry. DHL virtually created the international air express business, growing at a pace well ahead of GDP and world trade. Wal-Mart built a powerful business model that puts them among the top of the list of the world’s most valuable organizations. In the coffee industry, which is growing at 1 percent a year at best, Starbucks shot up 65 percent, brewing up a better formula for success. For the shoe industry, which was experiencing GDP-like growth, Nike raced ahead at four times that rate for a decade. And Harley-Davidson, once in need of government protection to stave off bankruptcy and Japanese competitors, roared out of difficulties to become a leader again in the large motorcycle stakes. For these and other consistent overachievers, visions have been realized. Superior operating performance has been demonstrated time and time again. Crises have been mastered. Strong platforms of capability and flexibility have been built to respond to risks and opportunities, both expected and unexpected. Resources have been allocated to generate higher returns. Individuals and teams have been inspired to higher achievement and reward.

Four Organizational Characteristics of Winners and Losers The lessons from winners and losers in the search for strategic excellence can be extracted, examined, and articulated to understand the best approach to winning strategy. As described earlier, analysis of companies in turbulence has shown a strikingly consistent set of organizational characteristics for both winners and losers. Despite the same external environment, competitors’ fates varied widely from highly valuable success to highly visible failure. Analyses confirm that the sources of differential performance by companies were, in the main, management-driven rather than the result of unmanageable changes in the external environment. Surprisingly, that analysis showed that 80 percent of business outcomes—positive or negative—were driven by conscious management actions, not by external events. Change in the economy, regulation, or technology affected all competitors equally. Yet some competitors consistently outperformed their rivals in the same competitive and industrial space. More particularly, the factors and sources that separated winners and losers were most clearly attributable to the “softer” aspects of the culture and organization of the companies in question. Successful programs of change varied widely due to different industrial challenges and performance pressures, but according to the insightful analysis of Chris Zook at Bain & Company, all winning companies demonstrated the same four organizational characteristics.

An Alternative Model of Organization The Four Characteristics Of Winning Organizations Focus: external vs internal Horizon: long term vs short term Organization: fast and flexible vs slow and bureaucratic Attitude: dissatisfied with the status quo vs. satisfied

Focus: external vs internal. Winners were universally focused on the external factors surrounding their businesses—customers, competitors, channels, influencing systems, and economic drivers. Constant attention to the outside world kept them focused on the priorities that made the biggest difference in the marketplace. A leading danger signal of excessive internal focus is a strategy or strategic plan made without reference to competitors, customers by segment, or changing business context. Losers are often preoccupied with their own internal issues, with energies and attention distracted from far more valuable external issues needing attention in the marketplace. Failure to focus on the external risks and opportunities inherent in a business will ensure that they are not properly managed and that full potential is not realized. Horizon: long term vs short term. A second shared characteristic of winners was an ability to navigate steadily toward long-term success. During periods of both crisis and calm, the most successful companies proved their capacity to “navigate by the horizons, not the headlines.” Clear articulation of this long-term vision was another common characteristic of most of the winning companies. Organizations with a history of underperformance often have an excessive amount of energy and interest tied up in short-term financial results. As a result, critical initiatives with a longer-term payback are deferred or inadequately funded, and quarterly operating results are often oversold to match immediate external expectations. Achieving short-term results is important, but not at the expense of sustaining investments and initiatives that underpin the long-term health of the organization. Organization: fast and flexible vs slow and bureaucratic. In today’s dynamic and accelerating world of global competition, it is not surprising that a fast and flexible response capability was a consistent characteristic of winners. Leading organizations were not only fast and flexible in response to external events, but also in their pursuit of proactive goals to create competitive advantage and achieve high levels of financial return.

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To co-opt the words of Marcus Aurelius on the art of life itself, winners will need to adopt an approach to strategy which is “. . . more like the wrestler’s art than the dancer’s, that it should stand ready and firm to meet onsets which are sudden and unexpected.” Strategy can no longer be fully choreographed in advance. The capabilities necessary for fast and flexible response to unexpected onsets may well be the capabilities which allow you to outmaneuver or overpower the competition and end up as the sole occupant of the winner’s circle in the future. An inability to make swift and effective decisions in today’s dynamic and rapidly changing world will ensure that opportunities are missed or risks realized through lack of a timely response. In fact, a critical element in net risk assessment, as detailed above, is the probability of timely deployment of effective response. A slow and bureaucratic organization will not only miss opportunities, but can also needlessly increase inherent risk. Attitude: dissatisfied vs satisfied with the status quo. Leading companies were never satisfied with their achievements. The status quo, no matter how successful, was only seen as a stage on the path to realize better opportunities or to reduce critical risks in the strategic development of the enterprise. Creating change, and overseeing a constant process to profit from change, are necessary for any company to stay on the cutting edge of competition and winning strategy. A lack of desire to change will ensure stagnation, institutionalize complacency, and create great vulnerability to competitors with a greater ability to change their organization, adapt quickly to shifts in the environment, and outperform their competitors.

“Guilty on All Four Counts” In one memorable encounter with a leader of one of the world’s largest consumer products companies, these four points were set out for discussion in a private session in the director’s large London office. Musing profoundly over the four characteristics of winning companies, the 30-year company veteran and main board director sighed and summarized (correctly) with both sadness and humor that his organization was “ . . . guilty on all four counts.” Although his summary was more amusing and poignant than many reviews of weaknesses in organizational strategy, he was not alone in facing the challenge of an entrenched culture which held back a business from achieving its vast potential. In this situation there was a happy ending. The director took the analysis and his conclusions to the main board meeting that same week and used the need for organizational change as a catalyst for broader, and much needed, strategic change in the organization.

An Alternative Model of Organization Creativity, Intuition, and Insight In all of the perspectives on strategy in business today, the need to be more creative and demonstrably different is a constant theme. There are too many competitors offering similar products and services at comparable prices and on comparable terms to make “me too” strategies acceptable in such a crowded pool. Strategy, in process and content, now benefits more than ever from the new, the different, the creative, and the unconventional. In setting out on your own STRATEGY program, it is essential to look for all opportunities to initiate constructive change through a creative strategic approach. Creativity requires a high level of individual receptivity to allow new external information or internal intuition to penetrate and influence established thought patterns, both conscious and unconscious. The creative process in strategy requires us to be more open, and to receive ideas without attempting to limit or control these new thoughts with old models of understanding. Receiving and processing thoughts, ideas, hunches, concerns, and even flashes of inspiration from unknown sources within our consciousness, may form the building blocks of a much greater creative capacity for a business. This openness to new ideas and unexpected inspiration is an essential part of a more creative process. Maximum corporate creativity requires individuals to improve their ability to capture the valuable flickers of inspiration on the margins of consciousness and at the frontiers of their processes of thought. These ideas must then be evaluated, assessed, filtered, and shaped into actionable ideas, plans, and initiatives. Often this kind of unprecedented action inspired by unencumbered intuitive thought is the source of great strategy. It goes without saying that a fearful or risk-averse corporate culture can only limit the opportunity for this kind of thinking. Blame, finger-pointing, or political manipulation of sincere attempts to find a better way forward can only operate in a manner adverse to competitive progress and damage shareholder interests. There is no limit to the source or impact of creative strategies. From the retail sector come many examples of concepts which break new ground and pave the way to great commercial success. Starbucks redefined the coffee business and established a café-like “third place” between home and office. IKEA became a global success by offering inexpensive and colorful items of clean Scandinavian design in large low cost premises outside of city centers, displacing many high cost, hard sell outlets offering more expensive and less accessible goods in smaller traditional formats. Across many sectors, a renewed competitive effort to redefine businesses, build new business models, and serve customers’ needs in a more satisfying manner have led to new leaders emerging from the pack and capturing a greater share of an expanded profit pool. In observing the leaders in the area

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STRATEGY Seven Methods to Improve Creativity Brainstorm Change the people involved Explore new angles Avoid insularity Meditate Look for patterns Integrate

of business creativity, seven common principles can be derived which may inform your own search for a new and different approach to business. While there is no magic formula for success in setting out a more creative strategy, a checklist of seven ideas may help to surface activities which can lead to the design and implementation of more creative strategies. Brainstorm—draw on the power of the group. Often, the best ideas are sparked by interaction between individuals in a group setting. Organizing and managing a process of group brainstorming may lay the groundwork for the generation of many good ideas, among them perhaps a few which can truly make a fundamental improvement in your business results. There are many businesses which do not allocate sufficient senior time to brainstorm during or between strategy exercises. Meetings are brief. Some now even take place in trendy environments where tables have no chairs, deliberately hurrying colleagues back to their desks rather than allowing them the time to reflect and share creative ideas in a less stressful, and certainly more comfortable, atmosphere. Change the people involved—bring in fresh blood. Great ideas can come from great people at all levels of the organization. As so much of creativity is about drawing from a set of differing personal experiences, changing the constitution of the group from time to time can be extremely useful. New members of the strategic group can come from different parts or levels of your business, or can be hired in from the outside on a full-time basis. Alternatively, resources can be brought in on a contract basis to assist in the strategic process on a focused basis and then released, without incurring the high costs of hiring and integrating a new staff member, and without running the risk of a subsequent need to lay off staff. Explore new angles—think from a competitor’s perspective. During one the largest takeover battles in UK history, a farsighted CFO appointed one of his cleverest assistants to step down from his daily job and act throughout the contested bid as the opposing bidder would act, thinking through the potential strategies, tactics, pricing limits, and alliances of both companies from an

An Alternative Model of Organization entirely different perspective. The colleague’s performance was so effective that the CFO, following a hard fought victory, institutionalized the practice for future takeover initiatives. This same approach could be valuable in a nontransactional situation as well, providing a whole new look at the business and its potential from a different perspective. Avoid insularity—extract lessons from parallel industries and other areas. It would be a folly to assume that there is only one insight, model, or approach that can lead to creative understanding or improved results. Nor is there any best approach which can be fixed in time. There is always an element of change, of adaptation to the unknown and the unexpected. It is essential always to leave an open space in the thought process to allow applicable new information to come forward and for further inspiration to flourish as the circle of knowledge grows. Remaining open to further inspiration, renewed creativity, fresh change, and insight from all sources is a kind of built-in protection against a closed mind and an antidote against past standards of satisfactory underperformance. By learning from other people’s successes and insights, and adapting their practices for direct application in a different context, imitators may even improve on an already good idea. Rapid and effective imitation may be the highest and most financially rewarding form of flattery you can bestow. The consideration of alternative views and innovative thinking can be extremely rewarding. Controversial reading material which is specific to the task at hand or industry in which a company operates, especially if shared across the group, can provide a common platform for group discussion from a new perspective. One of the limitations of using only a focused Internet-based information flow, which confines an individual to information related to specific areas requested, is that there is no exposure to valuable ideas surfacing in unexpected areas not directly related to the topic, opportunity, business, or industry at hand. Reading generally as well as specifically can thus also be useful, as we often do not know what we do not know. Perusing a broader set of materials may turn up an occasional nugget not readily available to individuals excessively focused on one industry. Albert Einstein once said that problems cannot be solved at the level where they arise. By taking a different perspective on issues and problems, we are far more likely to find solutions to even the most intractable of problems, no matter how and where they arise. Meditate—clear your mind to make room for innovative ideas. Most of the principles above are either directed at drawing on untapped sources of group capability within a firm or tapping into external sources of ideas which can be effectively transferred across a business or industry boundary. Other sources of creativity are more personal and require a different approach to clear and creative thinking. Meditation may be the best of these proven approaches.

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STRATEGY By clearing your mind from the clutter of daily preoccupations, there is more space available for new insights, for an unhurried balancing of contending claims, for the discovery of new ideas, and the arrival of fresh perspectives. Uninterrupted, calm meditation by any method not only aids in reducing stress, which is endemic in most organizations, it adds enormously to the potential for clear and creative strategic thought. Look for patterns—understand systemic behavior. Much of creativity, as Senge describes in his book The Fifth Discipline, is about understanding and managing systemic patterns of social or economic behavior. In one memorable article in the Harvard Business Review, a detailed interview was conducted with two birders, experts in the observation and understanding in patterns of avian behavior exhibited in the natural world. The interview focused on the predictability and analytical approaches necessary to understand natural patterns as they emerged. As the authors of Spotting Patterns on the Fly stated “ . . . The ability to grasp complicated phenomena and discern possible trends from seemingly random events can be a source of competitive advantage, allowing managers to capitalize on opportunities before they are apparent to others.” By seeing and exploiting patterns of behavior—customer, competitor, economic, technological, and other—before others may allow a creative and open minded management team to create a success story of unprecedented dimension in the business world as well. Integrate—find new connections in a network paradigm. The latter phrase is a modern version of the key principle underlying a world view which tracks back more than 600 years to the Italian Renaissance. For in the exploration and mastery of many disciplines, each one interconnected with the others, lie the sources of insights which can only be accessed through a combination of perspectives and experiences drawn from complementary disciplines. The notion of integrating disparate disciplines to find a greater perspective harks back to a period where a few exceptional men were able to benefit from an approach and an attitude that transcended any one discipline or single point of view. These Renaissance Men, some of the most accomplished individuals in human history, have been characterized by an ability to master and integrate the disciplines of their time. By bringing together studies in science, the arts, culture, philosophy, religion, language, politics, history, and engineering, these men were able to open new vistas, to see new connections and to generate new insights and works of art that stand as some of mankind’s greatest achievements. With Leonardo da Vinci as perhaps the leading Renaissance figure benefiting from this tradition, modern management teams could well aspire to learn from how he thought as well as what he thought. In a highly original book

An Alternative Model of Organization entitled How to Think Like Leonardo Da Vinci, published by Thorsons, author Michael Gelb lists the Seven Da Vincian Principles which underpinned the genius of a man many believe to have been the most creative of all time:

The Seven Da Vincian Principles Curiosita Dimostrazione Sensazione Sfumato Arte/Scienza Corporalita Connessione

Author (and juggler, consultant, martial arts master, chess expert, and thinker) Michael Gelb summarized each principle in a section of his book entitled A Practical Approach to Genius: Curiosita—An insatiably curious approach to life and an unrelenting quest for continuous learning. Dimonstrazione—A commitment to test knowledge through experience, persistence, and a willingness to learn from mistakes. Sensazione—The continual refinement of the senses, especially sight, as a means to enliven experience. Sfumato—(literally “Going up in Smoke”)—a willingness to embrace ambiguity, paradox, and uncertainty. Arte/Scienza—The development of the balance between science and art, logic, and imitation. “Whole-brain” thinking. Corporalita—The cultivation of grace, ambidexterity, fitness, and poise. Connessione—A recognition and appreciation for the interconnectedness of all things and phenomena. Systems thinking.

A Continuous Culture of Creativity As Leonardo Da Vinci proved, there is no end to the human potential for creativity. There is also no end to the culture of creativity and potential for

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creativity in a business organization. As organizational goals are achieved, new aspirations and opportunities for change will arise to replace them in the pursuit of the overall vision of the enterprise. Like success, creativity is a journey, not a destination. There is no end to the potential for improvement, growth, and greater reward. As one poetic summary stated: As the flames of a fire leap higher, the circle of light spreads wider. But as the light grows, thus also expands the circumference of darkness. This expanding circle of darkness provides ever more opportunities at its new borders to extend illumination and eliminate the shadows of ignorance. There is infinite potential for growth at the frontiers of the circle of light.

A Balanced Approach In many cases a balance of linear and nonlinear approaches drove the content of winning strategies for successful high-performance businesses. A visionary approach can link a projection of more stable elements from the past (the linear component) with “discontinuous” or paradigm-changing elements (the non-linear component) in a coherent approach to future breakthrough strategies. These new visionary approaches required not just a new process, but also new levels of creativity, a greater respect for intuition, and an acceptance of alternatives to past models of business success. An example of discontinuous strategy can be found in the examples of Starbucks and IKEA described above. Also, Southwest Airlines and Ryanair, through different low cost approaches, managed to redefine the airline industry and achieve business success in a highly troubled industry populated by a great number of high cost national flag carriers, most of whom are still mired to some extent in an outdated and ineffective business model. It is important to underscore that discontinuous strategies did not allow leaders or managers to opt out of the hard graft of linear analysis in developing strategy. On the contrary, they required more data-driven analysis and a more detailed understanding on the ground than past models of strategy. Only with the deepest understanding can the most valuable strategic options surface. Only with the presentation of all of the relevant data can patterns, risks, and opportunities be properly viewed. All of the expanded dimensions of linear strategy, as set out in the 7C’s model of business analysis, are required plus an overlay of creative thought to devise the best strategy for a given situation. An example of effective redefinition of a business model is found in a Boston-based stereo and hi-fi equipment dealer started by students at the Massachusetts Institute of Technology. While competing against more

An Alternative Model of Organization convenient Main Street retailers with cheap goods relying on the “location, location, location” mantra and a hard sell approach by uninformed and underpaid staff, this niche operator redefined the competitive equation completely. The competitors were also characterized by impersonal, uniformed staff who knew little about their customers or products, cared even less, and sold what was available as aggressively as possible. This smaller operator insisted on having the latest equipment, the widest range possible of high quality products, the lowest prices for those products, and the most knowledgeable sales force working in an informal atmosphere. Customers flocked to their small operation and initial success soon allowed them to repeat their successful formula across multiple locations.

