ThinkSales Convention - Business Strategy For Competitive Advantage
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1. Learn how business strategy can be broken down into a core set of simple and fundamental concepts. 2. Discover the five core elements of business strategy. 3. Learn how to raise value by understanding and integrating the five core elements of business strategy.
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ThinkSales Convention - Business Strategy For Competitive Advantage
- 1. Greg Fisher Kelley School of Business Indiana University STRATEGY BUSINESS FOR COMPETITIVE ADVANTAGE
- 2. The Challenge -2% 12% 14% 16% 18% 20% 10% 8% 6% 4% 2% 0% 2014 2015 2016 2017 1.7% 1.3% 0.28% GDPGrowth
- 3. The Challenge -2% 12% 14% 16% 18% 20% 10% 8% 6% 4% 2% 0% 2014 2015 2016 2017 10% 5% 15% 20% GAP GAP GAP GAP GAP GDPGrowth
- 4. You need to do something to fill that gap!
- 7. Raising kids
- 8. Getting fit
- 9. Fundamental Principles Balance and Moderation Taking Action
- 10. Fundamental Principles Balance and Moderation Taking Action STRATEGY BUSINESS 5 Core Concepts
- 12. THEORY Foresight Insight Hindsight A mental model or set of hypotheses about how a firm does (and will) create value.
- 13. Disney believes that noble, engaging characters composed in visual fantasy worlds, largely through animation, will have vast and enduring appeal to children and adults alike, and that it will sustain value creating growth by developing an unrivaled capability in family-friendly animated and live action films. The firm will assemble entertainment assets that both support and draw value from the characters and images developed within these films. Source: Beyond Competitive Advantage (2016) by Todd Zenger THEORY
- 14. [Steve Jobs] held that consumers would pay a premium for ease of use, reliability and elegant design in computing and later other digital devices, and the best means for delivering this was via a relatively closed system with vertical integration and heavy investment in effective design. Source: Beyond Competitive Advantage (2016) by Todd Zenger THEORY
- 16. Strategy Concept #2 CHOICES & TRADEOFFS
- 17. CHOICES & TRADEOFFS A choice is a clear decision to do something specific and meaningful. A tradeoff is a clear decision not to do something that is somewhat tempting or attractive. Deciding what to do? Deciding what not to do?
- 18. CHOICES & TRADEOFFS What markets to pursue (and not pursue) What customers to target (and not target) What products to produce (and not produce) What activities to engage in (and not engage in) What types of employees to hire (and not hire) What assets to own (and not own)
- 21. CHOICES & YOUR What are TRADEOFFSHow do they tie back to your theory?
- 23. DIFFERENTIATION Differentiation is something that clearly distinguishes a firm from others in the industry. It is something that other firms targeting the same customers are not doing and which those customers ultimately find valuable. Valuable Rare Costly to Imitate Organized to capture value
- 24. DIFFERENTIATION Buy one, give one Distinctive design Powerful story “The kind of shoes people talk about”
- 25. DIFFERENTIATION
- 27. YOUR POINTS OF Identify DIFFERENTIATION How do they tie back to your choices and tradeoffs and to your theory?
- 28. YOUR POINTS OF Do your CUSTOMERS see …. DIFFERENTIATION Do your EMPLOYEES know …. Do your COMPETITIORS try to emulate ….
- 30. The PROFIT equation Profit = (# of products sold x price per product) – expenses P = (# x p) – e
- 31. Cost to produce and deliverCustomer willingness to pay Industry Average Competitor Uniquely Differentiated Competitor Low-cost Competitor Competitor with Dual Advantage Variants on the PROFIT equation
- 32. Southwest Airlines compared to competitors Source: Harvard Business Review (2008), Putting the Service-Profit Chain to Work By James L. Heskett, Thomas O. Jones, Gary W. Loveman, W. Earl Sasser, Jr., Leonard A. Schlesinger
- 33. Southwest Airlines compared to competitors Source: Understanding Michael Porter (2012) by Joan Magretta
- 34. LEVERS Identify your PROFIT How do they tie back to your points of differentiation, your choices and tradeoffs and to your theory?
