Strategic sourcing: from periphery to the core

As globalization changes the basis of competition, sourcing is moving from the periphery of corporate functions to the core. Always important in terms of costs, sourcing is becoming a strategic opportunity. But few companies are ready for this shift. Outsourcing has grown so sophisticated that even critical functions like engineering, R&D, manufacturing, and marketing can-and often should-be moved outside. And that, in turn, is changing the way companies think about their organizations, their value chains, and their competitive positions. Already, a handful of vanguard companies are transforming what used to be purely internal corporate functions into entirely new industries. Companies like UPS, Solectron, and Hewitt have created new business models by concentrating scale and skill within a single function. As these and other function-based companies grow, so does the potential value of outsourcing to all companies. Migrating from a vertically integrated company to a specialized provider of a single function is not a winning strategy for everyone. But all companies need to rigorously reassess each of their functions as possible outsourcing candidates. Presented in this article is a simple three-step process to identify which functions your company needs to own and protect, which can be best performed by what kinds of partners, and which could be turned into new business opportunities. The result of such an analysis will be a comprehensive capabilities-sourcing strategy. As a detailed examination of 7-Eleven's experience shows, the success of the strategy often hinges on the creativity with which partnerships are organized and managed. But only by first taking a broad, strategic view of capabilities sourcing can your company gain the greatest benefit from all of its sourcing choices.     

The competitive advantage of corporate philanthropy

When it comes to philanthropy, executives increasingly see themselves as caught between critics demanding ever higher levels of "corporate social responsibility" and investors applying pressure to maximize short-term profits. In response, many companies have sought to make their giving more strategic, but what passes for strategic philanthropy is almost never truly strategic, and often isn't particularly effective as philanthropy. Increasingly, philanthropy is used as a form of public relations or advertising, promoting a company's image through high-profile sponsorships. But there is a more truly strategic way to think about philanthropy. Corporations can use their charitable efforts to improve their competitive context--the quality of the business environment in the locations where they operate. Using philanthropy to enhance competitive context aligns social and economic goals and improves a company's long-term business prospects. Addressing context enables a company to not only give money but also leverage its capabilities and relationships in support of charitable causes. The produces social benefits far exceeding those provided by individual donors, foundations, or even governments. Taking this new direction requires fundamental changes in the way companies approach their contribution programs. For example, philanthropic investments can improve education and local quality of life in ways that will benefit the company. Such investments can also improve the company's competitiveness by contributing to expanding the local market and helping to reduce corruption in the local business environment. Adopting a context-focused approach goes against the grain of current philanthropic practice, and it requires a far more disciplined approach than is prevalent today. But it can make a company's philanthropic activities far more effective.     

Putting leadership back into strategy

In recent decades an infusion of economics has lent the study of strategy much needed theory and empirical evidence. Strategy consultants, armed with frameworks and techniques, have stepped forward to help managers analyze their industries and position their companies for strategic advantage. Strategy has come to be seen as an analytical problem to be solved. But, says Montgomery, the Timken Professor of Business Administration at Harvard Business School, the benefits of this rigorous approach have attendant costs: Strategy has become a competitive game plan, separate from the company's larger sense of purpose. The CEO's unique role as arbiter and steward of strategy has been eclipsed. And an overemphasis on sustainable competitive advantage has obscured the importance of making strategy a dynamic tool for guiding the company's development over time. For any company, intelligent guidance requires a clear sense of purpose, of what makes the organization truly distinctive. Purpose, Montgomery says, serves as both a constraint on activity and a guide to behavior. Creativity and insight are key to forging a compelling organizational purpose; analysis alone will never suffice. As the CEO--properly a company's chief strategist--translates purpose into practice, he or she must remain open to the possibility that the purpose itself may need to change. Lou Gerstner did this in the 1990s, when he decided that IBM would evolve to focus on applying technology rather than on inventing it. So did Steve Jobs, when he rescued Apple from a poorly performing strategy and expanded the company into attractive new businesses. Watching over strategy day in and day out is the CEO's greatest opportunity to shape the firm as well as outwit the competition.     

