Michael E Porter’s Five Forces

Understand the five forces to better position your company that is more profitable and less vulnerable to attack.

The industry structure defined by the five forces determines the profitability of an industry regardless of the fact that it may be producing a product or service, is emerging or mature, is regulated or unregulated, is high-tech or manual. And the industry structure should be as much of a concern to a strategist as his or her company’s position.

The five forces are:

1. Threat of new entrants
2. Power of suppliers
3. Power of customers
4. Threat of substitutes
5. Rivalry among competitors

Threat of new Entrants

It’s the threat of new entrants and not the entry itself that holds down the profitability. Lesser barrier to entry, powerful financial position of the potential entrant all contributes to greater threat. It usually takes considerable investment from the incumbent to fight and win.

However, incumbents do have some advantages in the form of barriers to entry categorized into seven as given below.

• Supply-side economics: This is basically economies of scale. Incumbents output in the form of product, advertising etc. might be large driving down the cost per piece and to compete with them, the new comer may have to come big or take cost disadvantage – lesser profit, higher sale price etc.
• Demand-side benefits of scale: The more customers who fancy incumbents product such as apple fans, the greater the barrier for the new entrant to make customers switch and that’ll probably be the case till the new entrant builds up considerable customer base.
• Switching cost: These are fixed cost the customer has to bear. Mostly in terms of hardware, retraining for users and employees, documentation and the like. Mobile phone companies use this tactics to an extent by locking the customers in with the release of new phones. Database and software systems are similar examples.
• Capital requirement: This can be in the form of fixed facilities, inventory cost, customer credit, advertisement; upfront R&D. Advt. & R&D are unrecoverable expenses and the higher the unrecoverable expenses, the harder the entry. But do keep in mind that if the returns from the industry are good, investors will fund it.
• Incumbent advantages independent of size: These can be in the form of established brand identities, preferential access to supplier, best geographical location, fine-tuned production process etc.
• Unequal access to distribution channels: These manifests in the form of shelve space in shops for food items, agent access in case of airlines, displacing existing product from the super market such as getting Costco to sell your product.
• Restrictive government policy: It can be in many forms including licensing requirements, safety and environment regulations, expansive patent rules to protect from imitation, foreign direct investment limitations. Of course it can also be helpful in some cases as in distributing R&D for general good, subsidies, and reserving space for new entrants as in Canadian wireless industry’s case.

 Expected retaliation is no less a threat especially if incumbent is powerful financially & politically, has previously reacted vigorously to new entrant buy cutting prices and public statements and if the new entrant can gain customers only by poaching from incumbent because the growth is slow. Again Canadian wireless industry is a fine example.

Power of Suppliers

Suppliers are powerful whenever buyers cannot play them against each other. They keep most of the profit for themselves. That’s the case when suppliers produce unique products as in the case of pharma companies, when there is no substitute such as pilots union, switching cost are high as in the case of Bloomberg terminals or Charles  river trading software, and generally when the supplier industry is more concentrated – few in numbers – than buyers. Some time they can give the threat of integrating forward and make the product available in the market themselves.

Power of Buyers

Buyers tend to keep all the profit for themselves when they can, especially in cases such as when buying undifferentiated products where there are many suppliers, the product is costly relative to their income such as buying a house or when product features have limited attraction. Buyers can also play suppliers when they are very large volume buyers or when they can threaten to integrate backwards such as beverage companies threatening to do packaging themselves.

Threat of Substitutes

The threat is high when the value it brings to the customer is high and the switching cost is low.

Cheap and reliable automobiles threaten public transport companies. Skype phones threaten land lines. Netflix threaten movie-rental business. Courier & parcel services threaten postal service.

Rivalry among competitors

Rivalry among competitors in the same dimension such as price is more likely to erode profitability. On the other hand, when they compete in different dimension, such as product features, support services, delivery time, it’s less likely to be a zero-sum game as it can potentially provide better value for the customer. And in cases when rivals compete on different customer segments with mixes of prices, service, delivery, features, brand identities etc., it can even be a positive sum game. Competition just on price is probably the worst because it transfers profits directly from an industry to its customers.

How do you analyze the five forces?

Below are some of the questions you can try to answer in order to analyze the five forces.

 Threat of new entrant

You are assumed to be the incumbent here

•  Can the new entrant use its existing capability to shake up your market?
• Do you have low cost per unit that the new entrant would find hard to match?
• Do you already have a large satisfied customer base?
• Does your customer show brand loyalty?
• Is the switching cost for you customer to the new entrant low?
• Does the new entrant need large capital investment to enter your market?
• Do you have tie-ups or preferential access to distribution channels?
• Does the government policy favor you or the new entrant?
• Are you known to respond vigorously to new entrants by price cutting, promotion etc.?
• Do you wield substantial political & financial power to keep your market share?
• Is it a slow growth industry where new entrant has to poach your customer for business?

 Power of Suppliers

You are assumed to be the buyer here

•  Is the supplier industry more concentrated?  (Few suppliers and many buyers)
• Does the supplier serve many industries? (No one in particular is important)
• Are you a large volume buyer for the supplier? (Especially in high fixed cost industry)
• Is the cost of switching from one supplier to another high?
• Are there substitutes for supplier available?
• Does the supplier offer differentiated product to you?
• Can the supplier integrate forward and produce your stuff?
• Can you integrate backward and produce suppliers stuff?

