First Serve Strategies

Archive for the ‘Business Strategy’ Category

Most would agree that when trying to develop effective strategies to drive transformative change it is helpful to start with agreement regarding objectives.  After all, if we are each working toward a common objective, how hard can it be to reach agreement?  Look!  It’s a bird.  It’s a plane.  It’s a Debt Ceiling!

The current debt crisis in the U.S. provides ample evidence that starting with common objectives may be overrated.  I would like to believe that there is a common objective to which every member of Congress can agree.  Oh, I don’t know.  How about something like, “we all agree we would like to maintain a AAA bond rating?”  The problem is that finding a common objective that becomes the common denominator is often too far removed from strategies to be useful.  Said differently, the more abstract an idea, the farther it is from concrete strategy or policy.

Over the past two days I was involved in a strategy advance (as opposed to a strategy retreat) with a group of my colleagues at Drexel University.  At the beginning of the first day the facilitator asked each of us to reflect on past meetings or strategy sessions that were particularly productive.  She then asked us to recall if there was an essential ingredient that made it successful.  Upon reflection, I settled on one ground rule that I feel is essential–complete transparency of objectives.

While it is not necessary that we start from a common objective, it is essential that we be honest and transparent regarding our objectives.  Said differently, there should be no hidden agendas.  Often, facilitators argue that everyone must check their egos at the door.  One can check one’s coat at the door.  One can check one’s purse at the door.  One can even check one’s smart phone at the door.  But it is very difficult to check one’s ego at the door. Even if we could, it could prove dangerous.  All those very large egos would likely block the exit, creating a fire hazard! Furthermore, our passion, creativity, drive and intellectual power is often fueled by our egos. How transformative would our strategies be without passion, creativity, drive and intellect?

During those two days, I witnessed a diverse group of very bright, passionate, creative people working together in an energetic and collegial fashion to tackle tough issues toward positive, transformative growth.  As a result, we were able to celebrate the victory of a great start on a long journey.  One reason for the success is that we established realistic ground rules up front.  Not the least of which was to ensure complete transparency of objectives.

© Mark Loschiavo

When my son was in middle school he got involved in a program called Children’s International Summer Villages (http://www.cisv.org/about/history.html).  A woman who believed that if children could learn to relate to kids from other countries it would promote world peace started CISV shortly after WWII.

In my travels, I have found music to be a common denominator—the universal language.  Whether it was singing along to a Beatles tribute band at a table in Roppongi with two Koreans and six Japanese, jamming in a karaoke bar in Tokyo with musicians who spoke no English, or jamming with an outdoor market vendor in Bangkok for 45 minutes, playing a stringed instrument called a Thai Pin, that I picked up for the very first time that day, connections were made.  The Thai vendor and I couldn’t communicate with each other in any other way, but we became brothers that day.  When my business associates finally found me they were relieved to learn that I was NOT abducted–just distracted.

I am privileged to serve on the board of LiveConnections (http://liveconnections.org), an organization dedicated to providing innovative music education programs to build bridges and connect cultures.  It was started by a group of people who are passionate about music, but more passionate about making a difference in the world through music.  Now, that is something to sing about!

If this is something that resonates with you, please go to http://liveconnections.org to make a donation.

Previously, on The Disintegration of Companies, I wrote about the art of alliances.  The blog ended with the caution that alliances often fail.  In this installment I would like to discuss some of the reasons for failure.

In their work on Entrepreneurial Alliances, Jeffrey J. Reuer, Africa Ariño, and Paul M. Olk argue that alliances fail because of changes in the environment of the alliance, poorly aligned partner strategies, governance issues, deficiencies in managerial capabilities and commitments, and a failure to collaborate.  While all of these reasons are relevant I will focus on two.

Partners’ Strategies

Partners’ strategies, should be carefully evaluated during the selection process and before an alliance is created.  The more closely aligned the strategic interests of the prospective partners, the more likely the alliance will succeed.  Several years ago I was one of the founders of a Joint Venture between two fortune 100 companies.  The Joint Venture provided computer maintenance and network services to customers for all of the top tier brands.  As a private label company, we acted as representatives of the companies who sold the products to the end users.  Even though we delivered service to thousands of companies in the US, our direct customers were IBM, HP, Gateway, Dell and others.

The majority partner in this strategic alliance was IBM.  As such their strategic interest in the alliance was quality service at an affordable cost.  The other partner’s strategic interest was primarily one of financial return.  While these two strategic interests are not mutually exclusive, it proved challenging.  As expected, both partners cared deeply about financial returns, but one partner was unwilling to gain it at the cost of customer satisfaction.  Ultimately, the joint venture did exceedingly well, but not without its share of governance issues that may have been minimized if the partner selection process focused more on partner strategies.

