Discovering new points of differentiation

Most profitable strategies are built on differentiation: offering customers something they value that competitors don't have. But most companies concentrate only on their products or services. In fact, a company can differentiate itself every point where it comes in contact with its customers--from the moment customers realize they need a product or service to the time when they dispose of it. The authors believe that if companies open up their thinking to their customer's entire experience with a product or service--the consumption chain--they can uncover opportunities to position their offerings in ways that neither they nor their competitors though possible. The authors show how even a mundane product such as candles can be successfully differentiated. By analyzing its customers' experiences and exploring various options, Blyth Industries, for example, has grown from a $2 million U.S. candle manufacturer into a global candle and accessory business with nearly $500 million in sales and a market value of $1.2 billion. Finding ways to differentiate one's company is a skill that can be nurtured, the authors contend. In this Manager's Tool Kit, they have designed a two-part approach that can help companies continually identify new points of differentiation and develop the ability to generate successful differentiation strategies. "Mapping the Consumption Chain" captures the customer's total experience with a product or service. "Analyzing Your Customer's Experience" shows managers how directed brainstorming about each step in the consumption chain can elicit numerous ways to differentiate any offering.     

Knowing a winning business idea when you see one

Identifying which business ideas have real commercial potential is fraught with uncertainty, and even the most admired companies have stumbled. It's not as if they don't know what the challenges of innovation are. A new product has to offer customers exceptional utility at an attractive price, and the company must be able to deliver it at a tidy profit. But the uncertainties surrounding innovation are so great that even the most insightful managers have a hard time evaluating the commercial readiness of new business ideas. In this article, W. Chan Kim and Renée Mauborgne introduce three tools that managers can use to help strip away some of that uncertainty. The first tool, "the buyer utility map," indicates how likely it is that customers will be attracted to a new business idea. The second, "the price corridor of the mass," identifies what price will unlock the greatest number of customers. And the third tool, "the business model guide," offers a framework for figuring out whether and how a company can profitably deliver the new idea at the targeted price. Applying the tools, though, is not the end of the story. Many innovations have to overcome adoption hurdles--strong resistance from stakeholders inside and outside the company. Often overlooked in the planning process, adoption hurdles can make or break the commercial viability of even the most powerful new ideas. The authors conclude by discussing how managers can head off negative reactions from stakeholders.     

Who's bringing you hot ideas and how are you responding?

There's an unsung hero in your organization. It's the person who's bringing in new ideas from the outside about how to manage better. These aren't your product and service innovators--those people are celebrated loudly and often. This is the manager who, for instance, first uttered the phrase "balance scorecard" in your hallways, or "real options," or "intellectual capital." Managerial innovation is an increasingly important source of competitive advantage--especially given the speed with which product innovations are copied--but it doesn't happen automatically. It takes a certain kind of person to welcome new management ideas and usher them into an organization. The authors recently studied 100 such people to find out how they translate new ideas into action in their organizations. They discovered that they are a distinct type of practitioner; that is to say, they resemble their counterparts in other organizations more than they resemble their own colleagues, and they share a common way of working. "Idea practitioners," as the authors call them, begin by scouting for ideas. All of them are avid readers of management literature and enthusiastic participants in business conferences; many are friendly with business gurus. Once they've identified an idea that seems to hold promise, they tailor it to fit their organizations' specific needs. Next, they actively sell the idea--to senior executives, to the rank and file, to middle managers. And finally, they get the ball rolling by participating in small-scale experiments. But when those take off, they get out of the way and let others execute. In this article, the authors identify the characteristics of idea practitioners and offer strategies for managing them wisely.     