Power of Customers

You are assumed to be the supplier here

•  Are there many buyers or just few?
• Do you have any large volume buyers (especially if you are in high fixed cost industry)?
• Is your product standardized or undifferentiated?
• Is the switching cost high for the buyers?
• Can the buyer integrate backward and produce your stuff by themselves?
• Can you integrate forward and produce the buyers stuff?
• Are they “price” sensitive?

Is the product expensive relative to income? (More price sensitive if yes)
Is the buyer strapped for cash? (More price sensitive if yes)
Is the quality of whatever the buyer does affected by your product? (Less pricing sensitive if it is)
Will your product earn big returns for the buyer in the future? (Less sensitive if it can earn big returns)

Threat of Substitutes

•  How does the substitute fare against you in terms of price-features-performance trade-off? The better the relative value of the substitute, greater the threat.
• Does the buyer have high cost of switching to substitute?

Rivalry among competitors

• Are there many players of equal size and power in the market? Poaching will be rampant when there are many players.
• Is it a slow growth industry? Vigorous fight for market share if it’s a slow growth industry
• Are the rivals highly committed to business with goals going beyond economic performance?
• Is there a price war already?

Do the rivals compete in the same segment?
Are the products and services nearly identical in the same segment?
Are the fixed cost high and marginal costs low?
Do they have to expand capacity in large increments to be efficient?
Is the product perishable? (Food, computer software/hardware)

Factor look-alikes – Forces

Now, there are certain factors that can be mistaken for factors and may look like they have a direct impact on profitability. However, their influence is only through their impact on the five forces. Most common are, industry growth rate, government, complementary products and services. Complementary products for example make substitution difficult reducing the threat from substitution. Gasoline powered automobiles have enough easily accessible gas stations throughout the country unlike electric automobiles.

Factors for strategic planning

You have a company. Now where do you stand in terms to rivals, customers, suppliers, substitutes and new entrants? Understanding the five factors and analyzing the industry will help you develop the strategy to position your company, exploit industry change, shape the industry structure and define the industry.

Position your company: This is about finding a spot where the forces are the weakest. An understanding of the forces also helps with identifying opportunities and to decide on entering or exiting the market.

Exploiting industry change: This is about sniffing opportunities in the changing industry landscape for exploitation to the company’s advantage. Itunes exploited the reluctance of music labels to board on each other’s platform when music was getting more into digital format by providing a common platform to sell music to large customer base.

Shaping new industry: Rather than responding to the changing industry as in the case of exploiting, you can shape the industry structure itself by altering the five forces for the better and thus transforming the industry once and for all. While everyone in the industry benefits from it, you can benefit the most by shifting the industry into a spot where you can excel.

You do that by

Re-dividing profitability; where in you divide the pie in favor of existing incumbent instead of handing over to suppliers, customer, new entrants and substitutes. You try to understand the factors constraining the profit and address them effectively plugging the leak to suppliers, buyers, substitutes and new entrants.

A few ways of doing it:

Established Rivals: Differentiate your product to thwart competition
Fickle Customers: Expand your service making it harder for the customers to leave unless they are willing to compromise.
Suppliers: Standardize your parts so that many players can supply what you need.
New Players: Driving up the fixed cost for competing to thwart new entrants.
Substitutes: Offer better value through new features and wider product accessibility.

 Expanding the profit pool, where in everyone benefits because the overall productivity level and processes of the industry improves. This is basically a win-win opportunity for all.

In sum, a strategist who looks beyond his company to understand the factors that impact the industry structure would be better positioned for long time survival and profitability of the company.

Predator and Prey – A Business Ecosystem for Survival

In the business world, it’s not the fight between companies but the fight between ecosystems that determines the survivor. An ecosystem is determined by the leader/innovator and its business partners that works towards providing more value to the customers of a product – the product that leader brings to the market and the products that complement leaders product.

Evolution in the business world closely mimics the evolution of natural ecosystem – that of Predator and Prey. And the dominant ecosystem has to continuously invest time, energy and resources to continuously evolve so as not to lose their leadership position. Even then sudden environmental conditions might change the dynamics resulting in dominant combinations of species losing their leadership position and new ecosystems establish themselves, often with previously marginal plants and animals at the center.

The evolution of a business systems is characterized by four stages listed below.

Stage 1:- An entrepreneur defines a value proposition to the customer. It can be something the customer already knows he/she needs it or something surprising and of great value (for example Apple’s iPhones). At this point the entrepreneur has an early opportunity to strike business relationship with partners to fill the gap in serving its customers (People who creates apps in Apple’s iOS). This also has the benefit that it can prevent the partners from helping other ecosystems. Usually only the entrepreneur who provides the best value to the customers lives on to see the next stage (Apple Vs Nokia smartphones).