Culture

As mentioned above, Africa, Ariño, and Olk discuss managerial capabilities and commitments and collaborative processes.  I tend to group both of these under culture.  The need for a cultural match among alliance partners compounds as the level of interdependence and commitment among the parties increases.  If the alliance is in the form of a preferred vendor, cultural fit matters, but not as much as it does with a merger or acquisition.

In an attempt to enter the telecommunications market in 1984, IBM partnered with (and later acquired) Rolm Communications of Santa Clara, California.  In the mid-1980s IBM was known as an innovative company with a no-nonsense, button-down culture.  While employees were encouraged to take judicious risk and think outside the box, they were also encouraged to act and dress in only the most professional manner, which meant dark suits for both men and women. Alcohol was forbidden during the workday. A salesperson was only allowed to have a drink at lunch if his or her customer wanted a drink.  If that occurred, the salesperson was not supposed to make another call that day. While not forbidden, beards were discouraged.

Contrast that with the culture of California based Rolm, which held on-premise beer bashes for its employees each Friday, and the majority of the men I met sported full beards, and came to work dressed in casual clothes.  As far as I know, the women did not have facial hair, but they did dress casual.  I think you get the picture.  The two cultures were distinctly different, and I think it contributed heavily to the ultimate collapse of the alliance.

Cultural differences can lead to difficulties in collaboration, which can ultimately lead to the inability to adapt, a lack of communication and trust, and inadequate coordination and conflict resolution.

Before entering into an alliance it is important to look for fit—both in strategic interests and in culture.  All of these things can, and should be, evaluated during the selection process.  The selection process is much like the courting process in a romantic relationship, where each party is trying to put their best foot forward.  A dear friend once offered advice to her daughter regarding finding a mate.  “Take the one thing that bothers you about that person just a little bit now, multiply it by 100, and ask yourself if you could live with it for the rest of you life.”

©Mark P. Loschiavo

In part 1 of this series I talked about how more and more startup and emerging growth entrepreneurs are disintegrating their companies by outsourcing one or more of their three core business processes (product innovation/infrastructure/customer relationship).  Even corporate giants are outsourcing subsets of one or more of these processes.  Companies, who in the past would never consider entrusting any portion of the company’s customer relationship process to outsiders, have entered into agreements with outsiders to handle many of their customer sales, support and service processes.

In my last blog, I also wrote about the conflicts inherent in vertically integrated companies that can be minimized through disintegration. I would like to offer two more arguments in support of company disintegration through alliance.

The first is expedience.  In a world where technology cycles are measured in weeks or months and competition is truly global, speed to market has become increasingly important.  As mature companies attempt to grow, by entering new markets or expanding product lines, it is often more expedient to do this through acquisition or partnering.  Large pharmaceutical companies, who in the past have differentiated themselves through R&D, now allocate a higher percentage of their R&D budgets to acquiring technologies rather than developing them in-house.  This usually comes in the form of company acquisition or technology licenses.

For start-ups entering an existing market, the most viable protection from being crushed by incumbents is to get to market, reach scale and build brand equity quickly. eBay acquired Half.com in 2000 not because they were unable to build the same product but because Half.com had already owned the brand in the eyes of the consumers.  In order for start-ups to enter markets and reach scale quickly it is often necessary to partner with others to handle one or more of the core business processes.  One entrepreneurial company I worked with developed, manufactured, and sold fashionable compression garments aimed at women suffering from lymphedema—a condition that often accompanies breast cancer patients and survivors. In order to build the company they created an alliance with the company that produces LYRCA® and Coolmax® to develop the product.  They also used a toll manufacturer to handle production.  In other words, they disintegrated their company to the point where significant parts of their product innovation and infrastructure were handled through alliances.  What they kept in-house was what they saw as their points of differentiation (POD), print design and customer relationships.

The second good reason for company disintegration through alliance is economics.  For mature companies the decision to outsource is typically driven by income statement considerations.  While a solid balance sheet is always important, most large successful companies have sufficient access to capital.  They also have a healthy appetite for profit.  With increased specialization and advancements in technology come two economic principles, absolute advantage and comparative advantage.  Absolute advantage refers to the ability of a firm to produce a particular good at a lower absolute cost than another.  In this case a company may outsource the manufacture of the product it sells to an alliance partner who can produce the product at a lower absolute price. Comparative advantage speaks to one firm’s ability to produce a particular good or service at a lower opportunity cost than another.  In this case a firm may outsource one or more of their business processes to an alliance partner in order to focus their finite attention on those processes in which they are most efficient.