Organizational Creativity and Intellectual Capital It is not only external examples that can inspire creativity. The foundation for creative future initiatives may well be found in the intellectual capital already resident within an organization. This source of potential value should not be neglected. Like other asset categories, intellectual capital can be unbundled for further analysis and targeted development. In his book Intellectual Capital, Thomas Stewart outlines some of the elements of intellectual capital, based in part on an in-house approach taken by the Swedish financial services group Skandia. A parallel report from the Economist Intelligence Unit further breaks down the content of intellectual capital in the business world into three interrelated categories: human, structural, and customer. Each of these three sources of strategic advantage and superior performance will need to be explicitly addressed to exploit the full benefits of this corporate asset. Human capital resides in the staff of an enterprise. It includes innovation, attitude, tenure, turnover, experience, and learning. Employee surveys, new product success records, human resource records, research experience, know-how, and other “hard” elements of human capital can flesh out analyses and set targets for development in this area. Structural capital resides in a company’s documented sources and data registers such as customer information files, financial data banks, operating manuals, patents, intellectual property, and other encoded knowledge. The gap between a limited use of this structural capital and full potential use can provide a rich vein of value for data mining and commercial exploitation. Customer capital embraces downstream relations with customers and, thinking creatively, is also about upstream relations with suppliers where your own business is a valuable customer. Since each enterprise is a customer and a provider, the opportunity to learn exponentially and profitably exists

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at both ends of the business system. On the positive side, most customers represent untapped sources of fresh ideas and creative opportunities for change. On the negative side, erosion in the customer base carries with it both hard and soft costs of lost value. The creative capacity, and ultimately the wealth-generating capability of any organization, may now reside as much in its capability to capture, measure, and manage these intellectual and human assets as in its capability to manage traditional balance sheet assets such as plant, property, and equipment. In an age where communication and interaction among diverse communities, on-line and off-line, is easier than ever, the potential for creative sharing and crossfertilization is also greater and will need to be developed appropriately to extract the full set of available benefits.

3M’s Ten Commandments of Creativity 3M, the former Minnesota Mining and Manufacturing Company, is an acknowledged master of creativity in the development, application, and extension of intellectual capital. From an uninspiring base of expertise in overhead projector lens technology 40 years ago, 3M has grown to global leadership in refractive technology, adhesives, office supplies and other primary areas of growth and profitability. A brief summary of the successful 3M approach to creativity provides a checklist for companies and groups looking to optimize their development of intellectual capital. As well summarized by the Sunday Times, the ten commandments of creativity are: ■

Downplay management—senior managers are expected to lead, not direct. Barriers to performance should be removed, not institutionalized.

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Smile on chaos and lack of discipline—particularly during the early stages of conceptualization when freedom reigns in the creative process: “Control consciousness kills initiative.”

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Make nerds network—internal learning benefits from contact, just as external learning is best developed at points of contact with customers and suppliers. Networking is especially vital in technology. 3M’s Annual Technology Forum draws nearly 7,000 individuals from various disciplines to meet, share ideas, and develop relationships to share future ideas and initiatives. There is always potential for greater transfer of energy, ideas, and knowledge when there is greater human contact.

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Thou shalt follow through—ideas and initiatives with no immediate application should not be expunged from the repositories of corporate intellectual capital. The Post-It pads concept took a decade to gestate. Tambacer, a

An Alternative Model of Organization cardiac drug, took two years longer. At the right time each made a significant impact on its market. ■

Blur job distinctions—eliminating rigid boundaries enables creativity. Each employee has a right and an obligation to contribute to the success of the division and the company.

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Divide and grow—3M expressly avoids what could be called the “old IBM” syndrome which encumbered staff members with a monolithic similarity in dress, behavior, and thought processes. To maintain intimacy and to foster a “lean and mean” culture, 3M has divided itself into 50 small business units with separate responsibility for products, research, development, and financial results. Where small departmental budgets are not sufficient to drive new technological ideas, the company’s internal venture capital fund—the Genesis Grant—steps in to distribute $1 million a year in supportive development funds.

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Hear everyone out once—all staff are encouraged to speak at meetings. There is no monopoly on good ideas by the most experienced nor the most vocal. The strategic process, particularly at meetings, is set to reflect this understanding.

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Practice 360-degree performance reviews—reviews are set to break down barriers in the hierarchy and to maximize the development of intellectual capital. Supervisors, direct reports, and colleagues of the same level are canvassed for performance review input. A more holistic view of contribution of strengths and weaknesses can be extracted to confirm decisions on compensation, recognition, reward, and also to provide a comprehensive view for development priorities.

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Warm and fuzzy things matter—celebrating victories, attributing success, and personalizing products through an institutional memory extending back over decades, gives employees a feeling of personal engagement in their enterprise. Even 3M’s Scotch cellophane tape, developed in the 1930s, is still referred to as the product idea of Mr. John Borders, a long departed sales manager formerly based in Chicago.

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Hire good people and leave them alone—pursuing the best talent available and giving them room to develop is a foundation element of organizational strategy at 3M. Employees are encouraged to spend 15 percent of their time on unstructured experimentation and development. These unstructured experiments often are more valuable in the long run than the carefully designed and traditionally structured approaches to product innovation and service enhancement.

This ten-point approach to encourage and enable creativity has been enormously successful. 3M is now the leader in many fields of innovative

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technology and application. 3M’s leadership in these commercial areas owes much of its success to leadership in innovation management within a successful overall enterprise.

Back to Basics Although much of the preceding material has been about new and unconventional elements of organizational design and strategy in order to stimulate fresh thinking, in the end there are a number of basic questions that need to be answered in designing any organization. The basic issues of span of control, number and quality of direct reports, source of performance review input, relative and absolute compensation, terms of employment, and a whole host of other issues common to all organizations need to be addressed precisely. In any type of organization, traditional or modern, there is a standard list of questions which can be used to test the quality and effectiveness of an organization. This same list can also serve as a set of prompts which can lead to changes in structure or operation.

Seven Testing Questions Minimal layers between staff and customers? Reasonable spans of control? Right quality of people in place? Job descriptions clear? Potential conflicts eliminated? Structure and authorities clear? Likely problems surfaced and addressed?

By responding to these standard questions of organizational design, fresh and creative thinking on organization can be well anchored in the traditional disciplines of human capital management. By considering the best of the old along with the best of the new, you will be able to design and implement the organization best suited to assist you in the determination and implementation of your own world class STRATEGY. A full approach to an alternative model of organization needs to unfold at multiple levels. There can be change in the structure and operating principles of an organization, as reflected on a traditional organizational chart or organigram. At a second level, the individuals occupying the boxes on this chart and the application of external resources may need to be redefined to

An Alternative Model of Organization enable the organization to achieve the full potential which can be released by the appropriate structural approach. There can also be change in the ways in which an organization operates, calling into question how an organization’s culture and management systems evolve over time. And in all cases, paying attention to the opportunities arising to inspire, increase creativity, reinforce values, and confirm the vision of the enterprise must be taken into consideration in the assessment of the best way forward for your organization and your business.

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CHAPTER 7

A New Approach to Leadership

In developing the process and content of better strategy, and in building a more inspired and capable organization, a new model of leadership emerges which is worth exploring in greater detail. For navigating through the turbulence of the new paradigm will require that captains of enterprises adopt a new model of leadership: mastering and integrating the disciplines of their time, maintaining a clear sense of objective and direction, keeping a sensitive but firm hand on the tiller, motivating and guiding a disciplined and expert crew, staying abreast of changes ahead of competitors, and remaining prepared to tack quickly (or even to change direction entirely) as new risks and opportunities present themselves. While continually navigating by the horizons and not the headlines, modern leaders in the new paradigm will be charged with the traditional responsibility for overall performance while facing more complexity than ever before. The enhanced model of leadership necessary to master so many simultaneous challenges can also be broken into constituent elements to make the specific content of leadership more precise, and to provide a useful framework for any manager aspiring to be a leader of strategy and valuable change.

Of Captains and Stewards In today’s environment, there are few low-risk, high-return strategies. Status quo strategies are no longer effective. The old ambition of the CEO to act as a good steward of a company’s businesses is no longer enough. Winning businesses need a guiding star above the horizon and a captain to chart the course toward a more aspirational goal. The failure of many groups to grow profitably and to take advantage of the opportunities presented by evolution or turbulence can be attributed to the fact that, as one frustrated executive bemoaned, “We got a steward when we needed a captain.” Jack Welch echoed this sentiment in an internationally broadcast television interview when he responded with his usual passion to the question of leadership 132

A New Approach to Leadership and the stewardship mentality when he exclaimed that “Stewardship is the worst word in the world!” STRATEGY is obviously a program of change, engagement, and differentiation—real and visible differentiation from the past, from outdated models, and from current and future competitors in the marketplace. As such, it demands a new and more effective leadership model which can respond to the challenges of a new and different era of business practice and competition. The elements of this STRATEGY leadership model are as follows: Seven Principles of a STRATEGY Leadership Model Empower the vision and the STRATEGY Live the values Engage and motivate individuals Go beyond the conventional Lead from the front Lead from the center Get the job done

For each principle of leadership there are clear supporting observations and recommended standards of behavior which contribute to understanding and can lead to successful focus on each element of the new leadership model.

Principle 1. Empower the Vision and the STRATEGY The process and content of STRATEGY create a platform to provide leadership to an enterprise across every important area of the business model, internal and external. As such, it provides an opportunity for you to demonstrate leadership and values in a theater ideally suited for the exercise. Having brought into the open all aspects of your business for consideration and potential change, all eyes will be on the leadership team to see what principles and approaches will guide the effort to capitalize on the insight provided. As you open the forum and invite participation, the need for authenticity emerges as a dominant concern. There can be no space between the words, true beliefs and demonstrated actions of an effective leader. The launching of a STRATEGY program will be seen as a major event by all concerned. The combination of fear and excitement that accompanies the launching of any such program of potential change in the business, and hence potential change in the lives of the people who make up that business, will create a highly charged atmosphere in which each and every word, action and intention,

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STRATEGY real or imagined, will be carefully dissected, scrutinized, and discussed at great length. In this atmosphere, any hint of hidden agenda, lack of integrity, or selfish manipulation runs the risk of initiating an undesirable negative reaction and setting back a progressive agenda rather than moving forward toward a more positive future. In communicating the program it is instructive to remember the adage that “your actions speak so loud I cannot hear your words.” This old wisdom is backed up by research on internal communications and performance reviews which concludes that over eighty per cent of the impact of a performance review is derived from the body language and delivery style of the message, not the actual words recited. The same can be said for messages of change and strategic redirection. How you say it may be even more important than what you say. The process of empowerment of vision in a STRATEGY program is not only about the launching of the effort. How you treat the process and content during and after the exercise is also critical. Doubts, a diminishing level of enthusiasm or action inconsistent with the vision or content of the program will both confuse and alienate those who need to put so much into the effort to make the business better. In setting strategy, it is obvious that it is absolutely essential to get the right answer on where a business should go. A large part of individual trust and inspiration for greater collective effort is driven by the single test of whether the path set by leadership is correct and appropriate. A great deal of respect in a world driven ever more by intellectual capital and individual bandwidth comes from the ability to process data, synthesize it, and draw the right conclusions and implications. Rising individualism and declining loyalty mean that every colleague is also a critic. While every individual can make a substantial contribution to the successful design and implementation of strategy, each individual is also a possible source of resistance, recalcitrance, and inefficiency unless convinced of the direction set by the leadership team. For each piece of the strategic plan, the more differentiated the better. Motherhood and apple pie statements are seldom meaningful for an organization seeking clarity, direction, inspiration, and the potential for superior performance at each step of the way. STRATEGY is about thought and action combining to create the biggest, most powerful impact possible on a visibly differentiated approach to customers, markets, and management of an enterprise.

Principle 2. Live the Values—Demonstrate Character Through Action In accepting a leadership role, in assuming the rights and benefits of the leadership contract with those who follow, there is also a responsibility incumbent upon leaders to live the values promulgated, provide a model for behavior

A New Approach to Leadership which respects the words in a corporation’s value summary, and demonstrates in action the higher values, articulated or inchoate, which provide the foundation and guiding principles of an organization. Among these values, there is none more important than integrity. Trust, faith, hope, and many other higher aspects of human emotion are tied up in the complex psychological act of accepting leadership from another individual. Of all of the attributes of leadership, trust consistently emerges in research as the most valued by subordinates. Other values which come out regularly at the top of polls are credibility, expertise, intelligence, and inspiration. The balance of values desired from leaders, with character consistently topping capability and other expected attributes of individuals in positions of authority, reflects the fact that the true essence of leadership is much more about individual behavior and moral value than it is about possessing any particular skill or exhibiting any one personal style. In addition to the moral value of maintaining personal integrity, there is a practical reason for protecting and nurturing a company’s values espoused in action. Any violation in the standards of integrity will breach the tacit contract of leadership and can even create a counterproductive wave of disillusionment, anger, cynicism, and dysfunctional behavior. There can be no rational response to a loss of faith in leadership other than the creation of an individual agenda for each and every person in the business, replacing a desire to work for the general good with a need to protect or advance an individual position, no matter how inappropriate that individual agenda may be for the broader interests of the group.

Successful Leadership in a Sustainable Enterprise Arie de Geus, author of The Living Company, notes that the average life expectancy of a multinational company in the Fortune 500 or its equivalent is only somewhere between 40 and 50 years. One third of the companies listed in the 1970 Fortune 500, for example, were gone by 1983. Like so many smaller companies, these large companies collapse, merge, become acquired, and are broken into smaller pieces. The process of dynamic corporate change embraces attenuation, dismemberment and death as well birth, renewal and progressive reform. Much of survival and prospering in corporate evolution has to do with flexibility, the ability to adapt, and the ability to emerge triumphant from periods of adversity. Corporate sustainability and enduring success also have much to do with leaders, leadership and the management of processes which keep a company young. One of the leaders of a global family business, which has operated and prospered in over 40 countries since the middle of the 19th century, defined his

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views of successful leadership in simple terms. The keys to successful leadership, he wrote, were to focus on a limited set of high impact determinants of corporate success: ■

create the vision

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define the strategy

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establish professional standards of performance

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delegate authority, freedom and resources to the lower levels

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lead collective processes that support collaboration.

In addition to these five key points, observation of the management style of this low profile executive and his family, now worth many hundreds of millions of dollars, would add two key points: ■

intervene as necessary at key points in a company’s history

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live the values you want your business to honor.

This particular family shuns publicity at every turn, maintains a modest lifestyle, and ensures that the values which can support a sustainable enterprise are inculcated in each succeeding generation. The ethos of the family is centered on creating business value, working hard, working well with partners, accepting risk, embracing change, living appropriate personal values, and understanding how each new generation can contribute to the sustainability and continuing success of the family enterprise. Understanding and acting consistently with these seven simple principles has allowed this family enterprise not only to prosper for over 150 years, but also to be ready to continue that success well into the future.

Principle 3. Engage and Motivate Individuals—Reach the Heart of Your Organization Every organization is a collection of individuals, the vast majority of whom want to do a good job, want to learn and grow as they work, and want to feel as if they are contributing to the creation of something special. For many, there is a sense of unfulfilled promise in what they do, a sense of disengagement and a missing sense of a higher purpose. By reaching deeper into the organization to reach the hearts rather than just the minds and financial interests of your colleagues, by responding to that need to contribute to something greater than their individual selves, you will be able to release new levels of energy for performance and change in your business.

