The Timeless Principles of Successful Business Strategy

Management for Professionals

For further volumes: http://www.springer.com/series/10101

.

Eric Viardot

The Timeless Principles of Successful Business Strategy

Dr. Eric Viardot EADA C/Arago´ 204 0811 Barcelona Spain [email protected]

ISBN 978-3-642-21235-2 e-ISBN 978-3-642-21236-9 DOI 10.1007/978-3-642-21236-9 Springer Heidelberg Dordrecht London New York Library of Congress Control Number: 2011934037 # Springer-Verlag Berlin Heidelberg 2011 This work is subject to copyright. All rights are reserved, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilm or in any other way, and storage in data banks. Duplication of this publication or parts thereof is permitted only under the provisions of the German Copyright Law of September 9, 1965, in its current version, and permission for use must always be obtained from Springer. Violations are liable to prosecution under the German Copyright Law. The use of general descriptive names, registered names, trademarks, etc. in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. Cover design: eStudio Calamar S.L. Printed on acid-free paper Springer is part of Springer Science+Business Media (www.springer.com)

Acknowledgment

I would like to thank Jerome Thamungruxsat for his dedication to carefully review and edit the manuscript of this book. I want also to thank Michael Bursik and the rest of the team at Springer for giving me the opportunity to have this book published with a complete creative freedom. Finally, I want to thank my wife Anne for her patience and her faithful support in writing this book.

v

.

Contents

1

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

2

Strategic Design . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.1 An Agenda . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.2 A Compass in a Tornado . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.3 A Filter for Selecting Development Paths . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.4 A Unifying Cement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

3 4 5 6 7

3

Customers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.1 The Importance of Customers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.2 The Principle of Understanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.3 Needs and Wants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.4 The Principle of Focalization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.5 The Choice of Customers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.6 The Value Equation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.7 Benefit, the Central Core of Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.8 Loyalty . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.9 Communicate with the Customer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

9 9 10 11 12 13 14 15 16 17

4

Environment and Competitors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.1 Political Context . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.2 Economic Environment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.3 Socio-cultural Environment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.4 Technology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.5 Ecological Constraints . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.6 The Ethical Imperative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.7 The Principle of Permanent Monitoring . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.8 Competitors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.9 Identification of Competitors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.10 The Actions Against Competitors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

19 19 20 20 21 21 22 23 24 24 26

vii

viii

Contents

5

Capabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.1 Resources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.2 Skills . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.3 Identifying Capabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.4 Utilization of Various Capabilities Available . . . . . . . . . . . . . . . . . . . . . . . 5.5 Resource Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.6 Managing Skills . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.7 The Principle of Alignment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.8 The Principle of Capabilities Rationing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.9 The Principle of Valorization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.10 The Principle of Constant Flexibility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.11 The Principle of Singularity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.12 Capabilities Development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

29 29 30 31 31 32 33 33 34 35 36 36 37

6

Structure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.1 Functional Structure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.2 Divisional Structure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.3 Holding Company Structure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.4 Matrix Structure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.5 The International Organization: a non - issue . . . . . . . . . . . . . . . . . . . . . . . . 6.6 Cross-Functional Teams . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

39 40 40 42 42 43 43

7

Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.1 Autonomy in Decision Making . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.2 The Principle of Efficient Simplicity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.3 Hierarchical Frugality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.4 Continuous Learning . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.5 Outsourcing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.6 Accountable Control System . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

45 45 46 48 48 49 49

8

Innovation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.1 Different Types of Technological Innovation . . . . . . . . . . . . . . . . . . . . . . 8.2 Different Types of Organizational Change . . . . . . . . . . . . . . . . . . . . . . . . . 8.3 The Reasons Behind Technological Change . . . . . . . . . . . . . . . . . . . . . . . . 8.4 The Origin of Organizational Change . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.5 Preparing for Change . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.6 Necessary Changes: Degree and Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.7 Change and Available Resources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.8 Capabilities That Must Be Preserved . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.9 Timeframe for Change . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.10 Employees’ Motivation to Change . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.11 The Leaders’ Ability to Lead Change . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.12 The Credibility of Leaders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.13 Support from External Consultants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

51 52 52 53 54 54 55 55 56 56 56 57 58 58

Contents

ix

9

Maneuvering Change . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.1 Implementation of Technological Changes . . . . . . . . . . . . . . . . . . . . . . . . . 9.2 Development of Technical Innovation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.3 Implementation of Organizational Changes . . . . . . . . . . . . . . . . . . . . . . . . 9.4 The Principle of Systematic Experimentation . . . . . . . . . . . . . . . . . . . . . . 9.5 Controlling the Operational Timetable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.6 The Appropriate Maneuvering Style . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.7 A Clear, Appropriate and Reassuring Communication . . . . . . . . . . . . . 9.8 Political Agility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.9 Tenacity in Fulfilling the Change . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.10 Responsible Conscience . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.11 Change in Times of Crisis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

61 61 63 64 64 65 66 67 68 68 69 69

10

Growth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.1 The Causes of Growth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.2 Increasing the Number of Clients . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.3 Increasing Attractiveness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.4 Exploiting an Excess of Resources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.5 Achieving the Economies of Scale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.6 Dealing with Risks Within the Environment . . . . . . . . . . . . . . . . . . . . . . 10.7 Responding to Shareholders’ and Managers’ Desires . . . . . . . . . . . . . 10.8 Specializing in the Current Market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.9 Diversification of Solutions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.10 Diversification of Customers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.11 Total Diversification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.12 Growth Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.13 The Limits to Growth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

73 73 74 74 75 75 76 76 77 78 78 79 80 81

11

Execution and Humility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.1 Quality of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.2 From Success to Failure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.3 Avoid Being Blinded by Present Triumphs . . . . . . . . . . . . . . . . . . . . . . . . . 11.4 Accepting Decision Sharing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.5 Organizing the Succession . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

83 83 84 85 85 86

12

Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89

.

Chapter 1

Introduction

This book is intended for those who run or want to run a business whatever its size or activity. Indeed, we have not yet fully recovered from one of the most severe economic crisis in recent history. Lots of companies were forced to declare bankruptcy and cease their activities altogether: At the same time, in order to survive, many other firms had to resort to seeking help from their national governments. All this happened because a number of top managers, particularly those of large international banks—but they were far from being the only ones—forgot the basic strategic rules and steered their companies towards disaster or a total collapse. Greed facilitated by almost free credit, irresponsibility in accounting practice, lack of ethics or project, lack of respect for customers lured through inadequate or misleading product offering, underestimation of risks, complex and burdensome structures, lack of anticipation for changes in the environment. Consequently, this is a good time to return to the essential principles of strategy, by invoking lessons learned from academic research, from works undertaken by large consulting firms on strategy, as well as the practical experiences of companies that have stood the test of time. Lessons from these latter sources are fundamental to the premise of this book, which considers that the purpose of strategy is not simply to win but also to endure. In this regard, companies are like empires. The most spectacular are not necessarily the most efficient or the longest-living. In fact, the empire of Alexander the Great lasted only 12 years, and those of Hitler and Napoleon I both fell after 19 years. Conversely, the Ottoman Empire lasted for nearly 650 years, the RomanByzantine Empire survived for almost 1,500 years and the Empires of China and Japan even longer. Even if their place is sometimes discreet in history books, they left their mark on mankind. Similarly, sustainable companies do not always create a buzz even though they are present and numerous. Today some 1,700 companies worldwide have been around more than 150 years. Among these are 250 companies that date back to more than 400 years. Some have remained modest in size while others have become E. Viardot, The Timeless Principles of Successful Business Strategy, Management for Professionals, DOI 10.1007/978-3-642-21236-9_1, # Springer-Verlag Berlin Heidelberg 2011

1

2

1 Introduction

extremely powerful multinationals. The fact that they could survive and prosper is the best example of their strategic success in contrast to many others that have perished. Analysis of these sustainable firms is central to this book’s second premise: strategic success is built on rational audacity. However, in recent years, under the guise of growth, of increasing shareholder value, of leadership assertion, of adaptation to hyper-competition, and for many other reasons; leaders have been encouraged to take risks and to not hesitate to be adventurous. This attitude has its limits and its consequences can be witnessed in the defeat of many firms. Of course, together with imagination, audacity is an essential quality of leadership. It allows leaders to achieve their dreams and gives them the moral boost needed to face adversity. But it must be tempered with the circumspection that encompasses a virtue and a practical necessity for the strategist. Such prudence is not fear but rather reflection on one’s opponent and the forces that may oppose one; it is a set of boundaries and contained therein are choices to protect the interests of the firm. It instructs us to avoid engaging recklessly in any action and, if one comes along, to prepare extensively. It imposes planning for adequate and appropriate resources. It requires collecting information to avoid pitfalls. It is the source of a deliberate strategy and a premeditated and safe progression. It imposes a sense of anticipation as in the game of golf where every shot is played out in anticipation for the next shot. Rational audacity thus conveys leaders of sustainable businesses to act in a different way than to those of most firms and away from the usual management models, as this book will illustrate. For example, these business leaders can both dream and take risks while retaining a sense of reality by devising experiments that are contained yet systematic. They look for growth opportunities in times of crisis and control their costs in the growth phase, while other companies, wrongly do the opposite. Corporate strategy is commonly defined as the art by which leaders determine coherent actions and allocate resources that engage the company in the long term to achieve a sustainable profit. Strategic choices are the fruits of leaders’ analysis, experience, and of the company’s culture and its confrontation with the complexity of the outer environment, or within the firm if it is large in size. According to this definition, we detail the timeless principles of success along the main components of business strategy which are strategic design, customers, competitive environment, capabilities, structure and its operation, innovation management, growth and execution of operations. In each lesson, we illustrate our remarks by referring to sustainable firms without mentioning names. This choice is deliberate because we do not want to isolate any particular firms and single out a strict example to follow since one of the secrets of sustainable businesses is to have no reference model.

Chapter 2

Strategic Design

Sustainable businesses have an ulterior purpose beyond money. For them, profitability is a means but not an end. In fact they know that, apart from financiers and some shareholders, few are in love with profits. To sustain, they envision the world differently and they share that dream with their customers, their employees, future employees and all those who at one time or another are in contact with them. They have a great plan. They lay it out as a mission, an ambition or a business project. Beyond the name, this design reflects what the company wants to bring to the world, sometimes with a social, political or ecological connotation. It comes with the definition of core values to be respected to achieve that end. It’s more than just a vision, because it does not stagnate as mere illusion but emerges as reality. Large corporations in the past were formed with the goal of making electricity or water available to the public. Today, corporations want to transform the world by diffusing computer or mobile phone technology to reach the maximum number of individuals on the planet. But it is not always about changing the world or ushering in social upheavals. Sometimes the strategic design simply revolves around everyday life. Many business successes are built on the simple desire to bring more beauty, ease and convenience to customers by offering hair dyes, disposable pens or rubber tires. In all cases, the ambition of sustainable businesses is defined in relation to their existing or future clients. Indeed, a strategic design based on the mastering of a particular resource or in reaction to competitors rarely resists the ravages of time. Thus, some corporations set their ambitions to become the champion or leader of a new technology often presented as revolutionary. It is a worthy but risky goal. Obsessed with mastering the technology, these companies neither want to know about nor are they interested in alternative solutions. Soon their technology lags behind others and they eventually disappear. Such is the fate of many ‘high tech’ companies, even when they have acquired a large size. Being ahead of their competitors is not an end in itself except for those with a full-scale competitive spirit. Once this goal is achieved, the only remaining objective is to stay on top as number one. This can help motivate some employees who E. Viardot, The Timeless Principles of Successful Business Strategy, Management for Professionals, DOI 10.1007/978-3-642-21236-9_2, # Springer-Verlag Berlin Heidelberg 2011

3

4

2 Strategic Design

are proud to work for the “best” company in the sector. However, other employees need something more exhilarating for them to stay with the biggest firm in the sector. Size is not everything even if the media or some financial analysts and consultants frequently measure the strategic success of a firm in terms of its magnitude and sales volume. This is an oversimplified shortcut that ties a firm’s performance to its capacity to generate revenues. It’s a worthy indicator but it’s not always the most relevant to evaluate the success of a company and its ability to survive. Other data are also appropriate to monitor, such as profitability, quality of solutions, customer satisfaction and loyalty, and the internal atmosphere that makes a company a desirable workplace for its employees. Businesses that succeed in the long-run generally have a large-scale, long-term project. This presents numerous advantages for their leaders. First, a grand design provides a framework to clarify priorities, punctually structuring transactions to be achieved. Next it is a compass that indicates the direction for all employees. It is also a sieve that helps executives sift for development opportunities. Finally, it is the cement that unites different functions and departments which can be quite heterogeneous within a firm.

2.1

An Agenda

The foremost advantage of having a corporate ambition beyond the simple quest for profitability is the ability to guide the company towards long-term actions. When leaders know where they want to go and what they want to do, they can organize themselves in time. Choosing a launch window is a strategic decision by nature. To define their investment policy, leaders must decide when they want to make profits: now or later? If it is now, that means prioritizing immediate return on investment, raising share price and possibly market share. If later, then it means seeking for the largest market share, investing in innovation and quality and then considering the return on investment that ensues. It also helps reduce capital requirements by increasing the productivity of exploited assets. Experience shows that companies with a long-term vision always prevail over those that emphasize short-term profitability. We have seen recent examples in such industries as automobile, electronics, air transport and banking, to name a few. Naturally this grand design must be supported by the shareholders and managers at the same time. Some investors such as pension funds, families or sovereign wealth funds are willing to wait a long period for a return on their investment. They readily adhere to a strategic plan and are convinced of its impact to guarantee the long-term success of the company.

2.2 A Compass in a Tornado

5

On the contrary, other types of shareholders, generally investment or saving funds, want quick financial returns. They are often responsible for many bankruptcies because they push leaders to sacrifice long-term development for short-term profits. These investors are rarely found in the capital of sustainable businesses because leaders take greater care in distancing them or not giving them the majority of votes in decision-making. A good way to stay is to choose the shareholders and to build a strong relationship with them. The strategic plan needs to be executed at the right time by the head of the company. It’s easier when the project is orchestrated by one individual, especially if it’s the founder, as opposed to several people who may have different ambitions. It’s also more difficult when the firm is controlled by managers whose compensation is based primarily on short-term success, as with stock options. This often occurs when leadership changes hands too quickly, forcing strategic plans to shift direction according to newcomers; in this instance, these plans can be confusing for employees as well as customers or shareholders. Thus, sustainable businesses change their leaders with less frequency. Usually they remain in place. In addition, these companies plan and organize the mode of power transfer from one leader to another. This allows them to avoid rifts or abrupt changes of strategy that could destabilize their structure. It also ensures a continuity of purpose and action to achieve the company’s ambition.

2.2

A Compass in a Tornado

A grand design is also useful in the short-term to channel energies in the right direction, especially in turbulent periods of growth or crisis. In periods of strong growth, the business plan fully plays its role as a compass. In some companies that grow rapidly, it is not uncommon to see more than half or up to three-quarters of employees with less than 1 or 2 years of seniority. For a small company, the integration of new hires is manageable because they represent only ten or a score of new people a year. They can be on-boarded by managers and more experienced employees who already know the company. But the situation would be much more complex for large firms that annually recruit several thousand new employees in ten different countries throughout the world. In addition, when they are no longer able to find the right profiles internally, they recruit externally for managers to supervise these new hires. However, these external managers seldom master immediately the culture of the company they have just joined, not any more than the principles and values they need to communicate to their subordinates. This is when the corporate design plays a key role in structuring the behavior and roles of all new employees. Indeed, it helps them to navigate their routine activities. This is particularly valuable when the organization has not had time to fully

6

2 Strategic Design

implement all its operational processes, as is always the case in periods of strong growth. Experience shows that only firms with a grand plan navigate successfully through periods of strong growth. Others have lost their identity and become disjointed due to growing up too fast and having integrated too many different elements in divergent directions. To overcome the difficult conditions in periods of crisis, it is extremely useful to have a long-term project. This serves as a compass for the leaders to focus on the essentials and to find or redefine the company’s core business. All firms know that, at some point, internal crises arise, for example, from personal conflicts or arguments among different stakeholders, shareholders and employees. In this case, the reminder of having a great common purpose acts as a catalyst in bringing various parties to their sense. It joins together the energies and tensions towards achieving a collective goal, greater and nobler than the aspirations of each person or each group. Likewise, when under the pressure of emergency to halt certain activities or sell certain assets, the strategic plan helps their leaders in making choices so that they do not sacrifice unduly those resources that will be needed later on to accomplish the plan once the crisis is over. Having a project is also extremely important to make the most of all tactical opportunities as they arise in a difficult environment. Sustainable businesses are those that know how to make good use of economic crises and do not let themselves be destroyed by them. As such, during the Great Depression of 1929, suppliers of industrial products suffered, but companies that made consumer goods for mass consumption grew together with campsites, air transport, radio and cinema. Similarly, after the crisis following the dot-com bubble burst, many companies went bankrupt whereas many others took the opportunity to strengthen their position in their markets.

2.3

A Filter for Selecting Development Paths

Chief among the roles for leaders is to focus on development opportunities research. One must not be confined to dealing with day-to-day problems or else one risks spending valuable time extinguishing fires without improving the organization. From this perspective, having a strategic plan in place narrows down the choices that can otherwise be tough to make when there are opportunities for diversification. It always seems enticing to develop a new activity because it is requested by customers, prompted by public authorities, or already penetrated by competitors. But the final decision criterion is the potential contribution of this new activity to the attainment of the firm’s strategic design.

2.4 A Unifying Cement

7

A strategic plan also allows leaders to set up a framework for growth, choosing between internal development, partnership with third parties, or acquisition/merger with outside companies. In each case, it assists in evaluating the best solution to help achieve the company’s ambition, given the available resources. This applies in any circumstances. In times of growth, acquisition opportunities are plentiful and can make easy money. But one should not abuse them and risk a fatal demise from acquisition indigestion. But a period of economic crisis is also an opportune time to buy lesser or slowgrowing rivals to gain market share. However, as resources are limited in times of scarcity, leaders of sustainable companies must focus solely on the opportunities that contribute fully to the success of their strategic design. This prevents them from dispersing and squandering scarce resources.

2.4

A Unifying Cement

A strategic plan also serves to unite different parts of the company and have them work together to contribute to the collective success. Contributing towards a common dream is often the only link connecting the various divisions of highly diversified conglomerates. Indeed there is no presupposed link between a construction activity and a television channel, between the manufacturing of refrigerators and that of aircraft engines, or soft drink sales and rail services. When these trades belong to the same company, they often engage in fierce battles for the best resources or the best skills. The lack of common purpose can aggravate into fratricidal conflicts in which division directors spend more time quarreling among themselves than fighting against external competitors. They have it their ways and look after their future alone. The result then is a more or less rapid disintegration of the conglomerate. This equally applies to companies that are not as diversified. There is always the risk that functional departments lock themselves in an individual logic of specialization; they consider only their own objective (maximizing the revenue, on-time production, achieving maximum profit, etc.), which is sometimes contradictory to that of other departments. However, as in any team sport, it takes more than a small group of brilliant individuals with their respective specialties to succeed. Often in sports competitions, teams of average but motivated players outperform teams of outstanding talents. This can be explained by the good coordination that exists among individuals, which is important because it yields collective efficiency. But it is not everything. The shared desire to succeed in a common goal unites and brings together the energy that each member deploys to achieve the common goal. It is thus the company’s strategic design that holds its various departments and activities together.

8

2 Strategic Design

Ultimately, the inner strength of a company to live and grow for years or even centuries, is the result of a dream come true. This dream thrills the employees, the investors and the partners of the firm. But this may happen only if it touches customers, since nothing is possible without them.

Chapter 3

Customers

A customer or client is defined as an entity, individual or organization that purchases a product or service from a firm in response to a need or a want. In Latin cliens means a person under the protection of a wealthy patron, patronus. Then by extension, customers are all those who entrust their interests to a businessman. But the power relationship between customer and “protector” has been reversed since the end of the reconstruction period following World War II. Today, the protector has become a supplier. In an economy where supply far exceeds demand, it is the company that needs customers and not the reverse.