Stage 2:- Ecosystem expansion. This stage is characterised by a large number of users understanding the value proposition of the product the ecosystem is offering and the ability of the ecosystem to scale up the meet the demand. The stage is pestered with opportunists coming up with alternative ideas. The entrepreneur’s effort should be focused on making his/her product the gold standard in the market. This will give the dominant player the opportunity to push the competitors to the margin.

Stage 3:- Leadership. This stage is characterised by a stable, growing, and profitable ecosystem. This is the time the dominant player for the product defines the standards and the business model for the product. (Imagine IBM personal computer which sources finished parts from different producers for making it). The leader creates a vision that compels all the parties in the ecosystem to keep working together to improve the product. It also encourages the members of the ecosystem to expand by absorbing or collaborating with others providing similar value. The leader also ensures to keep the bargaining power to itself by holding on to the key elements of value through contracts and patents.

Stage 4:- Self Renewal or death. This is the stage where new entrance or substitutes threaten a mature ecosystem. The leader company at this stage has to constantly innovate and improve thus projecting a brighter future for everyone in the ecosystem and keep it together. That helps to instill the same values in the existing partners in the ecosystem and also to attract new one to provide greater value to customers. The risk of not working on improving itself is death. Some of survival tactics used by mature ecosystem is to slow the growth of new ones through marketing and government regulations or to snap us new ecosystem and make it part of their own.

Notes from the article “Predators and Prey: A new ecology of competition” by James F Moore.

Balanced Score Card – Linking current actions to future goals

Balanced Score Card: – Linking current actions to future goals aka achieving short term financial targets with long term strategy.

How do you tie long term strategy when management initiatives are built around short term financial goals? Enter Balanced Score Card (BSC) and its four management perspective – Customer, Financial, Internal Business Process, and Innovation and learning. With BSC, you are monitoring the performance from four different angles and making sure that they complement each other. 

Balance score card puts strategy and vision at the center and support it with financial performance. It provides a framework to orient the variables such as divisional and individual goal setting, capital allocation, planning, strategic initiatives, feedback and review that are usually fine-tuned towards achieving short term financial targets, to achieve long-term strategic goals.

A company’s vision statement usually wants it to be the best in multiple aspects. How is it going to know when it achieves it? For that, the first step is to break the generic vision statement into actionable objectives that can be clearly understood, measured and easily communicated to every layer in the organization.Balance score card understands the importance of educating everyone in the organization about the strategic objectives and involving them wholeheartedly in achieving it. Typically it starts with the top layer in the organization developing the financial and customer objectives. The next level of managers develops the internal business process and feedback and learning objectives that would drive the organization towards achieving those financial and customer objectives. Individuals are usually requested to come up with objectives and associated performance measures that align with the goals set forth in the upper layer. At each step of goal setting, the objectives are reviewed by the team above them to ensure that they are properly aligned. The front line employees are equipped with knowledge and tools necessary to execute their task well. Compensations and rewards are then based on the progress against the score card measures.

Taking a brief look at the four perspectives that define the Balanced Score Card

Customer :- How do customers see us? BSC forces the management to translate the vision on customer service to specific factors that really matter to the customers. Typically customer centricity revolves around time, quality, performance & service, and cost. Employ methods to understand the customer needs. Articulate goals around these four customer centered parameters and devise measure to improve it. Focus attention on those key operations that have the greatest impact in serving the customers. It also helps to identify core competencies of the company and assess the critical technologies needed to ensure market leadership.

Internal Business planning: – What must the company excel at to satisfy customer expectations? Customer expectations is directly related to the decisions, processes and actions that the company takes. Focus on those internal operations that is intended to serve customer demands; factors that directly affect time, quality, performance & service, and cost. Develop the core competencies in the company keeping the customer factors in mind. The front line employees who deals with the customers can be a great source of information for developing these. Needless the mention, external surveys that directly talk with customers can also provide invaluable information for this. A few of the benchmarks that can be used for this is your ability to launch new products, additional value created for the customers and the improvement in operating efficiency. 

Innovation and Learning:- What are the competencies required to continuously provide value?  Develop skill sets that are most critical for competitive success. Ability to innovate, improve and learn directly ties to the companies intention of providing exemplary values to the customers. It also enhances the prospects for the company to expand its existing market or penetrate into new ones. A few baselines that can be used to track it are measuring employee skills, productivity, and quality.

Financial:- How does the performance look to shareholders? Financial measures show if the strategy and implementation are contributing to the bottom line and the company was able to capitalize on the perceived benefits. A disparity between the strategy and the financial goals can be a red flag for management to re-analyze the strategy as it’s well known that not all long term strategies are wining and profitable strategies. A typical example would be operational improvements taken as a strategy producing better service; however, the product that’s being offered has become outdated.

