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Michael Porter: Competitive Strategy

Of all the strategic thinkers we have covered (like Igor Ansoff, Kenichi Ohmae, and Porter’s student, Kathryyn Rudi Harrigan), Michael Porter deserves a special place. His 1980 book, Competitive Strategy, transformed thinking, moving us from the pre-Porter world of strategic thinking dominated by Ansoff, to the post-Porter world that he still dominates.

Porter is an intellectual and an influencer who does not covet the easy quotability of some of his contemporaries. But the rigour of his analysis has made him all the more sought-after. His books have sold in the hundreds of thousands, and his speaking fees are legendary.

Michael Porter
Michael Porter

Short Biography

Michael Porter was born in 1947, in Michigan, and went to Princeton to study for a BSE in Aeronautical Engineering in 1969. He graduated top of his class and was inducted into the two most prestigious honor houses. He then shifted his focus to business, and went to Harvard Business School, where he received an MBA in 1971 and a PhD in Economics in 1973. From there he joined the faculty.

He remains at Harvard today, as a University Professor, and also Founding Director of Harvard Business School’s Institute for Strategy and Competitiveness, which he founded in 2001 to further his work and research.

Porter’s breakthrough came with the 1980 publication of Competitive Strategy. Other significant yet accessible books are The Competitive Advantage of Nations (1990) and the 1998 article and essay collection, On Competition. But these are among 15 other successful books and article collections.

But what you are interested in are Porter’s big ideas…

Michael Porter’s Big Ideas

Before Porter, Igor Ansoff dominated thinking on corporate strategy. His approach boiled down to choosing your market, matching your resources to meet the market’s demand, and then improving your competitiveness to increase your market share.

Michael Porter did not reject these ideas. Rather, he opened them out, approaching strategy from the perspective of the whole industry and then, later, as a national endeavour. He considered that earlier strategic thinking had become confused with simple (ahem) operational effectiveness. He argued that improving operational processes merely levelled out competitors, rather than giving them a differentiation that led to competitive advantage.

Let’s survey five big ideas that Michael Porter has given us. All remain core parts of any business education.

Primary and Secondary Activities, and the Importance of the Value Chain

Porter divided corporate activities into Primary Activities and Secondary Activities.

Primary Activities are the value chain from inbound materials to production operations, to outbound goods and their distribution, to the ‘far end of the value chain‘, marketing and sales, to customer care and after sales services. Here, Porter argued, lay the ground for competitive advantage. The key task is to integrate these into one value chain.

Secondary Activities are the business support functions, like IT, HR, Procurement, Facilities Management, and Finance. These cannot create competitive advantage They can merely enable efficiency, or act as a drag on the business.

Porter’s Five Forces

Corporations sit in a competitive environment, which creates five forces.

Michael Porter's Five Forces
Michael Porter’s Five Forces

Porter’s current view is that a company must aim to use these forces to re-cast the rules of its industry, in its own favour.

Sources of Competitive Advantage, and the Three Competitive Strategies

Porter argued that there are two sources of competitive advantage:

  1. Cost – being able to sell the same products or services at a lower price than your competitors, whilst maintaining profit margins
  2. Differentiation – being able to offer products and services which your customers want, but that your competitors cannot (yet) offer

This leads him to his three competitive strategies:

  1. Cost leadership – build the capability to produce at a lower cost than anyone else
  2. Differentiation – find a new product or service, or enhance what you offer to make it different
  3. Niche focus – find a profitable niche, and dominate it

Recently, we see competitors dominating their market with a fourth strategy, based on a third source of competitive advantage: deep loyalty. How does Apple dominate? Not by offering cheaper products, certainly. Although their supply chain efficiencies mean that their margins are exceptional.

And, some would argue, not by differentiation. Whilst they often lead for a short time here, their rivals also innovate, and certainly catch up quickly. Is there much a Mac can do that a PC cannot? Is there much an iPhone can do that a Samsung cannot?

And a company with as many and varied customers as Apple cannot truly be said to serve a niche.

No, I believe the source of Apple’s current dominance is largely the loyalty of its customer base, built on historic innovation, differentiation in multiple niches, and a reputation for excellence.

Diversification

Like Ansoff before him, Porter sees diversification as a shrewd strategy that spreads a corporation’s risk. This maybe through product development, or business acquisition.

In deciding how to diversify, Porter proposes three tests:

  1. Does the new industry, product set, or niche offer attractive returns on investment? Is there the opportunity to build differentiation or cost leadership?
  2. Is the cost of entry proportionate to the likely returns? If not, the risks are too high.
  3. Does the acquisition or the new venture leave the parties better-off? This is basically Ansoff’s concept of synergy.