A New Approach to Leadership The first step in pursuing this new leadership model is to engage the individuals involved at a human level. This requires listening actively to their concerns, communicating with them on the most important aspects of their business lives, and involving them in the processes of STRATEGY relevant to their areas of responsibility. Bridging the disengagement gap is one of the many reasons that the process of STRATEGY is as important as its content. By touching the hearts of the people in an organization, by demonstrating that the leaders of an organization genuinely care about their colleagues as people as well as caring about their business contribution, a door is opened to a different kind of relationship between firm and individual. At the same time, this approach also opens the possibility of a higher and more dedicated level of personal energy to contribute to the success of an organization. Motivation can increase from efforts to align the relationship between the business enterprise with the personal desires of the individuals within it. Performance-based compensation is a great source of alignment of interests, as are fair and objective performance review systems, skill development plans, and improved internal communications. Reward, recognition, promotion, punishment, demotion, and dismissal are all motivational opportunities which can guide the relationship between collective enterprise and individual member. In some cases, the job or task in itself is motivating and uplifting. But often it is the individual leader or leaders who embody the initiative and can reach out to inspire individuals to new levels of performance. Especially for hard-nosed “old school managers” operating in a newer business environment, it is important to adapt and to remind oneself constantly that inspiring individuals and teams requires more than mastery of the “hard” aspects and systems of behavioral modification and control such as pay, criticism, control and a constant threat of dismissal. Connecting with the deeper and more positive sources of individual motivation—hope, aspiration, and desire—rather than negative factors such as fear or insecurity may provide the greatest ability to increase individual motivation and contribution. Despite its importance, this ability to reach deeper into individuals is the hardest capability to analyze, package, or teach. Often it is intuitive or natural. While there is no single leadership style which is universally more effective than others, in all cases where modern leaders want to reach the highest possible level of corporate performance, they must pay attention to the deepest roots of individual motivation.

Principle 4. Go Beyond the Conventional—Set New Standards of Excellence No great champion or master of any discipline ever aspired to be average. No manager will ever achieve the more ambitious goals of STRATEGY or an

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STRATEGY inspiring vision for a business if its leadership aspires only to be conventional in approach or average in result. No leader, nor his or her organization, ever achieved greatness by pursuing the path of conventional behaviors and implementing a series of “me too” strategies. None of the leaders who created great business success stories, from Henry Ford to Bill Gates, built a winning enterprise using someone else’s blueprint. Revering convention may only be an excuse for putting on blinders which limit vision and focus an organization on a narrow subset of the possible. Redefining an industry, creating a new business model, or changing the habits of the past to move toward a better future for your customers are the experiences which can truly set your business apart from its competitors in a crowded industrial landscape. The essence of strategy lies in differentiation, in creativity, and in the art and science of informed action to bring about change. While understanding the past is always valuable to learn and apply its salient lessons, limiting oneself to that understanding or approach is never the pathway to new standards of future excellence and accomplishment. Breaking out of the box of conventionality can be a liberating experience for all concerned in a business system, from customers to suppliers to partners to employees. In rejecting an unacceptable past in favor of a truly satisfactory future, new sources of energy need to be released to propel a company to new levels of success and reward. In expanding the borders of what is possible, it may be useful to think about the application of the famous Zen principle that one should not become attached to any fixed outcome. Unexpected events, unanticipated insights, new risks and opportunities, and the simple nature of life as an ever changing experience may lead a business to a place not foreseen nor planned for. Embracing that possibility, and keeping the process and content of STRATEGY open to that potential, is a hallmark of the truly creative and extraordinary company. Innovation, experimentation, fresh perspectives, and the spirit of change always lie at the heart of any effective strategy.

Principle 5. Lead from the Front—Master the Visible Aspect of Leadership For all leaders, whether they want it or not, their job is now played out on a stage with increasing transparency, and in front of multiple sources of comment and criticism. Whether taking the podium at a company meeting in which the audience is briefed to expect an important speech on the direction of the company, or in conducting daily business from behind closed doors, the leader of a business is inevitably expected to be taking decisive actions to chart the direction and achieve the overall objectives of a business.

A New Approach to Leadership Whether by listening to explicit statements or by inference from indirect example, all organizations will look to the senior figures in its establishment to set out the direction of the enterprise and demonstrate in action the rules they too are expected to respect along the way. Leading from the front means that a leader must accept and take advantage of the fact that he or she is on full public display all the time. As such, it is not only the formal presentations, team meetings, and company videos which will act as communications vehicles for the leader in front of the team. Clever leaders will take advantage of every opportunity to direct and set an example for an organization in every interaction and exposure. The best leaders in a business are constantly mindful of the opportunities and risks inherent in the role of leadership from the front. Demonstrating clarity of vision and indicating collective direction are essential. Careful and effective communication is critical. Remaining positive and inspiring when and where possible is a valuable skill, even if personally very taxing on more than one occasion. Promulgating and policing policies and priorities are particularly important. Disciplining and correcting is necessary, but needs to be done selectively, carefully, constructively, and almost always in private. Finding and demonstrating a sense of confidence, common purpose, and belief is invaluable. Any hint of hesitation, disbelief, or deep uncertainty without a path to resolution of the tension created can be potentially confusing and costly to an entire organization. One of the most inevitably visible aspects of leadership from the front lies in articulating priorities and ensuring that they are respected. In a complex and busy world, it is all too easy to get caught up in long lists of initiatives and to start many interesting projects that cannot all be carried through to completion. Setting the right priorities to focus your team on the urgent and the important is a task of the highest importance and, by necessity, of the greatest visibility for any leader. One key attribute of an effective leader is an ability to clear away the underbrush and publicly focus the right balance of effort on the most pressing and most important challenges. For business turnarounds, where the risk of enterprise failure magnifies the intensity of any business experience many times over, one experienced CEO has stated that no more than three core initiatives can be rolled out by an organization in crisis. Some organizations can focus on only one or two at a time. Occasionally, an excellent team can stretch to embrace three major objectives such as simultaneous cost reduction, service enhancement, and portfolio restructuring, but that is rare. Concentration and consistent application of force are critical to change and strategic success in any dynamic system—commercial, military, or social. A capacity to focus on high-priority initiatives and ignore less valuable distractions is always a valuable skill, but can turn into a test of survival at a time of deep crisis or serious business difficulty.

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STRATEGY The STRATEGY process sets out a proven approach to leadership in strategy, guiding a team through a careful process of realizing the vision of an enterprise through effective thought, effort, direction, and inspiration. The overall approach is one which requires both individuals and the team to reflect and act upon a carefully implemented model of individual and team leadership throughout the process.

Principle 6. Lead from the Center—Manage Formal and Informal Networks At the same time that leaders must master the skill of visible leadership from the front, they must also master the more subtle skill of leading from the center, or even leading from behind, guiding the process with a less visible hand which brings people together and quietly provides guidance, encouragement, empowerment, direction, and correction where necessary. Involving the right people at the right time in the right way is a critical aspect of centered leadership effectiveness. Modern leaders will need to take into consideration that technology and social evolution have moved organizations into a state where they are populated not just by individuals operating within a single, clear organizational structure. Internal systems of communication, different affiliations, and the Internet have combined to create a series of overlapping networks and informal communities within and across business borders. These new networks now connect a business to the outside world and influence its development in ways just beginning to be understood. Whether you like it or not, every business is now more exposed than ever before to influences, analyses, discussion and criticism, justified and unjustified, through the new channels of communication which accompany the rise of a networked world. These new networks, formal and informal, will need to be understood, and this understanding incorporated into the active management and leadership of the business. Earl Wilson said many years ago that “Science will never invent a communication device as powerful as the afternoon tea break.” With the rise of the PC and the Internet, science may finally have proved him wrong. Yet the essential truth of his statement is correct, that the informal and human networks of communication can never be ignored in the management of a business. The informal gatherings, present and virtual, can be as powerful opportunities for change as are formal, scheduled session with colleagues. Contrary to the highly visible nature of the leadership from the front characteristic of the STRATEGY leadership model, leading from the center may be best pursued quietly and even invisibly. As Ronald Reagan’s famous desktop sign proclaimed “You can accomplish anything so long as you don’t care who gets the credit.”

A New Approach to Leadership By mastering the art of the invisible hand, you can influence others to work together toward a desired outcome without overtly driving or dominating the process. You can create the results you want, along with a pride of ownership and sense of accomplishment in a team that a more direct and interventionist approach from above may never be able to foster.

Principle 7. Get the Job Done—Move Seamlessly from Understanding to Execution Simply put, many leaders—national, business, or team—most often fail because they just don’t execute. Ensuring that you avoid this trap and get the job done, no matter how challenging the task, is the hallmark of an effective leader and a winning organization. In many ways, the best business leaders have much in common with star athletes. In addition to enormous pay packets, they are expected to lift the performance of an entire team and to outperform competition. Performance psychologists, drawing from their analysis of the best performing world-class athletes have identified a single, dominant psychological variable between their subjects. Surprisingly, the characteristic was not a desire to win. The real motivator was a deep-seated fear of failure. By refusing to accept failure, by getting the job done no matter how daunting the obstacles or how fearsome the adversary, is a true test of world-class business leadership. Good strategy, as one of the great figures of strategy consulting once explained, was an “inexorable flow of logic from insight through to execution.” The seamless nature of the process and content of strategy which flows from diagnosis through to implementation has been fully captured in the STRATEGY program. This implementation focus now needs to be embedded seamlessly into a winning leadership approach as well if a team is to implement effectively and get real benefit from its well-conceived strategic initiatives.

The 80:100 Rule As described above, the 80:20 rule is a longstanding rule of economic efficiency. A minority of a business (products, customers, channels) will always generate a majority of the results in sales, profits, or learning for the future. Applied directly, the 80:20 rule would say that 20 percent of customers should give you 80 percent of your profit. While never exactly 80:20, the rule of disproportionate contribution applies generally to almost all businesses, sometimes to the extent that some small minority of customers or products, on a full cost basis, may contribute more than 100 percent of the profits of a much larger business.

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One of the key skills of the effective strategic leader is to focus on the important, to keep the attention of the organization turned to the tasks necessary to achieve the greatest impact. Linked with the prioritization exercise set out in this book, awareness of and acting on the implications of the 80:20 rule can be a critical discipline in achieving a superior return for your business. Yet the 80:20 rule is not the only rule whose application can yield extraordinary benefits for your business. A new 80:100 rule is also becoming a basic truth of modern management. The 80:100 rule, which states that it is better to have a strategy that is 80 percent right but fully implemented than a strategy that is 100 percent right but never implemented, goes to the fundamental link between strategic design and execution. While the intellectual content of an 80 percent strategy may not be as elegant nor as detailed as the 100 percent approach, and the execution may be far rougher, the results are infinitely more valuable. Simply getting the job done, executing in spite of obstacles and resistance, is an essential part of both strategy and leadership.

Search for a Higher Purpose Across the pursuit of all of these principles, perhaps the greatest challenge modern leaders face in providing direction and leadership to business enterprises is not to direct investment, focus response to a shifting competitive landscape, or design an effective organizational structure. It may not even lie in the challenge of rallying a bureaucratic organization behind a more active vision or in bringing coherence to a diverse and fragmented business portfolio. The greatest challenge, in fact, may lie in awakening a more aspirational sense of the self in yourself, in other leaders of your business, in colleagues, and in other stakeholders of the enterprise. Only by convincing yourself and other potentially disengaged individuals of the full value and purpose of a more engaged and committed role can a business reach its true full potential. New leaders must think through approaches to address this missing element of higher purpose, understanding and acting on the reasons why so many people in so many businesses consistently give less than their best. In so doing, effective leaders will need to reach deeper into the individual nature of each stakeholder, including themselves, to lift up the collective capability of the whole organization. Not all leaders will be capable of pursuing this path successfully. Lack of confidence, failure to develop a compelling vision or strategy, adherence to rigid hierarchies, tolerance of exclusive cultural factions, poor communication skills, ego, and other weaknesses are some of the obstacles which may keep a business leader from achieving extraordinary results. Filling the gap felt by many in a search for a higher purpose requires an understanding which is less

A New Approach to Leadership tangible, more personal, more individual and ultimately more human than many skills required for traditional strategy. Leaders should not shy away from the task of inspiration and individual motivation, no matter how daunting the task may seem. At the heart of any program of new and deeper understanding, of strategic change and transformation, lies a uniquely human element which can only be fully reached if leaders of the enterprise, formal and informal, take into consideration a broader and deeper view of the values and motivations that inspire all individuals to purposeful engagement and effective action—from the top to the bottom of an organization. Creativity, courage, commitment, motivation, sacrifice, and determination will now all be required to bring to bear sufficient energy to change systems of entrenched behavior which may have been left unaddressed for far too long. In order to drive programs of broad change in areas of longstanding satisfactory collective underperformance, it will be essential to raise the level of available energy for change by engaging the individuals capable of contributing to change in an effort which is, to them, transcendent. We clearly have an opportunity to drive effective change if we can rise above old ideas, overcome old antagonisms, and discard outdated myopic visions of what can and should be done. This approach may require a fundamentally different approach to leadership. The challenges of setting out on such a radically different pathway may be daunting and always carry a greater degree of risk than a status quo approach. However, in the famous words of Sir Francis Bacon, “If we are to achieve results never before accomplished, we must expect methods never before attempted.” By combining individual commitment and collective effort in a new approach to strategy, it is possible to find solutions to seemingly intractable problems. By tapping into that uniquely human transcendent element, great reserves of energy can be released to overcome inertia and break down the limiting barriers of the past. It is indeed possible to create ever more victories in the battles for higher performance and competitive advantage. In a modern, fragmented, and increasingly individual world, a sense of purpose and restoration of belief in the personal value of our business lives can underpin a greater sense of commitment to the common purpose of commercial activity. That greater commitment and higher capability demonstrated by the leaders of an enterprise can indeed be the levers that move an ordinary business to truly world class standard.

Recovering the Lost Art of Strategy Strategy is both art and science. By considering these seven chapters, each addressing a separate area of strategy, and by turning your thoughts into

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STRATEGY action, you can move toward a realization of the full value that STRATEGY can provide. By integrating your thoughts from these first seven chapters into the concrete plans as developed in Book Two, you will be able to overcome many of the weaknesses underlying past unsatisfactory approaches. You can use your understanding in each of these areas as a foundation upon which to build the best and most effective winning strategies. The elements of strategy spelled out in these chapters can contribute to a new framework of understanding for you and your team. But improved understanding is not enough. These elements are only valuable when they create a platform for meaningful action and effective change. To profit fully from this new level of understanding, insight must lead seamlessly to action. By combining insight and action, great change can happen in the areas of highest priority. In so doing, you will be able to escape the trap of satisfactory underperformance, achieve ever higher levels of accomplishment and performance for your business and recover, through informed action and inspiration, the full benefit of the lost art of strategy.

BOOK TWO Developing Your Own World Class Strategy

In this second book, we will review both the process and content of strategy, setting out on a step-by-step basis how a truly world class strategy can best be developed and presented. The core principles of this approach have already generated dramatically better financial results for leading businesses in a wide variety of industry sectors and competitive situations. Companies that have gone through successful turnarounds, and those that consistently outperform competitors, often adopt a similar model to define and execute superior strategies, and thereby achieve superior results. Trillions of dollars of accumulated experience in business problem solving have shaped the process and content of this approach to STRATEGY. From decades of intensive (and expensive) learning across the business world, a reliable model of best practice strategy has emerged. The process of Darwinian selection and evolution to arrive at this worldclass model has been brutal. Winning approaches have been proven in the competitive marketplace, built upon, and rolled out over time, success begetting success. Others are found wanting and unceremoniously rejected. Surviving from this process of selection is the strongest model for determining direction, creating competitive advantage, allocating resources, solving problems, and getting results. That superior model, here captured in the STRATEGY program, provides a systematic approach to understanding the current situation of your business, forecasting where it is going, analyzing how the environment is evolving and changing the nature of competition, clarifying choices, setting priorities, managing risk, capturing opportunity, achieving targets, aligning efforts, and 145

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building the human and organizational elements of your business. It encourages the creative generation of ideas from all sources to design and implement new and winning strategies. STRATEGY addresses on an integrated basis both the “hard” and the “soft” elements of strategy, including the critical human issues of business as well as the traditional building blocks of physical, financial, and operating assets. In the end, the whole of STRATEGY is focused on the opportunity for your business to achieve the best results it possibly can.

Three Interrelated Phases Drawing on the experience of the examples selected here, and other world class companies, there are three interrelated steps in the STRATEGY approach to define and implement a world class strategy.

Phase I: Diagnosis

Phase I Diagnosis

II Design

Phase II: Design

Phase III: Implementation

Purpose This first phase provides a deep understanding of your business from multiple perspectives: internal and external, static and dynamic. It outlines the range of strategic options available to you given your unique environment and business history. The second phase builds on the understanding developed in the diagnostic phase and provides a comprehensive strategy from vision and values through to imperatives and actions to create competitive advantage and financial success. The content of this phase sets out the best strategic option to pursue, improves organizational design, clarifies priorities, specifies resource allocation, and identifies priority actions to focus the business on the key levers of performance and value.

Book Two: Developing Your Own World Class Strategy III Implementation

This final phase ensures that your strategy is fully aligned, implemented, led, and motivated. The seven steps in this final phase specify an effective approach to tactics, timetables, implementation team constitution, program control, and corrective management to ensure you achieve the target results and that your vision and overall objectives are realized.