Balanced Score Card is about integrating business and financial plans. Organization usually has a strategic planning unit that devices plans based on where the company wants to see itself in the next 5 or 10 years. Similarly it also usually has a financial planning unit that decides on resource allocation and budget based on the financial targets in terms of revenues, profits, and investments for the next fiscal year. The financial plan usually is based entirely on numbers that bear little resemblance to the targets developed by the strategic planning unit. And in most of the cases, the financial plan simply overrules the strategic plan. Here comes the use of balance score card. The very act of creating one forces the executives to create the budget plan while keeping the long term strategic plan in perspective. Budgets will still be created for short term financial goals but it will be also be evaluated against the short-term milestones that will mark the progress along the strategic paths that have been selected. Because the score card is developed considering financial and strategic goals for the organization itself, resource allocation and assigning priorities will be based directly on it. This helps to undertake and coordinate only those activities that move the company towards the strategic objectives and eliminate those that do not contribute towards it. Employees then get compensated based on the progress on BSC. Not that it’s better to decide on the threshold for a set of critical strategic measures and then base compensation on the fact the threshold has been achieved or not. Another method, though less effective, is to assign weights to each strategic measure. Keep in mind that this can potentially lead to significant compensation when a few of the important measures are over achieved though the company may have fallen short on a few others.

Notes based on the papers by Robert S Kaplan & David P Norton (the creators of Balanced Score Card). 

Little’s Law for Call Center Operation

Operations Management is the science of effectively matching supply with demand. With the objective of finding the efficient frontier, finding the right balance between competing objectives such as cost vs service, and fundamentally questioning the design of current system, Operations Management has acquired great significance for running an organization profitably.

Within Operations Management, Little’s Law has acquired prominence probably like no other.

Per Little’s Law

Inventory = Flow Rate × Flow Time

Without getting to the theoretical aspect of the law, let me try to show how useful it is.

Let us calculate if we have shortage of professional in a service industry such as call center.

For a call center,

Inventory = Calls waiting to be serviced including the calls that’s being currently attended.
Flow Time = the time for processing a call from the moment the caller dials to the moment the call has been serviced
Flow Rate = Average call volume for a duration, for example, calls per month.

Assume that the call center has an average call volume of 2000 calls per month.

Therefore, Flow Rate = 2000 calls/month

Assume that average taken during multiple times a month shows an average inventory of 10 calls at any point in time (on hold for service or being serviced).

Therefore, Inventory = 10 calls

According to Little’s law,

Flow time = Inventory ÷ Flow Rate

= 10 Calls ÷ 2000 Calls/month

= 0.005 month = 0.005 *30 Days = 0.15 Days (Assuming 30 days month)

= 3.6 Hours

Therefore, the average time for servicing a call is 3.6 hours.

If 3.6 hours to service a call is acceptable, then the call center can be considered adequately staffed. If not, take action to increase the calls per month and reduce the calls in waiting. Note that you don’t always have to increase the staff to increase through put. It can be through various means as better software to manage the systems, better method of call distribution to name a few.

Leadership for Innovation

What can leaders do to create an environment conductive to innovation?

Though it’s not possible to force anyone to innovate, it’s definitely possible for leaders to create an environment that’s conductive to innovation. Innovation happens when people with different skills and background come together to solve the business problem. And mostly they do that by taking a leaf out from their experience, improve, discuss the merits of different approaches and come out with an integrated solution to the problem. Explored below are some of the factors that can help to create an atmosphere that fosters innovation.

Skills: This is one of the easy wins. Create an environment that promotes skill development. Some of the options are internal training, external training, and information sessions. Even marketing session by vendors can be informative to know the latest developments in a particular field. And skills training can be as varied as training in a particular technology to a more abstract subject as business design.

Experience: It may not be enough to have people around who have had formal training in a topic. For those motivated employees it’s also necessary to create an environment to gain experience in what they have learned. It helps to understand the practicality of what they learned and to refine the knowledge about the subject. Mentoring, where in a more experienced staff has oversight on the trainee is one of the best ways of providing that. Role exchange between coworkers, pair programming and opportunities for rotation in different activities, function and departments all help with broadening the knowledge area and industry experience. It may be worthy to keep in mind that experience and not expertise in a wide area should be the primary goal. Excellence is the enemy of good.

Goals: Even though leaders are letting the innovators chose their path, it’s important to clearly set the goals they want to achieve and give specifics on how they would measure it. Clarification on the problem at hand is an important step. It may be wise to mention the boundaries and equip with possible tools, but be careful enough to not go into further details and to let the innovators chart the path themselves.

Collaboration: Create a platform for collaboration. For creating one, leaders need to identify people who will benefit most by collaborating in each segment. People from knowledge areas that have common ground, functions that interact with each other, individuals with similar taste are all candidates for forming their own group for partnership. Also, note that, social media may not always be the best option for employees to collaborate and that’s true even for people working in technology. Face to face interaction is still my preference though technology is changing the game everyday. Co-locating, networking session, fun events, interactive workshops, and training sessions are few of the many options available. If you are planning to leverage on technology, make sure that it’s easy for everyone using it to find and reach out to their target of choice for collaboration.

Risk: One of the biggest impediments to innovation is the aversion to risk. It’s absolutely necessary to develop an environment that supports risk taking within the organization. Leaders have to continuously review and understand how risk is perceived within the business unit and make changes when necessary so as to encourage calculated risk taking. An atmosphere that is supportive to disruptive ideas and potential failures, a mechanism for constructive feedback, a forum to analyze the positive and negative impacts of initiatives in the short and long run, and a mechanism to propagate the lessons learned are a must have for this. Showcasing people within the organization who have shown the courage to come up with disruptive ideas and succeeded in it also can act a booster for others to step out of their comfort zone.