- 36. Exhibit 1 Mechanical vs. Quartz Watch Technologies Mechanical A standard mechanical watch has approximately 130 parts that are assembled to form an energy system, regulating parts, and a display. Energy is supplied by the spring and transmitted to the gear-train. The escapement transmits impulses and the balance divides the time. Winding, either manual or automatic via the rotor, tightens the spring. The number of component parts increases with each additional “complication” (e.g., chronograph, calendar, moon phase, etc). Diagram of a mechanical watch: 1) Mainspring 2) Gear-train 3) Escapement 4) Oscillating balance 5a) Winding stem 5b) Rotor 6) Analogue display Quartz In a quartz watch, the heart of the watch consists of the integrated circuit. The energy source takes the form of a miniaturized battery with a lifespan of several years. The division of time is regulated by a quartz oscillator that transforms energy from the battery into vibrations. Diagram of a quartz watch: 1) Battery 2) Integrated circuit 3) Quartz 4) Trimmer regulating the frequency
- 37. ACTIVITY INTEGRATION Activity = the things that business does to implement its strategy Integration = two or more activities reinforce and amplify one another Implementing a strategy via a set of organizational activities that work together to amplify one another i.e. two activities operating together provide more total value than the value coming from each activity operating independently.
- 38. ACTIVITY INTEGRATION Source: Harvard Business Review (1996). What is Strategy? by Michael E. Porter
- 39. ACTIVITY INTEGRATION Do the Math… 1 x 1 x 1 x 1 x 1 x 1 x 1 x 1 x 1 x 1 = 100% .9 x .9 x .9 x .9 x .9 x .9 x .9 x .9 x .9 x .9 = 35%
- 40. ACTIVITY INTEGRATION Source: Beyond Competitive Advantage (2016) by Todd Zenger [From 1957]
- 41. needed to deliver on your profit equation, points of differentiation, choices and tradeoffs and your theory -- assess whether these activities are adequately Identify the ACTIVITIES INTEGRATED
- 42. THEORY >> CHOICES & TRADEOFFS >> DIFFERENTIATION >> PROFITS >> ACTIVITY INTEGRATION
- 43. What are YOUdoing to fill the gap? -2% 12% 14% 16% 18% 20% 10% 8% 6% 4% 2% 0% 2014 2015 2016 2017 10% 5% 15% 20% GAP GAP GAP GAP GAP GDPGrowth
- 44. Strategy without tactics is the slowest route to victory. Tactics without strategy is the noise before defeat. Sun Tzu
- 45. Greg Fisher Kelley School of Business Indiana University STRATEGY BUSINESS FOR COMPETITIVE ADVANTAGE
Notes de l'éditeur
- No fancy title here We are going back to basics To ask some of the most important and fundamental questions about business success…. “How does one formulate and implement a business strategy to establish a competitive advantage that drives revenue and profit growth”
- In South Africa you currently face a very real and significant challenge when it comes to driving revenue and profit growth The challenge is this – the economy in South Africa has been growing at 1.7%, 1.3% and 0.28% over the past three years, and it is expected to grow at approx. 1% in 2017.
- Now by show of hands how many of you have growth targets of less than 2%? NOBODY! How many have growth targets of less than 5%? Very few. 10%? 15%? 20% or more? So almost everyone in the room has a growth target that substantially exceeds GDP. This means that nobody can just rely on the momentum of the economy to deliver on your desired growth target. You need something more to FILL THAT GAP.
- You see Big Mike might be able to get away with a substantial gap, but if you are to deliver on expectations, you need to do something to FILL THE GAP.
- Now many of you might have arrived here today looking for a “silver bullet” – the one quick thing you can do to easily fill that gap and meet your growth targets I am here to tell you the very SAD NEWS: no such silver bullet exists. Engineering growth in a tough economic climate is very similar to many other familiar challenges in life.
- How many of you have tried to loose weight (NO ACTUALLY YOU DON’T NEED TO OWN UP) But for anyone who has tried to loose weight, you know that as much as the infomercials may try sell you on a quick fix or short cut, no such quick fix or short cut actually exists. Even if Tim Noakes tells you that you can eat all the meat, fat and cream that you desire, it is still damn hard to resist that croissant, and you still need to be very disciplined and consistent to make the Tim Noakes diet work – THERE ARE NO SHORTCUTS!