These three phases, and the seven strategic steps in each, can lead you to the definition and execution of creative breakthrough strategies like those described in the history of winning companies. You too will be able to reset strategy and align all aspects of your business system to achieve the visionary goals you set for your enterprise. This STRATEGY package will lead you through these three phases on a stepby-step basis. Along the way you will have an opportunity to address all elements of a best practice strategic architecture and integrate all aspects of your unique business strategy into a fully aligned and efficient plan of action. You will also be able to summarize your own strategy in a powerful presentation, pulling together all aspects your strategy in one single document that will allow you to communicate all (or key parts) of your strategy to the relevant constituencies inside and outside your organization. Each of the integrated phases of STRATEGY contains within it seven constituent elements. By stepping through the process set out in STRATEGY, you will be able to master each individual phase and be able to construct the whole of your strategy from the set of interrelated parts. The seven steps within each phase are as follows: Phase I Diagnosis

II Design

III Implementation

Constituent Elements 1. Point of departure 2. Portfolio perspective 3. Profit pool perspective 4. Competitive perspective 5. Business dynamics 6. Organizational assessment 7. Range of strategic options 1. The Promise: vision/values/mission 2. Key levers on performance and value 3. Priorities and resource allocation 4. Strategic option selection 5. New organizational approach 6. Risk management 7. Target results 1. Imperatives, actions, responsibilities 2. Tactics and timetable

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3. 4. 5. 6. 7.

Implementation team Alignment and integration Program control Full value capture Leadership and motivation

Although the approach set out below in these twenty-one sequential steps appears to be highly structured and analytical, managers should not lose sight of the fact that strategy today is more and more about the “softer” issues related to people and organizations. The organized nature of the approach should not lead to a mechanistic process or limited outcome.

People at the Heart of Strategy In fast-changing and turbulent environments, individual and organizational capabilities move to the fore in the battle for corporate progress and competitive advantage. In a world of shifting technologies and new orders of competition, culture and capability will need to be emphasized to increase creativity, manage complexity, and increase the intensity of effort applied to find effective solutions. Only through deeper commitment, and a leadership team sensitive to the human element of strategy, can inspirational visions be fully realized in the new world of competitive business. Across all elements of the STRATEGY approach, full attention must be given to the realities of execution and the achievement of results. Human resources must be fully inspired and totally aligned, pulling in the same direction without wasted energy, reduced effort, or unnecessary distraction to ensure that maximum results are achieved from the resources invested.

Focus and Brevity While covering all aspects of strategy—internal and external, past, present, and future—STRATEGY is expressly designed to focus on the essentials. In so doing, the value of clarity and brevity is an important consideration in the development of your thinking and in the presentation of your plan. There needs to be a constant focus on priorities at each and every step of the way. There is no great prose volume on your plans demanded by STRATEGY. The focus is on action and results, not the production of mountainous decks of acetate slides or voluminous leather bound reports which are far more likely to gather dust than inspire action. Often, lengthy reports, excess words, or an overload of data are the enemy of effective action, leaving readers or participants unable to extract the essence of a proposed course of action from impenetrable reams of charts, words, and

Book Two: Developing Your Own World Class Strategy data. An executive summary of no more than two pages in length which sits at the front and back of the STRATEGY presentation should help to convey the key points of the strategy and describe succinctly the results targeted. It is worth noting that shorter presentations may actually take longer to draft than longer ones as excess verbiage is squeezed out, sloppy thinking tightened up, priorities set, issues of alignment resolved, and realistic target results agreed. The format of a bullet point presentation has been selected as the most efficient and effective format for the summary of your strategy. You will be able to elaborate and expand on the contents in presenting the material and in the question and answer sessions that will inevitably follow your presentation. The time invested in improving focus, clarity and summary will be well spent. In so doing, you will be able to communicate the essence of what your STRATEGY contains. As Madame de Lafayette so famously wrote, “I apologize for the length of this letter. If I had more time it would have been shorter . . . ” Brevity can also be the soul of value.

New Elements of Strategy While valuing focus and concise thinking, strategy is also about consideration of the new, the emerging, and the future. In pursuing strategies to get the most from your businesses, it is important not to navigate solely with a narrow rear view mirror. A long-term forward perspective is essential, which takes into account a full 360 degree view of relevant facts and factors in all dimensions. Gazing into the future to understand and anticipate changes is equally, if not more, important than looking back in time to understand the causes of events and to describe the results of past strategies. Perceiving future changes in advance and acting faster and smarter than competitors to take advantage of those changes are characteristics winning companies have exhibited for many years. In thinking about future strategy, a few areas call out for particular attention: the need for more creative organizations, action to build a more responsible enterprise, an understanding of the patterns of dynamic global systems and their implications for strategy, a more scientific approach to business risk and opportunity, a practical approach to prioritization, a workable model of leadership, and a framework to pursue the elusive goal of profitable growth. These seven new elements, each of which is addressed in a separate chapter in Book One of STRATEGY, combine to illuminate many of the most difficult aspects of modern strategy. In these areas lie many of the insights which can identify, and even create, discontinuities in the status quo model which can be so important for business success. Through the contemplation and processing of insights inspired by this general material, you may well discover the seeds of a truly breakthrough strategy.

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STRATEGY By respecting the approach to process, priority setting, and content of STRATEGY set out in Book Two, and giving due consideration to the new elements of strategy set out in Book One, you will be able to develop and implement a truly world class strategy for your enterprise, no matter how large or small. Based upon an analysis and understanding of the roots of unsatisfactory past experience, it is clear that seven key characteristics need to separate a best practice model from past approaches.

The Seven Differentiating Characteristics of STRATEGY When compared to past models of strategy, the approach taken here proceeds in a different manner along a number of critical dimensions. While not discarding the useful elements of the past, STRATEGY is driven from a more modern framework of understanding and a more complete sense of what is needed to set and implement world class strategy in today’s world. Specifically, there are seven areas in which the STRATEGY approach will differ from the more traditional approaches taken to date:

Seven Differentiating Characteristics of STRATEGY More comprehensive More flexible More creative More integrating More motivating More responsible More effective

1. More comprehensive: integrating process and content. The first step in building a better approach to strategy is the fusion of process and content. In getting better results from your business, how you go about setting and implementing your strategy can be as important as the specific structure of your plans. By excluding key members of your enterprise from the process, you may be both demotivating those who most need to be motivated and also, through their exclusion, missing out on key sources of valuable information and potential competitive advantage. Especially by excluding those closest to the customers from a strategy process, or by pursuing an approach dominated by staff members from

Book Two: Developing Your Own World Class Strategy headquarters, you may be missing out on a fuller understanding of the risks and opportunities which can either turn into catastrophes or valuable growth in profits at the edges of your business. Strategy can no longer be set on an imperial basis from the lofty heights of a remote and uninvolved headquarters organization. Customers are too far away from the seat of power to be properly understood or fully served from afar. Critical employees and organizational needs are too important to overlook. Operating issues are too important to observe only from the end of a long distance telescope emanating from the ivory tower rooms of a remote planning department. A top-down imposition of strategy by e-mail or documentary fiat may well miss out on the subtleties of local markets and, through ignorance or arrogance, incur unnecessary risks or lose out on opportunities to create superior and lasting value for customers, employees, and shareholders. It is essential to give attention to the process of strategy and to think through how you will proceed and with whom you will collaborate at all three phases of development—diagnosis, design, and implementation. An inclusive strategy process will be critical in setting your business on a winning pathway and staying there. In addition to specifying the structure and content of strategy, the STRATEGY approach will also describe who should be involved and how they should participate in the process of defining strategies for your organization. 2. More flexible: better adapted to accelerating change. The business landscape is littered with the carcasses of dinosaurs unable to adapt to a new world of rapid change. Linear change is faster. Nonlinear shifts appear abruptly and unexpectedly. Longstanding borders on business and business definitions collapse or erode quickly. Customers and suppliers can become competitors or close collaborators in future strategy. Competitors can become allies or even colleagues in new business paradigms. Strategy in the business world, as it is in the natural world, is all about pursuing the best approach to winning the constant competition for survival and prosperity in a Darwinian world, or facing inevitable extinction in a remorseless world of natural selection. It is instructive to note that Charles Darwin did not say that only the strongest survive. As an interesting historical footnote, the most famous “Darwinian” phrase attributed to the renowned naturalist, “the survival of the fittest,” was not of Darwinian origin. These famous words were in fact penned by Herbert Spencer, the British author of Principles of Biology, who was describing in his own words Darwin’s theory of natural selection. This inaccurate but memorable summary of a more complex argument was drafted shortly after the publication of Darwin’s On the Origin of Species by Means of Natural Selection in 1859. Darwin himself said, more accurately, that those species which adapted fastest to changes in their environment were the most likely to survive.

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STRATEGY One leading European software company, whose products institutionalize a preset approach to business management, has been described as “pouring concrete around the pilings of an outdated business model.” As a result, many of its clients have suffered through an inability to adapt their business model to changes in the external environment. This type of approach runs counter to some of the most valuable historic knowledge on strategy and the management of dynamic systems. The best models of strategy are flexible and adaptable. They respect the ever-changing nature of the environment we compete in, the systems which are constantly changing and evolving within and around our businesses, and understand, as far as possible, the future flow of events which we can only partially anticipate at any one point in time. Winning competitors are constantly preparing their organizations, consciously and unconsciously, to respond effectively to inevitable change in the future operating environment. Constant vigilance across the entire business system is thus required to ensure that enterprises do not suffer from hardening of the corporate arteries or end up stuck in a business model with baked-in inflexibility. STRATEGY addresses the need for you to design and build your organization’s strategic capabilities to respond to future change, as well as set out specific strategic content for immediate action. Strategy today is as much about a continual building of people and teams as it is about a set plan of action. 3. More integrative: incorporating multiple perspectives. In a complex and dynamic world, multiple perspectives are necessary to understand the full meaning and impact of events taking place within and around an organization. No one person, team, or department will have a monopoly on valuable information or insight into any of the three phases of a full STRATEGY approach. Contributions from more people embracing diverse sources of perspective and experience need to be gathered and reviewed to create a full understanding. The individual elements of STRATEGY can and should be isolated and separately analyzed, but to be most effective they also need to be consolidated into one single program. The whole of the strategy, as well as the individual components, needs to be scrutinized and adapted where necessary for maximum integrated benefit. Decisions regarding resources and initiatives need to be informed by a full understanding of the changes in the industry or regulatory structure. A program to enhance capabilities needs to be reconciled with a future view of the relevant external risks and opportunities that will have the greatest impact on the enterprise. As a result, the whole of a strategy should always be worth more than the sum of the parts. Although there are always issues of confidentiality, and appropriate steps need to be taken to safeguard your strategy from inappropriate access or disclosure, the costs of excessive secrecy or exclusion often outweigh the risks

Book Two: Developing Your Own World Class Strategy of a more inclusive approach. Benefiting from a broader set of perspectives will require that an inclusive process be pursued, even at the risk of some potential loss of confidentiality in the process. Diagnosis, design, implementation, skill development, resource allocation, and motivation need to be consolidated into one indivisible whole. Vision, strategy, and tactics need to be reviewed, coordinated, integrated, and aligned in a unified approach to achieve full potential in the real world. Only through incorporation of a sufficiently large set of differing perspectives can these objectives be met. 4. More creative: breaking old ways of thinking. STRATEGY requires managers to nurture, value, and manage intuition and creativity as never before. Experimentation is encouraged and acceptable levels of failure are tolerated. No one ever made great scientific breakthroughs by a system of pure trial and success. Much creativity is free thought inspired by different perspectives. An approach that is conducive to moments of creative inspiration, the birth of a fresh perspective or unprecedented insight, can lead to new understanding, greater differentiation, and the accomplishment of far better results. Traditional linear thought is not often the chief source of inspired, groundbreaking insights or results. The status quo approach may often lead to a low common denominator approach to the creation of strategy. Too often, incremental change masquerades as strategy, with slight changes and tweaks to the existing business model allowing uninspired managers to complete their annual strategic review with little, if any, fundamental change. In so doing, they may well miss the most important opportunities to rethink the basic model of their business, missing the opportunities that more intrepid companies like Dell and Southwest Airlines have ridden to such heights. There is no exclusive single source or monopoly on creativity. The exercise of the creative faculty, often linked to intuition and inspiration, can emerge from many sources. In capturing the leading edge of competitive advantage, creative thought has become even more important and valuable. An environment to foster, rather than inhibit, that flow of creativity is a critical ingredient for long-term success. The STRATEGY model has its conceptual roots in two disciplines. Taking the best from traditional models, the content of new strategies respects the proven strategic laws of gravity, and honors the valuable insights from such thought leaders and authors as Michael Porter, Peter Drucker, C. K. Prahalad, Gary Hamel, and other business sages. But STRATEGY, in drawing out a new set of paradigm principles and incorporating a set of new elements of strategy, is also an extension of dynamic systems theory as applied to complex organizations in a flow of constant motion, change, and redefinition.

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STRATEGY The approach set out here takes into account the fact that the modern business environment is in a constantly shifting state of flux. Today is always different from yesterday and tomorrow. As ancient Hindu wisdom summarizes so well, “You never cross the same river twice.” Strategy now needs to embrace all elements of analysis and action that can contribute to winning results in an ever changing paradigm, including a fuller understanding of risk and opportunity, the full human dimension of business, and an approach which incorporates an understanding of the patterns and principles of dynamic systems. In the latter area, systemic insight is particularly valuable as this understanding can relate to the creation or profitable anticipation of discontinuities in the existing business system. Strategy is as much art as science and is as much an exercise in psychology as it is economics. Strategy is as much about vision, values, breakthrough thinking, a constant culture of creativity, organizational redesign, capability building, knowledge sharing, skill development, teamwork, communication, influence, alliance, and motivation as it is about market share and simple capital allocation to maximize short-term investment return. Strategy, while capturing the best possible understanding of the past, is really about building toward the best possible future. STRATEGY thus embraces the best of linear approaches from traditional models and adds nonlinear approaches from the application of these new elements of strategy. The synthesis of these two apparently contradictory elements changes the content, process, and characteristic of STRATEGY and allows you to integrate an understanding of both in your own winning approach to the future of your business. The Shiva Insight: It may be useful to draw again on past sources of Eastern wisdom on the nature of creativity as we attempt to build more creative strategies and pursue greater success in the future. Lord Shiva, one of the three supreme Hindu Gods, has been portrayed as a multi-armed deity with a tool in each hand. Five of these tools are for destruction and five are for building. The clear message which reaches out across thousands of years is that we cannot build the new without destroying the old, we cannot create a new and better business model if we insist on clinging to outdated practices and encumber ourselves with the legacy of an unsatisfactory past. Destroying old models and rejecting well-established practices is never easy. Organizational and staff changes are some of the most difficult decisions to take and to implement in any business environment. Yet without the courage to discard the old, we can never move forward fully into the new. 5. More motivating: inspiring as well as guiding individuals. The old model of an hour’s pay for an hour’s labor is no longer enough to retain employees or inspire them to achieve their full potential. The same is true at a higher level as engagement in a program of change needs to be presented and pursued in a new

Book Two: Developing Your Own World Class Strategy and different way. Individuals and entire organizations need to be more fully engaged and better motivated to rise to meet the challenge of better strategy. A fuller engagement and motivation of key individuals can trigger a quantum leap in the energy available for change, creating competitive advantage and inspiring greater collective performance. Great leaders in the new business paradigm will go beyond simple resource allocation, the bedrock notion of traditional strategy and, through inspiration, create a whole new level of resource for change in the energy of their people and their organizations. Throughout the entire strategic process, a new approach to leadership will be required, urging leaders to both lead from the front and simultaneously “lead from the center” through effective management of all supporting aspects of the business system. New leaders will be required who can think through problems and solutions differently and allocate strategic resources more appropriately. In a more individualistic world, leadership must respond more thoughtfully to individual needs and private aspirations to achieve this lifting of collective performance. Hearts and minds must both be engaged to ensure maximum individual contribution and the realization of full group potential. Inspired individuals will in turn become initiators and motivators, multiplying the power to set and achieve new standards of achievement and excellence across an entire organization. In so doing, engaged and motivated individuals will adapt and renew the process, content, and spirit of STRATEGY. 6. More responsible: integrating strategy and responsibility. One of the more innovative aspects of STRATEGY is the need to embed a more forwardthinking approach to corporate responsibility within the core model of business strategy. Pressures are growing to make corporations, and particularly large transnational corporations, more responsible in the areas of ecology, community, diversity, governance, and ethics. This process is gaining momentum and more enlightened leaders of business enterprises will see this as an opportunity for valuable differentiation and competitive advantage rather than as a threat to the advancement of their own strategic and commercial goals. A more responsible business stance can improve relations with customers, suppliers, legislators, and regulators. Perhaps most importantly, a proactive approach to responsibility can present opportunities to inspire greater personal engagement and commitment of employees and other stakeholders in your business system. Heading a company with a conscience and a healthy bottom line can create very real value for stakeholders. By moving faster than the competition in developing responsible strategies, leaders can position their businesses and their brands as more customer and community friendly than their rivals. They will reap the benefits of being an admired and welcome corporate citizen, resident, or guest in all the countries where they chose to operate. They will also benefit by participating at an early stage in the emergence of a more thoughtful model of engagement and