In sum, it’s all about building a culture around the core values that all good organizations should exhibit. You don’t bring forth innovation just by recruiting a bunch of genius minds into your organization. If you think about it, there is a genius in all of us. It’s how you extract it that makes your workplace exemplary.

Blue Ocean Strategy

Notes based on the article by W. Chan Kim & Renee A. Mauborgne

How do you reinvent an existing business in decline? A smart answer is to discover the market space which is still pristine. Enter Blue Ocean Strategy where the demand for a product is created than fought over. And it’s usually done more often by breaking the existing boundaries than creating entirely new industry. If history is any indicator of future, we can expect a bunch of new unheard of industry to flourish every few decades or so. The industrial space is getting overcrowded and it’s becoming increasingly harder to differentiate one brand from the other for the same product, mainly because the means of production is becoming generalized and the historic monopolies have been wiped clear by technological advances and the ever-increasing information availability. In such a competitive space, are the existing industries ignorant of the changing needs? Blame the existing strategy which is tuned towards warding off competition by crushing the opponents than discovering untouched land. But blue ocean strategy is different in that, it’s about finding and developing markets where there is little competition and then exploits and defends the newly discovered blue ocean.

What are some of the defining characteristics and features about Blue Ocean Strategy? Blue Ocean is not about technological innovation, but about linking technological innovation to your needs. Not R&D budgets, but right strategic moves are the key to new market space. An overwhelming reality is that blue oceans are existing next to you and can be created within your organization`s core business. But for that company and industry are the wrong units of analysis. That`s mainly because a company remains brilliant only as long as it keeps creating new blue oceans. Also, competition is not the benchmark in the blue ocean world and there is no trade-off between value and cost.

Blue oceans are largely unchallenged for quite a while because copying the blue ocean business model is easier said than done. Also, Blue Ocean many times creates a brand image that is hard to beat even for existing market leaders. Red and blue oceans always have and will coexist and the sooner corporations can realize the difference in the underlying logic, the more blue oceans can they create.

Business Design for solving business problems

 

Tell me everything that's wrong about it because I know I can fix it 
- David M Kelly

This blog is based on my experience at the Rotman Business Design Boot camp that I attended in 2014. The images that I’ve used  in this blog are from the slides used in the event.

Business problems and opportunities are all around us. And everyone got ideas. Some have big ideas and some others have smaller ones. But are they really the solution for the problem at hand? How can we know that?

Here comes the importance of business design to produce what the customer needs. Business Design would help you put structure around your thoughts. It helps you take that next step to define in more concrete terms what you want to make or do to satisfy customer needs, which helps when you want to present this great idea to the world. It helps you to analyze your concept against the backdrop of reality to understand if the great idea is indeed that great or not. Business design follows a few simple but thought provoking steps to get from the need to the solution concept, which later materializes into a product.

For simplicity, it can be taken to work out in three steps

• Empathy and need finding
• Ideation and prototyping
• Business Strategy

Once you’ve  a product, it’s equally important to do decide where you’ll market your product (deciding on your ideal customer, where to find your ideal customer) and how you’ll play to succeed in the chosen market. Basically determine your Business Strategy. Described in this blog are the first two steps – from identifying what the need is to coming out with a product that you think best satisfies that need. Business strategy, is too broad to be discussed in this space. Also, the whole process works best when done as a team of 4 to 5 people. That’s how we did in the Rotman design boot camp and so I’m going to assume such a team for rest of the blog.

Empathy and Need Finding

Empathy and need finding is about identifying what the customer really needs which might be very different from what they say they want. Unless we are all Steve Jobs, the process starts with asking the customer. Be a patient listener. Open ended questions such as “Why is that important” or “Tell me more about that” work best to extract maximum information. Once you believe you have got as much as you can from them, step into the next process which is to draw an empathy map.

An empathy map is a simple structure to differentiate what the user really needs from what she might say. Take a big sheet of paper and divide that into four quadrants. One on each quadrant, write “What’s she saying?”, “what’s she doing?”, “How does she feel?” and “What does she think?

From the discussion you had with the many customers, try to extract the deeper meaning and write that in each quadrant and complete the empathy map. Discuss the tensions and barriers.

Remember, it’s the customers need and not the want. This is really the time to go below the surface, get behind the mind, and understand the customer.

From the empathy map, pick couple of pressing needs that you identified for the customer. These needs are going to be the catalyst that would plant the seeds of great solutions.

Brainstorming: Ideation and Prototyping

So by now you may have fairly good opinion what customer requirements actually need to be satisfied. The next step is to generate ideas that would satisfy the needs. Couple of points to be kept in mind while you are brainstorming for solutions

• Defer judgement because criticizing too early stops the flow of creative ideas.
• Build on others ideas to make new possibilities. Share your ideas continuously.
• Go for quantity. Generate as many ideas as possible
• Come up with whacky crazy ideas; they might turn out to be the best solutions; who knows?
• Don’t get hung up on one thought. Get the essence of your idea, don’t wait to chart out the details and move on to the next.