- Now, how many people have kids? Raise your hands? (Some people not to sure – either you got kids or you don’t, its not like tan or a sunburn where you can be partially tanned or sunburned) For those with their hands raised, keep your hands UP if you find it EASY to raise your KIDS Very few hands left up, and all those who did have their hands up know that those who still have their hands up are most likely lying (OR deserve a massive book contract to share their secrets) You see, raising kids is not easy, there are no silver bullets
- Similarly many people like to keep fit (or we get told by our doctors that we have to keep fit) I happen to love endurance sports – running, biking, triathlons The more that I have engaged in these kinds of activities, the more I have noticed this unsurprising correlation between smart, consistent and disciplined training and endurance sports success. One of the most miserable and debilitating days of my life was the was the day I decided to run Comrades after a “crash course” of training. I was busy at work, I had not put in the miles, but I had run Comrades five or six times previously. I knew exactly what pills to take and when, I knew how to psyche myself up, I knew when to walk and exactly what to expect. Until I didn’t. No matter what I knew it could not make up for a lack of training. Getting fit requires training.
- Each of these three common activities – loosing weight, raising kids and getting fit – depend on three things: They are underpinned by fundamental, somewhat natural principles – and if one tried to circumvent or go against these fundamental principles, things often go hay why (ask anyone who tries to circumvent proper parenting with an iphone or ipad too often) The implementation of these principles requires balance and moderation – too much of anything in any of these areas leads to unfavorable results (even something that is supposedly good). Ask anyone who has eaten excessive avocados, cabbage or carrots in an attempt to loose weight, or someone who has enforced to much discipline on a child to over trained in an effort to get fit. And each one requires action. One can conceptually know what needs to be done to loose weight, raise kids or get fit, but unless you get out there and actually do what is required, your knowledge will amount to naught. HERE IS AN OBVIOUS YET OVERLOOKED SECRET
- BUSINESS STRATEGY IS VERY SIMILAR TO LOOSING WEIGHT, RAISING KIDS AND GETTING FIT. Business strategy is underpinned by core, fundamental principles The principles need to be enacted with balance and moderation And these principles mean nothing unless one take action to implement in an organization So what are these principles? For the past 12 years I have worked to distill and understand these principles. Ever since doing an MBA and being somewhat dissatisfied with what I learned about strategy on the MBA I have worked to isolate and refine these principles so I can share them with others. So I am going to share the 5 most critical concepts with you so that you can use them as you attempt to devise a strategy to fill the gap between GDP growth and your firms targeted growth rate.
- First, good strategy is based on a theory. In the same way that Albert Einstein or Richard Newton devise a theory to guide their thinking and action, so too do you as business leaders need to formulate a theory about how your ndustry works – and will work in the future – and how you will create and capture value in that context.
- A theory is a “mental model or set of hypotheses about how a firm does (and will) create value.” It is as simple as that. It accounts for an incorporates three essential elements: Foresight about what what is likely to happen in the industry in which your firm operates Insight about what customers value and what your firm can do to provide that value – how you firm is uniquely positioned to provide that value. Hindsight where your firm has come from, how its history, capabilities and assets place it is a position in a special position for the future
- Walt Disney had a very specific theory about how the firm he founded, bearing his name, would create value. He theorized that “noble, engaging characters composed in visual fantasy worlds, largely through animation, will have vast and enduring appeal to children and adults alike, and that it will sustain value creating growth by developing an unrivaled capability in family-friendly animated and live action films. The firm will assemble entertainment assets that both support and draw value from the characters and images developed within these films.”
- One of the things that distinguished Steve Jobs as a leader and a strategist was that he had a very strong theory about how Apple (and Pixar) would create and capture value. He “held that consumers would pay a premium for ease of use, reliability and elegant design in computing and later other digital devices, and the best means for delivering this was via a relatively closed system with vertical integration and heavy investment in effective design.”
- A critical question for you is WHAT’S YOUR THEORY FOR HOW YOUR FIRM WILL CREATE VALUE AND ADVANTAGE? Do you have a theory? Can you articulate it? Does everyone in a leadership position agree on your firms theory for how you will create and capture value?