Building a leadership brand

How do some firms produce a pipeline of consistently excellent managers? Instead of concentrating merely on strengthening the skills of individuals, these companies focus on building a broad organizational leadership capability. It's what Ulrich and Smallwood--cofounders of the RBL Group, a leadership development consultancy--call a leadership brand. Organizations with leadership brands take an "outside-in" approach to executive development. They begin with a clear statement of what they want to be known for by customers and then link it with a required set of management skills. The Lexus division of Toyota, for instance, translates its tagline--"The pursuit of perfection"--into an expectation that its leaders excel at managing quality processes. The slogan of Bon Secours Health System is "Good help to those in need." It demands that its managers balance business skills with compassion and caring. The outside-in approach helps firms build a reputation for high-quality leaders whom customers trust to deliver on the company's promises. In examining 150 companies with strong leadership capabilities, the authors found that the organizations follow five strategies. First, make sure managers master the basics of leadership--for example, setting strategy and grooming talent. Second, ensure that leaders internalize customers' high expectations. Third, incorporate customer feedback into evaluations of executives. Fourth, invest in programs that help managers hone the right skills, by tapping customers to participate in such programs. Finally, track the success of efforts to build leadership bench strength over the long-term. The result is outstanding management that persists even when individual executives leave. In fact, companies with the strongest leadership brands often become "leader feeders"--firms that regularly graduate leaders who go on to head other companies.     

Capitalizing on capabilities

By making the most of organizational capabilities--employees' collective skills and fields of expertise--you can dramatically improve your company's market value. Although there is no magic list of proficiencies that every organization needs in order to succeed, the authors identify 11 intangible assets that well-managed companies tend to have: talent, speed, shared mind-set and coherent brand identity, accountability, collaboration, learning, leadership, customer connectivity, strategic unity, innovation, and efficiency. Such companies typically excel in only three of these capabilities while maintaining industry parity in the other areas. Organizations that fall below the norm in any of the 11 are likely candidates for dysfunction and competitive disadvantage. So you can determine how your company fares in these categories (or others, if the generic list doesn't suit your needs), the authors explain how to conduct a "capabilities audit," describing in particular the experiences and findings of two companies that recently performed such audits. In addition to highlighting which intangible assets are most important given the organization's history and strategy, this exercise will gauge how well your company delivers on its capabilities and will guide you in developing an action plan for improvement. A capabilities audit can work for an entire organization, a business unit, or a region--indeed, for any part of a company that has a strategy to generate financial or customer-related results. It enables executives to assess overall company strengths and weaknesses, senior leaders to define strategy, midlevel managers to execute strategy, and frontline leaders to achieve tactical results. In short, it helps turn intangible assets into concrete strengths.     

Making strategy: learning by doing

Companies find it difficult to change strategy for many reasons, but one stands out: strategic thinking is not a core managerial competence at most companies. Executives hone their capabilities by tackling problems over and over again. Changing strategy, however, is not usually a task that they face repeatedly. Once companies have found a strategy that works, they want to use it, not change it. Consequently, most managers do not develop a competence in strategic thinking. This Manager's Tool Kit presents a three-stage method executives can use to conceive and implement a creative and coherent strategy themselves. The first stage is to identify and map the driving forces that the company needs to address. The process of mapping provides strategy-making teams with visual representations of team members' assumptions, those pictures, in turn, enable managers to achieve consensus in determining the driving forces. Once a senior management team has formulated a new strategy, it must align the strategy with the company's resource-allocation process to make implementation possible. Senior management teams can translate their strategy into action by using aggregate project planning. And management teams that link strategy and innovation through that planning process will develop a competence in implementing strategic change. The author guides the reader through the three stages of strategy making by examining the case of a manufacturing company that was losing ground to competitors. After mapping the driving forces, the company's senior managers were able to devise a new strategy that allowed the business to maintain a competitive advantage in its industry.     