Sort, reflect, and pick

Now that you probably have a ton of ideas generated, it’s time to figure out the best and move forward with it. Start sorting the ideas into three group – Boring, Cool, and Crazy. This might help you to identify the best idea from the lot to move forward with.

Visualization and Prototyping

Now that you’ve the one idea that you want to make a product, it’s time to prototype. The later you do the prototype, the more expensive it’s going to be; so earlier the better. Know that to create a robust product, you have to test your ideas early and as often as possible.

Prototyping is not always expensive or time consuming. Check out the videos below.
These short videos might help explain the concept of prototyping.

IDEO’s David Kelley on the Culture of Prototyping

Rapid prototyping Google Glass – Tom Chi

Feedback

It’s time for feedback. Does your idea really makes sense? What can be improved? What should be changed? This is the time to know that. The intention of this exercise is to know more, so do not get defensive. Find people around you. Use the prototype, explain the idea, and solicit more information with open ended questions such as

• What do you like?
• What would you change?
• What questions do you have?

Each of the questions can give information to make your product even better. With the feedback you received, go back to the drawing board and see if there are things that your can improve and repeat the process as many times as you can till you are really satisfied.

So by now, we went from understanding the customer’s underlying need to coming out with a product that would satisfied that need. And when we add the business strategy part to the mix, we’ve a practical solution to a business problem. This is the core concept of Business Design. Better understand the customers, design seamless experiences, and create a winning strategy.

Contextual Intelligence

Notes based on the article by Tarun Khanna

According to the author, we live in WEIRD – Western, Educated, Industrialized, Rich, Democratic societies, where everything from the concept of fairness to the realization of self differs from that found in the societies of the emerging nations. Even then, we behave as it’s a flat world wherein most of what worked in one place is expected to work at the other and we easily get confused and frustrated when it doesn’t.

It is here the relevance of contextual intelligence comes. Contextual Intelligence is about the ability to know the limits of our knowledge and to adapt that knowledge to an environment different from the one in which it was developed.

We tend to overestimate the ability about what can be ported across nations and cultures. And for companies who business and capabilities span multiple geographies, the negative impact of strategy build on that over confidence can be seen from the marketing department struggling to expand the business to the Information Technology department frustrated with the different levels of expectations and difficulties from outsourcing.

The author also gives some tips on ways to overcome the troubles of integrating with a market very different from that of your home country.

According to him, researching the new market’s institutional context is actually easy once you are willing to do it. But be warned, not all industrial area tracks data. Many times, you have to start an effort to collect data. But nevertheless, it’s possible.

Changing the persistent mental model you may have, can be hard. As an example, the author gives the example of China, where the economy is run pretty much in entirety by the government. And it’s efficient. Where as we have been living in Capitalist countries where the general belief is that the state is unimaginably incompetent to has to keep away from controlling industries.

General concept are adaptable, but specific dimensions may not be. The overarching strategy can probably remain the same. But how it’s implemented should be based on the knowledge about the domestic environment. For example, you might decide to rate employees based on performance at all the geographic location you operate. But what are the variables the performance would be measured should be adapted to local environment.

And change is, well slow; very very slow most of the times. You have to show patience, you have to show perseverance. A cultural change in the domestic business market for the better, which at times can be the way things are done in the WEIRD world, (more transparency, monitoring, regulation, responsible politics) can take a decade on average. So don’t expect things to change over night.

So what would be a better way to do business with a new market? Involving people who understand the new market well, hiring from local market for leadership positions, grooming more global business leaders with overseas posting are a few ways you might prepare to face the challenge of moving in the known unknowns.

 

Fostering innovation at workplace for ALL

Disclaimer: I work in technology and it may have profound influence in my outlook. Also the words and jargon I use might be from the IT world.

Employee skill rotation program: This would help to plant at least two of the many innovation seeds – skills and the culture of change. And this is not about sowing the seeds on just a chosen few as in a leadership development program; it’s to foster innovation as a cultural change in the entire organization. Just as traveler who has seen the world would be more knowledgeable and practical that someone who never stepped out of his hometown, an employee who has seen the professional world from different angles and perspectives is better equipped to face the challenges his profession throws at him.

Unless we are all Steve Jobs, we discover, invent and innovate by using the knowledge we gained in our past. And the best ones are always woven from our past experiences. (It’s not that formal training doesn’t help; even Steve Jobs relied on the lessons he learned in the calligraphy class when designing typefaces for Mac). An employee doing similar activities for too long (we all know at least a couple of people who have been doing the similar activity for a decade, don’t we?) develops competency in the tasks that he performs on a daily basis. He will know the processes that need to be followed and the policies in place that have to be considered when he is given a problem to solve. However, many times unknowing to him, working so long at repetitive tasks also would have tuned him to see the outside professional world from the perspective of his daily activities. Many times to the extent that he puts the boxes (so called procedures, policies, processes) in place first when he is given a problem to solve and then works around a solution that satisfies it. It does not occur to him that probably there are solutions out there that can solve the problem at hand in a better way all the while satisfying the issues for which the policies exist in the first place. In other words, out of the box thinking and innovation is not his cup of tea.