For start-ups the economics of disintegration tend to be driven by the balance sheet.  Unlike established companies, access to capital is difficult for new ventures.  As such, a start-up venture may choose to ally with a partner in order to enter markets and grow the business while conserving cash.  This often comes at the detriment of profit margins, but high margins on zero revenue still equals zero profit.

While alliances can help you build and scale your company quickly, they frequently fail.  When they fail, the results can be fatal.  It is important to:

1. choose your partners wisely,
2. implement the alliance carefully and,
3. nurture the ongoing partnership diligently.{a

©Mark P. Loschiavo

Ever since the industrial revolution there has been an inherent problem for companies.  A problem stemming from the nature of being vertically integrated—where research, development, operations, sales and support were all managed under the same roof.  While vertical integration has its benefits—centralized control of information, complete ownership of the customer experience to name two—it creates motivational conflicts throughout the organization.

Most business ventures can be broken down into three core processes—product innovation, infrastructure and customer relationships.  The inherent problem comes from the conflicting objectives associated with these three processes.

Successful product innovation requires speed-to-market and differentiation.  By contrast, economies of scale and standardization are watchwords for companies trying to maximize infrastructure efficiencies.  In the words of Henry Ford, “Any customer can have a car painted in any color that he wants so long as it is black.”  It doesn’t take long for conflict to arise when product developers are striving to frequently and rapidly introduce completely redesigned products, which require variations in infrastructure like tooling, molds, presses, automation equipment and assembly line alterations.

If that doesn’t create enough conflict, those involved with the customer relationship process care mostly about scope, wanting to satisfy each and every customer’s needs.  “What do you mean it only comes in black?  My customer is a Kentucky Wildcat fan, and wants his in UK blue!”

Until recently, companies have learned to live with these conflicts in order to ensure effective information flow and quality control regarding customer solutions and interactions. Rapid changes in information technology over the past two decades, however, have allowed for the disintegration of companies, where companies are becoming less vertically integrated.

In Corporate America this shift is happening at glacial speed, but in the new and emerging venture space it is becoming more the rule than the exception.  Over the past five years I have reviewed hundreds of business plans.  Virtually all of them employ a business model that is disintegrated, where one or more of the three core business processes are outsourced to vendors or alliance partners.

In this hyper-competitive business environment, the astute entrepreneur understands the need to focus attention on the company’s points of differentiation (POD) rather than trying to build a vertically integrated company.  The dichotomy is that new venture creation is not a linear process.  Often, discerning a company’s POD is an iterative process, making it important early in the strategic planning process to protect core business activities that may be critical to maintaining competitive advantage.  After all, we don’t want to throw out the proverbial baby with the bath water.

©Mark P. Loschiavo

While reading a recent blog post entitled, Develop A Business Plan and Change It Up On A Regular Basis, Susan Gunelius describes the importance of frequently revisiting the business plan and changing it as needed.

Being immersed in the strategic management process for 30 years, I have seen, first hand, the importance of continually monitoring strategies in order to make necessary changes. Even the very best business plans are nothing more than a “great start”. I often tell the many entrepreneurs and students I work with that the business plan changes the minute it is introduced to the market.

In the first sentence of her blog, Susan asserts that, “Most people in business believe that you should make a business plan and ‘stick to the plan’.”

Growing up, our family had a wonderful tradition of engaging in debate at the dinner table. These debates often became so spirited that, to an outsider, it might have the appearance of a town hall brawl. During those discussions I can still hear my mom saying, “never say never”. And if one of us fell into the trap of saying, “they say…”, it would be immediately met with “Whose they?” from my dad. As such, whenever a sentence begins with the phrase “most people”, my focus tends to drift away from the intended message to wondering about the veracity of whether or not it is really most people.

I am not really interested in determining if most people in business believe that you should stick to the plan. What I do find interesting are the contrasting philosophies by different types of people about changing the plan.

In large companies it is not uncommon to find scores of employees who only wish, “we could put a stake in the ground”. At the same time senior executives often embrace plan changes. In my work with startups and entrepreneurs I find a very different dynamic.

Instead of refusing to make adjustments to the business plan when needed, they take on the characteristics of a Golden Retriever in a field of butterflies–jumping from one opportunity to the next with reckless abandon.

In the end, I think there are two factors determining which camp one falls into—locus of control and opportunism.

Typically, folks with a strong internal locus of control, complemented with a dose of opportunism are more comfortable with change, because they believe they have more control over the change. People with a strong external locus of control often fear being victimized by change, and nobody wants to be a victim. Or do they?

©Mark P. Loschiavo