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.     

Defeating feature fatigue

Consider a coffeemaker that offers 12 drink options, a car with more than 700 features on the dashboard, and a mouse pad that's also a clock, calculator, and FM radio. All are examples of "feature bloat", or "featuritis", the result of an almost irresistible temptation to load products with lots of bells and whistles. The problem is that the more features a product boasts, the harder it is to use. Manufacturers that increase a product's capability--the number of useful functions it can perform--at the expense of its usability are exposing their customers to feature fatigue. The authors have conducted three studies to gain a better understanding of how consumers weigh a product's capability relative to its usability. They found that even though consumers know that products with more features are harder to use, they initially choose high-feature models. They also pile on more features when given the chance to customize a product for their needs. Once consumers have actually worked with a product, however, usability starts to matter more to them than capability. For managers in consumer products companies, these findings present a dilemma: Should they maximize initial sales by designing high-feature models, which consumers consistently choose, or should they limit the number of features in order to enhance the lifetime value of their customers? The authors' analytical model guides companies toward a happy middle ground: maximizing the net present value of the typical customer's profit stream. The authors also advise companies to build simpler products, help consumers learn which products suit their needs, develop products that do one thing very well, and design market research in which consumers use actual products or prototypes.     

MANAGEMENT FADS AND ORGANIZATIONAL ARCHITECTURE

This article applies and extends the three-part organizational framework used in the preceding article to a broad range of management innovations. After furnishing some interesting evidence of the rise and fall of management techniques such as TQM, Reengineering, Just-in-Time Production, and Activity-Based Costing, the authors raise and then attempt to answer a number of questions: What explains the popularity of these management innovations? Why do they often fail to produce the expected benefits? How can managers tell if a particular technique is right for them? What can managers do to increase the likelihood that an adopted technique will be successful? The persistent, and at times seemingly insatiable, corporate demand for management innovations is viewed by the authors as a “rational” economic response by senior managers to major changes in the external business environment—changes that in turn dictate changes in business strategy. For example, when confronted with external changes such as deregulation or heightened global competition, companies often find it necessary to refocus their efforts on improving product quality and operating efficiency. And such changes in business strategy tend to require a revamping of the three critical components of organizational architecture: (1) assignment of decision rights, (2) performance evaluation systems, and (3) compensation systems. As the authors argue, innovations such as TQM, outsourcing, Re-engineering, and JIT typically involve major changes in just one or two of these critical elements of the organization, but not all three. The failure to coordinate organizational changes in such a way that these three elements are mutually consistent and reinforcing is one important reason why management innovations can fail to meet expectations. The framework described in this article is designed to help managers considering one potentially valuable set of organizational changes to identify other facets of the organization that also require attention and perhaps complementary adjustments.     

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."     

Beyond products: services-based strategy

Services technologies are changing the way companies in every industry--manufacturers and service providers alike--compete. Vertical integration, physical facilities, even a seemingly superior product can no longer assure a competitive edge. Instead, sustainable advantage is more and more likely to come from developing superior capabilities in a few core service skills--and out-sourcing as much of the rest as possible. Within companies, technology is increasing the leverage of service activities: today, more value added comes from design innovations, product image, or other attributes that services create than from the production process. New technologies also let independent enterprises provide world-class services at lower costs than customers could achieve if they performed the activities themselves. These changes have far-reaching implications for how managers structure their organizations and define strategic focus. Companies like Apple, Honda, and Merck show that a less integrated but more focused organization is key to competitive success. They build their strategies around a few highly developed capabilities. And they outsource as many of the other activities in their value chain as possible. To help managers develop an activity-focused strategy, the authors offer a new way to approach competitive analyses, guidelines for determining which activities to outsource and which to retain, and an overview of the risks and rewards of strategic outsourcing. Throughout, they draw on the findings of their three-year study of the major impacts technology has had in the service sector.     