3.1

The Importance of Customers

For any business, customers are as vital as the air we breathe. Because, without customers, the business may not survive, grow or be sustained. By purchasing products and/or services, customers assure revenues. More so they provide the cash flow essential for the firm’s operations. They also participate in the firm’s growth and profitability. As a matter of fact, the more they buy, the more the firm’s market share and dominance increase over its competitors. At the same time customers allow the firm to achieve economies of scale, building upon profitability or allowing price cuts to reach new buyers. Finally, regular customers constitute a key asset to ensure corporate sustainability. First, by definition, loyal customers will return in repeated intervals to the same merchant. They typically spend more than average, buy more often and promote the company’s offer to their friends and loved ones, who may potentially become new customers. Having loyal customers as capital ensures long-term revenues, market share and profitability, all the essential conditions to grow sustainably.

E. Viardot, The Timeless Principles of Successful Business Strategy, Management for Professionals, DOI 10.1007/978-3-642-21236-9_3, # Springer-Verlag Berlin Heidelberg 2011

9

10

3 Customers

Sustainable businesses therefore do all they can to always have customers. They love their customers and the reverse is also true. These businesses understand, listen, pamper and inspire dreams. For this reason, they constantly study the characteristics and expectations of all existing and potential customers. That’s how they discover that markets are rarely homogeneous. Be they individuals or organizations, customers rarely share the same expectations, needs or wants. Sustainable companies segment their markets by identifying sub-groups of similar customers. Then they apply the principle of focalization to avoid spreading themselves too thin. Consequently they set priorities of customer groups to target. But they do not stop there. Having produced and sold the best solutions tailored for these targets, they then make every effort to pamper existing clients to keep them as long as possible.

3.2

The Principle of Understanding

Customer study makes an important distinction between consumers and businesses. Indeed, even if these two categories sometimes buy similar products, their characteristics and modi operandi are radically different. Thus, individuals usually take their own decision to buy a product. Sometimes they may do so only by taking the advice of a family member. On the other hand, in a company, it is rare to have a single decision maker to buy a product. There are certainly some exceptions like small business owners or end-users in large firms when product cost is low. But, in general, the decision to purchase a product or service is made by a professional buyer. This process takes into account user needs and possibly expert recommendations in the case of complex solutions. If the amount is high, the decision entails involvement from the Finance Department or the Chief Operating Officer. For this reason, impulse purchases, made on the spur of the moment, are rare for companies while they are quite common among individuals. Besides, volumes, rhythms and values of the products purchased by businesses are generally much higher than those made by an individual. Behaviors are also different. Consumers often buy for emotional reasons and they are not always very rational. They are sensitive to brands. Professional buyers, on the other hand, esteem efficiency, performance, or profitability of the products rather than appearance. They are less affected by the sentimental or humorous aspects of the solution they seek. They are also more demanding on the after-sales service quality, especially for products or services that can entail a significant loss of revenue. Consumers are also attentive to after-sales service but do not possess the same degree of urgency or requirement vis-a`-vis suppliers. Over time, many sustainable companies find themselves serving two types of customers: individuals and businesses. But they know how to distinguish between

3.3 Needs and Wants

11

these two groups by proposing different solutions and avoiding mix-ups between the two segments. It may sound easy, yet many companies do not know how to do it. Some have ruined their business-to-business distribution channels by selling to private consumers identical solutions at lower prices. Their industrial customers bought directly from retailers instead of their usual specialty distributor. On the other hand, some mass consumption businesses failed to maintain its presence in industrial markets even though they succeeded in distributing their consumer product to the general public. Normally, this occurs when they fail to adapt to demands of other businesses by refusing to implement, for instance, a dedicated commercial structure.

3.3

Needs and Wants

Concerning companies that are successful in converting and retaining customers, their secret lies not only in responding to the needs but also to the wants of their customers. For not only do customers have different needs, they also respond to a particular need differently. Need and want are two different concepts. A need arises from a state of craving (to be hungry, thirsty, healthy, wealthy, or to yearn for recognition or to be loved, etc.). A desire—or want—corresponds to how customers wish to meet their needs. For example, faced with the need to drink, an individual may choose between an alcoholic or non-alcoholic drink; if he opts for the latter, he may prefer drinking fruit juice, soft drink or water; if he wants water, it can be still or sparkling water, etc. Facing one same need—in this case, to be thirsty—, the different wants generated will belong to different groups of customers depending on what they want to drink. Identifying these segments of customers and gaining insights into their expectations are essential. Indeed, according to their needs, each group of customers may assign different values to products offered on the market. Sustainable businesses have a long lasting experience in this matter. When they turn to the mass consumption market, they identify customer segments of consumers according to the demographics (age, sex, etc.), geographical, economic, social and cultural characteristics. They also use behavioral criteria that allow them to classify customers according to how and how often they use the product, or according to their attitudes or expectations towards it. It is through this kind of study that sustainable firms have seen in recent years the gradual decline in purchasing power of middle class. This resulted in a significant decline in sales of mid-range products. Conversely, products or services that are either low-price or top-of-the-line have enjoyed a strong growth, at least until the crisis of 2009.

12

3 Customers

These companies also noted that the time spent on buying a product has become a prominent choice factor for consumers in developed countries. Today time plays as important a role as price (or cost) in the purchasing decision. Consumers do not want to lose time buying certain categories of products or services that they can easily and quickly buy on the Internet or in distribution centers closer to home. Some firms are able to understand and anticipate before others the evolution of their clientele. For example, they have successfully developed Internet solutions that add to their traditional activities while others have been slow to react. Some have suddenly gone bankrupt because they did not understand these changes among their customers; they have not evolved and were overtaken by competitors that were more in tune with customer expectations. A segmentation approach also applies to professional markets. Customer subgroups sharing similar needs are identified either by their characteristics (size, location, activity, type of organization), or according to their behaviors (product usage, method of purchase, benefit sought or attitude towards the product). Market segmentation is a necessary step in comprehending markets. It is a prerequisite for applying the principle of focalization.

3.4

The Principle of Focalization

Sustainable businesses focus on a limited number of segments. They choose a specified number of targets rather than indiscriminately taking a global pool of customers. The reasons are manifold. First, they learned that it is an error to try to reach all customers with a single type of offer. In reality, in this case, it is impossible to meet the diverse needs and wants expressed by multiple customers. Some companies try to offer the same product to all customers. But this model works only in a situation of monopoly where there are no competitors, thus only one viable option for customers. Apart from cases of regulated monopolies, there are few situations where a company will never meet a competitor capable of proposing a similar or even better solution for specific customer segments. Gone are the days during the 30s when a famous American industrialist said that his customers could have a car painted any color they wanted so long as it was black. Today overproduction is omnipresent; it is the customers who decide what they want to buy, not the suppliers. Another justification to abide by this principle of focalization concerns the limited resources of a company. No company today is rich enough in resources to handle all markets at once. This is why public service monopolies, such as electricity, are backed by the state to secure infrastructure financing and operation of services, because only the state has almost limitless resources.

3.5 The Choice of Customers

3.5

13

The Choice of Customers

One of the secrets of sustainable business success is to select profitable customers and avoid others. It is not uncommon to see situations where half of the profits come from only 10% of the customers. However, what really counts for the long term future of a firm is not revenue but profitability. Profitability truly measures effectiveness in making money by way of spending less than what is earned. Profitability also secures investment that will in turn allow the company to ensure its future by developing and adapting to changes in customer base and in the environment. That’s why sustainable corporations measure the performance of their sales network in terms of margin rather than revenue. Yet many companies are content to judge the success of their vendors or their distributors based on business volume concluded, i.e. the number of customers multiplied by their unit purchases. In this game, it is easy to boost sales while still losing money. But in the long term this can only lead to bankruptcy. Sustainable firms analyze the profitability of their customers. They do this by considering the products purchased by a customer altogether and not product by product. Sometimes a product is not profitable, but it generates additional purchases of other extremely profitable products. This applies, for example, to spare parts or maintenance services. Profitability from a customer includes all the goods and services purchased in the long run over a period of time. Sustainable companies are aware of the long-term value of their customers, measured by the number of annual purchases made by a customer multiplied by the number of years that the customer will be buying from the company. The sum of these accumulated earnings that make up the value of customer equity, substantiating a loyal and stable customer base, also represent a veritable asset for a company, its employees, real estate and its various competences. With few exceptions, sustainable companies do not trade with non-lucrative customers. For they bring little income and consume valuable resources that could be better used to satisfy interesting customers. Non-lucrative customers are handed to competitors who strictly reason in terms of customer volume rather than commercial viability. It keeps them busy and weakens them. The only non-lucrative customers to retain are opinion leaders. Because, when they buy a product, other customers imitate them. These are stars, elitists, and sports champions with whom the general public identifies. They are also “pro-users” who use the product intensively such as sports professionals in the case of athletic equipments; and their expert opinion serves as a reference to guide other customers in the market. Some companies are also “pro-users.” They constantly test the latest innovations and their authoritative opinion is used by other companies belonging to the same sector. The return from opinion leaders is calculated by considering the total volume of business generated by their reputation and not just from the products they purchased

14

3 Customers

or the costs associated in providing these products. In reality, they are not just mere customers, but also communication and sales media, so they should be treated as such. Serving non-lucrative customers is suitable for a short period when a company wants to earn market share by cutting price to destabilize the competition. This is also applicable when introducing a new product to augment its acceptability. A low price—whether “loss-leader price” or “penetration price”—can promote trying out and adopting the product. But it is a risky strategy, even for a short time. Indeed, experience shows that it is usually difficult to raise price without losing customers who do not accept this increase and stop buying the product. The principle of focalization does not preclude paying attention to other segments that were not originally targeted. Several companies have realized that some clients buy services and products that were not originally designed for them. For example, many in their 40s buy products designed for young people. Also, many men use the beauty products of their wives. Finally, some retirees have an inclination for cheap, small cars conceived for a younger market. Thus sustainable companies are also attentive and responsive to this group of unintended customers. These firms constantly listen to the market. They visit retailers, surf the Internet, and go to places where their products are used in order to know who their customers are. They realize they can never know enough about their customers. This is the key to their success, because they do not linger on past solutions to keep up with their ever-evolving customers.

3.6

The Value Equation

Another success secret of sustainable firms is their ability to target their customers based on the value of the products they are able to provide. In order for customers to be willing to pay a certain amount to acquire a product or use a service, it is necessary that the offer holds a value in their eyes. This value equation can be formulated as follows: V ¼ (B þ Ca)  (P þ Cp). The value expected by the client (V) is composed of benefit (B) that the product gives the customer coupled with competitive advantage (Ca). But this value (B þ Ca) is reduced by product price (P), and it is also necessary to subtract the physical cost of purchase (Cp) which includes time spent with the order, delivery time, installation time, installation conditions, etc. It can be deduced, among other things, that when Ca is negative, the customer will buy from the competitor. Moreover, if the value (B þ Ca) is less than the total cost (P þ Cp), the customer will not buy in any case; yet a low price (P) can be neutralized by a high physical cost (Cp) which then removes any interest in the product or service.

3.7 Benefit, the Central Core of Value

3.7

15

Benefit, the Central Core of Value

The proposed benefit to the customer is the determining factor in the value equation. It is benefit that initiates the customer’s desire to purchase. Leading companies also know that this proposed benefit must always be considered from the customer’s perspective, never that of the firm. A famous shoe designer, founder of one of the largest companies, once said: “I do not sell shoes, I sell beautiful feet.” Customers rarely buy a product for what it is but for what it brings. They buy pleasure, health, recreation, the opportunity to rejuvenate, beautify, to be different or to do as everyone else, to escape the routine, to discover new things or to enjoy being at home. For some customers, the product value is not merely limited to material gain, but rather the final purpose of purchase. The question no longer concerns what the product brings to the customers but why they need it. This explains the success of fair-trade products built on transparency and respect for independent producers to achieve greater equality in global trade. Thus, the same product can be a source of different interests for different categories of customers. Some prefer convenience or design while others appreciate ease of use or time saving, fun or innovative aspects, elegance or simplicity, and finally some will be sensitive to the product’s social or ethical impact. Services have different characteristics when compared to products. Consequently, their nature determines a unique value for customers. First, services are often intangible for customers. Unlike products, customers cannot touch services, at least not directly. For example, a trip has no physical characteristic except the time spent in moving from one point to another. Transportation mode—bicycle, train, car, plane, etc.—transforms it into reality, although the primary value of a journey is the destination. For what good is a cheap or luxurious flight if the travelers do not arrive at their final destination? Moreover, the production of a service is performed at the time of consumption. Unlike a product that can be consumed or used several times, consumption of a service—banking, tourism or beauty, for example—is unique. It is a singular experience, which eventually may be repeated although each time in distinct conditions. The value of a service can vary widely depending on the conditions under which the service is performed. Thus the value of a given meal in a restaurant varies according to the dish selection, the chef’s skill, the server’s mood and availability, or even the diner’s state of mind during the meal. Finally, unlike other products, services cannot be stocked. For example, unsold hotel rooms one night may not be sold the next day, even with a rebate. Service availability is directly dependent on the production infrastructure available at a given moment. Thus the value of a service for customers may decrease greatly when there are bottleneck issues at peak times. There are exceptions for some sporting events or concerts of popular artists; on the contrary, in these cases, the excitement and frenzy

16

3 Customers

are parts of the experience of participating in an event perceived as rare and exceptional. To measure the value sought by customers, sustainable companies have a simple method: they ask them what they want. Interviews can be formal or informal, short or long. Some interviews are conducted with the aid of questionnaires to be filled quickly by a large number of individuals; others take the form of semi-directive discussions with a smaller pool of respondents lasting 2 or 3 h. For years, surveys through interviews have been the preferred source of information. But they have one big drawback: sometimes the respondents evade telling the truth or they forget what they do exactly. In fact, there is often a gap, willful or not, between the response of customers and their actual behavior. Aware of this bias, sustainable companies now go beyond market research and rely on declarative data. They observe directly their customers’ behavior when they buy at the point of sale. They even go to customers’ homes to examine the actual conditions of product use. The results of these in-situ investigations are sometimes far from what clients describe in interviews or questionnaires. The most advanced companies act in the same way for their products in development. Before even launching them on the market, their marketing research departments have the new products tested by users and not just by laboratory researchers. It is in the actual context of use that these companies can actually understand the concrete value of their products as seen by the customers. It also gives them the opportunity to find ideas for additional benefits which could be offered to the customers.

3.8

Loyalty

Sustainable companies are not satisfied just responding to their customers’ expectations with an adequate offer. They know how to keep them for a long time. This distinguishes them from their more short-lived competitors. They are aware that any setback in a purchase may lead a customer to switch suppliers. For, today’s customers are becoming more educated and less faithful. Therefore they will ensure that the products they sell maintain a constant quality and homogeneity. They also bring a rapid and effective solution to any problems their customers may have. To achieve this, they mobilize adequate resources combined with impeccable organization that performs all operations with minimal errors. They also develop one or more brands with a strong image to build customer loyalty. Indeed brand brings a special identity to a product or service with a name, logo, slogan and color. Brand is also an opportunity to inspire clients and give added meaning to their purchase. It helps create a psychological value to the product. A famous publicist

3.9 Communicate with the Customer

17

compared brands to movie stars, noticing that each brand had its own personality in the minds of buyers. A brand creates a unique and comfortable involvement for customers. Having their favorite brand, they no longer need to ask questions when buying a product of a particular category. A familiar brand is also reassuring for customers when they know it well. Last but not least, a strong brand image, clearly recognized, appreciated, and distinguished from others is an additional way to prevent customers from purchasing products from competitors with a less attractive image. It is no coincidence that, in times of crisis, thus of uncertainty, consumers prefer either low-priced or top-brand products. Woe betide those firms that do not provide one of these two types of products: they will be the first to lose customers and see their sales drop.

3.9

Communicate with the Customer

Sustainable companies know that they must communicate their brands widely to have a recognized and appreciated image. They do this not only through advertising but also on product packaging, distribution sites and through all the communication media that may be reached through public relations. All this is costly, but it takes time and money to establish a strong and sustainable brand, even if a hint of creativity may sometimes make up for a slight lack or resources. Beyond the brand, all possible points of communication with customers are essential to establish a long-term relationship. Any exchange with customers is a good opportunity to take advantage of their input, assessing their satisfaction, asking them which improvements or innovations they expect to see. “Autistic” and egocentric companies that ignore their customers never last long, even if they have a popular product at some point. Moreover the development of communication technologies provides increasing opportunities for interaction with the market. In the past a company could find out what buyers thought by asking its sales persons and distributors. Today, even without performing direct sales on the Internet, a company may interact with its customers by computer or cell phone, not only on its official website, but also through discussion forums or ‘social networks’ that now feed word-of-mouth information about every important happening in our society. Sustainable corporations have learned to communicate with their customers over a long period without seeming too artificial or tiring, taking care not to bore or irritate them. For those companies, to communicate means above all to listen and not just passing information to customers. Thus they maintain an interactive relationship with their customers, giving them many opportunities to provide feedback.

18

3 Customers

Regular satisfaction surveys are indispensable but insufficient: indispensable because they allow assessment of customers’ opinions; insufficient because they are mainly declarative and not based on actual observation. Responding to product problems and answering to customer reviews are yet another opportunity of exchange. These transactions are generally conducted by after-sale service. But various studies show that this type of exchange is equally ineffective. Indeed, many customers “vote with their wallets”: when they are not satisfied, they do not spend time complaining, and just switch providers. This is particularly true for low-price and low-involvement products or services. Sustainable companies establish communication plans which provide them with various opportunities to communicate regularly with their customers in order to maintain loyalty. The correct method is to pet them without spoiling them. Otherwise they would become too demanding and difficult to satisfy. Companies can give presents or make customized special offers at certain times of the year outside sales periods. They know how to surprise their customers without upsetting the product value characteristics that they are used to (low price, good quality, high performance, unique design, etc.). Above all, they take into account the opinions of customers to apply to all requisite changes to products or operations. To achieve this they rely on information processing systems powerful enough to store all the data, which can represent several million stored messages. They also have an internal unit that uses all the data cascaded from their customers to amend concretely the company’s processes and products. This skill is one of their secrets for differentiating themselves from competitors and sustaining despite their customers’ innate inconsistency. This is how they manage to transmit passion for their products or services through generations of users. This is one of their differences from the majority of their competitors that perish as soon as their regular customers disappear.

Chapter 4

Environment and Competitors

Surviving and thriving is primarily a matter of adapting oneself to one’s environment. Companies are not exempted from this rule. If the Earth is 4.5 billion years old, evolution took four billion years to find its way. The first recognizable form of life started to exist after 550 million years. Mankind emerged approximately four million years ago. As for the oldest companies still in existence, they are less than 400 years old. Then and now, the environment remains turbulent and changes constantly. In the beginning of this century, things have become more complex with the continued increase in human population, degradation of the biosphere, successive technological revolutions; qualitative and quantitative growth of our knowledge and the acceleration of globalized exchanges of all kinds. As good Generals recognize the field in which they will advance their troops, leaders know the external elements of their firms in order to adjust to them. They analyze the opportunities and threats that arise to better exploit or counterattack them. A variety of influences shape the environment in which any organization operates. But they are grouped into six categories: political, economic, sociocultural, technological, environmental or ethical.

4.1

Political Context

The political sphere exerts its influence on many activities of a firm: locally, regionally, nationally, and internationally. Government stability, fiscal policy, external relations with other countries, basic research or educational public programs, partial or total nationalization risks are elements that leaders take into account when evaluating the possible impacts of the political context on their businesses. This list is not exhaustive. Governments also exercise power through their spending programs. In developed countries, public expenses account for more than 20% of GNP. Such E. Viardot, The Timeless Principles of Successful Business Strategy, Management for Professionals, DOI 10.1007/978-3-642-21236-9_4, # Springer-Verlag Berlin Heidelberg 2011

19

20

4

Environment and Competitors

expenditure makes the national and local governments the most important clients for certain categories of goods or services. Political power can be seen through regulation, in the form of laws and decrees. Its ubiquity imposes itself on businesses, at least in developed economies. It includes, among others, administrative authorizations to conduct or start a business, setting up minimum wage, working hours, or hygiene and safety practice standards. Non-compliance with regulation can result in fines at best and at worst in the sine die closure of the business. This is an important environment element that sustainable businesses have learned not to underestimate. Finally, besides the authorities in place, the political influence of some very specific categories of stakeholders such as media, political parties and some particularly effective NGO’s must also be considered when it comes to mobilizing public opinion on a given topic.