- The second critical strategy concept is to realize that that strategy is dependent on CHOICES & TRADEOFFS. As a strategist, you are like Keanu Reeves character in the Matrix – you need to make some clear and distinct choices. [PLAY VIDEO – NEXT SLIDE]
- As a strategist you need to make specific and meaningful choices for your organization that align with your strategy. And many times making such choices will involve a tradeoff – a clear decision not to do something that might be tempting or attractive. Making choices is about deciding what to do. Making tradeoffs is about deciding what NOT to do. Michael Porter said “strategy is mostly about deciding what what NOT to do”
- You need to decide: What markets to pursue (and not pursue) What customers to target (and not target) What products to produce (and not produce) What activities to engage in (and not engage in) What types of employees to hire (and not hire) What assets to own (and not own)
- Returning to Apple Inc. – in Steve Jobs biography by Walter Issacson there is a very clear illustration of deciding what to do and what not to do. Soon after going back to Apple in 1998, Steve was part of a product meeting. At the time Apple had 36 different products spanning multiple product categories including laptops, desktops, handhelds, printers, peripherals etc. and in many of these categories there was a confusing array of offerings. The group were feverishly debating how the product line-up should be organized. Jobs sat quietly! After along period of bickering and debate, Jobs slowly walked up to the white board, wiped it clean, drew a vertical and a horizontal line, making 4 quadrants. At the end of each row he wrote “desktop” and “portable” and at the top of each column he wrote “consumer” and ‘professional” He then indicated they would make one product in each category and all other products would be decided. This is the foundation off which the Apple of today was built, it was in making clear decisions and tradeoffs that Steve Jobs set Apple on a renewed path to success.
- IKEA is by many accounts, the most successful furniture retailer of all time. The firm has consistently and deliberately made clear choices and tradeoffs about everything from: Product design – choosing to design its own products almost all of which can be self-assembled by customers at home. They have restricted their product style to mostly simple, modern, Scandinavian style furniture, resisting temptation to be drawn into offering very diverse styles. Ikea have been very deliberate with their retail location choices, choosing to purpose build large campus style stores in lower cost suburban retail locations, close to their core customers (young families). Each store is laid out with a showroom, where shoppers see furniture is in a room context with other complementary furniture, they self select what pieces they desire and then pick those pieces for themselves from the self service area immediately prior to checkout. There are very few employees in each store, relative to traditional furniture retailers. Almost all furniture is flat packed so that customers can take it home with them on the day of purchase (as their own expense) rather than waiting 4-6 weeks for delivery. IKEA is a system to clear choices and tradeoffs. The firm have been very clear about what it is doing (and why) and what it is NOT doing (and why) and these choices and tradeoffs have fueled 70 years of sustained growth, success and profitability.
- Ultimately YOU need to make clear choices and tradeoffs – deciding what you are going to do and what you are not going to do. To be a good strategist you cannot and should not shy away from making clear choices and tradeoffs AND the choices and tradeoffs that you do make should tie back to your overall theory.
- The third core concept that is central to formulating a strategy for revenue and profit growth is that of differentiation. Markets today are more competitive than ever Competition can come from all corners of the globe Buyers have more info at their fingertips and more choice at their disposal than ever before Therefore, more than ever, BEING DIFFERENT from other alternative is important.
- Differentiation is something that clearly distinguishes a firm from others in the industry. It is something that other firms targeting the same customers are not doing and which those customers ultimately find valuable. True sources of differentiation come from things that a firm might do that are: Valuable (to customers) Rare (meaning on a few firms can do or offer this thing) costly to Imitate (meaning it would be difficult, if not impossible for other firms to replicate your approach) and to benefit, from this a firm must be Organized to capture value. This creates the acronym VRIO – when a client or a student tells me their source of differentiation is XYZ, I ask whether they have used VRIO to assess it?