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STRATEGY responsibility where positive images and actions can now be developed, and seen to be developed, at relatively lower cost than in a more crowded future. The list of winning companies above could easily have been expanded to include examples who have built their strategic success with a core element of greater responsibility than that demanded by the law. Starbucks have been an enormous success with a brand enhanced by a responsible attitude toward their suppliers in emerging markets and their employees. The Body Shop has made a dedication to the preservation of the environment and protection of indigenous peoples a core element in a unique customer value proposition. In the United Kingdom, the various Virgin enterprises all benefit from a core brand and charismatic individual leader exuding irreverence, youth, and a sympathetic notion of adult responsibility, with a condom business run by the group purely for the benefit of AIDS victims. Even former eco-villains like DuPont and some of the oil majors are cleaning up their environmental performance and achieving strong business results at the same time. As more is expected of the modern business in its impact on the community, the environment, and diversity, a summary template is included in the STRATEGY model which leads you to address these areas on an open and specific basis. Far-sighted leaders of enterprises and initiatives will want to move today to get ahead of the demands, and opportunities, of these broader expectations in the future. 7. More effective: ensuring implementation to achieve tangible results. Strategies are useful only if they create tangible value in the real world. The full measure of a new approach to strategy is whether it is more effective than its predecessors, whether the results are better than before, and whether the investments to achieve these results are justified by the return. Satisfactory underperformance must be unveiled in all its forms and addressed directly by effective actions leading to far better results. All too often, traditional strategies are documented rather than implemented. Clever titles or code names are dreamed up for strategic initiatives. Glossy charts or PC-based presentations are rolled out in front of boards, management teams, and outside audiences. General statements of direction and commitment are made. Detailed and expensive reports are drafted, edited, and bound for future reference. But little happens. Checkpoints are often missed. Declining results soon dwindle even further. Satisfactory underperformance reigns, and in a few years another suboptimal strategy and approach are launched, with results again falling short of both expectations and potential. More recently, the costs and risks of poor execution have become far more evident. CEOs are losing their jobs faster and more regularly than ever before. It is instructive to remember that, according to the Fortune magazine survey

Book Two: Developing Your Own World Class Strategy cited earlier, the majority of CEOs in America who lost their jobs did so over the lack of effective execution of strategy. Value in execution: Strategies need to be designed for execution. Theories are valuable in STRATEGY only when they lead to specific and measurable action. Strategies that are not implemented have little value to any stakeholder—owners, partners, suppliers, distributors, and employees alike. Indeed, strategies that are not implemented may well carry significant negative value. They carry a high opportunity cost on the management time invested, alienate the most capable employees, add to organizational cynicism and loss of faith in leadership, and lead to many lost opportunities in the marketplace. They may even leave behind potentially profitable customers in their unfortunate wake. Monday morning: For a strategy to be effective, it must set out a clear vision different from the status quo and enumerate a concrete set of actions to bring about change. Effective strategists must also ensure that those plans are carried out despite inevitable resistance, inertia, and problems which arise. STRATEGY is characterized by a clear set of well-defined and coordinated actions which are captured in a fully aligned implementation plan. In the business world, the operative question to test whether a strategy is fully understood and ready for implementation is whether it is clear to all participants what they need to do differently on Monday morning when they come to work. If it is not clear what they need to do at a very practical level, then the strategy process has either been incomplete or incorrect. Good strategy and effective action go hand in hand.

STRATEGY and the Spirit of Transformation By its nature, STRATEGY is more inclusive and less hierarchical than most earlier approaches. The output of the process is more visionary and, although precise in its vision, goals, priorities, and immediate action steps may be less detailed than past prescriptions in setting out future initiatives. By preserving strategic flexibility, and by leaving room for tailoring, input, and adaptation, STRATEGY recognizes that an environment may, and probably will, change as a result of the implementation of the strategy being pursued. Yet throughout all of the changes and new direction, there is a consistent spirit expressed in the process which is envigorating and demanding, but ultimately enormously rewarding. Perhaps the best word to describe the spirit of STRATEGY cannot be found in English. The Japanese word shintaro may be the best way to describe this new way in strategy. Shintaro is both an aspirational name and an abstract noun in Japan.

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STRATEGY Its full definition captures much of the spirit (and then some) of STRATEGY: A new vision; a fresh perspective that elevates an habitual experience; the process by which man conjures up the sublime in art, music, and cuisine; the creation of a loftier conceptual framework; what separates man from beast, what distinguishes the exalted from the mundane; a stimulation of the imagination that heightens the senses; a break in the conventional mold, leading to discoveries of countless joys; the essential way man is capable of contemplating the divine; the way man created the humanities; the state of mind leading to inspiration and poetry; a positive end result that stems from a search for new frontiers and horizons.

To capture the full value of a new and more fulfilling approach to strategy, this spirit must be embraced along with all the hard work and intellectual effort in the setting of strategy. STRATEGY can set out the specific changes in process and content which can lead to truly superior strategy and better bottom line results for your business. STRATEGY can provide a guide to eradicating the unsatisfactory elements of the past and building toward a more profitable and more satisfying future. But only you can infuse that effort with the spirit of change and fulfillment that will truly lift your business to its highest possible level. In order to break away from the risk of a fatiguing cycle of sameness and unsatisfying results, the best of leaders are finding new ways to both set and communicate strategy in order to rejuvenate their teams and reinvigorate their efforts. In so doing, they will propel their organizations to greater accomplishments, outperforming their competitors and realizing the full potential of their businesses. In so doing, they will also have adopted and confirmed the process, content, value, and spirit of STRATEGY.

CHAPTER 1

Shared Elements of World Class Strategy

The model promulgated here is divided into separate areas, all of which, taken together, make up the overall STRATEGY approach. The first area relates to the material set out in Book One, which requires the consideration of new elements of strategy to prompt ideas and stimulate thoughts which you may want to include in your own strategy. The first book of STRATEGY raises new ideas on the frontiers of business thinking—such thought-provoking ideas as systemic thought, new organizational models, extended notions of engagement and responsibility, practical ideas to aid in the pursuit of greater creativity, the application of more scientific definitions of business risk and opportunity, the setting of priorities, a new model of leadership and an understanding of the search for a higher purpose in a business enterprise—all of which can be considered and adapted as necessary to clarify your own strategic and tactical thinking.

The Rights of STRATEGY Within all of the related elements of better strategy can be found seven essential characteristics of a winning strategy exercise. Just as the rites of spring can usher in a new season of hope and fertility, understanding and respecting the “rights” of strategy can lead to a far better result from your own season of renewal and change. In pulling together all of these elements into one world class strategy, throughout all three stages of the strategic process set out below, it is essential to consider these seven “rights.”

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The Seven “Rights” of Strategy Right process Right attitude Right people Right content Right thought Right creativity Right results

While pursuing the development of your own strategy program, it is essential to ensure throughout the process that your organization is fully in line with these seven “rights” which can help you to navigate to a more successful strategic future. Right process—thought through from beginning to end by those responsible for the effort. Right attitude—open, honest, direct, as collaborative as possible, and fully committed. Right people—to ensure that both definition and implementation of strategy are pursued with the highest quality and full commitment of the organization. Right content—ensuring that all relevant issues and opportunities are raised and addressed. Right thought—embracing a full understanding of the situation, competitive reality, customer views, and real options, with no sacred cows or political obstacles. Right creativity—thinking out of the box on both process and content of strategy. Right results—setting the right vision and objectives for the organization and using the strategy process as a best practice example of how to get things done. Although no checklist can replace the motivating effect of high quality leadership, respecting these rights and specifying the correlative responsibilities for all involved will support the achievement of the highest standards of excellence in your approach to strategy. In the examples below, each and every of these rights of strategy was, to a greater or lesser extent, present and contributing to the realization of superior results.

The Winner’s Circle An elite circle of successful companies have proven that it is indeed possible to emerge as a winner time and time again in the highly demanding world of

Shared Elements of World Class Strategy modern business. Despite the increasing complexity and constant turbulence in many sectors of industry, there are consistent winners in the race for competitive advantage, decisive victors in the battles for market share and customer loyalty, and winning companies who consistently top the lists of the most successful and most admired companies. While there is more to becoming a winning company than pure strategy, getting the right strategy in place and executing it well is a common characteristic of all companies who create long term sustainable advantage and achieve superior returns for their shareholders year in and year out. Winning companies, through time and through accumulated experience both good and bad, evolve their strategies, redefine their organizations and set ever more aspirational targets for their enterprises. Change is a constant and effective adaptation to change is the hallmark of a champion, and of a survivor. Darwin was correct when he stated that the surviving species were not simply the strongest. The real survivors in the natural world were those who adapted most quickly to changes in the environment. The modern business world is indeed a world of the quick and the dead.

The Model in Action The dramatically successful turnaround of Del Monte Royal Foods provides a good case study of a winning strategic program driven by effective diagnosis, design, and implementation. The results achieved were exceptional. As a direct consequence of a new strategy, fully and effectively implemented, operating results doubled and the company’s share price rose more than 200 percent in 12 months.

The Man from Del Monte The turnaround story is particularly striking since the vision and leadership for the change program came from an existing leadership and senior management team. Usually, dramatic change occurs only when there is a change of leadership at the top. Although there were staff changes throughout the process, revolution in this case was led by the monarch. The story of the turnaround and the leadership of Vivian Imerman, the colorful Chairman and CEO, provides an example of how a comprehensive strategic approach can yield fresh breakthrough results in a long-established enterprise. The collection of famous Del Monte food businesses, formerly part of an integrated global operation, were broken up and sold separately following the takeover of RJR-Nabisco by KKR. The Anglo-American Corporation of South Africa teamed up with entrepreneur Imerman in a complex structure to win an auction for a large portion of the European and Asian Del Monte Foods businesses at the end of 1993.

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The collection of assets acquired included a minority share of a Philippines pineapple plantation and packaged food business, a fully owned pineapple production unit in Kenya, a South African deciduous fruit operation, 50 percent of the Nabisco operations in South Africa, and a full set of manufacturing and distribution operations in major European countries. Soon after the original acquisition of Del Monte Royal Foods, further production and distribution assets were added in Italy through the acquisition of Confruit, a strong local juice and nectar business. Tying all of the businesses together was the Del Monte brand and an experienced operating management team.

Overcoming Crisis Soon after the acquisition was completed, unexpected troubles emerged that required radical action. Asian currencies, which represented a significant portion of Del Monte’s costs, moved adversely against the dollar, as did all relevant European currencies. Weakening currencies in the selling countries and strengthening currencies in the producing countries created intense margin pressure across all business units. The external environment became increasingly hostile as large distribution chains in Europe continued their relentless pace of consolidation. Pressure on all food manufacturers heated up as the “balance of terror” increasingly moved in favor of the retail giants who dominated European distribution. Further, in attempting to grow and serve customer needs, product proliferation in the Del Monte European operations had crept in over many years, fragmenting management attention and diffusing investment. The product range had grown longer, pack types had multiplied and unrelated new product opportunities had been explored in different geographies. As a result, the cost of complexity rose, scarce resources were spread thinly across a wide range of traditional product support initiatives and other high growth, but low margin, opportunities in diversified product areas. Operating management, schooled in an environment of strong brands, solid operations and positive financial results, was increasingly challenged by a complex and distressed situation that promised to get worse before it got better. A fragmented shareholder structure at Del Monte Pacific Resources, the Asian production and marketing arm of the Del Monte businesses, struggled to reach agreement on a unified approach to strategy and operations, limiting the chance to achieve the full potential of that portion of the business. For two years, the share price continued to slide. The failure of incremental responses to fundamental problems only highlighted the need for a radical and comprehensive program to address the problems facing the group, and to reverse the erosion of shareholder value. The Chairman’s significant personal

Shared Elements of World Class Strategy ownership stake only increased his sense of the importance and urgency of a program to address the full set of problems on a direct and effective basis.

Comprehensive Strategic Program Following an intensive diagnosis of the business and its dynamic environment along all seven elements of the 7C’s model, Del Monte created a comprehensive strategic program to turn around the business. Having defined a different approach to costs, customers, channels, capital structure and the other elements of the model, Imerman and his team set out to achieve a completely different set of results which were to be pursued through a coherent and well articulated strategic plan: Vision. A new vision was developed to focus on core capabilities, the venerable Del Monte brand, and opportunities for profitable growth in the production, distribution, and sale of well-known pineapple, fruit, and vegetable products. The vision of leadership in selected fruit and vegetable categories was redefined and communicated. Each country and operating unit was assigned a role in the new vision, and strategies were set in place to achieve it. A task force at the top oversaw the efforts. Values. Del Monte’s turnaround began with an exhaustive diagnosis of the business, internally and externally. The company analyzed all elements of the business systems in detail and made tough decisions. The senior management team specifically requested that no stone remained unturned. Honesty was demanded. No issue was off limits. By the end of the six-month review, a weary group finance director quipped: “At the beginning of this, we stated that there were to be no sacred cows in the review process. Well, there are none left. They all were shot in the last six months.” The internal business values of relentless attention to the restoration of shareholder value were confirmed and acted on. The external values of high quality and healthy products were highlighted and communicated to consumers and staff of the rejuvenated enterprise. Imperatives/priorities. The highest priority imperatives necessary to realize the vision were identified and an action plan to support each drawn up. ■

Focus on core brand, products, and capabilities.

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Redefine the distribution system to reduce costs and improve profit.

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Sell assets to reduce debt.

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Restructure the organization.

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Acquire complementary businesses to increase scale.

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STRATEGY Improved operating results needed to be restored. Faced with a secular decline in volume, compounded by the currency and trade-driven margin squeeze, Del Monte attacked operating costs across the board. Country operations were consolidated or closed. New distributors were appointed. Information technology systems were simplified. Unprofitable customers were cut, reducing the Italian customer list from 9,000 to 2,700 in less than a year. Ineffective marketing spending was terminated. Unprofitable product lines were trimmed. Organizations were simplified. A new set of incentives kept the operating management team fixed on realizing the ambitious new vision. “We had the legacy of global-scale operating systems and processes and only a regional business,” Imerman said. “The costs were killing us.” Ownership and legal structures changed to solidify the business position, including a new shareholding structure in the Philippines. Following the break up and separate sale of the formerly integrated set of Del Monte businesses by KKR, a subset of the new owners of the branded businesses had each taken a shared ownership position in the Asian operation, which was the main source of many core pineapple products. With their ownership stakes had come matching board representation. The resulting complexity created a very difficult management situation. Del Monte Royal Foods (Europe), Del Monte Corporation (United States), Kikkoman (Japan and parts of Asia), the Macondray Group (Philippines), and others restructured the ownership of the operation, with only Del Monte Royal Foods and the Macondray Group remaining as active owners. The two equal partners shared ownership and control of the business. Rapid and effective change became possible as the structures were optimized and a full transformation program was successfully begun. Jointly led by Imerman and the Lorenzo family, the new capital structure of the streamlined business built on complementary strengths to increase revenues, broaden product categories, and improve productive yields, quality, and profits at the same time. In Europe, an equally dramatic transformation program was put in place at an operational level. Although most management effort focused on the existing business, selected new opportunities were pursued to accelerate growth at low capital cost. Joint ventures were successfully negotiated in Russia and India. A high quality Thai plantation, the Siam Agro Industrial Company, was acquired and its operations restarted. New line extensions and packaging concepts were developed. Advertising was refocused on core brands and well-established premium brand values. A bolt-on acquisition of complementary Just Juice in the United Kingdom added volume and market share to a strong Del Monte branded presence. The transition program did not come without significant investment costs. The cash costs alone of the European restructuring program were estimated to exceed $60 million. Among other moves to restructure the balance sheet, a

Shared Elements of World Class Strategy program of divestiture was undertaken to raise the funds to cover the restructuring charges. A portfolio of non-Del Monte brand products provided a priority list of candidates for divestiture. Property and plant left after consolidating assets in Italy were also put on the block. Auction of an Italian tea business was successfully concluded, with results far exceeding expectations, to help pay for the restructuring. New standards were implemented and the management team took a more conservative approach to accounting by “rebasing” the accounts. Burdened by a complex history of acquisition-related charges and multiple reporting entities in a wide set of countries and tax jurisdictions with differing accounting policies, the company was rightly concerned about a complexity discount on the share price. Executives at Del Monte and Anglo-American Corporation agreed that the reporting approach should be simplified and “all the bad news” incorporated into a single restructuring adjustment. More than $200 million was written off in an adjustment of the brand value carried on the balance sheet. Even more was taken as a provision for current and future restructuring costs. The year end was moved from November to December. New product development charges and the depreciation schedule were shifted to conform to international accounting standards. A new group finance director was appointed. Debt covenants were renegotiated or adjusted to reflect the new approach. All lenders were supportive and many positively applauded the changes. Organization. Imerman realized that his team needed a new set of skills to deal with the crisis. Greater personal incentives were required. A new and more entrepreneurial culture was needed to address current and future trade challenges. Within 18 months, 11 of the top 15 management positions were filled with new faces from within and outside the company. The organization structure was simplified. Redundant positions were eliminated and 500 staff positions worldwide were targeted for reduction. A core team comprising the chairman and his three senior operating and finance executives—Jacques Fragis, Francois de Lavallette, and Andrew Hawkins—led the charge to reverse the decline. Leadership. Only dynamic and fully involved leadership could have created a promising future for this long-established corporation. Chairman and CEO Vivian Imerman said at the time of the turnaround: We had our backs to the wall and no choice but to undertake a radical approach. And radical may not be a strong enough word! It took an extraordinary effort for more than a year, but we are now back on track. A year ago, things looked grim. Now we have a stronger, leaner business, a

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new and energized management team, and a range of interesting strategic options for the business. Without the intensive turnaround program we would still be facing far more difficulties than opportunities. Now the opposite is true. Only a total effort and total dedication could have changed the situation and gotten us to where we are today.