4.2

Economic Environment

There exist macro-trends that affect all players in the economic game, whether they are customers, competitors, suppliers, distributors or other intermediaries. Leaders of sustainable companies try continuously to analyze these trends to better anticipate them. They also observe the economy for its possible cyclical downturn, and changes in interest rates, which largely determine consumers’ consumption and saving rates or other companies’ investment levels. They consider other significant data such as inflation and unemployment rates or retained earnings after taxes. Indeed, according to these parameters, the final consumers demand will be more or less important and therefore determinant of the market share. While performing these analyses, leaders of sustainable companies always keep in mind that, in the economy, everything that goes up must come down 1 day. They also know that when the situation deteriorates, there will be a springboard helping the economy to rebound. They neither sink into blind optimism nor exaggerated pessimism. They avoid herd behavior and constantly prepare their businesses for future developments.

4.3

Socio-cultural Environment

Social structures and cultural norms may also have a huge influence on the business world. Demographic change, education level, attitude to leisure, dominant values in society, changes in lifestyle and household size are all factors that influence the purchasing volume and especially the consumption patterns of individuals.

4.5 Ecological Constraints

21

In this area, sustainable companies have as a rule to consider demographic change as a long term, stabilizing and structuring trend, even if, on a day-to-day basis, individual behaviors are a reflection of humanity: changing, often unreasonable and almost always emotional.

4.4

Technology

The knowledge and technical processes applied to industry may also upset the traditional economic battlefield. This is the case today with the rate of diffusion of the Internet which has destabilized large companies, even whole sectors of certain industries that have failed to adapt fast enough. Information technology such as email and mobile phones has radically modified the way businesses operate today, allowing them to move faster, be more flexible and relocate more easily. But those who did not catch up with information technology were overtaken and many of them ceased to exist. However, if new technologies replace old ones, they do not kill them completely. The Internet has not made television obsolete, although it largely replaced it. Similarly, television did not put an end to radio, and radio did not kill the cinema or printed media. Some firms have prospered, knowing better than others how to maximize returns from their existing technology in the face of competition from a sea of new technologies. At any rate, sustainable companies understood that no activity is protected from technological innovation. They therefore seek first to identify technologies that will develop in the future. Then they measure the diffusion rate of these inventions according to the users’ adoption rate. Finally they evaluate the consequences of these developments, because it can range from a marginal effect to a complete sweeping change of how business gets done. When they decide to adapt to technological innovations, they do so in their own way and at their own pace.

4.5

Ecological Constraints

Respect for the environment is more pressing each day. The demographic growth combined with the current model of economic development exerts an increasing pressure over natural resources and the environment of our planet. Countless initiatives are taken to try to resolve this problem, both locally and regionally, or internationally. Accordingly, the UN is now promoting a sustainable development model that serves as a reference in international agreements and national legislation. Consequently, the regulations concerning waste management or pollutants emission into the atmosphere are becoming tougher and more stringent.

22

4

Environment and Competitors

Customers are also becoming more sensitive to the environmental impact from foods and how they are prepared. Now there is no sector that can afford to disregard the environment. This constraint will increase in the future because it represents one of the great challenges of this century, indeed the very survival of mankind is at stake. Because sustainable companies generally have a longer history than other companies, their leaders measure, perhaps more than others, their responsibilities in this regard. They are aware that we do not inherit the Earth from our parents but we borrow it from our children, as stated in a Native American proverb. It is no coincidence that these companies are pioneers in shaping corporate, social and environmental roles in various national or international committees.

4.6

The Ethical Imperative

The recent financial crisis is mainly due to excessive risk taken by some banks for the sole purpose of increasing their profits. This has brought the issue of ethics back to the table. Cynics will argue that it is only when business cycles switch, usually marked by an economic bubble burst, that ethics are brought back into fashion. We point fingers to those leaders who did not hesitate to breach ethical principles—and sometimes their legal obligations—to make more profit with the aim to increase their companies’ share price on the stock market and better satisfy their shareholders. Other bosses now swear to respect the ethical principles of doing business. But once the economy recovers, they forget their promises and embark again on the quest for profit at any cost. This observation, albeit effective, is misleading. In order to grow, companies must respect the laws and comply with the basic moral rules. If they fail, it may cost onerous fines, license suspension or a permanent damage to their reputation among their customers, their suppliers and other stakeholders such as bankers, government or the media. In addition, ethics is now more than a moral imperative. It has become a social necessity to be able to operate an increasingly specialized collective system since confidence in specialists is based on ethics. Besides, the most advanced firms do not limit their moral obligations to mere compliance with the law. They go beyond, considering that they have an ethical responsibility to their employees, customers, creditors and even civil society as a whole. This is especially true for large firms whose turnover exceeds the GNP of some countries. Often going beyond the local regulations, they refrain from certain practices for the sake of ethical principles. This concerns finance and accounting (insider trading, “creative” accounting, misuse of corporate assets. . .), human resources (employment discrimination,

4.7 The Principle of Permanent Monitoring

23

privacy violation, working conditions, fair labor contracts . . .), sales (false advertising, Ponzi schemes, price fixing cartels, corruption, . . .), production (unsafe working conditions, use of toxic or fake ingredients, testing of products on human beings or animals. . .) or industrial property (patent misuse to block competition, counterfeit products or trademarks . . .).

4.7

The Principle of Permanent Monitoring

The environment requires careful consideration because in reality, all elements are not independent. They are intertwined to make up a complex environment as hydrogen and oxygen combine to form water. For example, a political choice often has an economic component that can also influence social behavior. Similarly, technological innovation can pose ethical problems that will solicit political reactions, leading to new regulations with an economic impact. Moreover, this interaction is dynamic and evolves constantly. For as Sun Tzu reminds us: “just as water retains no constant shape. . .there are no permanent conditions.” Sustainable businesses thus permanently monitor the context in which they operate. This versatile complexity makes it difficult to analyze in detail all the microcomponents of the external environment. Efficiency dictates identification of the most important elements and their positive or negative influence on the company business today—and, more importantly, tomorrow—in order to anticipate the consequences. Thus, regarding political factors, some U.S. and European banks did not survive the recent financial crisis because they did not have good political contacts that might have prevented them from going bankrupt and evaporate. On the other hand, those with a good network of relationships avoided bankruptcy and even received government aid. In the economic area, large companies in the automotive field or air transport went out of business because they failed to anticipate the downturn when their factories had already reached overcapacity. In terms of technological context, the music industry has completely misjudged the destructive impact of the Internet and its development. Firms in this sector underestimated the Internet’s capacity to digitalize and remotely download music and video, rendering obsolete the traditional media such as CD’s and DVD’s. The consequences of this technical change have also been accelerated by the socio-cultural developments. In fact, children and teenagers now prefer computer games to traditional games. This development has also eliminated France’s major toy manufacturers. Understanding the environment enables leaders to adapt and anticipate its evolution to be well prepared. This is an extra skill towards becoming successful, especially when confronted with competition. It then follows an Arab proverb

24

4

Environment and Competitors

which advises: “If you find yourself at war, position yourself so that the sun and the wind are with you and not against you.”

4.8

Competitors

In the military, the competitors are the enemy against whom the strategists will lead their troops to triumph in the war. This analogy can be applied to business. Competitors are the antagonists that will prevent a company from achieving its objectives, thus threatening its survival. Competitors can steal customers, block access to certain distribution channels, bring better quality or cheaper solutions, or take the best suppliers, etc. Accordingly, to survive and prosper, a business must maintain dominance, relative or absolute, over its competitors. Otherwise, it will be crushed and disappear, either being bought by a competitor, or terminating its activity and liquidating its assets. However, the term competitor comes from competere in Latin which means “to seek together.” Originally, a competitor is a person who pursues a common goal with others, but whose ultimate goal is to exceed them. The competitor is all at once an adversary and a peer, and even a partner in some occasions. This interpretation corresponds with how many leaders focus on the immediate competitors of their company. But competition is generally larger and more protean. Indeed, the most dangerous competitive threats often come from new entrants. These actors are radically different from the companies already existing in the market. And it is more difficult to find the Achilles’ heel of an unfamiliar competitor whose characteristics and habits are unknown. It is also more difficult to anticipate its possible moves to win the battle. We will see in the next chapter how sustainable companies develop competitive dominance over their rivals through the use of available resources. But to achieve this dominance, they previously identified and surveyed various competitors to assess their capacity to inflict harm. This enables them to choose the opponents with whom they want to fight at a given time. They can now take the decision best adapted to win.

4.9

Identification of Competitors

Competitors identification begins with direct competitors on the one hand and indirect competitors on the other. The direct rivals are the easiest to identify. Some are almost identical to the company. They have the same customers, distributors, suppliers, and they offer the same types of products when they do not copy them.

4.9 Identification of Competitors

25

But there are also direct competitors who play in a separate category. They target markets of different sizes or types: they offer products or services other than those offered by the company in terms of scale, variety, or even nature. They are obviously more difficult to discern but they are nevertheless detectable. Indeed, like planets in planetary systems are organized in orbits around a star, all direct competitors tend to congregate in various competitive systems. They gather around a company of reference and adopt the same modus operandi. As they are based on an analysis of the environment and on resources which are relatively similar, they tend to have similar strategies. In addition, each competitive system, having its own logic, has its own barriers to entry that must be overcome by those who want to become a member. These barriers are different from one system to another and it is generally difficult for a company to leave a system to enter into another group. Finally, it is often the companies that are most comparable that engage in the most savage wars within the group to gain control. This is true especially in economic sectors which are young and developing. In mature industries, companies that survive the fierce competitive struggles are those that have found the wisdom to get along with their competitors. However, this does not always please the authorities. The identification of direct competitors thus requires charting a map of the different competitive systems in the market. Adjacent to direct competitors are indirect opponents. They are disparate in nature and therefore more difficult to discern. They are more dangerous than they seem. They belong to two different categories. First are the companies offering substitute products: the nature of solutions proposed is different but they serve the same needs of customers, who may then prefer these competitors to their usual suppliers. There are also firms that enter the activity as newcomers. They may already be suppliers or distributors who know the industry because they are intermediaries within the system. They may also be companies that decide to diversify into new businesses. Sometimes it will complement what they already know how to do. But this is not always the case; sometimes there are firms that diversify in activities which are radically different from their core business. These new entrants show up generally during the growth phase of a market, when customers increase in number. These unexpected competitors are attracted by the prospect of achieving high turnover and margin. The competitive analysis should consider the asymmetry of proximity between the different players. This strategic concept was highlighted during the Pacific War between Japan and the United States. Indeed, in the last years of the war, the U.S. could easily approach Japan because they had installed bases on nearby islands. Conversely, Japanese planes had to fly nearly 9,000 miles over the Pacific before being able to attack the California coast. An assault was therefore difficult. This asymmetry also exists for businesses. It usually depends on the number of actors involved. For instance, in France, where mass distribution is highly concentrated, it is fairly easy for a wholesale distributor to find among the hundreds

26

4

Environment and Competitors

of existing producers in France a manufacturer that will develop a new activity. Conversely, it is much more difficult for producers to develop a new channel of distribution to the public since their choice is limited to less than a dozen brands of major retailers that may reject the endeavor. Competitive identification is not impervious to the Doppler Effect either. The term refers to the gap in assessing the extent of a wave when the distance between the transmitter and receiver varies over time. Thus, the sound of a car engine is different depending on whether the vehicle approaches the receiver (emitting higher pitch) or it moves away (lower pitch). This is analogous to analyzing the competitors: the further one is from reality, the more distorted one’s perception thereof, and the relevance of results will have to be weighed for uncertainty. That said some companies tend to fantasize about their competitors, especially when they are different. The competitors’ qualities or shortcomings are often exaggerated. This becomes a problem when companies want to emulate their competitors. Because they replicate only the image they have of them, not the reality. Similarly, when companies seek to differentiate from competitors, they err on the elements of differentiation they should promote.

4.10

The Actions Against Competitors

In the military, strategic action aims at leading the enemy to negotiate or to surrender sooner or later. It’s the same in business. Sustainable businesses have all survived countless battles with their competitors. They were able to eliminate their major rivals of any kind. Their leaders apply the principle of rational audacity. They combine boldness and courage with prudence and defense. The evaluation of power balance, achieved through a proper understanding of the environment and the opponent, guides them to take initiatives. When their companies are still young and small, their leaders use the principle of avoidance. They develop their firms away from existing major competitors by targeting customer segments poorly served by these competitors. This allows them to develop a sustainable and original competitive advantage. It also gives them time and capability to acquire the resources and skills needed to attain sufficient size to deal with their opponents who they may avoid, but never ignore. When a company increases in size, but is not yet dominant, its development strategy shifts to the conquest of markets belonging to other companies. The leaders first choose their targets because they cannot fight against everybody at once. The competitive analysis allows them to identify and choose the most intimidating opponents. They will rank their competitors according to the current market share of their company as well as the future business risks posed by some rivals in terms of evolution of the environment and customers.

4.10

The Actions Against Competitors

27

Sometimes top ranking competitors are the closest and most comparable to the company. They are found within the same competitive system. So they can easily imitate movements and intervene in commercial expansion. In other situations, top ranking competitors are those that are larger than the company. They impede development because their size and market control are too important. On the other hand, sometimes these are smaller competitors that are aggressive in converting customers. But remote competitors may also be a threat. If they offer an attractive product or service, they can be just as dangerous and their strategy is often difficult to understand or to reproduce, because their way of analyzing the market and their behaviors are different. Once the main competitor is identified, leaders choose their terrain carefully. They apply the principle of concentration dear to Napoleon: “the great art of a General, if inferior in troop size, consists in being superior on the battlefield.” Leaders overcome a relative superiority by using all available resources to break the moral and physical equilibrium of the enemy. The concentration of effort is not only the concentration of forces. It also implies the audacity which gives the morale necessary to take reasonable risks and win the battle. Audacity is the leaders’ primordial will, recognizing that the worst risk is not taking risk. It is strengthened by the spirit of initiative at all levels of the company. This is essential because, once launched, the competitive offense must be sustained until the end. Leaders choose the most appropriate form of offense in light of the situation and the power balance: be they the launch of new products or services, lower prices, destabilization of suppliers, seduction of distributors, or a mass communication campaign. . . The objective is to destabilize the opponent by invalidating its competitive advantage in order to steal customers and prevent it from striking back. Drawing from the parallel example in military science, the attack can be frontal or flank. The frontal attack is a face-to-face assault meant to fracture the enemy such as a price war on the business field. The indirect or flank attack favors the opponent’s weak point. As in jiu-jitsu, it uses the aggressive energy and weight to make the opponent go down. It may take the form of guerrilla warfare like targeted promotional campaigns. It is based on psychological warfare, propaganda, disinformation i.e. advertising, public relations and all current techniques to propagate rumors on the Internet. For the attack, leaders of sustainable firms successfully implement Napoleon’s advice who recommended against frontal attack if flank attack is possible. He also recommended a swift execution, recalling that “in the art of war, as in mechanics, time is the greatest element among mass and power.” Last but not least, Napoleon advised not to do as the enemy expects and in particular to avoid the battlefield that the enemy has already studied or has fortified and entrenched. Surprise, speed and also agility to confront changes in the market and environment are all factors enabling a firm to take market share away from its competitors. Originality is also important. No company has ever succeeded by merely imitating its rivals. If so, it is better to get rid of the model, as did Picasso who plagiarized

28

4

Environment and Competitors

some major themes of classical painters and freed himself by innovating on the form and providing stunning reinvented works. Finally, tenacity is essential to ensure victory in the long term. Indeed, in business, having a broader horizon on investment return puts the competitor at a disadvantage. Leaders can apply their determination and resolution in the implementation of the grand design for their companies. It is that distant goal that guides and enables them to endure the short-term difficulties and temporary setbacks experienced by any company that fights its rivals. Once the company has become dominant, the only way to stay is to be stronger than the others. When facing opponents smaller in size, the best defense is attack. Competition is like fire: the faster it is contained, the easier it is to extinguish; but if it flares up, it becomes more difficult and the damage increases considerably. With caution and determination, a leading company seeks to get rid of smaller challengers. In some highly capital-intensive activities—such as energy, telecommunications and transport—a critical size is necessary to continue to invest and remain competitive. It can then suffocate or take over its smaller competitors within what is accepted by the political authorities (law on monopolies) and by the customers. If opponents cannot be destroyed, then they have to be controlled, confining them to markets where customers are unprofitable or not sufficiently important for the achievement of the firm’s strategic design. Sometimes the firm can replace competition by cooperation with some of its competitors when it does not have sufficient resources to achieve certain economic or financial transactions to respond to demand from very large customers. But an alliance with a competitor can only be temporary. The alliance is not peace, even in mature markets where there exist a limited number of players. Ultimately, assessment of the environment and competition is based on rigorous, documented facts and not just feelings or rumors. Indeed, if anticipation, essential to success, is sometimes based on a brilliant intuition, it is always reinforced by the analysis of reality. Indeed, leaders are not clairvoyant, but creators. While a clairvoyant claims to see the future without possible error, a creator imagines it after studying the present. This is a parallel to Jules Verne who compiled more than 20,000 sheets cataloguing scientific advances of his time before writing his novels.

Chapter 5

Capabilities

Good management of existing capabilities makes the difference between businesses that fail and those that thrive over time. For, to achieve its strategic design in serving customers better than its competitors, every company must have the capabilities to do so. Capabilities can be categorized into two different types: resources or skills. Resources are what a company owns, while skills are what it can do. The leaders of sustainable firms have a clear idea of the nature of these two categories of capabilities. They also know how to properly identify them. They master the conditions of use to maintain the optimal level. Finally, they know when to develop these capabilities to their full potential when necessary.

5.1

Resources

Resources are properties and assets available to managers to express themselves and to realize their strategy. As the three primary colors or the seven notes in classical music, there are four basic types of resources: money, personnel, technology, and information. Sometimes, added to this list are geographic location and natural raw materials. Resources are more or less tangible and measurable. Thus, human resources can easily be divided into different categories of employees according to their function (workers, employees, managers . . .) or their role within the company (production engineers, scientists, accountants . . .). Similarly, technical tools are readily identifiable according to their application, for example, in manufacturing, logistics, or maintenance. Financial resources are measurable, but their degree of tangibility has declined significantly today. Indeed, less and less cash circulates in our developed economies. Today short-term liquidity or “cash” is less about banknotes or coins. Rather it is mostly money immediately available and transferable electronically to others. In our time, money is less of a physical good. It has become a sign—an information. E. Viardot, The Timeless Principles of Successful Business Strategy, Management for Professionals, DOI 10.1007/978-3-642-21236-9_5, # Springer-Verlag Berlin Heidelberg 2011

29

30

5 Capabilities

Information is an intangible resource, difficult to see and measure. Information is ubiquitous. It circulates in the company in all forms of personnel communication. Information enters the production process, for example, in machines that manufacture products according to certain instructions. Information resides in the products since they are nothing but an “informed matter”, adding to its final value. Services, also intangible, require information for production. It is thus a key determinant of the value of a solution proposed by a company to its customers. In order to share and disseminate information among members of different departments or divisions, sustainable businesses today use Enterprise Resource Planning (ERP) systems. ERP systems serve as the spinal cord and connect all body parts to the brain. They succeeded planning systems from the 1970s and 1980s which were heavy, complex and that connected more or less well with certain elements of the business. Information is also available outside the company. It is especially found in messages transmitted through mass media that are related directly or indirectly to the company when customers, competitors and all other elements of its environment are mentioned. But resources are futile if there is no skill to exploit them, just like a pile of bricks will never become a house on its own.

5.2

Skills

Skills represent activities and mechanisms through which an enterprise utilizes its resources. They fall into three categories. First, there are intellectual skills, defined as knowledge based on analysis, understanding, thinking or creativity. Then there are technical skills. These are skills that enable practical implementations. Some examples are manufacturing methods, work procedures, formulae of special products, etc. These skills may be confidential or potentially patentable, attaching to them an actual market value. There are also interpersonal skills. They are based on a savoir-eˆtre among individuals and also between different structures. This knowledge is primarily behavioral, but it can be broken down into operational terms, for example, an ability to work effectively as a team. Skills may be shared by one or more individuals through more or less structured networks. They are developed through personal and collective learning. To take a concrete form, they must combine knowledge with willingness and the ability to act. Being skilled means knowing when, how, and until which point to operate. But skill is always abstract. In effect, it is not readily visible; only its manifestations and outcomes are observable. Skill is therefore very difficult to codify. This is a drawback for information transmission inside the company, but it is also an advantage because it is difficult to be copied by a competitor.