The relative value of growth

Most executives would say that adding a point of growth and gaining a point of operating-profit margin contribute about equally to shareholder value. Margin improvements hit the bottom line immediately, while growth compounds value over time. But the reality is that the two are rarely equivalent. Growth often is far more valuable than managers think. For some companies, convincing the market that they can grow by just one additional percentage point can be worth six, seven, or even ten points of margin improvement. This article presents a new strategic metric, called the relative value of growth (RVG), which gives managers a clear picture of how growth projects and margin improvement initiatives affect shareholder value. Using basic balance sheet and income sheet data, managers can determine their companies' RVGs, as well as those of their competitors. Calculating RVGs gives managers insights into which corporate strategies are working to deliver value and whether their companies are pulling the most powerful value-creation levers. The author examines a number of well-known companies and explains what their RVG numbers say about their strategies. He reviews the unspoken assumption that growth and profits are incompatible over the long term and shows that a fair number of companies are effective at delivering both. Finally, he explains how managers can use the RVG framework to help them define strategies that balance growth and profitability at both the corporate and business unit levels.     

The four faces of mass customization

Virtually all executives today recognize the need to provide outstanding service to customers. Focusing on the customer, however, is both an imperative and a potential curse. In their desire to become customer driven, many companies have resorted to inventing new programs and procedures to meet every customer's request. But as customers and their needs grow increasingly diverse, such an approach has become a surefire way to add unnecessary cost and complexity to operations. Companies around the world have embraced mass customization in an attempt to avoid those pitfalls. Readily available information technology and flexible work processes permit them to customize goods or services for individual customers in high volumes at low cost. But many managers have discovered that mass customization itself can produce unnecessary cost and complexity. They are realizing that they did not examine thoroughly enough what kind of customization their customers would value before they plunged ahead. That is understandable. Until now, no framework has existed to help managers determine the type of customization they should pursue. James Gilmore and Joseph Pine provide managers with just such a framework. They have identified four distinct approaches to customization. When designing or redesigning a product, process, or business unit, managers should examine each approach for possible insights into how to serve their customers best. In some cases, a single approach will dominate the design. More often, however, managers will need a mix of some or all of the four approaches to serve their own particular set of customers.     

Employee motivation: a powerful new model

Motivating employees begins with recognizing that to do their best work, people must be in an environment that meets their basic emotional drives to acquire, bond, comprehend, and defend. So say Nohria and Groysberg, of Harvard Business School, and Lee, of the Center for Research on Corporate Performance. Using the results of surveys they conducted with employees at a wide range of Fortune 500 and other companies, they developed a model for how to increase workplace motivation dramatically. The authors identify the organizational levers that companies and frontline managers have at their disposal as they try to meet workers' deep needs. Reward systems that truly value good performance fulfill the drive to acquire. The drive to bond is best met by a culture that promotes collaboration and openness. Jobs that are designed to be meaningful and challenging meet the need to comprehend. Processes for performance management and resource allocation that are fair, trustworthy, and transparent address the drive to defend. Equipped with real-world company examples, the authors articulate how to apply these levers in productive ways. That application should not be selective, they argue, because a holistic approach gets you more than a piecemeal one. By using all four levers simultaneously, and thereby tackling all four drives, organizations can improve motivation levels by leaps and bounds. For example, a company that falls in the 50th percentile on employee motivation improves only to the 56th by boosting performance on one drive, but way up to the 88th percentile by doing better on all four drives. That's a powerful gain in competitive advantage that any business would relish.     