Organigraphs: drawing how companies really work

Walk into any organization and you will get a snapshot of the company in action--people and products moving every which way. But ask for a picture of the company and you will be given the org chart, with its orderly little boxes showing just the names and titles of managers. Now there's a more revealing way to depict the people and operations within an organization--an approach called the organigraph. The organigraph is not a chart. It's a map that offers an overview of the company's functions and the ways that people organize themselves at work. Perhaps most important, an organigraph can help managers see untapped competitive opportunities. Drawing on the organigraphs they created for about a dozen companies, authors Mintzberg and Van der Heyden illustrate just how valuable a tool the organigraph is. For instance, one they created for Electrocomponents, a British distributor of electrical and mechanical items, led managers to a better understanding of the company's real expertise--business-to-business relationships. As a result of that insight, the company wisely decided to expand in Asia and to increase its Internet business. As one manager says, "It allowed the company to see all sorts of new possibilities." With traditional hierarchies vanishing and newfangled--and often quite complex--organizational forms taking their place, people are struggling to understand how their companies work. What parts connect to one another? How should processes and people come together? Whose ideas have to flow where? With their flexibility and realism, organigraphs give managers a new way to answer those questions.     

Entering China: an unconventional approach

Conventional wisdom has it that the best way to do business in China is through an equity joint venture (EJV) with a well-connected Chinese partner. But pioneering companies are starting a trend toward a new way to enter that market: as a wholly foreign-owned enterprise, or WFOE. Increasingly, says the author, joint ventures do not offer foreign companies what they need to succeed in China. For example, many companies want to do business nationally, but the prospects for finding a Chinese partner with national scope are poor. Moreover, there are often conflicting perceptions between partners about how to operate an EJV: Chinese companies, for example, typically have a more immediate interest in profits than foreign investors do. By contrast, the author asserts, WFOEs are faster to set up and easier to manage; and they allow managers to expand operations more rapidly. That makes them the perfect solution, right? The answer is a qualified yes. First, foreign companies will still need sources of guanxi, or social and political connections. Second, managers must take steps to avoid trampling on China's cultural or economic sovereignty. Third and perhaps most important, foreign companies must be prepared to bring something of value to China-usually in the form of jobs or new technology that can help the country develop. Companies willing to make the effort, says the author, can reap the rewards of China's burgeoning marketplace.     

Introducing T-shaped managers. Knowledge management's next generation

Most companies do a poor job of capitalizing on the wealth of expertise scattered across their organizations. That's because they tend to rely on centralized knowledge-management systems and technologies. But such systems are really only good at distributing explicit knowledge, the kind that can be captured and codified for general use. They're not very good at transferring implicit knowledge, the kind needed to generate new insights and creative ways of tackling business problems or opportunities. The authors suggest another approach, something they call T-shaped management, which requires executives to share knowledge freely across their organization (the horizontal part of the "T"), while remaining fiercely committed to their individual business unit's performance (the vertical part). A few companies are starting to use this approach, and one--BP Amoco--has been especially successful. From BP's experience, the authors have gleaned five ways that T-shaped managers help companies capitalize on their inherent knowledge. They increase efficiency by transferring best practices. They improve the quality of decision making companywide. They grow revenues through shared expertise. They develop new business opportunities through the cross-pollination of ideas. And they make bold strategic moves possible by delivering well-coordinated implementation. All that takes time, and BP's managers have had to learn how to balance that time against the attention they must pay to their own units. The authors suggest, however, that it's worth the effort to find such a balance to more fully realize the immense value of the knowledge lying idle within so many companies.     

Building an innovation factory

New ideas are the precious currency of the new economy, but generating them doesn't have to be a mysterious process. The image of the lone genius inventing from scratch is a romantic fiction. Businesses that constantly innovate have systematized the production and testing of new ideas, and the system can be replicated by practically any organization. The best innovators use old ideas as the raw materials for new ideas, a strategy the authors call knowledge brokering. The system for sustaining innovation is the knowledge brokering cycle, and the authors discuss its four parts. The first is capturing good ideas from a wide variety of sources. The second is keeping those ideas alive by playing with them, discussing them, and using them. Imagining new uses for old ideas is the third part--some knowledge brokers encourage cross-pollination by creating physical layouts that allow, or even force, people to interact with one another. The fourth is turning promising concepts into real services, products, processes, or business models. Companies can use all or part of the cycle. Large companies in particular desperately need to move ideas from one place to another. Some will want to build full-fledged consulting groups dedicated to internal knowledge brokering. Others can hire people who have faced problems similar to the companies' current problems. The most important lesson is that business leaders must change how they think about innovation, and they must change how their company cultures reflect that thinking.     