5.4 Utilization of Various Capabilities Available

5.3

31

Identifying Capabilities

Identifying capabilities is a prerequisite to using them well. The inventory of resources will be based on an exhaustive list of all available capabilities in a business at a given time. This is easy for technical and human resources as they are readily visible. It is less easy for money and, above all, information resources. Indeed, the latter are not always apparent and require a preliminary formalization as is the case for information about customers or competitors that may be available to vendors or technical installation and maintenance staff. They know many things, but they rarely formalize them. Recognition of skills is more complicated because skills are essentially captured by their effects and not by their essence. There are so many tacit skills that are not formalized but rooted in the culture, organization, or even in individuals. Mapping skills, in terms of knowledge, savoir-faire, savoir-eˆtre thus requires an analysis of their contribution to creating solutions that are valued by customers and better than those of competitors. The first step of skills identification is carried out in each activity of the company by studying the different functions (Purchasing, Production, Logistics, Marketing and Sales, After-sales Service, General Services, Research and Development, Human Resources , Legal, Quality, Finance, etc.). The analysis is then extended to the whole firm. Indeed, certain skills result from combinations of functional skills. For example, a unified cooperation between R&D and Marketing will create a new skill in rapid and successful market positioning of new products. Other skills are situated at inter-divisional level. They deal for example with the ability to successfully integrate acquired companies. Such expertise is indeed the result of collaboration between different departments such as Legal, Finance, Sales and Human Resources, all belonging to distinct entities. Finally, some skills are literally found outside the company, especially when they revolve around special relationships with external partners. To name a few examples, these partners can be distributors or suppliers of complementary solutions that add significant value to the core solutions offered to customers, as well as the media that communicate positively about the company or its products.

5.4

Utilization of Various Capabilities Available

Because of their nature, resources and skills require different management. But the key to success lies in combining them into real tools to help achieve the firm’s strategic design. In this regard, sustainable companies manage their capabilities according to some basic principles that apply in times of growth as they do in crisis.

32

5.5

5 Capabilities

Resource Management

Resource management follows the principle of Threshold Requirement: the minimum amount of resources to be gathered in order to start a business. This threshold depends on the complexity of operations to be performed to provide a product or service, and the number of customers to serve. Without these minimum resources that define its waterline, the company cannot float. This baseline is not just the initial capital, but includes the incompressible level of requirements to stay afloat without sinking later on. However, this vital threshold can increase abruptly due to unexpected changes such as an economic crisis that suddenly dries up liquidity or a supply disruption that paralyzes production lines. It is necessary to have a cushion of additional resources readily available, otherwise bankruptcy is ineluctable. In fact, cases of bankruptcy due to lack of resources are numerous. Resources also serve to build a strong dominance over competitors. Sustainable firms use them in two manners: by applying the principle of exclusivity and the principle of mass. The Principle of Exclusivity consists of ensuring that a resource is not captured by other economic actors and to gain a monopoly or a dominant position, which provides an important long-term, regular income from the market. Utilization of a scare resource, deemed significant for the customers, brings value and justifies a high selling price. Exclusive control of a resource is obtained by controlling access to a geographical position or by negotiating with the regulatory authority for an exclusive right of ownership or operation. The Principle of Mass reflects the fact that, between two companies with equal skill level, the one with higher volume of resources is the most powerful. It will invest more, produce more, own more channels and therefore sell more. It will benefit from economies of scale, i.e. unit production costs will decrease at a faster rate by amortizing fixed costs over larger production volumes. This approach will also attract the most qualified and most intelligent candidates by offering them higher salaries and more attractive career prospects. So, size does matter for resource management. The accumulation of resources well beyond the critical threshold is in fact a formidable competitive weapon. But managing this large volume calls for dynamism to gain momentum against rivals. Sustainable businesses avoid the Goliath syndrome: size is of no use if we are not able to move nimbly against an opponent that is agile, clever, and fearless. Consequently, proper utilization of resources is at least as important as their usage intensity. This usage varies with the management skills available.

5.7 The Principle of Alignment

5.6

33

Managing Skills

Experience of sustainable companies illustrate that skills—in terms of knowledge and experience—are often more important than resources for long-term strategic success. As for resources, the Principle of Threshold Requirement also applies to management skills. Some are indispensable. These skills correspond to the minimum knowledge that is necessary for any company to master in order to operate its business and ensure its existence. The company also needs critical skills, which will allow it to sustain by providing maximum value to its customers while making a difference vis-a`-vis its competitors. The critical skills distinguish champions with talents from Sunday sports amateurs. As in sailing, mariners must be able to set up the rig of their boat, tacking and jibing. But to win a race, they must also possess, among other talents, the knowledge of how to interpret the weather forecast, know the currents, and master the rules of racing. To be qualified as crucial, a skill must clearly serve the company’s strategic project, directly or indirectly. Crucial skill must also contribute to value creation for customers, otherwise it is useless. Some companies even co-create skills with their customers in developing customized and specific solutions or processes. To have a distinctive effect with respect to competitors, crucial skill should lead to superior performance levels. It must also be exceptional and difficult to imitate or substitute. Hence secrecy, complexity, legal protection, boundary of information, assimilation of the internal culture: all are ways of ensuring that a skill will not be sold, disclosed and spread outside against the will of the company.

5.7

The Principle of Alignment

In reality, resources and skills need be inextricably linked to fulfill the strategic plan. The company acts as a pensioner if it lacks skills and solely lives off its resources. The day these resources disappear, or become obsolete because they are no longer of interest to customers, or they are no longer competitive; the company will die. On the other hand, trying to develop skills without resources boils down to a makeshift solution with little prospect of creating a durable and substantial competitive dominance that would guide an important development. To achieve optimal performance and success, sustainable companies assemble their key resources and critical skills following the Principle of Alignment. Indeed, if the skills do not activate the available resources, the combination will have no effect. Likewise, the alignment of two categories of capabilities allows the company to utilize its knowledge to lever its resources, in order to reach an optimal performance to achieve its strategic objective.

34

5 Capabilities

Alignment allows, for example, to reduce procurement costs by ways of combining a volume effect on the quantities purchased with negotiating powers to get the best conditions from suppliers. Similarly, the alignment of a creative intellectual skill with existing resources can lead to product inventions or innovations in manufacturing processes, sales techniques, or customer care operations.

5.8

The Principle of Capabilities Rationing

The abuse of wealth often generates waste, lethargy, diffidence, and lack of the selfchallenge necessary to adapt to new situations. It was established that, on average, over one third a firm’s assets generates a marginal, nil, or even negative contribution to results. Recognizing this, sustainable companies prefer frugality and apply the Principle of Capabilities Rationing. They seek to optimize their capabilities to attain their strategic objective: neither too much nor too little. In fact, these companies restrict or do not automatically renew access of financial, technical or human resources to their managers, obliging them to be more imaginative, organized, focused and serious to develop new skills under constraints to fulfill their objectives. Besides, the undistributed resources can be preserved for the future or reallocated to new development activities. More precisely, under the principle of capabilities rationing, leaders regularly control the level of resources consumed through a number of indicators. Concerning financial resources, they oversee three crucial data. The first concerns the level of cash available. Indeed, a lack of cash may lead directly to bankruptcy because it prevents the company from paying its employees, suppliers, and creditors. Conversely, an excess of available cash may reflect poor management, because these funds could be used to expand the business or invested in longterm bonds with a better remuneration. The second indication is the degree of profitability. In fact, a firm must achieve a rate of profit that allows it to invest and satisfy its shareholders. But profitability should not be appreciated in the short term, or as an end in itself. It is only a means to succeed in accomplishing the company’s strategic long-term project. The third indicator is the level of debt relative to stockholder’s equity. It measures the leaders’ strategic autonomy relative to bankers. If this ratio is too high, the weight of financial costs will impact heavily on profitability. Moreover, if creditors have doubts in the company’s ability to repay its debts, they will be able to put pressure on leaders to take the necessary corrective measures. But such actions may be inopportune, or even in opposition to the company’s strategic project. The principle of rationing, when applied to human resources, guides leaders to follow closely the labor turnover and internal satisfaction levels of employees. Employee turnover is a quantitative indicator. It measures, over a given period, the balance between new hires and departures in relation to the total number of employees. A high or low turnover reveals a problem in human resources

5.9 The Principle of Valorization

35

management. It can be explained by external reasons when, for example, competitors or other industries are able to capture the most valuable employees, either the best-trained or those who have the most potential. Its cause can also be internal, owing to demotivating management style, lack of medium-term career perspectives, or even just a poor work atmosphere. In the latter case, the qualitative indicator of employee satisfaction is an excellent diagnosis. Typically this is an anonymous questionnaire, filled by all employees. It is then processed by a third-party agency to ensure objectivity. Such methods prove useful well beyond the annual individual interviews which only give a fragmented view of the company’s human resources situation. Based on the results of the internal investigation, leaders then use the full panoply of tools of human resources management at their disposal: remuneration, goal setting, individual and collective performance evaluation, training, recruitment or dismissal, reorganization. Such tools play a vital role in ensuring the smooth functioning and sustainability of the company, as discussed in the chapter on change management. Regarding technical resources, leaders will follow closely the degree of obsolescence of machinery. The principle of capabilities rationing is reflected by the fact that it is useless to update to the latest in technology if this does not provide any significant performance gain of efficiency in creating value for customers, in comparison with other competitors.

5.9

The Principle of Valorization

Application of the Principle of Valorization is the basis of success for many sustainable companies. In line with the logic of capacity rationing principle, the valorization principle consists of systematically multiplying the effects of a resource or a skill to generate maximum value for customers and to build advantages over competitors. The applications of this principle are numerous. For example, regarding financial resources, the “leverage effect” obtained through debts will help generate additional revenues at a lower cost than a capital increase. For human resources, productivity gains will increase the quantity of goods or services provided by each employee of the company. For technical resources, investment in machinery will allow for making new products as anticipated by the market and that have previously been impossible to manufacture until then. For communication, this translates to the creative advertising campaign that everyone talks about, generating maximum awareness without necessarily requiring excessively large and expensive media coverage.

36

5.10

5 Capabilities

The Principle of Constant Flexibility

The Principle of Constant Flexibility provides that leaders retain flexibility in their capabilities management in order to be able to react swiftly when required by changes in the environment. This principle serves in time of crisis as well as in the growth phase. When a storm approaches, leaders will not change their course but they will reef the sail to avoid breaking the mast, immobilizing or sinking their enterprises. Conversely, they may require additional reserves that can readily be mobilized, as a General may do when facing an unexpected attack from a rival on the battlefield. They may also need to have additional capabilities to respond faster than their competitors to a sudden increase in customers demand. One application of the principle of constant flexibility is the transformation of fixed costs into variable costs. In the event of significant drop in revenues, the firm can easily adjust its variable costs down to maintain profitability, thus maintaining its capacity for strategic investment and survival in the medium term. Conversely, if costs are essentially fixed and cannot be curtailed quickly, a decrease in income will immediately result in losses which, if they recur, will lead the company to decline or even to its end. Sustainable companies therefore manage their resources in a flexible way through outsourcing some of their personnel, production tools, logistics, services and general maintenance. Paradoxically, the Principle of Constant Flexibility has led some companies to cease the fully automated production process. They discovered that although robots never get sick, they lack the flexibility to quickly adapt to various production constraints demanded by the markets. Some tasks that had previously been automated were given back to employees. It is also in the name of this Principle of Constant Flexibility that wise leaders dismiss employees sparingly in times of crisis. Because they know it will be expensive and complicated to find a skilled and well trained workforce when things recover.

5.11

The Principle of Singularity

In sustainable companies, the various principles in capabilities management always lose significance when facing the Principle of Singularity. This means that the key resources and critical skills must always remain under the leaders’ control to preserve what makes the company unique in the eyes of its customers and for its competitors. This principle prevents the company from losing its competitive advantage or draining its crucial skill that can threaten the firm’s survival sooner or later.

5.12

Capabilities Development

37

For example, a rigid application of the Principle of Mass in resources management can lead to diseconomies of scale and diminishing returns. These effects translate into an increase as opposed to a decrease in unit costs. Indeed, these diseconomies occur when the size of a structure generates too much organizational complexity. It slows or stops decisions and initiatives, stifling innovation, requiring excessive cost control; or, on the contrary, generating unproductive chaos. Finally, it dilutes the original strategic plan or the perception thereof held by the employees. Leaders also avoid over-specialization of capabilities because of the risk of obsolescence that may occur after a drastic shift in the environment, customer demand, or competitors’ offer. Sometimes, it so happens that some particular technical equipments, specialists in specific areas, or specific financing methods that once allowed the company to achieve its success become outmoded the next day. This can lead to a catastrophic consequence if the company does not have an alternative to replace them rapidly.

5.12

Capabilities Development

Sustainable companies rarely have internal weaknesses because they know how to nourish, enrich and expand their portfolio of resources and skills. They continually improve the quantity and quality of their capabilities. To achieve this, they establish continuous measure and evaluation of capabilities, in terms of performance and adequacy in the environment. In addition, they constantly compare themselves to their competitors to identify weaknesses that need improvement. But today, customer expectations in terms of reliability, quality of service or response time tend to become universal and apply to all sectors. This is why companies seeking improvement calibrate their critical skills in relation to benchmarked companies regardless of their respective sectors. Such comparisons allow them to build a program to improve their weakest skills. To achieve this, they rely on their internal capabilities: employee training, reconfiguration of manufacturing processes, better use of liquidities and internal reorganization, to name a few. But they do not systematically seek to develop every inadequate or missing capability by themselves. They do not hesitate to acquire resources or skills which are available outside the company to better meet the demands of their markets or to overtake a competitor. They may recruit people from outside, buy more modern machines, take out a loan or raise capital, buy other companies, etc. They may also choose to associate more closely with some of their partners to develop a true symbiosis of multiple skills between participants in the same ecosystem.

38

5 Capabilities

But there is always a risk that the grafting of skills or resources goes wrong and fails. Indeed, various studies indicate that more than half of all acquisitions fail and create more problems than they do results. Therefore, sustainable companies develop skills unique to external acquisition ranging from aiming at the right target, price negotiation, to integration of the acquisition into the existing company structure. As for choosing between internal development and external acquisition of capabilities, they proceed with rational audacity according to several criteria which are of strategic importance for the company’s capabilities, their complexity and level of risk, their urgency, their availability and, in the case of skills, the degree of expertise required. Ultimately, all these activities of evaluation, continuous improvement and development of capabilities allow sustainable companies to constantly adjust to their environment, anticipating the needs and desires of their customers and possibly opening new economic fields with a decisive, sustainable, and defensible competitive advantage. They do it at the right time, neither too late nor too early. This is another secret to their longevity.

Chapter 6

Structure

To organize, in its original sense, means to render life to a substance or being, setting up an arrangement to the various elements that compose it. Thus, humans, animals or plants are organized. At company, government or army level, to organize means to set up its interior arrangement through the choice of its members and the interactions that govern them. If people are a resource among others for a company, they nevertheless require special attention in terms of organization. Indeed, organization shapes the implementation of strategy as well as its success. A company without organization sinks rapidly into chaos. It is no longer able to realize any project. In its daily decisions, it will mislead its customers, waste or misuse its resources, failing to know its competitors and losing all sense of direction in day-to-day decisions beyond common sense. The structure often shapes leaders who, in turn, determine the company’s organization. To achieve this, business leaders construct a framework and adapt it over time when needed. Establishing a structure is defining the roles and responsibilities of its members, specifying “who does what?” Thus structure will define the relationship between operational and support units (administrative staff and “experts”), between generalists and specialists, or between regional and international units. These relationships are not always hierarchical; they may be horizontal when they form between units of the same level. They are not always explicit and some are completely informal. Taking into account their strategic projects, leaders have three choices in setting up a structure: functional structure, divisional structure, and a holding company structure. When a company trades all over the world, the organization of its international activities become more critical. Finally, leaders usually add small teams to complete the structure of their companies.

E. Viardot, The Timeless Principles of Successful Business Strategy, Management for Professionals, DOI 10.1007/978-3-642-21236-9_6, # Springer-Verlag Berlin Heidelberg 2011

39

40

6.1

6 Structure

Functional Structure

As its name suggests, this structure is formed from the various functions which are necessary for a company to propose a solution for its customers, whether it be a product or service or a mixture of both. The main functions are Supply, Production, Logistics, Marketing, Sales, and After-Sales Services. To carry out effectively the company’s daily business, operating functions need support functions. These include units engaged in research and product development, human resources, communication, finance and accounting, purchasing, quality, and legal services or general services. A functional structure is appropriate when the company is medium-size with little diversified central activities. This structure has the advantage of clearly defining responsibilities. It promotes the development of specialists in each office at all levels. With such a structure, it is relatively simple and easy to monitor the performance of individuals in their respective fields. Finally, it gives leaders a complete visibility over all business operations. On the other hand, they will run the risk of being caught in day-to-day management, since they are the only one who can mediate in case of conflict between functions. Indeed, specialization mechanically generates a lack of coordination between functions. Each function tends to focus on its own unit and will communicate only with top management, resembling a series of chimney stacks. Information exchanges only occur at the summit when a decision involving several functions has to be taken. Thus the functional structure leads to centralization. This often results in a slow reaction rate and an inability to understand the environment and to adapt quickly when the company exceeds a certain size. Today, electronic communication decreases these delays, thereby reducing the disadvantages of functional structure but not eliminating them.

6.2

Divisional Structure

With time or to achieve its strategic design, a company may be driven to diversify into sectors and professions which address new and markedly different customers, or to call forth heterogeneous resources and skills. With a functional structure, each function will then meet increasing difficulties to effectively cover all the needs of the company’s different units. Coordination also becomes all the more difficult given that the diversity of products and the variety of clients and their demands are increasing. In that situation, the divisional structure is best suited for the organization. Indeed, divisional structure gathers the various functions in units called “divisions” which are organized by categories of markets or products. The divisional structure has many advantages. As with any modular structure, it is very flexible and responsive. It is possible to add, merge or close divisions as

6.2 Divisional Structure

41

required without impacting the operation of other units. It also helps to focus on the markets identified as strategic priorities to better meet expectations. It also favors the development of skills specific to a product, profession, market, or geographical area. Each division becomes a kind of company within the company since it is equipped with all the functions necessary to accomplish its mission. The objectives of its directors are easily cascaded from the strategic objective of the company. It is obviously much simpler than in the case of a functional structure as the objectives of each function must be established according to criteria specific to each unit’s specialty. The divisional structure also promotes decentralization of decisions. The Divisional Director has all the elements in hand to meet the objectives set for him. Being a Divisional Director is also an excellent preparation to become a Chief Operating Officer. Indeed, the two positions require similar qualities in terms of analysis, decision making, and implementation. Another advantage of the divisional structure is the minimization of internal conflicts. For, if each division’s scope of activities is identified without overlapping areas, there is no reason that the divisions should compete to obtain a resource or a particular skill. All Divisional Directors have their field of responsibility where they are free to do what they want to contribute to the overall success of the group’s strategy. However, this autonomy is also the main drawback of this structure. In reality, it can lead to a desire for independence, or a revolt, of some units vis-a`-vis the group. Even though autonomy is sometimes desirable to achieve better efficiency, it is also the enemy of knowledge sharing and cooperation between divisions of the same company. Sometimes, autonomy can also unclog conflicts when it comes to acquiring, sharing or transferring human, financial or technical resources to meet the group’s strategic needs. Finally, decentralization of support functions is always expensive, because it inevitably leads to overlaps of expertise in the divisions. Hence, to avoid the drawbacks of autonomy, managers of sustainable divisional companies ensure proper power sharing between lieutenants heading the divisions. These companies make the Divisional Directors move from one division to another to avoid excessive intellectual or emotional attachment to a given structure. These companies rule with an iron fist to prevent fratricidal struggles that affect the common goal by reminding everyone of the purpose of the company and its values. This may prove much more difficult when such a design does not exist and the only ambitions of those in charge are limited to money and power. Divisional structure problems may occur when the company’s management weakens or disappears. As empires crumble at the death of the founder, divisional structures decline in the absence of a strong leader. Lieutenants become barons; they engage in internal fights which unleash centrifugal forces eventually leading to the structure’s explosion.