A key part of the leadership strategy was to change the approach to communications. More information was delivered more regularly to more constituencies. Key institutional investors were given detailed one-on-one briefings. A well-crafted public relations campaign built a positive profile for the company. The group soon became a better known and more trusted investment for both domestic and international investors. Results. With a full year of concerted effort, the Del Monte management team turned the corner for the first time following four years of decline. The dramatic news of the turnaround program and new operating style was announced in July. The share price began a steady climb within a few months of the announcement. Earnings stabilized in the first year at 30 cents a share. Results for the first full year of strategic benefits reflected a 70 percent increase in earnings, to more than 50 cents a share. The share price more than tripled following the announcements and the proven delivery of forecast results.

The Olam Story While the Del Monte story is one of recovery from a very difficult time through the successful application of a comprehensive STRATEGY model, the Olam International story is entirely different. Olam, which is a Hebrew word meaning without limits, is a world class logistics and supply chain manager based in Singapore. Focused on serving the needs of leading multinational foods and consumer products companies spread evenly across the United States, Europe, and Asia, Olam has grown quickly and quietly from start-up in 1989 to over $1 billion in profitable sales by 2003. This growth was achieved without a single acquisition or merger. The company is now the world’s leading handler of cashews and has aspirations to become a top three player in the supply chain for coffee, timber and other selected agricultural and industrial raw material and intermediate products. Sunny Verghese, Olam’s erudite founder and CEO, has led the business from a single source of product in one country to a global enterprise demonstrating over 20 percent per year growth in revenues and earnings over a 5-year period. Increasing its value-added well beyond traditional trading operations, Olam provides a reliable and de-risked purchasing, processing, handling, and delivery

Shared Elements of World Class Strategy business, sourcing from over 23 countries and operating in a total of 39 separate jurisdictions. Its margins are double those of traditional traders, reflecting its greater value-added strategy and effective use of over 2,700 employees worldwide.

Spanning the 7C’s In pursuing its vision of achieving continuing growth and profitability, Verghese and his highly capable team have pushed the envelope in all elements of the Seven C’s business model, with a focus on each of the areas as highlighted below: Costs. By drawing from low cost sources of skilled staff in India, Olam can put a highly capable and motivated graduate engineer in the field for far less than the all-in cost of its Western rivals. By exploiting this low cost and high quality source of expertise to drive increasing customer value across the entire spectrum of logistical activities, Olam has built an efficient machine to serve customers at low cost. It has simultaneously erected a formidable barrier to entry for competitors which would be exceedingly difficult for anyone to surmount. Customers. By serving mainly blue chip multinational companies like Nestle, Unilever, and Kraft Foods in the developed countries, Olam has a virtually zero bad debt position and a low risk sales profile spread evenly across the three major economic trading areas of the world. By de-risking the supply chain process “from farm gate to factory gate,” Olam allows its customers to outsource logistics and purchasing processes to a reliable supplier capable of operating at both lower cost and higher efficiency than any MNC could achieve on its own. Competitors. Often compared with agricultural and trading companies like ADM, ConAgra and Noble, Olam’s true long-term rivals are the supply chain managers like Hong Kong’s Li & Fung and other logistics companies filling the complex expert space between low cost origin markets in developing countries and sophisticated manufacturers in consuming countries. Capabilities. With over 130 MBAs in the organization, Olam is fully capable of designing and executing the most sophisticated of strategies and operating plans. Each member of the management team has spent a considerable time in at least one origin market, so all aspects of the business are well known across the whole top management group. Verghese himself began his career with Unilever in Nigeria, where he spent six years working in a small town hundreds of miles from the nearest large city. This hands-on experience gives each member of the organization a deep knowledge of the issues of sourcing,

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STRATEGY shipping, insuring, processing, and delivery of their various products. This shared experience, often painfully acquired, also adds to the practical, collegial, and friendly culture which underpins all of Olam’s interactions with clients, suppliers, and partners in their management of the various value chains on which they focus. Capital. Olam was started by Verghese with the support of his management team and an internationally savvy family investor, who had been impressed by the skill, dedication, and entrepreneurial drive of the Olam management team. By 2002, it became clear that the business would need to access more capital to fuel its continuing growth needs. Following a systematic process of partner identification and negotiation, Olam raised nearly $45 million in private equity capital in a short period of time and enlarged the ownership structure to include three firms: Russell-Asian Infrastructure Fund II; Temasek Holdings (a Singapore government entity); and the IFC (part of the World Bank group) to supplement the prior ownership stakes held by the management team and the original investing family. Context. One of the most striking characteristics of the unique Olam business model is its focus on profiting from a change in the regulatory structures in origin markets. With the removal of inefficient and frequently corrupt local commodity boards in many emerging market source countries, Olam was able swiftly to take up the opportunity to offer a better national economic solution as board after board was decommissioned around the world. The change in context fundamentally altered the rules of the game and allowed Olam to build a successful business ahead of its slower and less adept competitors along all seven dimensions of the model.

Gucci—A Modern Italian Renaissance A story of company turnaround and subsequent strategic success similar to Del Monte’s can be found in the glamorous world of high fashion and luxury lifestyle goods. The Gucci business, one of the most famous names in the history of the fashion business, has traveled through dramatic ups and downs over time. Driven in part by the involvement of a colorful Italian family, the business went through sequential phases of successful start-up, international growth, ownership transition, near bankruptcy, spectacular recovery, and new challenges. Beginning with the foundation of the company in 1923, when Guccio Gucci opened his first leather goods shop in Florence selling high-end luggage and saddlery equipment, the Gucci business expanded rapidly. By 1953 the company was operating in the United States as well as Europe and had become a fashion icon. Clients included some of the most elegant women in the world: Audrey Hepburn, Jacqueline Kennedy, Maria Callas, and the Duchess of Windsor.

Shared Elements of World Class Strategy After overexpanding into a plethora of wholesale outlets and a lower end canvas range of highly visible branded products, the company decided to cut back aggressively in both areas. Unfortunately, the precipitous drop in sales which resulted from terminating the wholesale channel and cutting out the canvas product lines was not matched by a commensurate decrease in costs. Profits plummeted and the company was threatened with bankruptcy. At this decisive moment in the company’s history, Investcorp, the private equity firm which had become the owners of the business, stepped in and supported a program which required that a new strategy be put in place and that the value of the business—brand franchise, operating results, and capital value—be restored. In response, Domenico De Sole, the then new energetic, bearded CEO of Gucci, and Tom Ford, who became the world’s most sought after designer, banded together to create one of the most fabled success stories in the history of the luxury goods industry. Sharing a vision of restored preeminence of the Gucci brand in the high end of the luxury goods and fashion industry, De Sole and Ford set out together to turn around a deeply troubled business. From the beginning, the Gucci renaissance was marked by creativity, focus, and an attention to all elements of the strategic mix. The corporate values of reliable performance and high quality financial results were targeted and pursued relentlessly by De Sole and his team. Tom Ford restored the values of glamour, fashion relevance, and brand awareness through a full redesign of all categories in the Gucci collection from shoes to handbags to accessories. A special initiative emphasizing and upgrading the ready-to-wear clothing collections was particularly well received, generating millions of dollars of free publicity. While Tom Ford was reestablishing the external values of the brand, Domenico De Sole was overhauling every aspect of the internal business operation with equal creativity, energy, and success. Supplier relations were restructured across northern Italy, the distribution system was reset, and the instore operations driven to world class standards, encouraged by De Sole’s unannounced visits to Gucci shops, internally known as “terminatory tours,” which left no item of Gucci store operations unchecked. The organization was restructured and new managers brought in to help refresh the organization. Old channels, such as the franchise networks in Asia and Italy, were bought out and direct control of the customer interface and product merchandising by the company were restored in critical markets. An independent holder of the watch franchise was also bought out, allowing the Gucci watch brand to be moved upmarket in line with the more elegant and fashion forward approach taken to leather goods, accessories, and the ready-towear collections. The result was extraordinary sales growth, rising from $200 million to $1 billion in 5 years. There were similar increases in profit, and an October

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1995 IPO was successfully concluded that was later voted the deal of the decade in Europe for the 1990s. Investcorp, by then 100 percent owners of the business following an acquisition of Maurizio Gucci’s 50 percent in 1993, sold their stake into the market in two tranches for $2.1 billion, four times what they had unsuccessfully sought only two years earlier. The share price rose dramatically from the IPO to match the fashion renaissance of one of the luxury goods industry’s grandest names as a new generation of Hollywood icons and music industry luminaries such as Madonna, Gwyneth Paltrow, and others once again vied to be identified with the Gucci label. The strategic success of the business turnaround depended upon an entirely new approach to the business: a new vision; new corporate and design values; new sets of imperatives; a new organization; a new approach to managing and owning channels; a new attention to costs, a new focus on effective implementation, and an entirely new approach to the capital markets.

A New Chapter of Challenge From its successful initial public offering at the end of 1995 as a high growth, highly profitable single-brand company, Gucci grew into a multi-brand leader in the luxury goods sector, expending $1 billion to acquire Yves Saint Laurent and pursuing other acquisition opportunities to build a broader brand and distribution platform. In a constant and emotional battle with industry rival Bernard Arnault at LVMH for years, Gucci eventually ended up in the arms of urbane French suitor Francois Pinault. The company then went on a rapid-fire acquisition program to build the set of opportunities available to replicate the Gucci success and to harness the potential to build a string of success stories within the PPR/Gucci stable. Other brand names acquired for a total of $2.3 billion included Bottega Veneta in handbags, Boucheron in jewelry, Bedat & Company in watchmaking, Balenciaga in fashion, Sergio Rossi in shoes and new designer lines for Stella McCartney and Alexander McQueen. The business challenges of portfolio and management integration, coupled with the need to restore profitability to a portfolio of ailing brands, were daunting in themselves. Yet after years of success and growth, at the end of 2003, once again Gucci was caught up in dramatic events at an ownership and senior executive level. The two stars who had driven the company to such great heights—59-year-old De Sole and 42-year-old Ford—resigned together, apparently due to disagreements with the interventionist approach taken by billionaire Francois Pinault and his team at PPR. The Gucci NV (as it had become) business, number 3 in Europe in the luxury goods sector, struggled with an expanded portfolio of 9 brands, of which 8 were unprofitable on a combined basis. The Gucci business, representing 67 percent of sales, contributed all of group profit. The $2.3 billion of

Shared Elements of World Class Strategy investment outside of the Gucci brand was, according to Pinault CEO Weinberg in a year end 2003 interview, losing $200 million a year. The need for a new strategy for the next chapter in the company’s history was clear. While sharing some of the same elements of challenge faced by De Sole and Ford a decade earlier, the problems appeared to be even more difficult to overcome the second time around. The environment in which the turnaround needed to take place under new leadership was dramatically different from that of the mid- and late 1990s when De Sole and Ford successfully changed the strategy of the business. The brand portfolio had become far more complex to sort out. The events of 9/11, the war in Afghanistan, the war in Iraq, SARS, the weakened dollar, the strengthened euro, the lingering aftershocks of the Asian Economic Crisis, and the long decline of the Japanese economy all contributed to a far more difficult operating environment as a background for the next phase of the inevitably dramatic Gucci saga. As for Del Monte and Olam, the Gucci story proves that there is no end to the dynamic history of a company. Demonstrating that consolidation, globalization, increasing complexity and virtually all of the other eleven principles of the new paradigm can be reflected in a single company’s history, the Gucci story is one which will be watched with fascination by industry observers and customers for many years to come. The glamour of the brand, the drama of its ownership struggles, the swings in its past fortunes and the scale of its new challenges mark the company as one whose future may well be as interesting, and perhaps as instructive, as its colorful past.

The Cisco Rebound Cisco Systems, cited earlier in the section on principles of the new paradigm as a prime example of a company riding the phenomenon of connectivity to new heights, also stands as proof that that an upward ride in the technology business can be far from smooth and anything but painless. The dramatic redirection of the business following the difficulties experienced by all technology companies in the early years of the new millennium proved that creative, swift, and effective action ahead of competitors in a turbulent environment can lead to truly world class results. Following the problems of “Tech Wreck 2000,” the once triumphalist John Chambers and his colleagues at Cisco went through an extremely difficult period of far-reaching strategic diagnosis, design, and active corporate redirection. The top to bottom overhaul addressed virtually every element of strategy and resulted in the writing of a very positive new chapter in the continuing business success story of the Cisco enterprise.

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The changes that drove the Cisco renaissance included a familiar line up of ideas and approaches: New vision—Instead of focusing heavily on networking equipment, Cisco redirected its growth initiatives to pursue opportunities in six new markets as well. To ensure that its business system was fully aligned with growth goals, Cisco allocated half of its $3 billion budget for research and development to emerging market opportunities. New values—Although painful to implement, Cisco was forced to reverse its longstanding no layoff policy. 8,500 people were let go, 18 percent of the work force. Following the painful and far-reaching layoffs, Cisco recommitted itself to building a more disciplined and team-oriented corporate culture. New organizational approach—The engineering function was centralized, purchasing rationalized, and web strategy sessions increased to extract the full benefits of Cisco’s Internet applications. Processes, accountabilities, and responsibilities were reinforced, a major change in the Cisco culture, from CEO downward. Standards of operating excellence—Cisco achieved new levels of efficiency in reducing the complexity of its product portfolio by 27 percent, increasing sales per worker by 24 percent, reducing costs by over $2 billion in 2002, and raising sales from new product areas, such as security products, to 14 percent of total sales. Growth strategies—Cisco dramatically slowed its acquisition program, with its pace of deal completion dropping from two per month in 2000 to two per year in 2002. A focus on organic growth was intensified. An internal program linking post-transaction management accountability to those responsible for acquisition projects tightened up on the achievement of expected returns in completed transactions.

Results Speak for Themselves The financial and operating results from the new strategic approach have been remarkable. Cisco’s share of the $90 billion equipment market increased in 2003 to 16 percent, a dramatic increase on its 10 percent showing in 2001. Profits reported near the end of 2003 exceeded $1 billion per quarter on sales exceeding $5 billion. The company had no debt on its balance sheet and nearly $20 billion in cash and liquid investments. Crowed a once again ebullient CEO Chambers in a November 2003 Business Week interview “We’ve executed to the point that we have 100 percent of the industry’s profits, 100 percent of the cash, and about 70 percent of the market cap.” Facing a post tech crisis future from a strong platform of recovery and success, Cisco emerged from its bold period of strategic rethink and redirection

Shared Elements of World Class Strategy stronger than ever, and ready to embark on its next successful phase of strategic diagnosis, design, and implementation.

Shared Lessons Although the four companies chosen for elaboration here—Del Monte, Olam, Gucci, and Cisco—are all very different businesses at different phases of their strategic cycles, all bear witness to the value of good strategy. They also show that strategic excellence is a journey, not a destination. There is always a new phase coming with new challenges and a need for further strategic development and execution. All four companies also show the value of addressing the common elements of strategy which form the core process and content of a STRATEGY program. By pursuing the program set out here, you will be benefiting from the learning, often painfully acquired, of some of the world’s leading companies. By applying the process and content of STRATEGY, you will be able to achieve many of the benefits of world class strategy without paying the learning costs of those who came before you and contributed to its development.