Every employee an owner. Really

Surveys indicate that when new rules on expensing stock options take effect, many companies are likely to limit the number of employees who can receive equity compensation. But companies that reserve equity for executives are bound to suffer in the long run. Study after study proves that broad-based ownership, when done right, leads to higher productivity, lower workforce turnover, better recruits, and bigger profits. "Done right" is the key. Here are the four most important factors in implementing a broad-based employee equity plan: A significant portion of the workforce--generally, most of the full-time people--must hold equity; employees must think the amounts they hold can significantly improve their financial prospects; managerial practices and policies must reinforce the plan; and employees must feel a true sense of company ownership. Those factors add up to an ownership culture in which employees' interests are aligned with the company's. The result is a workforce that is loyal, cooperative, and willing to go above and beyond to make the organization successful. A wide variety of companies have recorded exceptional business performance with the help of employee-ownership programs supported by management policies. The authors examine two: Science Applications International, a research and development contractor, and Scot Forge, which shapes metal and other materials for industrial machinery. At both companies, every employee with a year or so of service holds equity, and employees who stay on can accumulate a comfortable nest egg. Management's sharing of financial information reinforces workers' sense of ownership. So does the expectation that employees will accept the responsibilities of ownership. Workers with an ownership stake internalize their responsibilities and feel they have an obligation not only to management but to one another.     

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.     

Innovation at the speed of information

Conventional project-management tools--PERT charts and Gantt charts, for example--were created to help manage sequences of discrete tasks that make up large construction projects. Yet these tools don't capture clearly the back-and-forth of information that takes place in innovative processes, such as product development. Conventional tools are designed to answer the question, "What other tasks must be completed before I begin this one?" But product development planners, especially in high-tech businesses, need tools that answer a very different question: "What information do I need from other tasks before I can complete this one?" The author describes the Design Structure Matrix (DSM), a project management tool that focuses on representing the information flows of a project rather than its work flows. He explains how the DSM works and how to use it to make development processes more efficient. A project DSM can show which information exchanges involve design iteration and how well a process anticipates the need for rework. In addition, the author suggests four ways to improve a company's information flows: rearranging the sequence of tasks, reconsidering the organization of tasks, reducing the number of information exchanges, and managing unplannable work. By stripping away the mystery around information exchange during innovation, the DSM can give managers far more control over their most risky and expensive projects.     

What really works

When it comes to improving business performance, managers have no shortage of tools and techniques to choose from. But what really works? What's critical, and what's optional? Two business professors and a former McKinsey consultant set out to answer those questions. In a ground-breaking, five-year study that involved more than 50 academics and consultants, the authors analyzed 200 management techniques as they were employed by 160 companies over ten years. Their findings at a high level? Business basics really matter. In this article, the authors outline the management practices that are imperative for sustained superior financial performance--their "4+2 formula" for business success. They provide examples of companies that achieved varying degrees of success depending on whether they applied the formula, and they suggest ways that other companies can achieve excellence. The 160 companies in their study--called the Evergreen Project--were divided into 40 quads, each comprising four companies in a narrowly defined industry. Based on its performance between 1986 and 1996, each company in each quad was classified as either a winner (for instance, Dollar General), a loser (Kmart), a climber (Target), or a tumbler (the Limited). Without exception, the companies that outperformed their industry peers excelled in what the authors call the four primary management practices: strategy, execution, culture, and structure. And they supplemented their great skill in those areas with a mastery of any two of four secondary management practices: talent, leadership, innovation, and mergers and partnerships. A company that consistently follows this 4+2 formula has a better than 90% chance of sustaining superior performance, according to the authors.     

Women as a business imperative

In 1989, Felice N. Schwartz's HBR article "Management Women and the New Facts of Life" generated a huge debate over the rules established by corporations in their handling of women executives. Now in "Women as a Business Imperative," Schwartz follows up with practical insights about the costs companies incur in passing over qualified businesswomen. In the form of a memo to a fictional CEO, Schwartz describes how the atmosphere within most companies is corrosive to women and must change. Preconceptions harbored by male senior managers about women are so deeply ingrained that many men are not even aware of them. Yet senior managers must help women advance. Those companies that accept their responsibility to make radical change--both in women's treatment and in family support--can improve their bottom lines enormously. Treating women as a business imperative is the equivalent of creating a unique R&D product for which there is great demand. Most companies ignore child care and other family concerns. Many companies hire women to ensure mere adequacy and avoid litigation. Women's ambitions and energies are stifled by such businesses at the same time that women have demonstrated their competence and potential in the best business schools. High turnover results. However, the restraints that now hold women back can be loosened easily. CEOs and other senior managers must support their female employees by (1) acknowledging the fundamental difference between women and men--the biological fact of maternity; (2) allowing flexibility for women and men who need it; (3) providing training that takes advantage of women's leadership potential; and (4) eliminating the corrosive atmosphere and the barriers that exist for women in the workplace.     