42

6.3

6 Structure

Holding Company Structure

When a company becomes too diversified, a holding company structure is a response to the need for autonomy of all divisions, which are then transformed into independent companies. The majority or total of their capital is held by a holding company, which is an investment company. The holding company manages a portfolio of companies that are independent and often very different. Each has its strategy, its customers, and its own resources. The logic of a holding company is less strategic than financial, at least in developed western countries. The objective is to optimize the portfolio of businesses in a perspective which is often patrimonial. The head of the holding company makes decisions to purchase or sell, but does not get involved in steering the companies within the portfolio. In emerging countries, the concept is often different. A number of holding companies depend on large families or governmental structures. They essentially have an objective of strengthening influence or consolidation of power. In parallel, they often compensate the lack of capital markets or of personnel in these countries. The holding company thus becomes an advantageous way to develop young companies which will rely on the resources and expertise of an existing company. However, as economies of emerging countries increasingly resemble those of developed countries, these holding structures tend to decrease in number and relative weight.

6.4

Matrix Structure

The Matrix structure is the “white elephant” of organizational typology. In some cases, it is defined as the crossbreed of a functional structure and a divisional structure or as the intersection between a “products” division and a “markets” division. Each member of the structure has to report to two leaders (hence the name matrix) in order to make more “informed” decisions. In theory, it combines the advantages of each of the previous structures: an in-depth specialization combined with a general overview of activities or customers. But, in practice, this does not work. This mode of organization was set up by a few large multinational companies in the 1990s. It has always ended in failure, because it accrues more disadvantages than advantages when compared to divisional and functional models. The matrix structure greatly complicates the decision circuits, in particular with the double hierarchical dependence. It also leads to confusion and inaction in case of conflicts. Indeed, conflicts may never be resolved promptly with the dual authority system, because there are no clear arbitrators and it takes time to identify them.

6.6 Cross-Functional Teams

43

The matrix organization is, today, no more than a textbook case and sustainable companies are careful not to use this model.

6.5

The International Organization: a non - issue

The intellectual debate is sometimes virulent when it comes to debating about the organization mode of a company that reaches a global dimension. Should it be local, decentralized, organized by country or groups of countries? Or, on the contrary, would it not be more appropriate to give it a global and central framework, allowing it to take advantage of the volume effects linked to its international size and bringing down costs? This dichotomy of “local” vs. “global” is a false debate. In fact, sustainable companies that go international combine the two dimensions. They will prefer a local organization type for marketing and sales to ensure the best response to customer demands. On the contrary, they will handle centrally all the activities where they can maximize the economies of scale and investment returns (Procurement, Manufacturing, R&D, Information Systems, etc.).

6.6

Cross-Functional Teams

Whatever their choice—functional or divisional—all sustainable companies established another particular form of organization: cross-functional teams. Such teams call on various members from each base unit, division, or function. Some teams have a limited lifespan when they are formed to accomplish a specific project. Once the project is completed, they are dismantled and each participant returns to his or her original unit. Other multi-disciplinary teams have a longer lifetime when they are organized to tackle repeated or continuous issues concerning all business units. This applies to teams working to ensure the quality of products and services or to restrict pollution impacting the environment. Generally, these long established teams are more successful because, over time, members learn to trust one another more, to communicate more effectively, and to unite their skills. Thanks to its small scale, the team structure allows the sharing of expertise and skills previously developed in each original unit. Such exchange is often impossible in larger entities because of their size or the physical distance between different units. These teams, sometimes self-managed, are also more flexible, work faster and often are more enthusiastic to solve a particular problem. Unlike traditional organizations, they are not constrained by size or protocols which are often more procedural than relevant.

44

6 Structure

Cross-functional teams compensate the shortcomings of functional or divisional models, since they facilitate the coordination between entities which operate in an excessively independent way. When these teams are designed to work on projects which go beyond the company’s main activities and far into future development, they also bring to leaders a certain liberty of action. But multifunction teams are no panacea for organizations. First, they cannot replace a larger structure since several commandos have never made an army. Moreover, uncontrolled proliferation of such teams associated with inadequate control by their leaders can lead to confusion and loss of sight of the company’s strategic design. As in a police turf war, it may happen that different teams compete or destroy one another instead of collaborating. Furthermore, the value of cross-functional teams is largely related to the recruitment of each member and to the group dynamics that team leaders manage to create. Some of these teams may be composed mainly of individuals who joined the team only because they were not well accepted in their original structure. Other teams may be poorly managed and prove to be inefficient or unable to complete the project or task assigned to them. Sometimes the challenge for these team leaders concerns more their authority than their actual skills. Indeed, as managers must draw resources from various existing functions, there is a risk of conflict with other business unit managers, who do not always appreciate losing precious resources, and who will sometimes refuse it. Therefore leaders of sustainable companies ensure that cross-functional team managers report directly to them. This reinforces the managers’ authority when discussing capabilities allocation. And it will also prevent parochial community spirit, intrinsic to each function, from impeding the sharing of complementary expertise required to achieve strategic objectives. So team structure implementation is neither an end nor a guarantee of performance. But if the teams are well trained and skillfully managed, they will prove to be a very effective way to adapt rapidly to a turbulent environment and respond more effectively to the complex demands of customers involving multiple areas of expertise. Indeed team structure favors a more innovative coordination and a faster redeployment of skills than that which can be achieved within a large structure organized by functions or divisions. Ultimately, leaders set the general architecture of their structures to best match their company’s strategic plan while taking into account the business environment, targeted customers, and available capabilities. This is why leaders of sustainable companies dynamically alter their structures. They continuously adjust their sails as best as they can to face the weather conditions, but never lose sight of the final destination.

Chapter 7

Operations

Structure obviously influences a company’s performance. But what makes the difference over time is its mode of operation. In this regard, sustainable companies provide some interesting lessons. Indeed, experience shows that they follow certain principles such as autonomy in decision making, simplified and efficient processes, a frugal hierarchical structure, continuous learning, and careful use of outsourcing and external exchanges, and finally, an accountable control system.

7.1

Autonomy in Decision Making

Autonomy, in its political sense, implies the ability of a party within the structure to make decisions independently from the head office. As a consequence of the changing context in recent years, particularly under the influence of globalization and development of the Internet; centralization, which requires that all decisions be endorsed by the company headquarters, has been rendered moot. Even governments have come to adopt a decentralized structure. A completely centralized system is far removed from reality. Such a system poorly analyzes the opportunities and threats in its environment. It incorrectly allocates available resources and skills according to the priorities of the field. In addition, the decisions emanating from the headquarters are more or less understood by the intermediate bureaucracy. Figuratively, there is often a gap between what is desired by the brain and what is manifested by the members of the firm. Decision-making autonomy at the field level is therefore important to be able to respond effectively to—and to make the most of—new opportunities with the available resources and skills. But autonomy does not make miracles. On the one hand, it works only on the condition that the local managers make the right decisions. Even if the proximity to the field grants better information, it does not guarantee that a decision made will E. Viardot, The Timeless Principles of Successful Business Strategy, Management for Professionals, DOI 10.1007/978-3-642-21236-9_7, # Springer-Verlag Berlin Heidelberg 2011

45

46

7 Operations

be in the company’s best interests. Autonomy implies not only empowerment but also selection of the best individuals to lead a unit. For that, it is essential to have an adequate process for the selection, further evaluation and training of those persons in charge. This is also one of the key success factors of sustainable companies. They know how to create a pool of leaders at their first hierarchy level. The other disadvantage of autonomy is its lack of overall vision. Because it can lead the unit managers to excessively focus on their area of responsibility at the expense of the general interest of the company. What the company earns in speed is lost in terms of quality, or even consistency in the implementation of its activities. Finally, autonomy is not always a guarantee of speed if it leads to contradictory or conflicting decisions that slow or paralyze the organization. Besides, centralization is not always analogous to slowness when the central power is strong. Moreover, it is not by chance that sustainable companies centralize decision-making when they face a financial crisis or a particular strategic challenge which threatens their survival. Consistency and uniqueness of decisions prevail over familiarity and adaptability to the terrain.

7.2

The Principle of Efficient Simplicity

Another great secret of sustainable companies is their ability to keep themselves simple and not to be overwhelmed by suffocating organizational complexity in the long run. Strategy-wise, simplifying the structure has numerous advantages. First, it allows a better understanding of the environment and markets. Second, it facilitates faster decisions. Finally it promotes better execution and quicker feedback to make new choices. Simplicity in an organization also allows faster and more efficient selfadjustments. It favors velocity over size, mobility over conservatism, and attack over defense. But simple does not mean simplistic. For this desired organizational austerity is in tandem with a constant search for efficiency in all processes of running the organization. Simplicity begins with the structure. When an activity becomes too complicated to understand or manage, it is broken down into pieces that are clearer and easier to comprehend. The search for simplicity also leads managers to restrict their company’s business portfolio by abandoning businesses which are too far from their core activity since they dilute critical skills or waste critical resources. This is why, for simplicity’s sake, sustainable companies are quick to reduce their portfolios of products or services offered, when they deem it necessary. Indeed too wide a range of products generates hidden costs in terms of production, storage, and marketing. In addition, an offer too rich in content leads to confusion among

7.2 The Principle of Efficient Simplicity

47

customers, who do not know what product or service they should purchase. They then turn to a competitor whose product offer is clearer or whose value-for-money ratio is more evident. Pruning the product offer portfolio may be a good opportunity to reduce the number of suppliers. It also helps to simplify the company’s structure and its logistics processes in terms of supply, transport, and storage in particular. Simplicity also translates to the ability to set clear priorities at all its levels and to avoid being pointlessly dispersed. Frequently, certain organizations amplify their activity when they have lost sight of their goal. Unfortunately, such a stochastic move is rather an attempt to justify their existence more than to achieve any goal. Quite the contrary, sustainable companies establish priorities. They first identify the three or four most important expectations for each of their major customer groups. Then they focus their resources to meet these needs better than their competitors. Top athletes know that performance comes from focusing. This brings concentration, preparation, perfect execution with attention to detail. Sustainable companies do the same. To achieve their strategic design, they focus on a limited number of priority actions which they perform with precision, speed, and professionalism. Simplicity and efficiency also concern the communication of messages between each part of the organization. It is a well known token of performance. For example, Genghis Khan established a method of transmitting information between his regiments with a formidable efficiency. As there were few Mongolian commanders who could write or read, all orders on the battlefield were given by white and black flags; this avoided errors due to poorly written or misinterpreted documents. Today, new information technologies are accelerating the speed of information diffusion within a company. Initially, these technologies helped optimize efficiency in making decisions as well as rapidity in operational actions. However, today, technologies tend to make life more difficult for organizations. The most obvious case today is e-mails. By replacing physical mails usually distributed once or twice a day, e-mails represent a significant time saving. But they also generate new problems. On the one hand, they often call for an immediate response, hence establishing a diktat of what is urgent above what is important. On the other hand, the everincreasing volume of messages received daily overwhelms users who do not have time to read everything, including some important instructions for the rest of the organization. Sustainable companies thus fight against the constant influence of complexity that can hinder or distort communication. Their leaders call for short and detailed messages that go straight to the point. In some of these companies, the first thing a new employee learns is to use the “in-house” format and mode of communication so that the company’s messages may have a chance to be read or heard.

48

7.3

7 Operations

Hierarchical Frugality

A special means to keep operations simple and efficient is to limit the heaviness of the hierarchy, with less emphasis on power and stressing instead on decision levels. Because, often, it is the stacking of hierarchical levels, rather than centralization of decisions itself, which causes problems; for it creates an intermediate bureaucracy that filters the communication between the field and the headquarters according to its own agenda. Sustainable companies follow the advice of William of Ockham: “Entia non sunt multiplicanda praeter necessitatem” which translates to “entities should not be multiplied beyond what is necessary.” These companies realize that a small number of hierarchical levels provide a lighter, swifter organization, better able to seize opportunities that arise. On average, they have a 1:9 manager-employees ratio. This ratio is not surprising. It was used by the Roman army and the Mongol cavalry. Even for large corporations, it translates into a maximum of five hierarchical levels between core staff and top management.

7.4

Continuous Learning

Part of the efficiency of sustainable companies is also due to their organizational learning capacity. This enables them to continuously improve. It consists of two different elements which are, on the one hand, the extensive and challenging training and, on the other, the ability to integrate the lessons learned—both positive and negative—from their experiences. The aim is to avoid repeating past mistakes and allowing each individual to perform to their full capacity. Training through repetition, or even simulation, of certain operations is useful in helping to anticipate and cope with certain future situations. It is an improved and less martial form of the drill that the Emperor Frederick II imposed on the Prussian army: an extremely severe preparation, based on relentless repetition, which enables individuals to execute, without hesitation, quickly and flawlessly appropriate maneuvers even in situations of extreme stress. Another part of learning comes from the organizational experience gained from experiencing a difficult situation and successfully surmounting it. This experience is transmitted through formal training materials or manuals of procedures, but it also diffuses itself informally through stories, practices, and other organizational symbols that are part of the company’s culture.

7.6 Accountable Control System

7.5

49

Outsourcing

Systematic use of outsourcing by sustainable companies is a result of the search for simplicity by way of focalization. Outsourcing means that the company conducts only essential operations that create value for customers and provide a durable competitive advantage. All other operations are performed by outside organizations—more competent or less expensive. Such outsourcing can be done through sub-contracting or alliance with one or several partners belonging to a network. Sub-contracting is formalized through a contract involving a clear supplier-customer relationship. In an alliance, the connection is more informal and egalitarian with various organizational arrangements: from simple information exchange to definition of a common structure. Sustainable companies master the outsourcing and alliance processes which are empirically established through various tests to find appropriate partners while trying not to repeat past mistakes. They know that successful outsourcing is always based on strong interactions between the company and its partners. These interactions may be technical such as sharing the same communication or management system; or cultural ties when network members share the same values. Sustainable companies have a clear idea of their strategic ambitions and of the resources needed to realize them. Therefore they rarely commit the mistake of losing their distinctive know-how by sub-contracting or divulging it to an alliance partner. Many companies have disappeared after outsourcing their critical skills, often without realizing that these skills were essential. By doing so, they allowed competitors to access some of their critical skills directly or indirectly. The competitors then imitated and surpassed them, destroying some or all of their competitive advantage.

7.6

Accountable Control System

The best of structures are nothing without a proper coordination of their various members. Indeed, it is coordination that deploys the company’s strategy by controlling the outcome of its actions and by making necessary readjustments. Such control may be made a priori in terms of capabilities or a posteriori in terms of results. It may be formal, through the use of specific indicators, or informal by simply defining desired behaviors between each element of the structure. Direct supervision in terms of capabilities obviously means a completely centralized control, particularly if it based on the detailed planning of resources.

50

7 Operations

But it works very poorly when the company has to adapt to fluctuating markets, new competitive situations, or significant changes in its environment. Such coordination rigidifies the structure, paralyzing or, at least, slowing it down enough to harness it to the strategy. To move along, everyone must have a relative degree of autonomy and initiative. That is why sustainable companies coordinate their activities by evaluating results based on a limited number of predefined performance indicators. These indicators measure the results expected by the organization in terms of revenues, profit, quality, customer satisfaction, or any other data relevant to the realization of the company’s strategic project. These quantitative and qualitative indicators are combined in a synthetic control panel. Depending on the measured results of achievement, corrective actions will be taken either by the company’s leader or the unit in charge. Some companies go even further. They encourage the coordination of functions without direct intervention from the leaders. These companies replicate the human body model where certain organ regulations are made semi-automatically and unconsciously, without direct control from the brain. Sustainable companies achieve this without formal supervision by relying on motivation and self-control of their employees. To achieve this, they develop a strong corporate culture built around their strategic plan and some key values. This internal culture induces the standards of behavior for the employees. Leaders then configure the roles and tasks of each member. They fix three to five imperatives for the organization and communicate them so that everyone remembers what they have to do and adheres to these objectives. Then they trust the people to act in the most appropriate manner. The control is therefore a matter of individual accountability rather than a response to stimuli from the hierarchical structure. Bureaucracy, in this case, is replaced by self-regulating communities that are more or less formal. It is obviously a tremendous asset to be able to evolve with time, countries, and the various crises that a business may encounter. This model of coordination and control has been proven successful outside the business world. In effect, it is the same model adopted by all major religions that have developed successfully in time and space. Its only risk lies in the rigidification of the company’s culture should the latter become too introverted. It will then lose its ability to adapt to the environment, giving wrong signals to each member of the structure. It also leads to an aversion to change, and, likewise, to a self-absorption that is detrimental to the company’s sustainability. Should this happen, the only remedy for the leaders are to open up the structure through communication and the recruitment of fresh people to support the necessary cultural changes.

Chapter 8

Innovation

To better serve their customers, adapting to their environment or developing new skills, sustainable companies change over time as do any living organisms. They reconfigure entirely all the units which make up the organization, either through removing or adding new units. They progress from one state to another, manifesting the very definition of change. The changes undergone are technical or organizational. Technical changes concern the products or are related to the products or methods of operation. Organizational changes affect the company’s capabilities and structure. The two approaches, nonetheless, are strongly linked. Indeed, the success of technological innovation within an organization often depends on its culture, the motivation of its employees or its structures of power. Conversely, organizational innovation is often shaped by technological changes that alter its key resources and critical skills. Innovation and change are double-edged swords. There is always a risk in using them. Various studies show that most companies fail when they try something new. But an organization cannot afford to fossilize if it wants to survive and grow. Instead, it must evolve to keep pace with its customers, maintain a competitive advantage over its competitors or exploit new opportunities. Leaders of sustainable companies know that lack of change is even more dangerous than change itself. In this respect, the leaders clearly distinguish between technical change and organizational modification because they are different in nature although they are often interrelated. They also prepare any change with great care. Consequently, they estimate what added value would changes bring to their company and they evaluate their company’s ability to accomplish them. Then, if there’s a case, they initiate programs aimed at technological or organizational changes.

E. Viardot, The Timeless Principles of Successful Business Strategy, Management for Professionals, DOI 10.1007/978-3-642-21236-9_8, # Springer-Verlag Berlin Heidelberg 2011

51

52

8.1

8 Innovation

Different Types of Technological Innovation

Technological innovation is not uniform. It is divided into several categories according to its purpose or nature. The first type of innovation concerns improvements or new products or services offered to customers—whether individual or corporate. Innovation in the offer is quite visible. Indeed, it results in tangible changes which are discernible in the market by customers, competitors, and other actors in the economic life. Equally important but less visible is innovation in terms of process, such as technical changes introduced in a company’s manufacturing or marketing methods, or in its internal functioning. Recent examples are the wide usage of the Internet, the implementation of Enterprise Resource Planning (ERP) or the use of robots in production lines. Technological innovation can also be characterized by the degree of change implicated. Some innovations are said to be radical because they cause an extreme technological revolution. Radical innovation profoundly changes the products value and their terms of use. As for process innovation, it completely transforms the company’s customary way of working. The printing press, the internal combustion engine, the telephone, the television, and computing science are all radical technological inventions. Conversely, other innovations are defined as incremental or marginal. They represent gradual improvements in the technologies of existing products. They do not change the behavior of customers or users and do not drastically alter the dynamics of an industry. Non-polluting inks, unleaded gasoline, cordless phones, color TV or computer mice are all incremental innovations that followed the radical innovations listed in the preceding paragraph. They did not revolutionize the world, but made it more comfortable, safer or more convenient. They are also behind the success of those companies that managed to detect customers’ interest in this type of improvement.

8.2

Different Types of Organizational Change

As in the case of technology, organizational changes are not all alike. They vary according to their nature and magnitude. Some of these changes are minor or marginal. These are the ones that organizations experience every day inside and outside their structure, such as an absent employee or a transport strike that disrupts a work schedule. Sometimes these changes, although modest, require more than an adaptation but an evolution of the company. They require a concerted action by the leaders to change behavior, attitudes or the beliefs of individual employees. Other changes may be more radical, such as an economic crisis, the end of an exclusive patent or the departure of a prominent leader. All sustainable companies

8.3 The Reasons Behind Technological Change

53

have experienced such changes at some point. And it is because they were able to cope with them better than their competitors that they are still there. These turbulences do not fundamentally call into question the company’s strategic design. They are simply more disruptive than marginal changes, thus requiring more extensive recovery actions to reposition the company on its strategic trajectory and thrusting it forward. But certain turbulences can completely destabilize the organization by undermining its existence and purpose. The change is then revolutionary, in a historical sense, in that it yields a complete transformation of the company, which is pushed violently to metamorphose in the same way that water turns into ice or vapor. Some large companies managed to completely reinvent themselves by changing activity because their original business had become obsolete. But these are quite rare compared to a vast majority of firms that disappeared with the collapse of their industry.