Exposure to different perspective is the key to unlearning from this kind of tunnel vision. For that it’ll be nice to have the staff move around and undertake work in different business model, technology, support architecture and the like in a safe and secure environment. It has to be ever so frequently, probably every few years, such that the employee gets sufficient exposure and experience in new functions that he performs every time. This empowers him to borrow the idea and way of thinking from the all the work he undertakes to come up with better integrated solutions to the problems thrown to him. In other words, it fosters innovative thinking. It has to be considered that the employee might feel threatened and stressed by the challenges of frequent changes in the scope & content of his work. And that’s why support and encouragement is so important in these scenarios.

Tap the honey pot – Front line employees: These are the people who deal with business users and customers most frequently. To put things in perspective, a customer is someone who takes your service or product. If you happen to do something that gets you to interact with the person using what you make or do, you are candidate for tapping innovative ideas. Front line employees know customers pain as they are the ones taking the brunt when something goes wrong with the service provided. They know things that can be done differently to bring greater value to the customer. And many times they have to deal with a multitude of problems in a variety of situation, which means they have experience and knowledge on many things that matters. Often they know more than the manager higher up who just consumes the information filtered up through mostly word of mouth. And we all know how well that usually goes!

So, form a group to champion the effort of tapping these rich sources. Identify the best ideas. Work together on solving those problems that gives the best bang for the buck. And don’t forget to keep this process iterative.

Innovation Killers

I can’t think this blog to be complete without posting a few thoughts from the HBR article authored by Clayton M. Christensen, Stephen P. Kaufman, and Willy C. Shih.

They present very valid points on some of the strategies and best practices that can kill innovation.

The authors take the first short at Discounted Cash Flow (DCF) and Net Present Value (NPV) calculations for deciding on the projects to be approved. Anyone who has taken a 2 days course on corporate finance knows the importance of making fair assumptions and projections and using DCF to put a dollar figure against each new project proposal. According to my professor, if you cannot get a thought into spreadsheet, then it’s not worth mentioning while deciding on project proposals. However, the authors of this article are questioning one of the basic assumptions made in corporate finance – the option of doing nothing. When you are to decide if a project is a GO or NO-GO, you are asked to see if the NPV of the project is positive or negative. If it’s positive, your project is a go. Vice versa is also true, which means, if the NPV of the project is negative, you are not supposed to approve the project as it depletes shareholder value. At this point, there is this assumption that if you do nothing, your company continues to exist in to the eternity by doing what it’s doing now and nothing more. And who doesn’t know that’s a fallacy? So the option of doing nothing is not really an option at all. So what if you have all projects with negative NPV and worse, some of the project looks like futuristic whose value is difficult to define. Because NPV is negative, do you go for the option of doing nothing? Um, this is tough. Kind of gives the feeling – I want to agree but on second thought I don’t want to agree.

The next one looks even more important. The Fixed cost and sunk cost and its impact on marginal cost analysis. The authors claim that, when you are assessing a new project, unless it’s just adding to what you are already making, the marginal cost is actually the full cost itself. Say, you are running a company that makes nuts and bolts. If you plan to use the same machinery to manufacture say a new tool and the reason that you are using the existing machinery is just because you can, then the authors are asking you to rethink to strategy. Because you are using existing machinery, you might believe that your marginal cost is less as you are not spending on fixed cost again. But in reality, you might be forfeiting your future capabilities by not investing in new machinery that’s more appropriate for making the new tool and the tools of the future. That being the case, when you are making the decision on a new project proposal, unless you are on an incremental project (such as increasing the capabilities to make more nuts and bolts of the same kind), be cognizant of the future opportunities and use the full cost of production as your marginal cost. That way you are giving a fair chance to new disruptive project that might initially look like a loser for increasing shareholder value.

The solution the authors suggest is not to consider corporate finance and strategy as two different subjects that are not well related. They are indeed closely related and you’ve to take an integrated approach when deciding on new projects. The authors go as far as to recommend accepting strategies and not projects!

Do I want to agree? Not sure. The professor’s words still ring on my ear – If you can’t get it into spreadsheet, it’s not worth mentioning.

 

Canadian Oil by rail

In 2013, Canada shipped 200,000 barrels per day. That number is expected to be 500,000 by the end of next year. Trains carried one million barrels per day of US oil and the shipment is expected to be 1.5 million barrels this year.

Oil by rail may indeed become an effective replacement for Keystone pipeline, though it’s three times more expensive. The alternative route of the northern leg of the pipeline through Nebraska is still stuck in the court battle over the regulatory review of the line’s path through the state. With the Canadian pipeline operator TransCanada admitting that the costs of the pipeline may climb 85% from $5.4 billion to $10 billion, the rail option indeed looks very attractive. It should be noted that environmentalists are as much against increasing the rail capacity as they are against the pipeline though the former objection is not widely known.

The tragedy at Lac-Megantic will haunt the industry for a long time to come and rightfully so. Trains companies such as the one that caused the disaster runs with minimum or no insurance (it had 17 mil liability coverage when the physical damage itself was in excess of 200 mil)

Canadian and US government should impose stricter rules (many are already in the works) regarding the age of oil cars, trackage, the speed at which they are allowed to travel and audit & inspection.