Future space. A new blueprint for business architecture

Although the Internet is an essential conduit for many business activities, it isn't rendering the physical world any less important, as the failures of many Web merchants demonstrate. People need social and sensual contact. The companies that succeed will be those best able to integrate the physical and the virtual. But that requires a new kind of business architecture--a new approach to designing stores, offices, factories, and other spaces where business is conducted. The author, a faculty member at Harvard Graduate School of Design, provides practical guidelines to help managers and entrepreneurs think creatively about the structures in which their businesses operate. He outlines four challenges facing designers of such "convergent" structures, so-called because they function in both physical and virtual space: matching form to function, allowing visitors to visualize the presence of others, personalizing spaces, and choreographing connectivity. Using numerous examples, from a fashion retailer that wants to sell in stores as well as through a Web site to a radically new kind of consulate, the author shows how businesses can meet each challenge. For instance, allowing customers to visualize the presence of others means that visitors to a Web site should be given a sense of other site visitors. Personalizing physical and virtual spaces involves using databases to enable those spaces to adapt quickly to user preferences. The success of companies attempting to merge on-line and traditional operations will depend on many factors. But without a well-designed convergent architecture, no company will fully reap the synergies of physical space and Internet technology.     

Disruptive change. When trying harder is part of the problem

When a company faces a major disruption in its markets, managers' perceptions of the disruption influence how they respond to it. If, for instance, they view the disruption as a threat to their core business, managers tend to overreact, committing too many resources too quickly. But if they see it as an opportunity, they're likely to commit insufficient resources to its development. Clark Gilbert and Joseph Bower explain why thinking in such stark terms--threat or opportunity--is dangerous. It's possible, they argue, to arrive at an organizational framing that makes good use of the adrenaline a threat creates as well as of the creativity an opportunity affords. The authors claim that the most successful companies frame the challenge differently at different times: When resources are being allocated, managers see the disruptive innovation as a threat. But when the hard strategic work of discovering and responding to new markets begins, the disruptive innovation is treated as an opportunity. The ability to reframe the disruptive technology as circumstances evolve is not an easy skill to master, the authors admit. In fact, it might not be possible without adjusting the organizational structure and the processes governing new business funding. Successful companies, the authors have determined, tend to do certain things: They establish a new venture separate from the core business; they fund the venture in stages as markets emerge; they don't rely on employees from the core organization to staff the new business; and they appoint an active integrator to manage the tensions between the two organizations, to name a few. This article will help executives frame innovations in more balanced ways--allowing them to recognize threats but also to seize opportunities.     

Is American business working for the poor?

At first glance, poverty seems to have little to do with business. When most people--managers included--think about poverty, they assume that people are poor because they are isolated from the mainstream economy, not productive participants in it. But according to Harvard University professors Mary Jo Bane and David Ellwood, this is a misleading image of the true face of poverty in the United States today. Most poor adults--and a full 90% of poor children--live in families where work is the norm, not the exception. Poor people often work or want to work. But at the low-wage end of the American economy, having a job is no guarantee of avoiding poverty. Poverty is a business issue, then, because the American poor are part of the American work force. And this poses a problem for managers. In a more competitive and fast-changing economic environment, the performance of companies increasingly depends on the capabilities of their employees. In response to this human-resource challenge, more and more managers are embracing the language of "empowerment". And yet how can low-wage employees believe empowerment when their experience of work is, quite literally, impoverishment? It is unlikely that American companies can create the work force of the future with the poverty policies of the past. Fortunately, there are some simple policy mechanisms that can assist the working poor without putting an undue burden on business. Enacting them, however, requires managers to see poverty policy as one part of a national human-resource strategy that links the strategic concerns of companies to a broad social agenda.     