8.3

The Reasons Behind Technological Change

The need for technical innovation is motivated by all sorts of reasons within a company. Leaders must understand and identify them beforehand because they influence the response both in terms of preparation and implementation. The first reason that pushes any company to innovate technologically is strategic in nature. Indeed, a new technology can help a company increase the value of the solution proposed to its customers and better differentiate itself from its competitors. In terms of offer, technological change allows a company to propose a unique, uncommon, or even unusual product. Moreover, if an innovation is radical, it will obliterate the competitors’ products, depreciating their value. In terms of process, a technological innovation leads to an improvement of the existing offer by making a product or service cheaper, more powerful, faster, easier to use, etc. Thus, the Internet has revolutionized the banking, retail, and tourism sectors by promoting the direct sale of these services. Some companies also invest in technological innovation to protect themselves from potential new entrants. In fact, the technological complexity acts as a barrier to entry into a sector; it increases the cost of initial investment and therefore reduces potential profitability. This may slow down the appetite of new competitors. Other companies also innovate to enhance their internal resources or skills. This is particularly true of companies that spend heavily on Research & Development. Research laboratories annually generate innovations—radical or incremental—and file patents to justify, protect and make profitable their investments in equipment and brainpower that can amount to millions of Euros. In some cases, technological innovation is not so much desired but, rather, coerced by a strong external force. Such is the case of computers where innovation on processors made by a handful of suppliers led to an explosion of computing

54

8 Innovation

power while their prices continue to fall. This has fueled the adoption of IT by all stakeholders in the business world.

8.4

The Origin of Organizational Change

The origin of a need for change can be exogenous or endogenous, driven either by external or internal forces on the company. Thus, some radical changes arise from outside the company, as in the case of a severe economic or political crisis. Other changes occur from within, such as a sudden disappearance of the management team or a violent conflict between managers. Similarly, some minor actions will need to be taken to accommodate external technology changes such as portable communication devices; or internal changes such as switching the cafeteria service provider. When the causes of changes are internal, it is easier to discover, analyze and come up with a solution. For example, a common reason to reorganize a structure is to provide top performing employees with new careers perspectives so they will not leave the company. Indeed it is always the best employees who are the first ones to leave their companies as they can easily find other opportunities in the job market. When the reasons are external, the need for transformation may be less clearly understood by managers, especially if the company lacks information about its environment. The risks of error in the drive towards changes are much higher when these changes come from outside. In that case, leaders run a greater risk of making bad decisions about modifications to be carried out. They must be well prepared in order to be able to take bold, yet rational, decisions.

8.5

Preparing for Change

The first step to succeed in technological or organizational change starts with a good preparation and a sound analysis of the situation. Consequently, leaders begin by analyzing carefully the context in which the contemplated changes will take place. This analysis of context is done through examining the degree and interest of the upcoming change, measuring the capabilities available and those that must be imperatively preserved, evaluating the necessary delay; estimating employees’ motivation and managers’ capacity to maneuver the change, as well as assessing their ability to enforce or halt a project related to change.

8.7 Change and Available Resources

8.6

55

Necessary Changes: Degree and Interest

The more important the change, the riskier it will be for the company. Leaders of sustainable companies first measure the amplitude of change before any implementation. Indeed, significant changes are not always the most pertinent. They also assess whether a possible change justifies the time and resources invested and the disruption caused by it. They realize that sometimes changes are implemented solely because they are good for the managers but may be bad for the company. For example, they consider with extreme caution any acquisitions and will sparingly approve such operations. Indeed, in the short term, a merger always improves the prestige and salary of the acquiring company’s officers. Yet, over the long term, more than every acquisition out of two proved to be failures that diminished the value of the firms involved. Similarly, sustainable companies never thrust blindly into a trendy innovation. They first assess whether the technology is basic, essential but undifferentiated, or a key technology building values and a unique product offering. Then they gauge the benefits and risks before considering a possible testing.

8.7

Change and Available Resources

Any change requires financial, human, and technical resources. However, many leaders systematically underestimate the cost of change. For example, many firms almost perished because of the financial cost of the Enterprise Resource Planning (ERP) installation that they had purchased. This type of computer software constrains the company’s structure and demands major adaptation efforts by employees to reorganize their way of working. Consequently, the cost for adjustments and training adds up, on average, to four times the price of the program itself. And this does not take into account the disruption caused during the installation of the software. Under these circumstances, it is not surprising that some companies nearly declared bankruptcy after the implementation of their ERP system, because they had not anticipated all the resources necessary for such transformation. Similarly, the majority of massive layoff plans turn out to be failures even though they were meant to rapidly restore profitability for companies. Analogically, layoff is an act of bloodletting; it weakens instead of fortifying the company, which finds itself depleted of the resources and skills necessary to recover after a crisis. Therefore leaders of sustainable companies adjust their change plan according to the resources available and not vice-versa. They prudently prefer to restrict their policy to their capabilities rather than risking the failure of an ambitious change due to lack of resources.

56

8.8

8 Innovation

Capabilities That Must Be Preserved

Many companies realize afterwards that an innovation introduced too quickly or an ill-conceived reorganization plan eliminated specialists or structures that were essential for the proper functioning of their activities. Sometimes these companies inadvertently give away trade secrets to their competitors through their outsourcing or relocation policies that are ill-conceived or poorly executed. While their goal is to lose fat and regain muscle and strength, they actually weaken themselves by fracturing their own bones. This is why, before making a decision concerning change in the organization, leaders of sustainable companies identify the critical resources and skills whose preservation is imperative. For these are the sources of value for the customers. They lead to a sustainable competitive advantage, fueling the company to achieve its strategic design.

8.9

Timeframe for Change

The speed required for a technical or organizational change is an important parameter to consider. Because timeframes may vary greatly depending on the nature of the changes to initiate, the conditions for implementations and the impacts on the company. Speed is essential to success in some cases, but not always. The key is to accurately assess the timeframe. Allowing an insufficient interval can lead to precipitation or improvisation. Conversely, overestimating the duration may lead to an unrealistic timetable which will have to be cut or shortened to avoid the risk of compromising the change’s effectiveness. At any rate, one must never believe that a profound change is always long. Even large organizations are astonishingly adaptable and capable of changing quickly and easily if one does it right. The frenzied individualism cherished in the Western world makes us forget that organizational systems and collective experience strongly influence the behaviors of individuals and organizations. Thus several sustainable companies have experimented dramatic and rapid recoveries.

8.10

Employees’ Motivation to Change

Many firms prove to be extraordinarily conservative because their employees are satisfied with the current situation and do not see the reason for change. This is a matter of collective as opposed to personal motivation.

8.11

The Leaders’ Ability to Lead Change

57

However, one basic requirement for an organizational change is the prevalence of employees’ dissatisfaction with their current situation. If this condition is absent, it is almost impossible to generate the spark that will motivate them to alter the status quo. Such a spark can only come from an emotional reaction of the individuals in the company or from the leaders’ will. In a structure made up of entities, employees or heterogeneous structures, it is easy to find some members who will agree to change the existing situation. On the contrary, aversion to change is common in companies where there is a high degree of homogeneity among employees in terms of experience, opinion or thinking. This results in the so-called phenomenon of pense´e unique and any action aimed at challenging the paradigm, that is to say, the current way of doing things, is rejected, sometimes violently. In these monolithic structures, the only organizational response to a problem is to do more of what it already knows; even though it would be better to do less or differently. They are victims of the Icarus syndrome and face a similar fate; by flying ever higher, Icarus flew too close to the sun, fell, and drowned in the Aegean Sea because the wax that was holding his wings melted. We will see in Chap. 11 how sustainable companies attempt to escape this paradox where an excess of success ultimately leads to failure.

8.11

The Leaders’ Ability to Lead Change

Sustainable companies ensure that their managers are prepared intellectually and in-practice to lead change. Even if they desire it, some middle managers do not have the ability to complete a major transformation in their structure, whether technical or organizational. In fact, in many firms, the Peter Principle, “every employee tends to rise to his level of incompetence” marries with Dilbert’s principle, “the least competent employees are promoted to management positions to limit the amount of damage they are capable of making.” However, even then, cognitive ability is not as hard to improve as one may think. Experience shows that when people are convinced that they can become more intelligent, they actually will; but if they are persuaded of the contrary, they will not change. On the other hand, natural talent is useless without practice. Ultimately, what one person can do in the beginning is less important than their daily efforts and their ability to learn. Sometimes, a managers’ inability is not related to their lack of ability but to the fact that they are already overwhelmed by changes. This is a fairly common situation in large multinationals with diversified activities. Because of the complexity of their environment, the number of their clients, the diversity of their offer, these companies undergo overlapping changes of different importance and nature. The collision of changes creates confusion to the point that sometimes managers do not know anymore how to prioritize one change over others.

58

8.12

8 Innovation

The Credibility of Leaders

There is a long list of leaders who tried in vain to transform large companies when in fact they had no authority to do so. The reasons for such failure are multiple. It may be due to a cumbersome structure that dilutes the instructions sent from the headquarters or, on the contrary, due to an overly decentralized organization that begets poor decisions by management. Sometimes leaders do not have the legitimate power required to transform their firms because they have failed to enlist support from key stakeholders, whether they be employees, middle managers, unions, shareholders, even the government or the media. Hence, decisions are challenged or deadlocked, hindering the acceptance by employees as well as the implementation. In general, this lack of authority reflects a lack of preparation or a poor assessment of the need for change. Leaders must also have sufficient authority to immediately halt any technical or organizational change even after it has started. Indeed, they cannot just plan a change and then hope that everything will work out for the better. Instead, for the sake of rational audacity and anticipation, they prepare alternative and backup plans in case the operations do not function as expected; or if the transformations prove disappointing and even dangerous for the firm. Yet again, when the time comes, leaders ought to have the authority to defer or stop the current actions. This is easier said than done. In fact, it often happens that a program, once launched, lives its life independently and no longer responds to the leader’s orders. One alteration leads to another which, like a snowball effect, infuses into the organization changes that are irreversible, unexpected and usually impossible to remove.

8.13

Support from External Consultants

From time to time, it is useful to have an outside view of the changes to be made and how to prepare for them. In this respect, external consultants can help leaders to formulate and plan for change. In some cases, the use of a large consulting firm, at a huge cost, signals to employees how important the change is for the leader. But the presence of consultants is not necessarily a guarantee that the employees will be convinced of the efficacy of change. External consultants can take a step back from the company’s culture because they have a more objective view of its functioning and thinking modes. A joke says that hiring a consultant is to hire someone to tell you the time while looking at your watch. This aphorism is probably true, but there are so many biases in decision making that it is justified to use consultants before embarking on an important change for the organization.

8.13

Support from External Consultants

59

Nevertheless, sustainable companies know how to avoid trends propagated from time to time by business news and consulting firms. These companies are sometimes labeled spinsters for not immediately adopting the latest trend in management. They prefer to observe the impact that such techniques may have on other firms that have already adopted them. Only then do sustainable companies adopt those techniques in their own way.

.

Chapter 9

Maneuvering Change

Once the decision on technical or organizational change has been taken, it’s time to put it in place. The leader’s great challenge now is to overcome the inertia of the structure. For Newton’s first law of inertia applies to organizations: if there is no force acting upon on an object or if the sum of these forces is equal to zero, the object’s direction and speed do not change, and its acceleration is nil. On the other hand, as in any system, once the structure is launched, it releases energy or the capacity to perform work. The challenge then is to channel and transform this energy in the best strategic interest of the company in the same way that electricity is converted into light, or into mechanical or thermal energies.

9.1

Implementation of Technological Changes

There are many reasons why companies are incited to invest in technological innovation, although it is a risky business because most changes are doomed to fail. On the average, only one product out of ten is still on the market one year after its launch date—that is a failure rate of 90%. Sustainable companies know this issue in their domain and base their strategy on rational audacity, as a consequence. They generally wait until a radical technology has been tested before adopting it for their products or integrating its use internally. Doing so avoids confusing their regular customers or destabilizing their operation. On the other hand, they systematically engage in practicing incremental technological innovation. They prioritize improving the performance of existing products; and technologies that are simple to use, compatible with other products, or where the possibility exists to test these technologies beforehand. The goal of these companies is to develop new products that adhere to their customers’ needs and to find new routes to differentiate from their competitors. They also pay a particular attention to the commercialization of their innovative products. They are aware that not all customers react the same way to a new technology. In fact, only a small minority among them buy a new technology E. Viardot, The Timeless Principles of Successful Business Strategy, Management for Professionals, DOI 10.1007/978-3-642-21236-9_9, # Springer-Verlag Berlin Heidelberg 2011

61

62

9 Maneuvering Change

immediately, out of curiosity or because it is a unique offering that allows them to distinguish themselves from the mass. Yet, the success of an innovation is measured by its adoption by the majority of customers, otherwise it is a failure. But consumers are generally conservative and often confused, even frightened, by a very radical change. Sustainable companies thus know how to reassure and convince these customers to adopt an innovative offer: they communicate in a soothing way and often rely on their strong and well-established brand image. They explain the benefits of this innovation, using terms their customers can understand and avoiding technical jargon. They also give customers the opportunity to test their new offer. When appropriate, sustainable companies partner with other companies and other organizations to expand the number of users and make this innovation a new standard in the market. They do not hesitate to cannibalize their offer, which means replacing some of their existing products with new products, introducing them as successors even if their content is radically different. In this manner, they do all they can to facilitate the adoption of innovation by most customers in order to transform this new technology into a commercial success. They have acquired a real know-how in disseminating innovation in the market. Sustainable companies also act with rational audacity regarding the process of technical innovation, which indeed can help create or reinforce critical skills within a company but can also destroy others. Consequently, if an innovation seems interesting, they will first test it on a small scale before generalizing it, if they deem it appropriate. In addition, they never rely on a single technology as this always runs the risk of becoming obsolete and being overtaken by another. Besides, the value of a technology often depends on its combination with other technologies that are more or less sophisticated. So they prefer to work in parallel on several potential technological innovations, then integrating them in their technical processes as deemed most strategically appropriate. In this way, they sometimes manage to create a new core competency by achieving novel combinations of technologies. Sustainable companies also continuously invest in developing new techniques. They do not do so simply to hold and master radical technological innovations. They know that electricity was not discovered through experimenting with candle lighting. But what they want most is to have a constant stream of improvements with potential strategic values, in accordance with their grand plan and with the aim to better serve their customers. Always following the rational audacity principle, sustainable businesses favor innovations which may be protected and ones that will bring them a secured income. Indeed, some technological inventions are open and easily imitated whereas others can be protected by a patent or a legal protection of industrial property. It can also be preserved by secrecy or by its sheer technical complexity, due to either its very nature or method of implementation.

9.2 Development of Technical Innovation

63

By definition, protected innovations are hard for competitors to imitate. This contributes to their rarity or their exclusivity. Innovation introduced in a product allows selling it at a higher price since it has a higher value for customers. Innovations relating to process provide the firm with a unique and sustainable competitive advantage which can often make a difference in the long term in terms of efficiency and performance.

9.2

Development of Technical Innovation

When it comes to technical innovation, leaders arbitrate between internal and external production. There is no automatic answer to the dilemma between “do” or “have it done.” Their choice depends on the resources that can be invested, the existing in-house expertise in R&D, the level of commercial and financial risk they are willing to bear and the degree of urgency to achieve the expected results. The degree of complexity of innovation is also a crucial factor. Indeed, the more complex is an innovation, the harder it is for the company to achieve the necessary developments on its own. Concerning the core technologies that need be mastered by all competitors in the industry, sustainable companies often opt to share development costs through alliances or partnerships. On the other hand, they usually prefer to develop internally technologies they see as key resources. They retain exclusive ownership and thus ensure a significant competitive advantage. This is particularly true in the case of noncomplex technology, and when they have time, financial resources and sufficient expert personnel to conduct research with a reasonable chance of success. However, they often prefer to buy these key technologies when they need them urgently and when they have sufficient financial and organizational resources. They can then exploit a license or an available patent, or they may directly acquire the companies that own the desired technologies. Some companies thus develop a specific competence by consistently and repeatedly making acquisitions. They learn how to have a solid understanding of their needs, identifying the best technological solutions available on the market, negotiating the patents or licenses, and finally mastering the integration of new employees once they have bought a business. All these elements represent a veritable know-how and give them an extra competitive edge because very few companies dominate these elements completely. Finally, in terms of organization, sustainable companies generally prefer that experiments in new technologies be held at the headquarters with the funding from potentially interested divisions. On the other hand, the diffusion of these technologies is carried out by the divisions, for it is them who are in contact with the markets.

64

9.3

9 Maneuvering Change

Implementation of Organizational Changes

Ideally an organizational change is a tempered, organized and well planned operation. But sometimes the changes are driven by a crisis—internal or external. In some cases, form may be more important than substance. Indeed, modifying the symbols of the company or work routines may be necessary and sufficient to influence the workers’ attitudes so that they do something new. Etymologically, a symbol is the concrete representation of an abstract concept. There are many symbols in a business, such as office size and location, type of car and the various benefits attached to a senior position. They embody the power, authority or significance of a person. Also symbolic are the language used, the social rituals unique to the company— such as promotions, year-end celebrations, or strikes—or certain individuals who are idealized and presented as models for other employees. So sometimes a change of dress code or usual language, a relocation or promotion of an iconic employee is enough to change the organizational behavior. Organizations are like molecules. Existing links must be broken by providing energy to free their constituent atoms. In an analogous manner, sometimes the simple act of breaking an organizational routine, that is to say the habitual way to perform an activity, liberates individuals from their shackles. Tradition is a formidable wall to overcome; it makes employees stand still. And sustainable companies’ leaders know that breaking habits will yield changes in attitude. But, most often, symbolic or procedural detailed changes are not sufficient. Then the changes concern the activities, resources and skills of the company. As the case may be, some of these resources and skills may have to be discarded, others may need to be acquired or developed to change the structure in the desired direction. The successful experience of sustainable companies which have carried out many changes in their life makes it possible to identify some rules that leaders must follow to succeed in effectively changing their firms. First and foremost, leaders systematically experiment before making any assumption. Then they define their timeline as well as their style in heading the project. Upon starting, they give a clear, adequate, and credible direction to launch the operations. Finally, throughout the whole process, they show their skill and tenacity but also their sense of responsibility.

9.4

The Principle of Systematic Experimentation

Sustainable companies hold a secret in effectively transforming themselves: through experimentation. Any change is potentially dangerous and the degree of risk is generally proportionate to the magnitude of the transformation aimed at. Thus sustainable

9.5 Controlling the Operational Timetable

65

companies’ leaders systematically act with rational audacity. They do not place double-or-nothing bets on their company’s destiny. They take some time to test. As in the case of a technological innovation development program, they set up a temporary work unit, with its own resources, dedicated to the project. This work unit is in charge of developing and testing a given change within the company, then measuring the results over time. At the end of the test phase, the leaders decide to generalize whether or not to expand the change to the rest of the structure, according to the assessment made. Once this decision takes place, the results gathered from the experiment are used to build the change deployment system to be applied throughout the organization. That said, they can, at any time, accelerate, slow down, or halt the project. They retain control of the situation because they know that some firms perish from uncontrolled organizational revolutions that were intended to do more good than harm. They view change as a mustache one shaves: a temporary and always reversible action. This ability to conduct small experiments gives them the opportunity to learn along the road. It provides sustainable companies with a sustainable edge over their competitors who are either too conservative or too bold. They progress through experimenting, keeping what works and discarding what does not.

9.5

Controlling the Operational Timetable

In addition to testing, time management plays an essential role in implementing change. This concerns both the timetable and also the phasing and pacing of various operations, as well as the frequency of adjustments. Timing is often crucial. There are launch windows during which change is easily implemented. Some of these windows are: after an acquisition, the appointment of a new leader, the successful launch of a project or even the unexpected arrival of a new and dangerous competitor, etc. When the company is not suffering from a crisis, such events make the employees accept changes that they would normally reject. Because any major disruption blurs the employees’ perspective for a period of time. Under this new pressure, they are ready to endorse a proposal for change that they would not normally accept. Once the disruption has passed or been acknowledged, the situation returns to the normal routine. The company finds its ways of thinking and its usual functioning modes. The launch window has now closed and any transformation becomes difficult to perform then. The pace of change is also important. Rapid changes are often the most successful, contrary to what many leaders believe, that the more complicated the change, the longer it takes. A swift and well organized change encourages the employees’ dynamism and reduces their anxiety. Indeed, when the employees know that decisions are pending,

66

9 Maneuvering Change

they cease all activity until they know what will happen to them. This can completely paralyze the company. This is why sustainable companies prefer to carry out promptly all required job cuts and downsizing operations, as well as other personnel reassignments and divestments. They then turn the page and anchor the structure in the actions to perform for the future. Conversely, spreading out these actions over time contributes to create a deleterious and demoralizing atmosphere for the employees who live in perpetual fear for their future. Therefore, all positive actions, such as a merger or reorganization, are conducted at a brisk pace. This facilitates the rapid finalization of the change and demonstrates its relevance to the employees who are not yet convinced. Finally, it appears that too many changes, simultaneous or successive, increase risks rather than reducing them. The saying “less is more” holds true in this case; a burgeoning of excessive development projects or changes may eventually lead to a breakdown. This erases the existing structure without erecting something new in its place, due to the confusion and even chaos generated. Unlike nature, which loves disorder, sustainable companies do not show much liking for paroxysms of changes. They do not constantly reorganize themselves because they know the risks associated with changes, especially if they are excessive in nature or in their rhythm. The leader acts as a skipper who does not constantly change sails, but always adjust the settings to reach the goal as quickly and safely as possible.