Lead from the center. How to manage divisions dynamically

Conventional wisdom holds that a company's divisions should be given almost total autonomy--especially under conditions of uncertainty--because they are closer to emerging technologies, customers, and competitors than corporate headquarters could ever be. But research from Michael Raynor and Joseph Bower suggests that the corporate office should be more, not less, directive in turbulent markets. Rapid changes in an industry make it difficult to predict where and when synergies among divisions might emerge. With so many possibilities and such uncertainty, companies can't afford to sacrifice their ability to flexibly execute business strategy. Corporate headquarters must play an active role in defining the scope of division-level strategy, the authors say, so that divisions do not act in ways that undermine opportunities to collaborate in the future. But neither can companies afford to sacrifice the competitiveness of their divisions as stand-alone businesses. In creating corporate-level strategic flexibility, a corporate office must balance the need for divisional autonomy now with the potential need for cooperation in the future. Through an examination of four corporations--Sprint, WPP, Teradyne, and Viacom--the authors challenge traditional approaches to diversification in which a company's divisions are either related (they share resources and collaborate) or unrelated (they compete for resources and operate as stand-alone businesses). They argue that companies should adopt a dynamic approach to cooperation among divisions, enabling varying degrees of relatedness between divisions depending on strategic circumstances. The authors offer four tactics to help executives manage divisions dynamically.     

Stop making plans; start making decisions

Many executives have grown skeptical of strategic planning. Is it any wonder? Despite all the time and energy that go into it, strategic planning most often acts as a barrier to good decision making and does little to influence strategy. Strategic planning fails because of two factors: It typically occurs annually, and it focuses on individual business units. As such, the process is completely at odds with the way executives actually make important strategy decisions, which are neither constrained by the calendar nor defined by unit boundaries. Thus, according to a survey of 156 large companies, senior executives often make strategic decisions outside the planning process, in an ad hoc fashion and without rigorous analysis or productive debate. But companies can fix the process if they attack its root problems. A few forward-looking firms have thrown out their calendar-driven, business-unit-focused planning procedures and replaced them with continuous, issues-focused decision making. In doing so, they rely on several basic principles: They separate, but integrate, decision making and plan making. They focus on a few key themes. And they structure strategy reviews to produce real decisions. When companies change the timing and focus of strategic planning, they also change the nature of senior management's discussions about strategy--from "review and approve" to "debate and decide," in which top executives actively think through every major decision and its implications for the company's performance and value. The authors have found that these companies make more than twice as many important strategic decisions per year as companies that follow the traditional planning model.     

Charting your company's future

Few companies have a clear strategic vision. The problem, say the authors, stems from the strategic-planning process itself, which usually involves preparing a large document, culled from a mishmash of data provided by people with conflicting agendas. That kind of process almost guarantees an unfocused strategy. Instead, companies should design the strategic-planning process by drawing a picture: a strategy canvas. A strategy canvas shows the strategic profile of your industry by depicting the various factors that affect competition. And it shows the strategic profiles of your current and potential competitors as well as your own company's strategic profile--how it invests in the factors of competition and how it might in the future. The basic component of a strategy canvas--the value curve--is a tool the authors created in their consulting work and have written about in previous HBR articles. This article introduces a four-step process for actually drawing and discussing a strategy canvas. Readers will learn how one European financial services company used this process to create a distinct and easily communicable strategy. The process begins with a visual awakening. Managers compare their business's value curve with competitors' to discover where their strategy needs to change. In the next step--visual exploration--managers do field research on customers and alternative products. At the visual strategy fair, the third step, managers draw new strategic profiles based on field observations and get feedback from customers and peers about these new proposals. Once the best strategy is created from that feedback, it's time for the last step--visual communication. Executives distribute "before" and "after" strategic profiles to the whole company, and only projects that will help move the company closer to the "after" profile are supported.     