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CHAPTER 2

The Process of STRATEGY

One principle underlying much of what is good about the Anglo-Saxon legal system was famously captured by a leading mind of American jurisprudence when he stated: “Good process makes good law.” For many of the same reasons, good process also makes good strategy. A sound strategic process can ensure that high quality information is available to inform and guide the development and implementation of strategy. It can also ensure that the strategic laws of gravity and fundamental principles of strategy are respected. In addition, good strategic process ensures that the goals, alternative action plans, and customer needs are debated in a wide and inclusive forum. Sound strategic process also ensures that the eventual output will benefit from thoughtful application of the full intellectual capital of an organization, and will lead to the full motivation of its members. Gary Hamel, author of leading books on strategy, is only partially correct when he says that we do not have a theory of strategy creation and that we know a good strategy only when we see one. A good process and effective strategic model illuminate the theory and practice of successful strategy creation. Neither a model nor a process can guarantee good strategy, but they can substantially improve the average result and can more easily lead to great breakthrough strategies in some circumstances. A random, unstructured, or highly constrained process is far less likely to allow a business to depart from an unsatisfactory status quo and lead to breakthroughs in operating performance or value creation. A better approach which captures the best of past learning and builds on it can improve the practice and discipline of strategy, thus improving its results. Because the content of STRATEGY may be more demanding than past approaches, the process to design, implement and document it will probably also be more demanding. There could be more steps in the process. More people and perspectives may need to be taken into account. The design process must slide smoothly into implementation, which will involve even more people. Although more challenging to manage than more limited approaches, the rewards of a STRATEGY effort, properly pursued, will be well worth the extra effort. 174

The Process of STRATEGY The Value of Clear Documentation One of the most valuable characteristics of STRATEGY is an ability to document a strategy clearly and succinctly. Failure to capture the content of strategy accurately in a manner which can allow easy communication can reduce its value significantly. Strategies need to be documented for five reasons. ■

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First, writing down the strategy inspires thought, insight, and focus. Conflicts and gaps in thinking and proposed action are exposed. The quality of thought is improved. Second, a written document is essential for communication of the strategy throughout the organization to refine its content, achieve buy-in and approval as needed, and to develop a shared sense of common purpose. Third, future generations of strategy managers will need a reference point to understand the past and to assess success and failure of the initiatives undertaken. Fourth, a cogent, crisp, and concise summary of the strategy provides the foundation for aligning group and individual objectives. The quality of organizational alignment depends in great measure on the clarity and communication of the vision and supporting strategy. Fifth and finally, strategies are relevant for all members of an organization, and not everyone can join directly in the process steps of diagnosis, design, and implementation. For those colleagues who are not part of the core team or who may have joined after the completion of the STRATEGY exercise, the opportunity to access a cogent summary of the strategy can be invaluable.

To ensure that a new strategy benefits from the full capability of an organization and the people in it, a few useful process rules, in addition to the need to document your strategy, can lead to the highest quality strategic process. Observing these seven process principles can provide a useful checklist and reference guide to keep a STRATEGY program on track. Seven Process Principles of STRATEGY Ensure an effective process Ensure an inclusive process—break down the hierarchy Set long-term objectives for individuals and the group Test the logic and the process Balance strategic planning with strategic flexibility Search for nonlinearity and creative breakthroughs Embrace risk, action, and the acceptance of failure

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STRATEGY Principle 1. Ensure an Effective Process One frustration that managers face in complex modern organizations: too much data, too little useful information. Distillation, simplification, interpretation, harmonization (the use of similar templates to enhance the comparability of information), and upfront summaries of conclusions are essential in a process create deeper understanding and more effective strategic decisionmaking. Many review and strategy development meetings will be less structured, more critical, and bolder in thought than usual discussions. Ironically, this broader range of thought and greater depth of content require basic meeting disciplines to be even sharper than usual. The time of participants needs to be respected and the principles of efficient meetings observed. High quality materials and presentations need to be developed in advance and summarized clearly. Objectives for each meeting need to be agreed at the outset. Attendance and distribution lists for minutes need to be defined thoughtfully. A summary of agreed points, points in contention, possible breakthrough ideas, the potential value of ideas, and agreed next steps need to be documented and circulated. Summary perspectives and agreed points need to be recorded and circulated, as do action steps. Promising thoughts need to be evaluated, distilled, captured, and circulated. Perhaps the most important of traditional meeting disciplines is listening carefully and ensuring broad and active participation. The chair’s obligation is to ensure that all relevant views are heard from each attendee and that appropriate debate is allowed on each individual’s perspectives. Meetings dominated by a few individuals or characterized by interruptions and distractions are unlikely to capture the full potential of the group’s capabilities. If the process does veer off track, corrective action should be taken swiftly. Frequent, small corrections in earlier stages of flight are always a more efficient way to keep a rocket on track than is a massive effort to recapture an erring trajectory that has gone way off course for a lengthy period. It requires less energy. The likelihood of a successful flight achieving its objective is far greater. The risk of unforeseen catastrophe is lower due to a less intrusive set of corrections and interventions. The same is true for large transformation projects or strategic planning exercises. Constant feedback and quick response can keep the process on track. An effective and efficient process leading to superior strategy and implementation is the objective. Frequent, small corrections improve the odds of achieving these larger goals. STRATEGY may require longer lead times and more groups to provide input and coordinate multi-year initiatives. In addition to your STRATEGY document itself, you may also want to include marketing plans, year-end reviews, investment proposals, capital market initiatives, and other events that would benefit from full integration with the strategic process. An effective

The Process of STRATEGY process that ensures management buy-in and effective implementation takes longer and absorbs more resources up front. But the payback in the future will be faster and greater. Many strategic planning processes are set to be efficient rather than effective. Timetables are brisk. Review sessions are short. Feedback is focused. The process is repetitive, mechanical and uninspiring. The linear and nonlinear character of STRATEGY may require further discussion from fresh perspectives and more challenge on the underlying vision than past processes. More questions need to be asked, contrary positions played out, and new ideas explored. The main elements of STRATEGY provide a checklist to ensure that strategic reflection covers all the issues. The 7C’s, 9S’s, 8 Strategic Laws of Gravity, and other models can also help stimulate discussion and ensure that all relevant items surface and are integrated into the process. For generating breakthrough strategies, a systemic view is also essential. Exploring the dynamic implications of a more systemic view does not mean discarding other viewpoints, but it does mean adding a new and higher level perspective which can change the overall perspective and hence the subsequent actions of the group. An open forum to develop and test these new perspectives is also necessary, for dynamic systems behavior can be captured at many levels and from many complementary perspectives. Just as wave and particle physics can describe the same phenomenon from two equally valued perspectives, systemic (holistic) and particular (atomistic) views of a business trend or event can be equally valid and complementary. The more radically different views may be the least comfortable to adopt, but ultimately may prove to be the most valuable. All need to be fully explained in an effective STRATEGY process.

A Quick Test One useful tactic is to end each major meeting with two simple questions that all participants are required to answer: On a scale of one to ten, how are we doing? In one sentence, what could we have done better? The short answers to these questions take little time to gather and may add great value to the next stages of the process.

Principle 2. Ensure an Inclusive Process—Break Down the Hierarchy The development of the best contemporary strategies often reflect a process which respects neither internal walls within a business nor the traditional boundaries of a business enterprise. Strategies can benefit enormously from the informed perspectives of other players in the business and industry value chains. Entire books are now written on the value of including customers in

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strategy. Suppliers as well can be brought in to produce good ideas, align economic activities, and negotiate the most appropriate trade terms. And, with the greatest degree of caution, selected competitors may also cooperate with part or all of a rival in business activities. Developed rapidly in the technology sector in particular, the trend of greater strategic inclusion does now extend across the full gamut of industry players. Even old rivals can become new friends, allies and contributors to strategic development, spawning the creation of the new word “comperation” to capture the emerging synthesis of competition and cooperation. A more inclusive approach internally can also yield great benefits. No individual or single level in the hierarchy has an exclusivity on good ideas. At 3M, a secretary contributed to the creation of the universally popular Post-It, a highly successful and nonlinear development in office supplies. At Asda, a successful British grocery chain recently purchased by WalMart, the word employee was discarded in favor of colleague, a less hierarchical term which applied to everyone from the CEO to the newest member of staff in the loading bays. Under unconventional Asda CEO Archie Norman, all colleagues sat in an open plan setting where no one had an office with walls, not even the CEO himself. The more collegial atmosphere opened new channels in the organization for innovation, leading to new concepts in product, service, category management, promotion, and supplier arrangements. Effective access to knowledge, intuition, and insight at all levels maximized the use of intellectual capital in the organization and allowed the once sleepy Leeds-based retailer to become one of England’s most admired turnaround stories and a sought after acquisition target. One proven way to increase the creative output of a high-quality organization is to break down line and staff barriers in the STRATEGY process. A combined team of finance, marketing, and line management looking at competitors may be far more effective than a purely marketing-led view of the opposition. Creative teaming can also break down external and internal walls. Involving suppliers and customers may elicit win–win opportunities and new sources of competitive advantage. One limitation of linear models is that they often do not acknowledge the systemic trend of shared economics that is redefining the boundaries of processes, strategies and competition. A more inclusive and participatory approach to the development of strategy meets four objectives. ■

First, the strategy is improved by increasing the thought and perspectives that go into the process. In particular, the younger employees in an organization may contribute fresh and unexpected views on key risks and opportunities. To hammer home that point, Infosys, a leading Indian software company, once introduced a rule at some planning meetings that no one older than 30 is allowed to speak.

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Second, the chance of effective implementation improves greatly through inclusion. An organization’s sense of owning a strategy will be much stronger if a broader set of colleagues is involved in its generation.

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Third, the process provides valuable learning opportunities to participants, adding practical tools and techniques and stepping up integration within an organization. An inclusive process allows organizations to realize internal synergies among divisions, departments, and business opportunities that might have gone unnoticed.

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Fourth, a broader process increases the engagement of individuals. The challenge of engaging and motivating individuals in a collective effort is one of the most critical tasks a senior manager faces today. Inspiring this engagement will improve the entire morale of an organization, leading to higher individual satisfaction, better retention of key staff and customers, and a wholehearted dedication to the vision and agreed initiatives of a business strategy.

Experienced strategists will note, however, that one danger in pursuing a new and more inclusive process of change is that overenthusiasm can lead to having too many people in too many meetings with too little effective output. A carefully managed process will avoid this risk and police the line between the interesting and the useful.

Principle 3. Set Long-term Objectives for Individuals and the Group Deeper understanding of the nature of business enterprises and the competitive challenges they face will require setting objectives for actions which have immediate results, and also may require objectives to be set which will only show benefits in a much longer time frame. Multi-year perspectives and targets may be required for major initiatives, for individual and group development plans, and for organizational evolution. Longer term objectives could include revenue and profit targets, new product initiatives, improvements in departmental satisfaction scores, new systems implementation, team skills development, hiring targets, and individual skills development programs. Consolidation and communication of these objectives is one of the most important opportunities for senior managers to engage, direct, and motivate their colleagues. Longer term personal objectives need to be aligned with group objectives. Development and career plans need to be aligned with the current opportunities and longer term objectives of both individual and enterprise. A realistic development plan with long term dates and responsibilities may need to be set for each individual. These phased objectives should be short, fewer than ten per

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STRATEGY person, and all action items need to be both measurable and realistic. They should be shared with colleagues and confirmed with all relevant senior mangers. A clear hierarchy of objectives from enterprise down through all supporting individuals should be crafted so that each longer term goal is fully supported by the requisite complement of supporting objectives.

Principle 4. Test the Logic and the Process Good strategy has been characterized as an inexorable flow of logic from insight to action, a seamless web of facts, principles, decisions, and actions that allow an organization to reach its goals and generate extraordinary returns. In order to ensure that your strategy is indeed world class, all parts of the strategic logic should be tested, cross-examined, and challenged. Where falling short, necessary change should be made as early as possible. As most strategies in the business world have created operating results characterized far too often by satisfactory underperformance, external examples of real excellence need to be examined. New and better approaches to operations, growth, and transformation need to be described and their potential application examined and challenged. A constant challenge from external perspectives and from a platform of dissatisfaction with the status quo is required. Effectiveness, as well as efficiency, needs to be an objective. One optional element of many sound STRATEGY approaches is a set of beta tests and pilots to assess the workability of proposed new approaches in the real world. Beta testing, or testing a developed model in a real operating environment, is particularly important in the implementation of a risky new approach. Changes that threaten (or promise) to disrupt a long established way of doing business may need detailed testing, revising, and a phased roll out to ensure that risk is properly managed and the new model properly implemented. In order to keep the process on track and the content correct, seven questions should be constantly in the minds of participants in a STRATEGY exercise.

Seven Testing Process Questions Are the facts correct and the full picture clear? Is the proposed interpretation correct? Is the process capturing all internal and external elements necessary for inclusion? Is a past approach obscuring a clear understanding of the present or limiting the potential of the future? Is there a better way to achieve what we are trying to achieve?

The Process of STRATEGY Is this process different, and better, than prior exercises? Do your business judgment and intuition say this is the best you can do?

An application of best practice from the manufacturing world requires that strategists do not wait until the process is finished to assess the quality of the effort. At each stage of the process, particularly at mid-term reviews or other critical junctures, team members should step back and ask these questions to assess whether the process is correct, which areas need improvement, and how the next phase could be improved. Good leaders should regularly solicit concerns from each member of the team, regularly pose these seven questions, assess progress and performance objectively, and take remedial action swiftly.

Principle 5. Balance Strategic Planning with Strategic Flexibility There is a benefit to specificity in strategy, but there is also a risk in over-prescribing and limiting future freedom of action. Strategy in our new electronic world is exceptionally dynamic, and paradigms are rapidly evolving. Strategy is now more about people, flexibility, and adaptations to shorter and shorter cycles of all kinds, including technological, product, logistical and competitive. The product of a STRATEGY exercise is not an enormous tome that sets out in minute detail the activities and responsibilities of each individual for the coming years. The business environment is too volatile, the future too uncertain, and the individual too independent (at least the best ones are) to benefit from excessive direction and control. The final content of the strategic document should be architectural rather than exhaustive. It should describe the vision, principles, goals, and outline plans for action. The plumbing, engineering, and detailed individual plans may need to be developed and implemented flexibly over time, always fully coordinated and aligned with the vision, but always with the appropriate autonomy and freedom. The needs for flexibility and adaptability in modern strategy are so extreme, particularly in the new market spaces of e-commerce and Internet competition, that some business sages are recommending a more Zen-like approach to strategy. They assert that one can no longer become attached to any fixed outcome. Adhering to static, outdated visions, or even any fixed outcome at all, can be an automatic death sentence in the e-world in particular. Almost all winning businesses work at Internet speed these days, or at the speed of thought as Bill Gates describes it, ensuring that the strategy world is more than ever a world where accelerating productive change and a built-in capacity to adapt swiftly to change is a necessity for corporate survival.

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Professor Moshe Rubinstein captured the necessary hybrid of strategic planning and strategic flexibility when he described the need in modern strategy to be “half planned and half unplanned,” executing on well thought through initiatives but always ready to respond to the unexpected.

Principle 6. Search for Nonlinearity and Creative Breakthroughs STRATEGY makes the best of what we do know about creating positive discontinuity and establishes an effective process to both generate and respond to the inevitability of that kind of dramatic change. The three phases maximize the benefits of past experience and learning in the context of the expected, and also prepare an organization for the unexpected in the future as much as possible, enabling you to profit from discontinuous change as and when it occurs. The environment will always produce surprises, as discontinuities in complex systems, by their very nature, are not always predictable. Those surprises may require strategic change or redirection and will require organizational cultures both to plan in an expert manner and to be prepared to discard or amend those plans if necessary. Good strategies will benefit from fast response to change, and may even deliberately create and exploit discontinuity for their own advantage. By understanding the multi-dimensional and interdependent nature of events and business systems, talented management teams will be able to profit from the opportunities inherent in any turbulent period. Dell focused on a new model of channel leadership and created a highly successful direct sales model. Intuit shifted its Quicken packaged software business to an on-line presence. ICI and 3Com have redefined their business models as they voluntarily broke up their business portfolios. The Quantum Fund constantly seeks arbitrage opportunities for investment to profit from discontinuities in the international financial order. With a fuller understanding of risk, opportunity, and the repetitive patterns visible in dynamic systems, aspects of strategy discussed in Book One, it is easier to search for nonlinear opportunities and to generate breakthrough insights and actions. Non-linear change is becoming more common, and mastering response to unexpected events is more than ever a valuable asset in the business world.