- TOMS shoes is an interesting example of differentiation. Founded in 2008 by Blake Mycoskie, TOMS was created when Blake was visiting Argentina and he became involved in a local shoe drive, and realized how desperately local kids needed and valued shoes. To solve this problem he cam up with the concept of buy one, give one. He also noticed that many of the local polo players and affluent women wore what looked to be trendy, locally crafted shoes with a distinctive design. He ordered batch and took them back to LA to sell them in the US on the basis of “buy one, give one.” The novel style of shoe and the story of supporting underprivileged kids in emerging markets appealed to many consumers in the US and the idea slowly took hold. Eventually the media heard about Blake’s story, and a local news show did an insert about him and about TOMS shoes (the names was going to be tomorrow shoes, but he could not fit “tomorrow” on the label). An AT&T advertising executive saw the news insert about TOMS and noticed in some of the shots that Blake appeared to use his cell phone to help manage his growing business – he did some research and found out that Blake had an AT&T contract, and approached him to be the feature of an AT&T advert. THIS IS THE OUTCOME….
- Now for a differentiation story much closer to home (this one might irritate a few of the bankers in the audience). This is a picture of yours truly at my graduation approx. 20 years ago (yes I did once have a mop of strawberry blond hair) At this time I got a random call from Investec, they had recently launched a retail bank and were offering recent grads like me a consolidated banking account, with a “platinum” credit card and a private banker. I signed up. And I have never left. Investec were playing the long game. They differentiated themselves my targeting individuals with high future earning potential and they looked after me REALLY REALLY well, to the extent that I would never consider switching banks and I would just sit back and smile when my friends complained about frustrating banking experiences. Investec had/have differentiated themselves on CUSTOMER INTIMACY. So what is the outcome of all of this.
- Well my monthly banking fees alone (excluding any mortgage or car payment interest) over the past 20 years totals up to R75,600 When I incorporate the fees my wife and I have both paid, it goes up to R126,000 (more than I paid for my first apartment) Yet how many times have I complained about these fees for felt ripped off: 0 You see if you do offer a truly differentiated service that provides value, then customers WILL pay more (maybe just suckers like me, but some people will pay)
- For you to be an effective strategist, you MUST identify and understand your points of differentiation. Those points of differentiation should tie back to your theory and to the choices and tradeoffs that you have made with respect to what you are going to do and not going to do.
- Furthermore, you should consider Whether your CUSTOMERS see and appreciate your points of differentiation, Whether your EMPLOYEES know your points of differentiation and Whether some of your COMPETITIORS are trying to emulate your points of differentiation All these things are signals that your strategy revolves around a valuable point of differentiation.
- The forth concept that should be part of a strategic discussion is that of PROFITS. Ultimately a good strategy need to feed to the bottom line, but many times financial and strategy discussions seems to take place in different worlds. Strategy gets spoken about when thinking about the future and profit get discussed when reviewing annual results. This is CRAZY – there has to be a stronger link between STRATEGY and PROFITS. Strategy is about driving a wedge between customers willingness to pay and the cost to deliver a products – the better the strategy, the bigger and more robust that wedge becomes.
- To think about this a little more clearly, it is worth analyzing how ones theory, choices and tradeoffs, and points of differentiation impact the profit equation. In its simplest form, a profit equation is made up of Profit = (# of products sold x price per product) – expenses If the goal of strategy is to increase profits, then one needs to consider whether the primary intention is to Increase number of products sold Increase the price per product and/or Reduce the firms expenses to produce and market products If the strategic choices that you make do none of these, then you may be barking up the wrong tree with your strategy. (Only Jeff Bezos and Elon Musk are able to get away without making profits because of the positive investor sentiment that have engineered around Amazon and Tesla – the rest of us mere mortal have to actually think about how our strategy affects profits)
- Effectively manipulating the profit equation translates into one of three broad strategic approaches. A Uniquely Differentiated Competitor with higher costs, but much higher willingness to pay (my Investec example, Woolworths food) A Low-cost Competitor with much lower costs to produce and deliver products, such that it can sell goods at much lower costs (sticking with banks, Capitec leveraged this strategy, Checkers) A Competitor with Dual Advantage where a firm both attempts to reduce cost to produce and deliver and increase prices relative to the industry average (FNB, Fruit & Veg City)
- Here's an example of how Southwest Airlines intentionally and strategically controls and manipulates the profit equation, to be the only consistently profitable airline in the USA. Southwest is not the biggest, so they don’t rely on scale to reduce costs; they have the lowest overall revenue of all the major airlines. They however manage the business for on time arrival, minimizing customer complaints, using the fewest employees per aircraft and having the largest number of customers per employee. This careful and deliberate management of the profit equation mans that they are the only one with a strategy in place that consistently produces profit. This is evidence by their performance relative to other airlines over time……
- Southwest’s return on invested capital (ROIC) has consistently outperformed ROIC of the other airlines over the past 30 years because they have been highly attuned to the lever that they need to manage to drive profits.