The real new economy

During the soar-and-swoon days of the late 1990s, many people believed that information technology, and the Internet in particular, were "changing everything" in business. A fundamental change did happen in the 1990s, but it was less about technology than about competition. Under director Diana Farrell, the McKinsey Global Institute has conducted an extensive study of productivity and its connection to corporate IT spending and use during that period. The study revealed that information technology is important--but not central--to the fate of industries and individual companies. So if information technology was not the primary factor in the productivity surge, what was? The study points to competition and innovation. In those industries that saw increases in competitive intensity, managers were forced to innovate aggressively to protect their revenues and profits. Those innovations--in products, business practices, and technology--led to the gains in productivity. In fact, a critical dynamic of the new economy--the real new economy--is the virtuous cycle of competition, innovation, and productivity growth. Managers can innovate in many ways, but during the 1990s, information technology was a particularly powerful tool, for three reasons: First, IT enabled the development of attractive new products and efficient new business processes. Second, it facilitated the rapid industrywide diffusion of innovations. And third, it exhibited strong scale economies--its benefits multiplied rapidly as its use expanded. This article reveals surprising data on how various industries in the United States and Europe were affected by competition, innovation, and information technology in the 1990s and offers insights about how managers can get more from their IT investments.     

Why change programs don't produce change

Faced with changing markets and tougher competition, more and more companies realize that to compete effectively they must transform how they function. But while senior managers understand the necessity of change, they often misunderstand what it takes to bring it about. They assume that corporate renewal is the product of company-wide change programs and that in order to transform employee behavior, they must alter a company's formal structure and systems. Both these assumptions are wrong, say these authors. Using examples drawn from their four-year study of organizational change at six large corporations, they argue that change programs are, in fact, the greatest obstacle to successful revitalization and that formal structures and systems are the last thing a company should change, not the first. The most successful change efforts begin at the periphery of a corporation, in a single plant or division. Such efforts are led by general managers, not the CEO or corporate staff people. And these general managers concentrate not on changing formal structures and systems but on creating ad hoc organizational arrangements to solve concrete business problems. This focuses energy for change on the work itself, not on abstractions such as "participation" or "culture." Once general managers understand the importance of this grass-roots approach to change, they don't have to wait for senior management to start a process of corporate renewal. The authors describe a six-step change process they call the "critical path."     

Transforming corner-office strategy into frontline action

When CEOs push decision making out to the far reaches of an organization, good things happen: fleeting business opportunities are seized quickly and workers are motivated to innovate and take risks. But it's tricky to achieve both decentralized decision making and coherent strategic action at a company. If everyone is a decision maker, things can spin out of control. In this article, Bain consultants Orit Gadiesh and James Gilbert explore the concept of the strategic principle--a memorable and actionable phrase that distills a company's corporate strategy into its unique essence and communicates it across an organization. If it's devised and disseminated properly, a strategic principle can empower employees to seize business opportunities but also focus everyone in an organization--executives and line managers alike--on the same strategic objectives. The authors outline the three defining characteristics of a good strategic principle--it should force trade-offs between competing resource demands, it should serve as a test for the strategic soundness of a particular action, and it should set clear boundaries for employees to operate within even as it grants them freedom to experiment. They explain how managers can create a strategic principle, how they should test it, and when they should revisit it. The authors present real-world examples of how companies use their strategic principles. For instance, they describe how South-west Airlines stopped flying to Denver after it measured the high costs of providing flight service in that part of the country against its strategic principle of offering customers short-haul air travel at fares competitive with the cost of automobile travel. This tool is increasingly useful in today's rapidly changing business environment, the authors conclude, and it is likely to become even more crucial to corporate success.     

Six IT decisions your IT people shouldn't make

Senior managers often feel frustration--even exasperation--toward information technology and their IT departments. The managers complain that they don't see much business value from the high-priced systems they install, but they don't understand the technology well enough to manage it in detail. So they often leave IT people to make, by default, choices that affect the company's business strategy. The frequent result? Too many projects, a demoralized IT unit, and disappointing returns on IT investments. What distinguishes companies that generate substantial value from their IT investments from those that don't? The leadership of senior managers in making six key IT decisions. The first three relate to strategy: How much should we spend on IT? Which business processes should receive our IT dollars? Which IT capabilities need to be companywide? The second three relate to execution: How good do our IT services really need to be? Which security and privacy risks will we accept? Whom do we blame if an IT initiative fails? When senior managers aren't involved in these decisions, the results can be profound. For example, if they don't take the lead in deciding which IT initiatives to fund, they end up overloading the IT department with projects that may not further the company's strategy. And if they aren't assessing security and privacy risks, they are ignoring crucial business trade-offs. Smart companies are establishing IT governance structures that identify who should be responsible for critical IT decisions and ensure that such decisions further IT's strategic role in the organization.     