9.6

The Appropriate Maneuvering Style

Leaders possess a wide range of styles in maneuvering change. They adopt a different style depending on the nature of the required change. Thus, in a radical change outside of a crisis period, they broadly set the outlines of change and entrust the implementation to their managers and employees. Doing so allows for more involvement from the employees although the risk that they feel manipulated cannot be entirely discarded. For smaller changes, or changes achievable over the long term, leaders prefer a collaborative mode. They set up groups dedicated to strategic thinking in charge of making recommendations for possible changes. This encourages communication, enhancing the quality of strategic decisions, and facilitating their appropriation. But it is a lengthy process. Besides it does not encourage creativity because the reflections are generally limited to what is already done in the firm.

9.7 A Clear, Appropriate and Reassuring Communication

9.7

67

A Clear, Appropriate and Reassuring Communication

At the beginning of the change program, leaders indicate clearly what is expected from the organization and its individual members in terms of goals and achievements. This is important to reassure and motivate staff. Indeed, most human beings hate new things that are too original and we abhor the unknown. Not everyone has the spirit of an explorer, which is, by no means, a major quality required to be recruited or be successful in a company. Appropriate communication among all the employees is also necessary. It is sometimes imperative to raise individuals’ awareness. Indeed, the absence of dissatisfaction with the current situation may be linked to the fact that the employees do not realize the objective reasons for change. In this case, sustainable company leaders alter this misperception. Some rely on their charisma to incite the employees to dream, and encourage them to move. Others explain as teachers the reasons for change. Others prefer to put their organization under pressure through setting ambitious goals that generate a sense of effort and frustration with the current situation. Leaders should not hesitate to keep communicating about the contemplated change, using the most appropriate means. If the change is simple, traditional means of communication such as e-mail or videoconferencing should do the job. If the change is more complex, it is better to explain it face-to-face with small groups of key individuals or middle managers. They then cascade the messages to other employees. The Principle of Simplicity here exemplifies its full value. In fact, excessive communication on a limited change may create confusion by inducing individuals to dig for a hidden meaning to it. Conversely, lack of information, particularly for major changes, can only lead to mistrust and misunderstanding, which will limit employees’ commitment. Finally, to ensure the engagement of their troops, leaders do not hesitate to show confidence in the planned change and actions even if they sometimes have doubts. Here is the paradox: everybody expects that leaders can exert a decisive influence even though it is a known fact that they can only have a limited impact. Leaders should set an example so that their enthusiasm may be communicated to the majority of employees. Otherwise, they should not be surprised that no one follows. Leaders act as if they have control over the events, but they are wise enough not to become complacent. They constantly update their information and do not hesitate to question their choices in order to be prepared for all contingencies.

68

9.8

9 Maneuvering Change

Political Agility

The need for clarity and consistency during change may incite confrontation with individuals and groups who oppose the announced changes. Some may be backed by powerful external supports such as shareholders, bankers and influential politicians. Any organizational change inevitably leads to changes in power among the various stakeholders of the company. This is where the leaders’ political agility plays an important role to achieve a significant change. So they identify in advance the forces in favor of change and those opposing it. Leaders forge alliances with the former forces and use their networks; with the latter leaders try to convince them to change and, if this fails, leaders confront them and sometimes exclude them from the game.

9.9

Tenacity in Fulfilling the Change

Great reformers are both inspired prophets and architects. Thus, in parallel with their communication, leaders set control measures to realign the structure in the desired direction whenever it deviates from that direction. They also add consistency, which is needed to maintain the pace of change. For, as in physics, any transformation is accompanied by some loss of energy, which makes perpetual motion impossible. However, the speed of an object in motion, to which a constant force is applied, would keep increasing. Therefore leaders keep their organizations under pressure to make them evolve to the desired state. In particular they use the various tools at their disposal to motivate their employees, such as bonuses, pay raises or promotions. These are like enzymes that allow chemical reactions to occur. Without these catalysts, the reactions are very slow or nonexistent and change does not occur. They also rely on the managers in their companies who are essential for relaying their actions. It is true that some managers may sometimes act as filters, or even resist changes coming from the top. In this case, they dismiss them. Indeed, dismissals do not only concern employees. Sometimes, they practice “percussive sublimation” as described by Peter, which means to grant an incompetent person a promotion to a higher position in appearance but with much less responsibility in reality. Exceptionally, they may even remove an entire level of middle management in the hierarchy, should those managers be too antagonistic or too passive. But normally management is the front line to deploy and monitor the change operations. Middle managers play a primary role in translating the change desired by the head office to operational staff; this is particularly true in multinational companies where the local cultural dimension may sometimes distort the understanding of decisions made by the head office located in another country. They are also in the best position to adapt decisions that are specific to the local situation. Finally, they can give feedback information concerning the various

9.11

Change in Times of Crisis

69

obstacles encountered in implementing a program of change, and suggesting appropriate solutions.

9.10

Responsible Conscience

Leaders of sustainable companies accept the difficulties inherent in change, which naturally increase in importance as the transformation increases in complexity. They prefer to seek solutions rather than finding scapegoats. For a cull to punish those responsible will only lead to inaction; it distracts the attention and the reflection of all parties involved from finding constructive solutions. Leaders of sustainable companies assert their sense of responsibility when they decide to halt a change program because it is technically impossible to achieve or because it generates too much dissension within the organization. This decision is sometimes hard to make and difficult to apply when a heavy structural change creates a momentum which is almost impossible to stop. The situation may even be aggravated by the leaders. This happens when they continue to invest in a project that goes wrong, thinking it will get better by putting more resources and energy into it. What follows this escalation of commitments is the opposite. Sometimes leaders do not want to stop a project even if the results seem questionable because they think that this would be admitting personal failure. Such conduct is a characteristic of those individuals who enjoy self-satisfaction— the best way to fall into blind self-esteem is to refuse reflecting on one’s errors. For that reason, some companies are paying the high price for the egos of their leaders who refuse to question themselves thereby changing the company against its long-term interest. On the other hand, the leaders of sustainable companies always behave as persons bearing full responsibility for the long-term success of their firms. Moreover, it is no coincidence that most of them receive more than decent wages. Indeed, when CEO’s are paid millions in bonuses a year, it is not surprising that they opt for long-term risks to ensure substantial short-term income for themselves. Instead, a proper remuneration for the leaders sends a message that performance results from a collective effort and does not depend only on one individual. This helps to stimulate creativity, reflection, and hard work in every employee, all of which are essential for a successful organizational change.

9.11

Change in Times of Crisis

From time to time, an unexpected situation such as an economic downturn, an unforeseen attack from a competitor, or an internal upheaval may put the company’s survival at stake. It may disappear or be acquired by a competitor if it does not react.

70

9 Maneuvering Change

In this situation, speed is essential to implement a reorganization plan that firmly addresses the problem. But speed does not mean precipitation. Leaders cannot overlook the preliminary analysis of the context in order to prepare for the appropriate change; although they will do so quicker and launch the operations rapidly. In times of crisis, the leaders’ role is primarily to clarify the direction of change and establish priorities to ensure the continuity of short-term financial liquidity and some key skills necessary for business survival. To achieve this, they do not take the easy way out by stopping production and investment, or implement massive layoffs; because these drastic measures will only jeopardize the chances of success when the company recovers from the crisis. Indeed they must also prepare for its rebound after the crisis. Recovery plans that work best in an emergency are usually those which put the company back on the right path rather than venturing into new territories without any experience and proper preparation. It begins with focusing on the groups of customers that are most essential to the company in terms of strategic purpose, profitability and loyalty and also the development opportunities in light of the competition. Indeed, there is no recovery without a comprehension of and a better tailored response to customers’ expectations. This requires getting closer to the customers and having an effective marketing information system able to reliably update the leaders on market developments. In parallel, the portfolio of products and activities are to be simplified to make it easier for customers to understand and less costly for the structure to manage. The supply, production, and logistics functions are also tightened to be more efficient and productive. To be effective, leaders also ensures the support of the main key stakeholders. Chief among them are the employees with their unions, for without their consent nothing can be done and they can block any change. Bankers and shareholders also have their say. A crisis frequently involves financial restructuring, often resulting in a cancellation or rescheduling of debts or by issuing new shares to raise capital in order to establish the financial security for the company. In some cases, the recovery plan must also receive the approval of international authorities, national or local governments. This happens when the company benefits from subsidies or public financial guarantees. It is also mandatory when the company operates in an area deemed critical to the safety or stature of a nation. The government may exercise its right to veto against takeover by a foreign competitor, or against closure of an activity that is considered essential for the country. Sustainable companies have all been through one or more crises. But they always survived, otherwise they would have disappeared as did many of their competitors that went bankrupt or were absorbed by other firms. They pass through these crises thanks to their strategic design which is like a compass for them: in the storm, it allows them to discern the direction to take and the actions to carry out.

9.11

Change in Times of Crisis

71

Faced with a major storm, many companies get rid of their leaders for various reasons. They criticize these deposed leaders for their lack of foresight and inability to avoid the worst; or because they no longer have credibility facing various stakeholders involved in the implementation of the recovery. At best, these companies find it appropriate to transfer these leaders, even if their skills are not in question, to symbolically show that the company is actually changing. Thus, it is very tempting in a situation of crisis to call on leaders from outside who will bring a fresh perspective or previous experience of setting up a recovery plan. Yet sustainable companies will rarely proceed in this direction. They do not suddenly change the captain when the storm approaches. When they are forced to change a leader, they prefer to select one in the pool of managers who already know the company and its procedures. Because it is a mistake to believe that a competent leader can be a good one in any company or any sector of activity. In fact, to become efficient, leaders must develop a thorough knowledge of the sector, structure, employees and their tasks. It takes time and the best leaders realize their full potential only after years of experience and learning. Thus, sustainable corporations tend to have leaders who remain in place longer than the average. Their replacement is usually planned and prepared with much care and anticipation. The successor is chosen internally, leaving ample time to detect potential candidates and to best prepare them to take the leader’s function. Ultimately, it is never easy to change, even though it’s often necessary. Nobody can plan everything. The inertia of organizations is sometimes impossible to overcome, especially when this is due to cultural reasons and the lack of involvement. Therefore sustainable company leaders think twice before embarking on drastic changes. They always avoid change for the sake of changing simply because it is fashionable or evades the real issues at hands. Change, for them, always has a sound reason and is always tested to find the appropriate mode of application.

.

Chapter 10

Growth

In biology, the growth of an organism is a progressive increase in its size without loss of individuality or interruption of its functional activity. Growth is not always compulsory for a firm. Some of the oldest existing companies are medium sized and continue to prosper. On the other hand many sustainable businesses have acquired a dominant position in their industry, which is the fruit of their growth over time. However, if size and longevity are often associated, the relationship is not direct: longevity is a factor of growth, but growth is not always a factor of longevity. In fact, the large size of some companies did not stop them from going bankrupt and sometimes even precipitated their decline. For the growth of a firm is not fundamentally determined by the increase in number of its employees and its capabilities. The key indicator is the increase of its customers and turnover and, at the same time, the strengthening of its market share against its competitors. In more military terms, business growth is measured by the size of territories conquered and controlled, and not by the number of divisions. In fact, many large armies have proved powerless to safeguard the interests of their nation. The example of sustainable companies shows that growth is a consequence and not an objective of the strategy. Growth has different origins and may also have various translations depending on the choices made by leaders. Finally, it meets natural boundaries that should not be exceeded.

10.1

The Causes of Growth

There are several reasons for which a company grows. Indeed, growth allows the company to gain as many customers as possible, increasing its attractiveness, exploiting capabilities and achieving economies of scale, spreading risks or simply answering the will of its shareholders and executives.

E. Viardot, The Timeless Principles of Successful Business Strategy, Management for Professionals, DOI 10.1007/978-3-642-21236-9_10, # Springer-Verlag Berlin Heidelberg 2011

73

74

10.2

10

Growth

Increasing the Number of Clients

The most natural reason for growth is to retain as many customers as possible. Sales development may sometimes be accidental or intentional, when customers scuffle to buy products or services. But when such a phenomenon turns out to be just a fad, such growth does not last long. When growth comes from a relative absence of competition, this near monopolistic situation is always under the threat of a ban or regulatory restrictions meant to favor the emergence of new rivals. In this case, the company defends its secured situation by protecting its exclusive resources using legal means such as patents, or trade secrets. But usually the development of customers results from the successful accomplishment of the company’s strategic plan. Thus, all large-sized sustainable companies defined their mission at a near-universal level. They want to offer their solutions to a very large number of customers, even to almost all mankind, in the entire world. The success of some companies comes from their founders’ desire to make hair dye available to all women in the planet, to propose cheap razors to all men, or to build a car that is affordable for the masses. This also applies to industrial markets. Some companies voluntarily limit their activity to serve only a few firms and become their exclusive or preferred supplier. They then grow at the pace of these few customers they have chosen. But other firms have a broader vision of their mission. They feel they must sell their products and services to all types of businesses or government bodies, without any limitation of business sector or geographical boundary. When they succeed, they become global companies.

10.3

Increasing Attractiveness

In nature, small stars revolve around bigger ones and not the reverse. The like applies in the business world where large firms exert a gravitational power over firms of more modest sizes. In fact, a large market share usually allows its holder to dictate the rules of the game in terms of distribution, communication, or price. If, in addition, the number of competitors is limited and the barriers to entry are high, then the law of the jungle prevails. A large size is also advantageous when dealing with distributors. Indeed, a large volume of products to distribute leads to better conditions for prices and product listing by distributors, and even more so when the company represents a very large share of the distributor’s total sales volume. This power of attraction exists also vis-a`-vis suppliers that spontaneously come forward to do business with a large potential client; there is no need to solicit them

10.5

Achieving the Economies of Scale

75

for they are attracted by the opportunity to obtain substantial orders. Moreover, a large company will be in a position to negotiate very attractive prices due its high volume of purchase, especially if the quantities it orders represent a significant weight in its suppliers’ total sales. This lowers unit costs of purchase and therefore brings heftier profits. Strengthening attractiveness leads to acquisitions of competitors, distributors or suppliers to take full control, thus extending the market power.

10.4

Exploiting an Excess of Resources

Growth can come from exploiting excessive or completely underutilized resources that the company can neither reduce nor sell. Some sustainable companies expanded in this way by taking advantage of their vast infrastructure (factories, communication networks, stores, etc.) or their intangible resources (brand, managerial ability, high creativity, etc.) to start new businesses, which generally are complementary to their original business. As a result substantial economies can be generated through the creation of synergies between different activities. Indeed, their combination as a whole normally performs better than the sum of their parts through the joint operation of resources and common skills.

10.5

Achieving the Economies of Scale

Economies of scale on resource utilization may sometimes be obtained through the development of activities. In fact, a greater volume of production can spread out fixed costs on a larger number of products, which in turn lowers their unit costs. The savings can then be used in two ways. Either it is translated into a reduction in product price with the aim of reaching new potential customers that are sensitive to lower prices; or the company does not change its price and so it improves its profitability by earning more per product. This then enables the company to better pay its employees, shareholders and other stakeholders. It may also make provisions to finance future development activities, such as technological or commercial innovation, or to extend its offer to other potential customers. Obviously, it is essential to sell the surplus of manufactured products to achieve economies of scale. Otherwise, the production increase will only inflate stocks and increase the company’s expenses. This then results in a negative return on investment in production.

76

10.6

10

Growth

Dealing with Risks Within the Environment

Some sustainable companies have grown with the aim to better attenuate risks associated with their environment. This is particularly true of companies that have a cyclical business where periods of rapid booms in sales are rapidly followed by declines. Actually, many industrial markets experience a cyclical activity because of the accordion effect caused by changes in final demand that strongly affect each of the actors in a sector. The situation is similar to a traffic jam on a motorway: a car behind another car which reduces its speed will have to reduce its speed too; and, as each car behind will have to reduce its speed even more, the end result is a total stop. The more a company is distant from the final consumer, the more it is affected by this phenomenon. The impact of cyclicality is even worse when it is difficult to immediately stop the production plants as soon as a decrease in demand is detected. As a result, inventory pile-up will have to be cleared before resuming production. The cyclical phenomenon is also predominant in activities that are sensitive to fashion, where customers’ affection for a product or service is followed by disaffection, sometimes quite rapidly, contributing to fluctuations in demand. Consequently, leaders seek to diversify their activities to better attenuate risks. The goal is to offset revenue decreases in an activity by an increase in another at a given time, smoothing out financial results and stabilizing the company’s profitability. This may also even prevent the company’s demise when its core business is on a perpetual decline.

10.7

Responding to Shareholders’ and Managers’ Desires

Some company’s shareholders may demand a continued growth of its profits to stimulate an increase in its share price, thus generating financial gains. They do not hesitate to promise leaders major monetary rewards directly linked to the growth of earnings. Recent crises, however, show that this is a myopic policy that sacrifices longterm interests for short term ones. It leads to diversification without strategic significance or to high risk-taking. Some large companies have gone bankrupt for having massively invested to grow rapidly while demand for their products or services did not keep pace. It is for this reason that sustainable companies do not have such delusional remuneration systems; they do not promise huge sums to their leaders to reward them for short-term actions, but they assess and reward them based on their results in the medium and long term.

10.8

Specializing in the Current Market

77

Beyond any financial motivation and regardless of pressure from different stakeholders, the growth policy of a company may sometimes be explained by the egos of its leaders. Many companies have been lured to their doom by the megalomania of their leaders. The hunger for power is a dangerous motivation to guide a growth policy. It leads to excessive risk-taking since risks are underestimated by a leader who believes he is more powerful or more skilled than the rest of the market. This extreme appetite for risk is further exacerbated when the company culture emphasizes aggressiveness and fearlessness at the expense of realism and wisdom in choosing the dominant culture in the organization. Whatever the reasons, every firm can grow either by specializing in activities in its current market or by diversifying its customers, its offer or both.

10.8

Specializing in the Current Market

The easiest way for a company to grow is to defend its home base and to increase its market share in its core business against its competitors. A good knowledge of customers and their needs, a good use of resources and core skills based on a solid organization to meet customers’ demand with a strong and sustainable competitive advantage, an effective capacity for implementing technical and organizational change are all assets that favor growth. This mode of growth is called organic because it values all assets already available to the firm. This form of expansion is easier when the market is expanding with a continuously growing number of customers interested in the proposed products and services. It is the company that is best prepared in terms of capabilities and most willing to take advantage of the “fair winds and following seas” that can capture additional demand. Sometimes the market leader company cannot or is not willing to respond to this additional demand; it then offers good opportunities to more determined and alert suitors. Growth by specializing is obviously more difficult in static or declining markets. Acquiring one or more competitors is then the best—and sometimes the only— solution to increase market share of a shrinking pie. Some sustainable companies have become real experts in acquisitions or in integrating less efficient competitors. In this regard, size does not matter. Some companies manage to buy larger competitors than themselves and absorb them successfully. Their victory is due to their speed, quality of execution and their proactivity, which are the fruit of their determination to achieve their strategic design.

78

10.9

10

Growth

Diversification of Solutions

Another way to increase market share is to offer new products or services to existing customers. If such products or services are adopted by the customers, the purchase volume per customer will increase along with the total turnover. Such a development mode is based on the ability of the company to design new products. It also depends on its ability to manage technical change (see Lesson 6) and to create a sustainable competitive advantage (see Lesson 3) with unique, unmatched, and evolving skills, in relation to market conditions and the environment (see Lesson 4). This requires special marketing research skills to understand and identify the expectations of existing customers and to identify all the needs or desires that the company can fulfill. Experiences in communication and brand management are also useful to change the perception of a new product by the customers. Indeed, the customers may be destabilized by the fact that their regular supplier offers them something new.