Based on the article by Diane Francis and Euan Rocha, Financial Post

What Is Strategy?

 This is a compilation of notes from the Michael E Porters’s namesake article.

Strategy is about unique and valuable positioning involving different set of activities and you do that by serving

1) few needs of many customers (“variety based positioning”). Lube provides lubrication service and just that for anyone with an automobile. The Vanguard Group provides an array of common stock, bond, and money market funds that offer predictable performance and rock-bottom expenses.

2) many needs of few customer (“need based positioning” more like traditional segmentation). Ikea offers all home furniture for young people who are looking for style. They offer child care service while customers shop targeting those with kids and no nanny!

3) many needs of many customers in a narrow market (“access based positioning”). Carmike Cinemas, for example, operates movie theaters exclusively in cities and towns with populations under 200,000

Strategic positioning Vs Operational effectiveness

Operational effectiveness is about performing similar activities better than your competitor. But Strategic positioning is about performing similar activities in different ways than your competitor there by preserving and showcasing what is different about your company. ah ha.

Total quality management, bench marking, time-based competition, outsourcing, partnering, re-engineering, change management are all tool for operational improvement. Because operational effectiveness is concrete and measurable, managers are lured into it.

A company needs to establish a difference that it can preserve for competitive advantage. Provide greater value to customers or provide same value at a lower cost. The innumerable activities that companies need to perform, if they do it in a leaner way results in cost efficiency. Efficiency can be achieved by better, faster work as well as by reducing defects, rework and similar pain points. But you differentiate from rivals by the activities you choose to perform as well as how well you do it.

Strategic trade-offs

Strategy needs you make trade-offs in competing; choosing what to do and what not to do! The argument is, without trade-offs, there would be no need for choice and thus no need for strategy. So strategy is also about making trade-offs in competing – I don’t want to believe this. I like strategy to be more of an integrated approach where you come up with smart ideas which does not involve trade-offs. Why trade-off? I want to keep all the best stuff in the best-est way.

Deciding which target group of customers, services and needs to serve is important in strategy. So is deciding not to server other customers, services or needs. So strict discipline and clear communication is vital to make trade-offs.

Strategic fit

Strategy is about creating a synergy, creating a fit between the activities in the company so as to make it harder for anyone to copy.- agreed. The bigger the array of activities, the harder it is for a competitor to imitate. It is also understood that each of the individual activities are done well. A fit enhances the positions uniqueness.

Types of fit:

1. Simple consistency: Just a consistency with all its activities. Vanguard has a low cost strategy and every thing they do is aligned with it. No big money managers and no intermediaries.
2. Activity reinforcing: Neutrogena offers their soap at high end hotels and hotels let it display Neutrogena name instead of hotels. Customers use it, like it and buys it from drug store when they see it.
3. Optimization of effort: I don’t understand this!

A fit also means that poor performance in one activity will reflect in other activities and so weakness are more easily exposed and prone to get attention. In the same way, improvements in one activity will reflect as payback through other activities too.

Strategic positioning should have a window of a decade or more since continuity fosters improvements in individual activities as well as in the fit across activities. Also, frequent change in fit can be very costly and bound to be ‘no strategy’.

Failures – Why do strategies fail?

Eagerness to grow. Unwillingness to make trade-offs. The overconfidence in the need to capture all the market instead of a selected few. Offer all services instead of the ones in which you have developed competency. (isn’t this then betting on the core competency that the author initially disagreed in developing). eg:- Maytag, which offered only a few appliances expanded by mergers to offer everything and their returns went from 8% to less than 1% over a span of 10 years.

How to grow?

The goal is to extend strategy to other things that you already perform. That’s basically you are deepening a strategic position than broadening and compromising it. Identify activities and features that are less costly to implement because of complementary activities that they already perform rather than adding new things which the company has noting new to offer as value to customers. Invest more in those things where you are distinct.

Also, globalization allows growth that’s fits well with the strategy as it opens the larger market for more focused strategy. Unlike broadening domestically, expanding globally is likely to leverage and reinforce a company’s unique position and identity. – This is a super cool observation.

If you are broadening domestically, create stand alone units with its own brand name and tailored activities. – I so believe in this and always have been an advocate. Don’t paint everything red immediately because the parent company’s color is red. Take your time as synergies are so difficult to realize and bring it under the same umbrella when you are really sure about the outcomes.

Operational effectiveness is not strategy

Operational effectiveness is about continuously improving everything you do and do not make any trade-offs. Even if you acquire new things, you keep on improving it with out analyzing if its a proper strategic fit.

Strategy on the other hand is about defining a unique position, making clear trade-offs and tightening the fit. But it doesn’t mean that company should have a static view of competition. It should continuously improve and extend its frontier at the same time try to enhance its uniqueness while strengthening its fit. Don’t get a bunch of things because it’s nice. See if it fits you.

This got me thinking if facebook and whatsapp is in a unholy wedlock? Are they strategic fit? Can facebook extend its business model. But they seem to have got the start right as they have been keep as different entities – no facebook blue over whatsapp green yet. Only time will tell how worthy was that $19 Billion spend.