- The question is WHAT PROFIT LEVERS ARE YOU MANIPULATING as part of your strategy. Have you identified your key profit levers so you can drive a wedge between willingness to pay and cost to deliver. Do your profit levers relate back to your points of differentiation, your choices and tradeoffs and to your theory?
- The final key strategy concept that should be part of any strategic conversation in your organization is that of ACTIVITY INTEGRATION. To implement a strategy a firm needs to engage is deliberate activities – without action and activity, strategy is a just a pipe dream. To be really effective, strategic activities should be integrated such that different activities work together to reinforce one another and make each other more effective together than if they were operating independently
- Strategic activities are often like watch parts, of a traditional mechanical watch. One or two parts operating independently have little effect or purpose, but when they come together and work together they create a beautiful, highly precise and very valuable timepiece [INSERT SLIDE OF A BEAUTIFUL WATCH]
- Activities are things that a business does to implement its strategy Integration comes about when two or more activities reinforce and amplify one another Activity integration can thus be defined as “Implementing a strategy via a set of organizational activities that work together to amplify one another i.e. two activities operating together provide more total value than the value coming from each activity operating independently.”
- To see an example of this in action, less return to Southwest Airlines. Southwest main goal was to keep prices low (as low as travelling on a business) while still being profitable. To do this ….. [discuss the reinforcing activities in the diagram] These reinforcing activities working together create competitive advantage – when other try copy, they struggle to get the whole system right. Continental entered the low cost market to compete with Southwest with ContinentalLite. Although they blatantly tried to copy Southwest, they sub optimized on some of the activities – getting them partially right This is the outcome of that….
- If Southwest are effective at each of these activities – they have optimized for them And continental are pretty effective (but not quite as effective) at each – say 90% then this is what happens when they try emulate Southwest performance: .9 x .9 x .9 x .9 x .9 x .9 x .9 x .9 x .9 x .9 = 35%
- Walt Disney was also acutely aware of activity integration This is a diagram drawn by Walt in 1957, in which he depicts how the activities pertaining to films connect with and reinforce the other elements of the business including TV, Music, Publications, Parks (Disneyland) and Licensing. Each time Disney has lost its way (e.g. in early 1980s and early 2000s) was because the leaders at the helm of Disney lost sight of the important linkages and reinforcing connections in this activity integration diagram.
- So we end up with five simple, but extremely powerful and important concepts that should be central to any meaningful strategic discussion. A theory of value creation with foresight, insight and hindsight about how your firm will create an capture value A set of choices and tradeoffs that need to be made – deliberate decisions about what to do and what not to do to enact the theory Clear recognition of the firm’s points of differentiation, and an assessment of whether such points are Valuable, Rare, costly to Imitate and whether the firm is Organized to capture value (VRIO) A discussion of how your theory, choices and tradeoffs, and points of differentiation drive profits – what are you doing to drive a wedge between willingness to pay and cost to deliver And finally activity integration which entails setting up the activities in your organization to deliver on your theory, choices and tradeoffs, points of differentiation and profit intentions such that the activities reinforce and amplify one another.
- The 5 building blocks are the things that YOU can do to fill the cap between the economic growth rate in SA and your firms desired or targeted growth rate. Each person here has the responsibility to help fill that gap, you would not be hear if you were not partially or fully responsible for filling this gap. Don’t assume its someone else's job – its YOUR job.
- No fancy title here We are going back to basics To ask some of the most important and fundamental questions about business success…. “How does one formulate and implement a business strategy to establish a competitive advantage that drives revenue and profit growth”