10.10

Diversification of Customers

To increase the number of its buyers, a company may also turn to new customers to whom it presents its catalog of solutions already available, possibly with original usages. The most common way to perform this is through geographic diversification crossing the borders of its home market with the aim of expanding internationally. The majority of sustainable companies have successfully achieved this internationalization. They deserve twice the merit for developing turnover and spreading out risks between different zones. To be successful, internationalization involves organizational changes often accompanied by cultural changes. Internationalization means working in many different countries around the world with executives and employees who speak different languages, and have different customs and commercial approaches. Many companies cross these borders poorly or not at all. Some simply lack resources. Others prefer to retreat back to their domestic markets after suffering a failure. The experience of sustainable companies indicates that successful internationalization is easier when all employees, regardless of their location, share the purpose and core values of the company. Indeed such values provide the benchmarks and bonds necessary for all members of local organizations, sometimes very far from the headquarters, to integrate into the structure and to participate fully in its growth by adapting to the reality of each geographic market. The quality of management is also important for a successful internationalization. The role of leaders is particularly important to ensure the respect of

10.11

Total Diversification

79

fundamental values and principles when the commercial development of local entities is implemented. When it comes to internationalization, sustainable companies proceed by successive testing, as with any change. To enter into new geographic markets, they usually start indirectly by contracting a distributor or a local partner. This allows them to test the water while minimizing risks. If the experience proves positive, they move quickly to the next step which is direct investment in the creation of a local subsidiary. This gives them direct contact with the customers, and complete control over the operations to be performed to satisfy those goals. There is no uniform structure model to internationalize. Indeed, some large multinational sustainable companies are centralized while others are decentralized. Each form has its advantages and disadvantages in terms of speed of reaction, adaptation to local markets, capacity to take advantage of synergies, and economies of scale or of scope. A strategy of internationalization taken to the extreme can lead to the development of new offers and the establishment of local structures dedicated to a particular geographic market. It requires a de facto development of new skills. In this case, the generalized internationalization of activities is close to a total diversification.

10.11

Total Diversification

Total diversification means standing out from its core business and offering new solutions to new customers. If such new activities have some points in common with the existing activities, diversification is considered related. If the activities are completely new to the firm, diversification is called conglomerate or absolute. The majority of sustainable companies proceed through related diversification. To generate economies of scope, they rely on their portfolio of available resources and enrich it by building or acquiring resources and expertise adjacent with the aim to engage in new activities. When such new activities are positioned upstream or downstream, the company’s core business—that is to say at suppliers’ or distributors’ level—, the movement of diversification is called vertical integration; if new activities are complementary or competing with those that already exist, they are referred to as integration or horizontal diversification. In all cases, a related diversification is based on synergies with existing skills and resources of commercial, technical or managerial nature. It is obviously less risky than an absolute diversification since the company diversifies on a familiar terrain, which facilitates experimentation—essential to any major change—and allows for a better control. Moreover, in case of failure, related diversification limits risks and avoids catastrophic consequences. Indeed, the firm still has the ability to stop the new

80

10

Growth

activity and to turn back without jeopardizing its whole organizational system and its operation. In this manner, some sustainable companies successfully implement one related diversification to another, which drives them more and more apart from their initial activity, but still achieved by leveraging existing or recently developed skills. In contrast, conglomerate diversification enforces coexistence of completely independent activities that do not share common capabilities. The only common point is the company headquarters. Basically, this type of diversification meets the same logic as that of fund managers who diversify their risks by investing in the capital of several companies. It is frequently linked to the strong hold of a leader, usually the founder, whose strategic vision is not just the universal propagation of a single type of solution. As such, the company’s evolution will reflect changes in his vision, depending on his degree of reflection, maturity or his ongoing desires. Other conglomerate diversifications are made to better attenuate the risk when the principal activity is bound to disappear in short- or medium-term. This is how a chemical group evolved into a giant in the tourism business; how a company originally in the field of paper pulp has become a leading mobile phone company; and a company that a century ago used to sell soft drinks is now a leading global hotel chain. Clearly, a policy of total diversification can lead to a genuine strategic dilemma when a new activity comes to be more successful than the original activity when the firm was created. Faced with this situation, leaders of sustainable companies have always defined a new strategic plan for their company, which allowed them to avoid the fate of those companies that have lost their souls from over diversifying. The latter eventually disappeared because their customers, their employees or their partners, who no longer understood what the leaders wanted to do, withdrew their confidence and gradually abandoned them.

10.12

Growth Management

Growth is a particular mode of change. It has a direct impact on the structure and operation of the business. Therefore, as with any transformation, growing is never without risk. Internal development is not easy either: the failure rate after one year of a new product is, on average, 90%. External growth through acquisition is no less perilous. In fact, various studies show that more than half of mergers or acquisitions turned out to be strategic failures. In other words, companies would have been richer, more profitable and more effective had they remained independent. One explanation is that many mergers or acquisitions are made for reasons that are more financial than strategic. Short term gains are the priority and leaders have

10.13

The Limits to Growth

81

little regard for their company’s real capacity to absorb a new entity. This explains many transplant rejections, which eventually translate into failed mergers. The fact is that any merger process is tricky. Consequently, sustainable companies tend to favor acquisitions of small structures rather than large-size companies that are always much more complicated to integrate. In this way, they avoid many unnecessary qualms. Rather they focus on the future and the new operations to perform. Some sustainable company leaders give considerable autonomy to the companies they have just bought. Others operate in synergy by facilitating their cooperation within the different units of the group. Others develop a synergy through the provision of capabilities from the headquarters such as a brand image, a particular managerial know-how or a specific technical expertise such as the implementation of an ERP system. In reality, many firms fail to grow because they fail to integrate or nurture new skills and resources. It is the experimentation and the quality of execution of operations necessary for growth that enable sustainable companies to develop better than others. By expanding their markets and resources, they enrich their genetic heritage and contribute to their perpetuation.

10.13

The Limits to Growth

Undoubtedly any growth policy encounters limits, especially when the company begins to reach a large size. One risk is the actual physical saturation. The company undergoes a situation analogous to a water lily doubling in size every day; it takes 9 days to occupy half of the pond, but on the tenth day it fills the pond completely. Some growth rates are thus unsustainable on the long run. They lead the company to an asphyxiating saturation with no more space to grow. Or else the company is overheating and thus becomes less profitable because of its diminishing yields or diseconomies of scale. There are also some legal risks related to achieving a dominant position in the market. As representatives of customers and consumers, governments do not appreciate monopolies apart from those which belong to the public sphere. The danger for the company is then to be nationalized or forced to sell some activities under penalty of fines that are generally substantial. Growth can also cause a “strategic cataract,” that is to say, a clouding of leaders’ vision that occurs when the size and complexity of the organization make them lose touch with reality, especially with the market and the competitors. They are engulfed in internal priorities where what is urgent often outweighs what is important, in particular just after an acquisition. They then focus only on internal problems and short term issues, ignoring the real strategic priorities. Bankruptcy is not so far away in this case.

82

10

Growth

There is also a risk of “strategic astigmatism” due to leader’s sources of information. Through sheer lack of time, leaders come to rely only on the information provided by their subordinates and specialists even though they are interested in what goes on outside. Now there is a natural tendency in large bureaucracies to present only good news to executives. This prevents the announcer from suffering the messenger’s syndrome which, in ancient times, implied that the issuer of bad news was considered guilty and then executed. Therefore information is filtered positively at every level of the hierarchy, completely distorting the reality. That’s why leaders of sustainable companies always take the time to talk directly with the customers. In this way, they retain a sense of reality and are cautious with excessively positive market analysis. Overgrowth may finally cause organizational obesity. The company can no longer adapt because of its cumbersome structure that continuously expands and keeps becoming more complex. It may become more and more disconnected with changes in its environment or is unable to effectively implement the decisions commanded by the brain. In response, the experience of sustainable companies shows that the success of a company depends more on its reactivity than its size. Thus, they do not hesitate to split structures that have become too heavy to make them smaller in order to regain flexibility and velocity. This is not an obvious choice because, in times of growth, firms tend to avoid questioning themselves, and to opt for the easy way out by simply adding staff to the existing structure. More generally, they regularly evaluate the potential of each activity. They avoid growing beyond the optimal threshold that will only tire them out. This threshold is reached when an activity ceases being profitable because the market is no longer able to sustain further growth, and when investments required to acquire marginal customers become too expensive in relation to the economic returns they bring. When they reach this stage sustainable companies prefer to stop an activity or sell it off, even if that means reconsidering their strategic design.

Chapter 11

Execution and Humility

The strategic success for a firm can only be measured over time. Many companies that were at the top one day can suddenly go bankrupt. For those firms that did not completely disappear, they never regained their past success, except some very few exceptional cases. The leaders of sustainable companies are aware that the Tarpeian Rock is close to the Capitol. They know that strategy is not the only element needed to succeed. For success also depends on the quality of operations and sometimes on the mere chance of seizing the right opportunity at the right time. So they inject a healthy dose of humility into the relative importance of the strategy they develop as well as for their own actions.

11.1

Quality of Operations

Execution is at least as important as strategy in the long term success of a firm. To paraphrase General Moltke, the famous German general of the last century, success in business often depends less on what we do than how we do it. Firm resolution and tenacious execution of a simple idea will most certainly lead to the goal. Many brilliant strategies designed by inspiring leaders have failed because the corresponding organizations were unable to perform the necessary operations in due time. In this case, Thomas Edison’s maxim is most pertinent: “Vision without execution is hallucination.” Sometimes failure comes from the lack of available capabilities. The company will explode like the frog who wants to be bigger than the ox in one of Aesop’s fables! The responsibility rests with leaders who failed to choose a strategy commensurate with the capacities at their disposal. However, the impaired performance may also be related to a lack of training or of employees’ discipline. This is why large sustainable companies built speedy logistics in production, transportation, and distribution. Their members are experienced and regularly trained. E. Viardot, The Timeless Principles of Successful Business Strategy, Management for Professionals, DOI 10.1007/978-3-642-21236-9_11, # Springer-Verlag Berlin Heidelberg 2011

83

84

11

Execution and Humility

They are like soldiers of the Macedonian phalanx, the Roman legion or the Prussian Army, whose rigorous training led them to victory even with fewer troops than their opponents with larger and theoretically more powerful forces. Sustainable companies also follow a strict financial discipline, especially in costs and cash flow control. Doing so, they avoid the fate of many companies that choked themselves in growing too fast. Victims of their own commercial success, these firms were left without cash to pay their employees, suppliers, or their funds providers; or without any means to finance the necessary investments to ensure their sustainability. Nevertheless, a perfect operational performance is neither an end in itself nor an absolute guarantee of sustainability. It may even become a liability. Indeed, a company that gets used to excelling in one area can be caught up in its own arrogance and die of its own success: it falls victim to the Icarus Syndrome. Icarus’ artificial wings allowed him to fly from his prison, but they also failed him: as he flew near the sun, the heat melted the wax holding his wings and he drowned in the Aegean Sea.

11.2

From Success to Failure

Factors fueling a firm’s success can also lead it to failure if it pushes it to the extreme. In fact, excessive success sometimes leads to complacency, dogmatism, ritualization, and excessive specialization. Indeed, some firms systematically repeat the strategy that was successful in a particular area in other contexts. Obviously, they fail most of the time because their new clients, environment, and competitors are different from the initial situation. For other companies, being perfectionist does more harm to their cause than good. Where attention to detail was once a productive feature, it becomes a nagging obsession; an innovative research becomes a trivial pursuit of inventions; and well thought-out growth turns into a raging expansion. Other companies idolize one key resource or one skill at the expense of all others that are virtually forgotten. This results in the hyper specialization of a strategy which then loses its equilibrium and becomes risky. The phenomenon aggravates when leaders make causal inversion, i.e. they consider that the company’s success comes from a determined function or activity when in fact it is only the result of something else. This contributes to building even more on that activity and losing sight of all the components of reality. The reason for all these perversions is usually because the strategy and the systems implied are rooted in the employees’ mentality and everyday behavior to the extent that it becomes an implicit cultural phenomenon for all, backed by symbols, procedures and organizational routines. To challenge them means to question the strategy, thus the whole company. These strategic drifts caused by too much success are far from being uncommon. Besides the companies that disappear because of their failures, there are also those

11.4

Accepting Decision Sharing

85

that are blinded by their own success and perish because they are unable to adapt to new situations. Leaders of sustainable companies avoid this fate by maintaining a certain degree of humility. First, they do not allow themselves to be blinded by their triumphs. Then they agree to share decision making. They know also to build trust with their employees and yield to them. Finally, they never consider themselves as indispensable and irreplaceable.

11.3

Avoid Being Blinded by Present Triumphs

To fulfill the company’s plan, often set by one of their predecessors, the leaders of sustainable companies are quick to challenge the current business model. They resist the phenomenon of ready-made answer driven by the company’s culture and automatically applied to new circumstances. Consequently, they always question the established patterns of thought, including their own. They rely primarily on external consultants or external educators who provide them with strategic analysis tools that allow them to view reality differently from what they usually see. They also avoid falling into the trap of selective perception and stereotypes. For individuals, selective perception is selecting only the information which intuitively seems consistent with their level of knowledge and experience. And a stereotyped vision of reality summarizes it in a partially representative model. Both simplifying approaches allow leaders to save time. But if such approaches become the exclusive modes of reflection, there is a high risk that any disturbing information will be systematically excluded, and any questioning of the dominant thinking pattern becomes virtually impossible. These leaders also keep in mind that, like all decision makers, they tend to exaggerate their own influence or that of the organization on external events. This is even more so when their company has only known success and never endured setbacks. However, by overestimating the capacity of their organization, business leaders risk being overwhelmingly proud—they develop a superiority complex. When succumbing to it, they tend to disdain customers, and to underestimate competitors, or to stop believing in seizing new opportunities. Believing with arrogance that the environment must adapt to their business and not the reverse, they run straight towards bankruptcy.

11.4

Accepting Decision Sharing

Sustainable company leaders understand that strategy arises from the variety and the diversity inside and outside the company. Indeed, new ideas do not come only from the top. These ideas from the top may even be rejected if they deviate too

86

11

Execution and Humility

much from the dominant cultural model or if they are poorly transmitted. They can also reach all levels of the company via transplantation or imitation. Leaders recognize that innovation may emerge from any level of the organization. They often encourage it. For example a leader reminded his middle management that even if he came up with a brilliant idea per day while all of them came up with one per year, he would still be beaten; because his 365 ideas could not even match the multitude of ideas from his 1,000 executives. Leaders also admit that an innovation may initially deviate from established standards. So they tolerate this deviation in some parts of their organizations while observing the effects. It is a form of experimentation. Rather than relying on some outstanding talents or brilliant individuals, business leaders build and then run a system in which teams and an organizational culture favor the success of all employees. For it is impossible for an individual, however gifted, to perform a good job in an inefficient system. On the other hand a well designed system staffed by average but properly trained employees may permanently achieve remarkable results. All this implies that business leaders accept some form of protest which is reflected in an open and positive mode in terms of recruitment, motivation and promotion of the employees. Indeed, criticism is not tolerated in those firms whose leaders, wanting to look like giants, surround themselves with dwarves and use fear as a primary mode of management. In such circumstances it is difficult or even impossible to challenge the status quo. To motivate and lure their troops, leaders of sustainable companies associate their employees with their companies’ victories and say “we” instead of “I” when speaking of actions that led their companies to success. They have no problem in recognizing their own weaknesses and admit their mistakes when the company experiences setbacks. They say such phrases as “I do not know”, “I was wrong” or “I need your support.” Obviously, such phrases seem difficult to pronounce for leaders of powerful corporations, but these phrases demonstrate the leaders’ ability to assume their responsibilities, a quality widely appreciated by all employees. On the other hand, refusing to acknowledge mistakes, that are often obvious, or blaming failures on others or calling it bad luck is generally regarded as a sign of weakness, or even cowardice or hypocrisy. This attitude destroys the leaders’ sense of control, tarnishes their credibility, and undermines the confidence that employees are willing to give.

11.5

Organizing the Succession

Leaders also express humility when they resign from their top positions. This concerns mainly the company’s founder. History shows that many companies collapsed or were improperly sold after the death of their creator.

11.5

Organizing the Succession

87

Concerning elitism, French writer Chateaubriand noted that “aristocracy has three successive ages: the age of superiority, the age of privileges, and the age of vanities.” Originating in the first generation, elitism degenerates in the second and disappears in the final one. Mutatis mutandis, this rule also applies to the business world: the founder successfully creates his companies, but his children run them and his grandchildren ruin them. In fact, many companies’ succession failures are primarily the founders’ responsibility. Considering themselves indispensable, the founders did not want to plan ahead the transmission of their businesses to their heirs, assuming that they were not ready for succession. When the founders disappear, some haphazard and often irreparable decisions are made by some misinformed executives. As for the family members who are unprepared, they take over the relay, doing their best in learning to manage the company, with the possible help of the company’s executives, but always with the company’s survival at stake. Actually, many do not manage and turn to executives from outside. If some companies became sustainable, it is because they successfully passed this difficult hurdle of the first transmission of power. Their creators were wise enough not to think they were eternal. They prepared their succession in advance rather than at the last minute, in line with an old German proverb: “It is better to have a cold-blooded discussion about my succession while I am still warm rather than under fire when I’m cold.” In particular they identify in advance the potential candidates to succeed them and provide for their training insights into the realities and complexities of the business. When the time comes, they choose their departure date and introduce their successors. While far from being a general rule, some founders choose from the beginning to be succeeded by a professional who is not a family member, selected for his or her competence to develop the company. All this helps to avoid the disasters that may come from succession struggles among potential pretenders if no successor has been clearly identified. If it is useful that the founders care about their replacement while still in place, it becomes absolutely essential when the passing of the torch is not done between members of the same family but between professional managers. Sustainable companies, whose life cycle can span beyond 100 years, master this process of management change. It is an undeniable factor of their success. All said and done, having faith in execution and humility do not reflect a lack of confidence in the leader, but, simply, a recognition that the development and success of an enterprise depend both on chance and obligation. Indeed, companies evolve through natural selection according to the value of what they bring to the markets and how they adapt to their environment. As in sports where champions are those who commit fewer mistakes than their competitors, leaders must always prepare for the worst while keeping an eye open for any opportunities for their companies.

.

Chapter 12

Conclusion

How many companies in existence today will still be present in 200 years? Normally, many of them should still be there, but probably not all those who make headlines in business newspapers today. We are inclined to think that the survivors will be those whose leaders have implemented the lessons of this book. Any management book for professional managers must be prescriptive and deliver advice to the reader. It is tempting to do so at the conclusion of this work. Indeed, the experience of sustainable companies as well as academic and professional research works help to paint a picture of the ideal leader. These leaders are imaginative in order make their companies achieve a strategic design. They listen and pamper their customers. They anticipate the changing environment and cultivate their difference with their competitors. They demonstrate rational audacity when managing capabilities, setting up the structure and making strategic decisions about technical and organizational innovation and about growth management in their firms. They also ensure the quality of operations in strategy implementation. In addition to being creative, they have the intellectual capacity to disassemble situations to rebuild new ones in order to properly adjust their companies to the changing environment. But they always take care to make a preliminary analysis and make decisions on hard facts and not on hope, fear, or what the others are doing. With all these qualities, they nevertheless remain humble in putting their role into perspective so as not to be excessively proud and complacent. In particular, they take into account all possible sources of new strategic directions such as the ideas of their employees or mere chance. Finally, these qualities and behavior are fairly easy to develop and adopt. Thus, provided that the basic principles of corporate strategy are followed, it is not so hard to be a good leader. But ultimately, this book is a guide to help readers and certainly not a vade mecum for recommending specific methods to be applied in certain circumstances. It refuses to set up norms in the name of contingency, because each company, each situation is unique.

E. Viardot, The Timeless Principles of Successful Business Strategy, Management for Professionals, DOI 10.1007/978-3-642-21236-9_12, # Springer-Verlag Berlin Heidelberg 2011

89

90

12 Conclusion

Indeed, there is no business model that is immutable. Therefore there is no standard solution, but just lessons learned from experience that should be contemplated. Business leaders, of today or tomorrow, will retain from this book what seems most relevant to their particular situations.