M&A needn't be a loser's game

Three out of four acquisitions fail; they destroy wealth for the buyer's shareholders, who end up worse off than they would have been had the deal not been done. But it doesn't have to be that way, argue the authors. In evaluating acquisitions, companies must look beyond the lure of profits the income statement promises and examine the balance sheet, where the company keeps track of capital. It's ignoring the balance sheet that causes so many acquisitions to destroy shareholders' wealth. Unfortunately, most executives focus only on sales and profits going up, never realizing that they've put in motion a plan to destroy their company's true profitability--its return on invested capital. M&A, like other aspects of running a company, works best when seen as a way to create shareholder value through customers. Some deals are sought to help create better value propositions for the business or to better execute current strategies--or to block competitors from doing these things. But most deals are about customers and should start with an analysis of customer profitability. Some customers are deliciously profitable; others are dismal money losers. The better an acquirer understands the profitability of its own customers, the better positioned it will be to perform such analyses on other companies. In this article, the authors show that customer profitability varies far more dramatically than most managers suspect. They also describe how to measure the profitability of customers. By understanding the economics of customer profitability, companies can avoid making deals that hurt their shareholders, they can identify surprising deals that do create wealth, and they can salvage deals that would otherwise be losers.     

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.     

Bringing Silicon Valley inside

In 1998, Silicon Valley companies produced 41 IPOs, which by January 1999 had a combined market capitalization of $27 billion--that works out to $54,000 in new wealth creation per worker in a single year. Multiply the number of employees in your company by $54,000. Did your business create that much new wealth last year? Half that amount? It's not a group of geniuses generating such riches. It's a business model. In Silicon Valley, ideas, capital, and talent circulate freely, gathering into whatever combinations are most likely to generate innovation and wealth. Unlike most traditional companies, which spend their energy in resource allocation--a system designed to avoid failure--the Valley operates through resource attraction--a system that nurtures innovation. In a traditional company, people with innovative ideas must go hat in hand to the guardians of the old ideas for funding and for staff. But in Silicon Valley, a slew of venture capitalists vie to attract the best new ideas, infusing relatively small amounts of capital into a portfolio of ventures. And talent is free to go to the companies offering the most exhilarating work and the greatest potential rewards. It should actually be easier for large, traditional companies to set up similar markets for capital, ideas, and talent internally. After all, big companies often already have extensive capital, marketing, and distribution resources, and a first crack at the talent in their own ranks. And some of them are doing it. The choice is yours--you can do your best to make sure you never put a dollar of capital at risk, or you can tap into the kind of wealth that's being created every day in Silicon Valley.     

How executives can shape their company's information systems.

When a big New York bank expanded in London, technical specialists in the two cities disagreed about which vendor's information system was best. The debate continued for several months until finally the technical experts took the issue to a senior-management policy committee. But the senior managers didn't understand the terminology and kept postponing the decision. Meanwhile, the London office complained loudly that the slowdown was threatening the unit's growth. Like the bank, most companies need a new approach to making decisions about information technology (IT), especially since it now affects so many aspects of the business. The company's technical experts seldom understand the overall business, and the senior managers who understand the business are usually lost when it comes to computers. One way to blend both perspectives is to establish a task force that solicits input from top management and creates a set of principles to guide subsequent investments in information technology. By drawing on 10 to 15 statements that reflect management's basic beliefs about how the company should use IT, the task force translates the language of corporate strategy into computerese. For instance, an electronics company wanted various functions to act more like one company. It created a principle that said, "Information systems will provide application that support cross-functional integration of business processes." Managers making subsequent decisions about computers could immediately rule out any technologies that contradicted that statement. Principles thus speed up the decision-making process, but more important, they ensure that every investment in IT helps the corporation achieve its strategic goals.     