Opening the books

For years, small companies have experimented with forms of open-book management. Open-book systems have smoothed change efforts by giving workers the why instead of just the how of initiatives; they have enabled employees to think like owners. Now divisions of large organizations such as R.R. Donnelley & Sons and Amoco Canada are finding opening the books can work for them, too. It isn't easy, and companies must adapt the principles to their own situations. AES Corporation, for example, found that it had to declare all its employees "insiders" when it went public. One of the reasons for large companies' interest in open-book management is the success of a role-model company, Missouri-based Springfield ReManufacturing. Leaders of divisions of large companies have been able to visit and ask questions. Other early adopters are also showing competitive advantages. Among them are Wabash National, now the nation's leading truck and tractor manufacturer, and Physician Sales & Service, a distributor of supplies to doctors' office. Open-book principles are the same whether a company is large or small: every employee must receive all relevant financial information and be taught to understand it; managers must hold employees accountable for making their unit's goals; and the compensation system must reward everyone for the overall success of the business. Hexacomb Corporation is one large organization that has done well. Workers at the company's seven plants are inspired by a system of splitting profits over budget fifty-fifty: half goes to the company and half to the bonus pool. Such companies are learning the benefits of having everyone work to push the numbers in the right direction.     

Managing hybrid marketing systems

As competition increases and costs become critical, companies that once went to market only one way are adding new channels and using new methods - creating hybrid marketing systems. These hybrid marketing systems hold the promise of greater coverage and reduced costs. But they are also hard to manage; they inevitably raise questions of conflict and control: conflict because marketing units compete for customers; control because new indirect channels are less subject to management authority. Hard as they are to manage, however, hybrid marketing systems promise to become the dominant design, replacing the "purebred" channel strategy in all kinds of businesses. The trick to managing the hybrid is to analyze tasks and channels within and across a marketing system. A map - the hybrid grid - can help managers make sense of their hybrid system. What the chart reveals is that channels are not the basic building blocks of a marketing system; marketing tasks are. The hybrid grid forces managers to consider various combinations of channels and tasks that will optimize both cost and coverage. Managing conflict is also an important element of a successful hybrid system. Managers should first acknowledge the inevitability of conflict. Then they should move to bound it by creating guidelines that spell out which customers to serve through which methods. Finally, a marketing and sales productivity (MSP) system, consisting of a central marketing database, can act as the central nervous system of a hybrid marketing system, helping managers create customized channels and service for specific customer segments.     

RETHINKING RISK MANAGEMENT

This paper presents a theory of corporate risk management that attempts to go beyond the "variance-minimization" model that dominates most academic discussions of the subject. It argues that the primary goal of risk management is not to dampen swings in corporate cash flows or value, but rather to provide protection against the possibility of costly lower-tail outcomes –situations that would cause financial distress or make a company unable to carry out its investment strategy. (In the jargon of finance specialists, risk management can be viewed as the purchase of well-out-of-the-money put options designed to limit downside risk.)
By eliminating downside risk and reducing the expected costs of financial trouble, risk management can also help a company to achieve both its optimal capital structure and its optimal ownership structure. For, besides increasing corporate debt capacity, the reduction of downside risk also encourages larger equity stakes for managers by shielding their investments from "uncontrollables."
The paper also departs from standard finance theory in suggesting that some companies may have a comparative advantage in bearing certain financial market risks–an advantage that derives from information acquired through their normal business activities. Although such specialized information may lead some companies to take speculative positions in commodities or currencies, it is more likely to encourage "selective" hedging, a practice in which the risk manager's "view" of future price movements influences the percentage of the exposure that is hedged.
But, to the extent that such view-taking becomes an accepted part of a company's risk management program, it is important to evaluate managers' bets on a risk-adjusted basis and relative to the market. If risk managers want to behave like money managers, they should be evaluated like money managers.     