Strategic renewal for business units

Over the past decade, business units have increasingly taken the role of strategy formulation away from corporate headquarters. The change makes sense: business units are closer to customers, competitors, and costs. Nevertheless, business units can fail, just as headquarters once did, by losing their focus on the organization's priorities and capabilities. John Whitney--turnaround expert and professor of management at Columbia University--offers a method for refocusing companies that he calls the strategic-renewal process. The principles behind the process are straightforward, but its execution demands extensive data, rigorous analysis, and the judgment of key decision makers. However, when applied with diligence, it can produce a strategy that yields both growth and profit. To carry out the process, managers must analyze, one by one or in logical groupings, the company's customers, the products it sells, and the services it offers in light of three criteria: strategic importance, significance, and profitability. Does a given customer, product, or service mesh with the organization's goals? Is it significant in terms of current and future revenues? And is it truly profitable when all costs are care fully considered? Customers, products, and services that do not measure up, says the author, must be weeded out relentlessly. Although the process is a painstaking one, the article offers clear thinking on why-and how-to go about it. A series of exhibits takes managers through the questions they need to raise, and two matrices offer Whitney's concentrated wisdom on when to cultivate--and when to prune.     

The chief strategy officer

They're nominally and ultimately responsible for strategy, but today's CEOs have less and less time to devote to it. As a result, CEOs are appointing "chief strategy officers"--executives specifically tasked with creating, communicating, executing, and sustaining a company's strategic initiatives. In this article, three authors from Accenture share the results of their research on this emerging organizational role. The typical CSO or top strategy executive is not a pure strategist, conducting long-range planning in relative isolation. Most CSOs consider themselves doers first, with the mandate, credentials, and desire to act as well as advise. They are seasoned executives with a strong strategy orientation who have usually worn many operations hats before taking on the role. Strategy executives are charged with three critical jobs that together form the very definition of strategy execution. First, they must clarify the company's strategy for themselves and for every business unit and function, ensuring that all employees understand the details of the strategic plan and how their work connects to corporate goals. Second, CSOs must drive immediate change. The focus of the job almost always quickly evolves from creating shared alignment around a vision to riding herd on the ensuing change effort. Finally, a CSO must drive decision making that sustains organizational change. He or she must be that person who, in the CEO's stead, can walk into any office and test whether the decisions being made are aligned with the strategy and are creating the desired results. When decisions below the executive suite aren't being made in accordance with strategy, much of the CSO's job involves learning why and quickly determining whether to stay the course or change tack.     

Strategy and the art of reinventing value

In "From Value Chain to Value Constellation: Designing Interactive Strategy" (July-August 1993), Richard Normann and Rafael Ramírez argue that successful companies increasingly do not just add value, they reinvent it. The key strategic task is to reconfigure roles and relationships among a constellation of actors--suppliers, business partners, customers--in order to mobilize the creation of value in new forms and by new players. What is so different about this new logic of value? It breaks down the distinction between products and services and combines them into activity-based "offerings" from which customers can create value for themselves. But as potential offerings become more complex, so do the relationships necessary to create them. As a result, a company's strategic task becomes the reconfiguration and integration of its compentencies and customers. Normann and Ramírez provide three illustrations of these new rules of strategy. IKEA has blossomed into the world's largest retailer of home furnishings by redefining the relationships and organizational pratices of the furniture business. Danish pharmacies and their national organization have used the opportunity of health care reform to reconfigure their relationships with customers, doctors, hospitals, drug manufacturers, and with Danish and international health organizations.(ABSTRACT TRUNCATED AT 250 WORDS)     

What's a business for?