Bootstrap finance: the art of start-ups

Entrepreneurship is more popular than ever: courses are full, policymakers emphasize new ventures, managers yearn to go off on their own. Would-be founders often misplace their energies, however. Believing in a "big money" model of entrepreneurship, they spend a lot of time trying to attract investors instead of using wits and hustle to get their ideas off the ground. A study of 100 of the 1989 Inc. "500" list of fastest growing U.S. start-ups attests to the value of bootstrapping. In fact, what it takes to start a business often conflicts with what venture capitalists require. Investors prefer solid plans, well-defined markets, and track records. Entrepreneurs are heavy on energy and enthusiasm but may be short on credentials. They thrive in rapidly changing environments where uncertain prospects may scare off established companies. Rolling with the punches is often more important than formal plans. Striving to adhere to investors' criteria can diminish the flexibility--the try-it, fix-it approach--an entrepreneur needs to make a new venture work. Seven principles are basic for successful start-ups: get operational fast; look for quick break-even, cash-generating projects; offer high-value products or services that can sustain direct personal selling; don't try to hire the crack team; keep growth in check; focus on cash; and cultivate banks early. Growth and change are the start-up's natural environment. But change is also the reward for success: just as ventures grow, their founders usually have to take a fresh look at everything again: roles, organization, even the very policies that got the business up and running.     

Crisis communication. Lessons from 9/11

The sheer enormity of last year's terrorist attacks on the World Trade Center and the Pentagon gave new meaning to the term "crisis management." Suddenly, companies near Ground Zero, as well as those more than a thousand miles away, needed a plan. Because the disasters disrupted established channels not only between businesses and customers but between businesses and employees, internal crisis-communications strategies that could be quickly implemented became a key responsibility of top management. Without these strategies, employees' trauma and confusion might have immobilized their firms and set their customers adrift. In this article, executives from a range of industries talk about how their companies, including Morgan Stanley, Oppenheimer Funds, American Airlines, Verizon, the New York Times, Dell, and Starbucks, went about restoring operations and morale. From his interviews with these individuals, author and management professor Paul Argenti was able to distill a number of lessons, each of which, he says, may "serve as guideposts for any company facing a crisis that undermines its employees' composure, confidence, or concentration." His advice to senior executives includes: Maintain high levels of visibility, so that employees are certain of top management's command of the situation and concern; establish contingency communication channels and work sites; strive to keep employees focused on the business itself, because a sense of usefulness enhances morale and good morale enhances usefulness; and ensure that employees have absorbed the firm's values, which will guide them as they cope with the unpredictable. The most forward-thinking leaders realize that managing a crisis-communications program requires the same dedication and resources they give to other dimensions of their business. More important, they realize that their employees always come first.     

IT doesn't matter

As information technology has grown in power and ubiquity, companies have come to view it as ever more critical to their success; their heavy spending on hardware and software clearly reflects that assumption. Chief executives routinely talk about information technology's strategic value, about how they can use IT to gain a competitive edge. But scarcity, not ubiquity, makes a business resource truly strategic--and allows companies to use it for a sustained competitive advantage. You only gain an edge over rivals by doing something that they can't. IT is the latest in a series of broadly adopted technologies--think of the railroad or the electric generator--that have reshaped industry over the past two centuries. For a brief time, as they were being built into the infrastructure of commerce, these technologies created powerful opportunities for forward-looking companies. But as their availability increased and their costs decreased, they became commodity inputs. From a strategic standpoint, they became invisible; they no longer mattered. that's exactly what's happening to IT, and the implications are profound. In this article, HBR's editor-at-large Nicholas Carr suggests that IT management should, frankly, become boring. It should focus on reducing risks, not increasing opportunities. For example, companies need to pay more attention to ensuring network and data security. Even more important, they need to manage IT costs more aggressively. IT may not help you gain a strategic advantage, but it could easily put you at a cost disadvantage. If, like many executives, you've begun to take a more defensive posture toward IT, spending more frugally and thinking more pragmatically, you're already on the right course. The challenge will be to maintain that discipline when the business cycle strengthens.     