A new game plan for C players

It's a big driver of business success, but one that executives are loath to talk about: upgrading the talent pool by weeding out "C" players from management. These aren't the incompetent or unethical managers whom organizations dismiss without a backward glance; C performers deliver results that are acceptable--barely--but they fail to innovate or to inspire the people they lead. The authors of The War for Talent have studied what it takes to upgrade an organization's talent pool. In this article, they explore the hidden costs of tolerating under-performance and acknowledge the reasons why executives may shy away from dealing decisively with C players. They recommend that organizations take an "iron hand in a velvet glove" approach to managing subpar performers. That is, companies should establish rigorous, disciplined processes for assessing and dealing with low-performing managers but still treat them with respect. The authors outline three ironhanded steps. First, executives must identify C players by evaluating their talents and distributing employee performances along an assessment curve. Second, executives must agree on explicit action plans that articulate the improvements or changes that C performers must achieve within six to 12 months. And third, executives should hold managers accountable for carrying out the action plans. Without such discipline, procrastination, rationalization, and inaction will prevail. The authors also emphasize the need for the "velvet glove." Executives must ensure that low performers are treated with dignity, so they should offer candid feedback, instructive coaching, and generous severance packages and outplacement support. The authors' approach isn't about being tough on people; it's about being relentlessly focused on performance.     

Strategy as stretch and leverage

Global competition is not just product versus product or company versus company. It is mind-set versus mind-set. Driven to understand the dynamics of competition, we have learned a lot about what makes one company more successful than another. But to find the root of competitiveness--to understand why some companies create new forms of competitive advantage while others watch and follow--we must look at strategic mind-sets. For many managers, "being strategic" means pursuing opportunities that fit the company's resources. This approach is not wrong, Gary Hamel and C.K. Prahalad contend, but it obscures an approach in which "stretch" supplements fit and being strategic means creating a chasm between ambition and resources. Toyota, CNN, British Airways, Sony, and others all displaced competitors with stronger reputations and deeper pockets. Their secret? In each case, the winner had greater ambition than its well-endowed rivals. Winners also find less resource-intensive ways of achieving their ambitious goals. This is where leverage complements the strategic allocation of resources. Managers at competitive companies can get a bigger bang for their buck in five basic ways: by concentrating resources around strategic goals; by accumulating resources more efficiently; by complementing one kind of resource with another; by conserving resources whenever they can; and by recovering resources from the market-place as quickly as possible. As recent competitive battles have demonstrated, abundant resources can't guarantee continued industry leadership.(ABSTRACT TRUNCATED AT 250 WORDS)     

Market risks in asset management companies

This paper shows that revenues from a sample of publicly traded US asset management companies carry substantial market risks. Not only does this challenge the academic risk management literature about the predominance of operative risks in asset management, it is also at odds with current practice in asset management firms. Asset managers do not hedge market risks even though these risks are systematically built into the revenue generation process. This is surprising as shareholders would not optimally choose asset management companies as their source of market beta. They rather prefer to participate in alpha generation and fund gathering expertise of investment managers as financial intermediaries. At the very minimum, asset managers need to monitor their ‘fees at risk’ to understand what impact product design, benchmark choice and fee contract design have on revenue volatility. This calls for a much wider interpretation of the risk management function that too narrowly focuses on client risks.     

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.