In the wake of the recent corporate scandals, it's time to reconsider the assumptions underlying American-style stock-market capitalism. That heady doctrine--in which the market is king, success is measured in terms of shareholder value, and profits are an end in themselves--enraptured America for a generation, spread to Britain during the 1980s, and recently began to gain acceptance in Continental Europe. But now, many wonder if the American model is corrupt. The American scandals are not just a matter of dubious personal ethics or of rogue companies fudging the odd billion. And the cure for the problems will not come solely from tougher regulations. We must also ask more fundamental questions: Whom and what is a business for? And are traditional ownership and governance structures suited to the knowledge economy? According to corporate law, a company's financiers are its owners, and employees are treated as property and recorded as costs. But while that may have been true in the early days of industry, it does not reflect today's reality. Now a company's assets are increasingly found in the employees who contribute their time and talents rather than in the stockholders who temporarily contribute their money. The language and measures of business must be reversed. In a knowledge economy, a good business is a community with a purpose, not a piece of property. If, like many European companies, a business considers itself a wealth-creating community consisting of members who have certain rights, those members will be more likely to treat one another as valued partners and take responsibility for telling the truth. Such a community can also help repair the image of business by insisting that its purpose is not just to make a profit but to make a profit in order to do something better.     

Building effective R&D capabilities abroad

In the past, companies kept most of their research and development activities in their home country because they thought it important to have R&D close to where strategic decisions were being made. But today many companies choose to establish R&D networks in foreign countries in order to tap the knowledge there or to commercialize products for those markets at a competitive speed. Adopting a global approach entails new, complex managerial challenges. It means linking R&D strategy to a company's overall business strategy. The first step in adopting such an approach is to build a team to lead the initiative--a team whose members are sufficiently senior to be able to mobilize resources at short notice. Second, companies must determine whether an R&D site's primary objective is to augment the expertise that the home base has the offer or to exploit that knowledge for use in the foreign country. That determination affects the choice of location and staff. For example, to augment the home base laboratory, a company would want to be near a foreign university; to exploit the home base laboratory it would need to be near large markets and manufacturing facilities. The best individual for managing both types of site combines the qualities of good scientist and good manager, knows how to integrate the new site with existing sites, understand technology trends, and is good at gaining access to foreign scientific communities. As more pockets of knowledge emerge around the globe and competition in foreign markets mounts, only those companies that embrace an informed approach to global R&D will be able to meet the new challenges.     

Execution without excuses. Interview by Thomas A. Stewart and Louise O'Brien

The success of Dell--it provides extraordinary rewards to shareholders, it can turn on a dime, and it has demonstrated impeccable timing in entering new markets--is based on more than its famous business model. High expectations and disciplined, consistent execution are embedded in the company's DNA. "We don't tolerate businesses that don't make money," founder Michael Dell tells HBR. "We used to hear all sorts of excuses for why a business didn't make money, but to us they all sounded like 'The dog ate my homework.' We just don't accept that." In order to double its revenues in a five-year period, the company had to adapt its execution-obsessed culture to new demands. In fact, Michael Dell and CEO Kevin Rollins realized they had a crisis on their hands."We had a very visible group of employees who'd gotten rich from stock options," Rollins says. "You can't build a great company on employees who say, 'If you pay me enough, I'll stay.'" Dell and Rollins knew they had to reignite the spirit of the company. They implemented an employee survey, whose results led to the creation of the Winning Culture initiative, now a top operating priority at Dell. They also defined the Soul of Dell: Focus on the customer, be open and direct in communications, be a good global citizen, have fun in winning. It turned outto be a huge motivator. And they increased the focus on developing people within the company. "We've changed as individuals and as an organization," Rollins says. "We want the world to see not just a great financial record and operational performance but a great company. We want to have leaders that other companies covet. We want a culture that makes people stick around for reasons other than money."     

Customer value exchange

This paper discusses the state of the US banking industry — its challenges and some of the common shortcomings of their current strategies — and presents compelling reasons why banks must re-formulate new strategies for growth and profitability focused on the customer. It proposes a framework, called the customer value exchange (CVE), as a potential solution that would enable banks to develop effective strategies tailored to their customers’ specific needs and perceptions of value, which are the drivers for profitability. This framework is organised into capabilities, which are explained in this paper. A sample process for how these capabilities are applied is provided with an emphasis on an iterative, dynamic refinement process. The iterative approach includes strategy, people, process, analyses and information that companies can integrate to yield higher value and exchange with the banks’ customers. The paper also presents a real company case study. This framework can be utilised by academics and industry practitioners of customer relationship programmes alike.