The discipline of innovation. 1985

How much of innovation is inspiration, and how much is hard work? The answer lies somewhere in the middle, says management thinker Peter Drucker. In this HBR classic from 1985, he argues that innovation is real work that can and should be managed like any other corporate function. Success is more likely to result from the systematic pursuit of opportunities than from a flash of genius. Indeed, most innovative business ideas arise through the methodical analysis of seven areas of opportunity. Within a company or industry, opportunities can be found in unexpected occurrences, incongruities of various kinds, process needs, or changes in an industry or market. Outside a company, opportunities arise from demographic changes, changes in perception, or new knowledge. There is some overlap among the sources, and the potential for innovation may well lie in more than one area at a time. Innovations based on new knowledge tend to have the greatest effect on the marketplace, but it often takes decades before the ideas are translated into actual products, processes, or services. The other sources of innovation are easier and simpler to handle, yet they still require managers to look beyond established practices, Drucker explains. The author emphasizes that innovators need to look for simple, focused solutions to real problems. The greatest praise an innovation can receive is for people to say, "That's so obvious!" Grandiose ideas designed to revolutionize an industry rarely work. Innovation, like any other endeavor, takes talent, ingenuity, and knowledge. But Drucker cautions that if diligence, persistence, and commitment are lacking, companies are unlikely to succeed at the business of innovation.     

Predators and prey: a new ecology of competition

Much has been written about networks, strategic alliances, and virtual organizations. Yet these currently popular frameworks provide little systematic assistance when it comes to out-innovating the competition. That's because most managers still view the problem in the old way: companies go head-to-head in an industry, battling for market share. James Moore sets up a new metaphor for competition drawn from the study of biology and social systems. He suggests that a company be viewed not as a member of a single industry but as a part of a business ecosystem that crosses a variety of industries. In a business ecosystem, companies "co-evolve" around a new innovation, working cooperatively and competitively to support new products and satisfy customer needs. Apple Computer, for example, leads an ecosystem that covers personal computers, consumer electronics, information, and communications. In any larger business environment, several ecosystems may vie for survival and dominance, such as the IBM and Apple ecosystems in personal computers or Wal-Mart and K mart in discount retailing. In fact, it's largely competition among business ecosystems, not individual companies, that's fueling today's industrial transformation. Managers can't afford to ignore the birth of new ecosystems or the competition among those that already exist. Whether that means investing in the right new technology, signing on suppliers to expand a growing business, developing crucial elements of value to maintain leadership, or incorporating new innovations to fend off obsolescence, executives must understand the evolutionary stages all business ecosystems go through and, more important, how to direct those changes.     

The weird rules of creativity

For at least the past decade, the holy grail for companies has been innovation. Managers have gone after it with all the zeal their training has instilled in them, using a full complement of tried and true management techniques. The problem is that none of these practices, well suited for cashing in on old, proven products and business models, works very well when it comes to innovation. Instead, managers should take most of what they know about management and stand it on its head. In this article, Robert Sutton outlines several ideas for managing creativity that are clearly odd but clearly effective: Place bets on ideas without much heed to their projected returns. Ignore what has worked before. Goad perfectly happy people into fights among themselves. Good creativity management means hiring the candidate you have a gut feeling against. And as for the people who stick their fingers in their ears and chant, "I'm not listening, I'm not listening," when customers make suggestions? Praise and promote them. Using vivid examples from more than a decade of academic research to illustrate his points, the author discusses new approaches to hiring, managing creative people, and dealing with risk and randomness in innovation. His conclusions? The practices in this article succeed because they increase the range of a company's knowledge, allow people to see old problems in new ways, and help companies break from the past.