Challenge Received Wisdom There are many implicit assumptions, beliefs and ideas that underlie most existing strategies. Often, they are outdated or incorrect. By exposing the building blocks of belief that provide the foundation of strategy, you may well

The Process of STRATEGY be able to move on from those misconceptions or outdated assumptions that lead to inappropriate actions. For example, in the retail trade, as mentioned above, there is no more widely disseminated “truth” than the notion that the three most important factors are “location, location, and location.” Many modern retail empires have been founded on an entirely different conceptual foundation. The success of new giants like IKEA, Wal-Mart, and out-of-town “category killers” such as Toys R Us, Staples, and others stand as testimony to the success of redefining the nature of a challenge and executing well in a new strategic space. On the other hand, many vacant shops on elegant streets in city centers, once the best examples of the “location, location, location” philosophy, show that business today is very visibly divided into those capable of adapting to change and those who will not survive a new order of competition in a new paradigm.

Search for Win–Win Answers Many breakthrough strategies are driven by new approaches. New supplier relations, integrated logistics, alliances, business combinations, outsourcing arrangements and new business models bringing manufacturer, service provider, and customer closer together have all created new business approaches and led to higher rewards for their creators. There needs to be time allocated in the STRATEGY process to assess new win–win models of operation, not just for discussion aimed at optimizations of old approaches and frameworks.

Principle 7. Embrace Risk, Action, and the Acceptance of Failure Not all efforts will succeed, but without risk, trial and some failure there can be little progress. As we have already noted, no scientist ever made great breakthroughs merely through a methodology of trial and success. Mere theory, no matter how elegant, is not enough in the real world. The only way we really learn is through action and experience, both good and bad. In fact, it is perhaps only through our worst experiences that we gain the most valuable knowledge. Acting, and learning from that action, are thus the source of our knowledge and wisdom. We must be willing to act, to test the boundaries of what we know, and to accept risk to add to our store of relevant knowledge. By acting more boldly, with more courage and creativity, we can test ever more aggressively the borders of the possible.

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Advanced companies accept and manage failure as part of organizational learning in very different ways. At Intuit, parent company of the enormously successful Quicken software, unsuccessful initiatives are ended with a party to celebrate the learning they represent. At 3Com, parent company of the ubiquitous Palm Pilot, a different rite of passage is observed. A mock funeral is held to bury the effort and free the organization to move forward again. These two approaches, radically different in their content, recognize the value of risk and the inevitable need to tolerate some examples of failure as a part of the organizational learning process. In testing any alternatives against the current state of satisfactory underperformance, we will not always succeed. But failing to take on risk is a guarantee of failure to achieve our full potential and a sure path to satisfactory underperformance.

Lessons from the Past From the contrasting stories of success and failure in past strategic planning exercises emerge a number of valuable lessons to inform STRATEGY participants of the potential for missteps in the formulation of strategy. While accepting some degree of failure as an inevitable part of the risk cost of aspiration, it is also important to extract as much learning as we can from the past to avoid repeating old mistakes in the future. From a broad set of past strategic exercises, a few observations on potential future process pitfalls may be instructive.

Seven Principles to Avoid Process Problems Getting the team right first is essential A vision cannot be developed in a vacuum There is no independent element of strategy Strategy is no longer about incremental improvement The softer elements are more than ever at the heart of strategy The broader application of principles should not be limited Address irritants, obstacles, and impediments early

First, getting the team right before you start the STRATEGY process is an essential part of moving your business and strategy to a new level of

The Process of STRATEGY excellence. In his book Good to Great, which analyzed the key success factors of a number of “good” performing companies which later became long-term “great” success stories, Jim Collins discovered that often the management team had to change before the strategy and operations of a business could be fully tuned. Other experts have pointed out that in two-thirds of dramatically successful turnarounds, the old management team had to be replaced before significant progress could be made in driving an enterprise to turnaround success. Second, a vision, while essential, cannot be developed in a vacuum. A thorough understanding of the history, current state of affairs, and future options is essential to create a meaningful vision for a business that is capable of being realized through implemented strategy. A full framework of understanding is needed to promote a more comprehensive and useable set of inputs to strategic diagnosis and design. It is essential to identify sources of satisfactory underperformance and to ensure that relevant patterns are observed, systemic characteristics understood, relevant net risks and opportunities quantified, and the individual elements of the framework fully integrated to provide a comprehensive foundation for strategy development. The third insight is that there is no independent element of strategy. All elements are important for generating superior results at operating and strategic levels. Strategic diagnosis, design, and implementation all need to be fully addressed to realize an aspirational vision for an enterprise. In all the winning examples described here, a shared approach addressing and aligning each of the supporting elements of diagnosis, design, and implementation was necessary to support the ultimate execution of successful initiatives. Fourth, strategy is no longer about incremental improvement or protecting the status quo. Successful strategies in today’s world may need to create opportunities for breakthroughs and fundamental change in industry or business enterprise models. New business definitions, new alliances and combinations of resources, new standards of excellence, and new approaches to old problems are all necessary components of a more ambitious strategic agenda. Fifth, the softer elements of organization, motivation, capability, and leadership are more than ever at the heart of strategy. These softer elements merit the greatest attention if full potential is to be achieved in an enterprise. Sixth, the broader application of principles derived from one source of insight should not be artificially limited. Commercial success and failure in the United States, Europe, and Asia share common patterns, principles, and lessons. The best practice model of transnational strategy captures the common nature of this understanding. The resulting implications are more universally applicable and the sources and content of these new models more relevant to a range of problems and challenges wherever they arise.

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STRATEGY Finally, address irritants, obstacles and impediments early. Even if there is no wholesale change proposed in management structure, staffing, or operating principles, it is always important to address on a timely basis the counter-productive sources of irritation and resistance that can derail a strategy process and undermine efforts to achieve operating full potential. These sources may be found in inadequate data bases, overburdened IT or marketing staff, or even simple human character. Over time, a number of styles or attitudes of team participants may emerge which signal the need for senior management to act swiftly to correct problems. By taking tough decisions and acting early, risks to the process and strategy can be managed and greater costs avoided at a later date. A few recurring archetypes of individuals who can interfere negatively with a STRATEGY process and jeopardize the outcome can be derived from prior strategic exercises: The always right type. Individuals who make no attempt to listen to new facts or views of colleagues can be a major problem in a STRATEGY program. Frequently disruptive, these types often fail to contribute to the process and remove the possibility of a motivating consensus to move a business forward. There is always a need for individuals participating in the process to work together to create and execute strategy. Those unable to pull together with colleagues risk pulling the entire effort out of alignment. The passive resister. Individuals who do not confront and challenge the process, but attempt to slow, stop, or redirect the program through passive behaviors can unproductively delay, derail or obfuscate the matters at hand. Frequently failing to complete necessary work, avoiding the chance to voice an opinion or ducking chances to participate actively in a discussion, the passive resistors may be either risk averse or more political in their motivation. But in both cases, taking a stand early on with regard to the appropriate style and role for all concerned is important. The indiscreet broadcaster. Confidentiality is one of the key elements of an effective STRATEGY process. Work in progress insights, proposed actions, and investment proposals have a real value which can be diminished considerably by exposure to the wrong parties. While needing broader participation and communication, the elements and objectives of strategy, even unfinished, deserve to be carefully protected and released only in a conscious and controlled manner. The kiasu king. In Asia, and in particular in Singapore, the Hokkien term kiasu has emerged to fill a conceptual gap in the English vocabulary. Kiasu is an unfortunate state of mind driven by a great fear of being left out or losing advantage, no matter how small, to another person. It means essentially doing as little as possible to help others while maximizing the value to oneself of all individual actions. In kiasu thinking, it does not matter whether the team

The Process of STRATEGY succeeds or whether the greater good is served. Narrow short-term self-interest is the only measure of kiasu success. Visionary thinking, team work, effort, honor, and honesty have nothing to do with kiasu behavior. Small thinking, self-interest, manipulation, deceit, and laziness are the central values developed by the kiasu individual. In fact, selfish kiasu behavior leads to the ultimate in satisfactory underperformance and should be swiftly rooted out wherever discovered. Only by exposing the games being played and by setting a clear standard of what can and should be achieved can the kiasu risk be avoided throughout the process. Silo prisoner. Some individuals may have difficulty breaking out of the status quo models of strategic thinking and status quo models of the organization. Established departmental or divisional barriers may be considered sacrosanct and organizational hierarchy rigidly observed. Unless these limitations can be broken down and removed, the full value of the STRATEGY process will not emerge. In these, and other well-known models of resistance and inefficiency, the individuals who threaten a process of change because of self-interest, limited capability, or emotional attachment to the status quo will require addressing as early as possible.

Other Irritants Not all irritants and obstacles in a STRATEGY process are driven by individual personalities and problems associated with their interactions during the process. Information systems, budgeting forms, performance review systems, inter-departmental issues, difficulties with geographical distance, and communications issues can all create impediments to a fully effective process. Wherever possible, these impediments should be surfaced, understood and dealt with as early in the process as possible. By so doing, the full value of the exercise can be realized and a standard of operating excellence in a project forum established for replication elsewhere in the organization.

Caveat: Tolerate and Encourage the Intelligent Voice of Dissent On the other hand, intelligent voices of dissent should not be stilled. The lone dissenter can be a powerful voice for creativity and new thinking if running against the grain of established thought. One of the attributes of a true leader is the ability to separate the fresh thinkers from the counterproductive at all stages in setting and implementing strategy. The process of STRATEGY requires leaders to master many complex balancing acts like this, taking into account and assessing the need for constructive dissent with the value of eradicating counter-productive resistance,

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STRATEGY the need for creativity with the value of realism, and the need for rigorous analysis with the value of discontinuous ideas which are not capable of complete data-based understanding. In tolerating, and even in recognizing the value of dissent without allowing the process to be derailed, the effective leader will be able to oversee a debate which is open, constructive, and comprehensive without descending into a state of counter-productive discord where the overall objectives of STRATEGY could be compromised.

CHAPTER 3

Content Phase I: Diagnosis

In this phase we shall begin to set out the specific slides and charts necessary to generate the best STRATEGY for your own business. As you work through each step of the prescribed process, you will be moving toward the goal of a comprehensive, thoughtful, and winning strategy. In order to make the structure and content of STRATEGY as clear and useable as possible, an example is developed throughout all phases of the approach. Although your own business may differ in many critical aspects from the fictitious example chosen, the slides and graphs included for the Royal Richesse Company can easily be supplemented or adapted for any business in a competitive environment.

Three-phase Approach Strategy is best developed through three sequential phases of diagnosis, design, and implementation. Every company’s strategy needs to be unique, but this common approach can serve as a guide and checklist to ensure that your own world-class strategy is fully developed and properly aligned. The first diagnostic phase sets out clearly the current and past state of the business from all relevant perspectives. In this phase is included a set of slides to help you to think through the past history and current definition of your business, understand the dynamic trends and influences that will shape the future of that business, describe succinctly the new paradigm of business competition, and identify the levers on profit and value which can raise the economic performance of your enterprise. The second design phase of strategy begins with the selection of a new vision and the determination of the most attractive strategic option going forward. The content of this phase focuses on the imperatives, initiatives, and actions which are required for your business to set out on a winning pathway. The best organizational approach, targeted standards of excellence, and a process of integration and alignment of the independent elements of your strategy will round out this phase. A new organizational structure, staffing, and operating approach will be prescribed. A final stage of specifying target results will lock in the fundamental notion that the essence of strategy is all about 189

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achieving a vision and getting real results for all stakeholders through informed and effective action. The third and final implementation phase ensures that the enterprise realizes the target results specified in the design phase and captures the full value of the strategy. The individual steps within this final phase ensure that appropriate resources are made available, that proper measures and controls are in place, that corrective actions are taken as and when needed, and that the full value of the strategy is captured from every possible angle. The STRATEGY process begin with a thorough diagnosis. Before setting out on any strategic direction for the future, it is essential to learn as much as possible from the past, to review the pertinent facts and experiences, and extract the appropriate lessons from information and memory. That learning must provide a comprehensive understanding of the history of a particular business, including the immediate competitive environment and those broader trends and influences which have and will continue to shape that business. It also helps to understand applicable lessons from adjacent, similar, or relevant sources of learning and knowledge. A full diagnosis looks backward and forward, outward and inward, and takes into account both dynamic and static views. Moreover, a thorough approach will look at those subtle trends and influences which only affect the business on an indirect basis today, but may have an important impact on the future performance of a business. This thorough approach will ensure that you have learned the lessons of the past as comprehensively as possible in order to determine as far as possible the shape of the future. Only through this kind of comprehensive and thoughtful diagnostic approach can your team arrive at an adequate understanding and evaluation of the full range of options available. The diagnostic phase, as are the other two phases in the STRATEGY approach, is broken down into seven steps, each important in its own right but

Phase II: Design

Phase I: Diagnosis

Phase I: Diagnosis 1. 2. 3. 4. 5. 6. 7.

Point of departure Portfolio perspective Profit pool perspective Competitive perspective Business dynamics Organizational assessment Range of strategic options

Phase III: Implementation

Content Phase 1: Diagnosis

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with each also contributing to the achievement of the greater objectives of a particular phase and to the overall value of the STRATEGY program. For each of the seven steps in all three phases there is attached an explanatory slide and at least one example slide. In a later section, you will find the instructions on how to download a soft copy of these PowerPoint presentation slides to make your own STRATEGY exercise as easy as possible.

I.1. Point of Departure The first step in the diagnostic phase is to describe the point of departure of a business. This first step captures the company’s current performance, defines its I.1. Point of Departure Explanation The first step in a STRATEGY diagnostic is a description of the point of departure, setting out the facts and an analytical summary of the current state of the business – in absolute terms and relative to competitors. This will include: a)

Company history and business definition

b)

An overview of customers, markets, and sources of profitability

c)

Historical and current results i) financial ii) strategic balance sheet iii) organizational

The fundamental measures of business performance are essential to document for two reasons. First, they describe factually the past and present position of the business and provide a foundation for strategic design. Second, they will form an important yardstick for a new strategy – the charts here will also be a key part of the target results for the implementation phase of your STRATEGY.

1. Point of departure 2. Portfolio perspective 3. Profit pool perspective 4. Competitive perspective 5. Business dynamics 6. Organizational assessment 7. Range of strategic options

I.1. Point of Departure a. Background and history Royal Richesse Watches (“Richesse”), founded in 1736, is one of the world’s leading luxury watch houses, specializing in high end men’s gold case, leather strap chronometers and pocket watches, epitomizing Swiss values of precision, quality and exclusivity. Following a series of poorly received product launches in the early 1980’s, the watch business lost a global leadership position and continues to suffer long term erosion in market share, brand presence, and relative margins. Ladies' watches are in a particularly weak position and suffer from performance problems. Competitors have overtaken Richesse and continue to grow in the core luxury watch segments and in high growth sectors such as sports watches, where Richesse is not present. Only pocket watches have maintained a leadership position. In 1995, the company diversified into the luxury leather goods market with the acquisition of Perso for $200 million. This acquisition also brought Richesse into the Italian property market through a Perso subsidiary in Milan. The acquisition of Perso in 1995 has not provided the desired uplift in profits nor the expected cross-sell of leather goods and watches. The property division of Perso has provided even more problems than the core leather goods division. A new CEO has been hired from the outside to develop a new strategy for business.

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business(es), and documents its relevant past. In this step will be included summaries of financial results, a strategic balance sheet and a description of key product and customer segments, with particular reference to the profits generated in each area. The expanded versions of traditional models of business analysis, the 7C’s or 9S’s, can provide a useful checklist to identify the most salient points.

I.1. Point of Departure b. Business definition Richesse is in the business of designing, manufacturing, distributing, servicing, and marketing one of the world’s leading luxury watch brands. In addition, Richesse owns and operates an Italian leather goods business and a property business unrelated to the luxury goods unit.

I.1. Point of Departure c. Financial results Asian Economic Crisis Acquisition of Perso

1200

US$ million

1000

Perso Watch Revenues

800 600 400

Poorly received relaunch EBIT

200

PAT 1980

Current year

193

I.1. Point of Departure d. Customer matrix * Product sales/ service $ mm

Total sales %

Pre-tax profit $ mm

Total profit %

Core Collectors

400

European men 4060+

190

40

62

41

Mostly European – need to identify and work with via direct outlets

19

30

20

Losing to Zurich-Swiss (leading competitor)

European men 2040

50

5

9

6

Losing to Sportius (leading competitor)

European women

50

5

8

5

Weak range and low brand presence

Asian

100

10

10

7

Price pressure

American

200

20

30

20

Flat sales – lack of brand excitement

Third Party service

10

1

1