The National Competitive Environment

In The Competitive Advantage of Nations, Porter fully articulated a line of thinking that placed national conditions at the heart of corporate success. A strong home base with good infrastructure and healthy competition grows successful global companies. Porter’s Diamond Model sets out four factors that affect a nation’s industries.

Michael Porter's Diamond Model
Michael Porter’s Diamond Model

Michael Porter on Competitive Strategy

An old, but excellent video of Porter describing some of his main ideas.

You might enjoy the Strategy Pocketbook

… and the following earlier Pocketblogs:

 

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On Competition, again: Porter’s Five Forces

Back in the summer of 2011, we did a couple of blogs on the work of Michael Porter – one of the most serious-minded academic thinkers in the realm of corporate strategy.

In the first, ‘On Competition: Five Forces’, we surveyed his five forces model from a high vantage point and also introduced his three sources of competitive advantage.  We then, in ‘On Competition: The Far End of the Value Chain’ questioned whether there are not, in fact other sources of competitive advantage.

The Five Forces

I think it’s time to take a closer look at these five forces, and maybe question the adequacy of that model too.  So what are Porter’s Five Forces?

1. The Bargaining Power of Suppliers

If your business is dependent upon the supply of materials, assets, or people, then your suppliers have power over your business – which is increased as the market dominance of your supplier increases.  You need a strategy to keep your suppliers’ interests aligned with yours, by being as important to them as they are to you.  Dependence on a monopoly or near monopoly supplier is a route to doom.  Consider creating alternative supply sources, alternative inputs, or vertical integration to control your own supply source.

2. The Bargaining Power of Customers

It would be great to be a monopoly supplier of a commodity product.  Few are although, if you can differentiate your product sufficiently – for example, as Apple did with the launches of the iPhone and iPad – then you can simulate that position for a while.  Ultimately, the customer is king or queen: without them, you are doomed.

3. Competitive Rivalry

Existing players in your market will be jostling for customers’ attention and preferential deals for suppliers.  For most people, this is where their conception of competition ends.  Porter knew differently . . .

4. The Threat of New Entrants

When Sea and Atari were slugging it out for dominance of the games console market, who would have predicted the arrival of the Sony Playstation?  Answer: anyone familiar with this model.  They would not necessarily have known it would be Sony or that it would be successful, but the threat was there… As it was some years later, when, Atari gone, Microsoft entered the market to challenge Sega and Sony, with the X-Box.

5. The threat of Substitute Products

Somewhere in my stationery cupboard, I have a bottle of Tipp-Ex (probably set solid) and a pack of acetate sheets.  Is there a better supplier of correction fluid or a superior priced transparent paper?  Who knows?  Who cares?  I don’t use either: I print drafts from my PC and re-print when I’ve made corrections, and I project straight from my PC when I need slides.  I doubt many of my clients retain a working overhead projector (OHP).

Are there More Forces?

There you have it in a nutshell: five competitive forces that allow a business to evaluate its competitive strategy.  It is one of the most successful and widely used management models.

The last fifteen years have emphasised the rightful role of regulation as a competitive force or, rather, sometimes the failure of regulation to curb competitive behaviours (Enron, anybody?) I think we would now have to add regulatory forces to any complete analysis.

But I also have to ask, what about internal forces.  How do the social, cultural, political, operational, technological… forces within the business affect strategy.  To me, this is a big gap.

If only someone could plug it . . .

Happily, they can.
But you’ll have to wait until next week’s Pocketblog for that.

Management Pocketbooks you might Enjoy

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Charles Margerison & Dick McCann: Team Management

Charles Margerison and Dick McCann developed one of the leading tools to help managers with team performance.

When you want your team to perform well, there are two approaches you can take:

  1. Manage them well
  2. Select them for a good balance

There are tools available for each, though there are fewer to help with selecting a balanced team. Of those there are, without a doubt, Meredith Belbin‘s Team Roles is the best known by far.

But it is not the only game in town. You might choose it for its simplicity. But for sophistication, let’s look at the work of Charles Margerison and Dick McCann.

Charles Margerison and Dick McCann
Charles Margerison and Dick McCann

Charles Margerison

Charles Margerison grew up in the 1940s in the UK. He studied economics at the University of London School of Economics, securing a BSc. He remained to research a PhD in educational psychology. In 1967, he moved to Bradford University, and in 1971 was awarded his second PhD, in social science.

Some time after this, he moved to Australia, and joined the staff of University of Queensland. He was Professor of Management from 1982 to 1989.

From 1982, he worked with Dick McCann to research team management. And, in 1985, they co-founded Team Management Systems. He remains a part of the business, as well as being a director and President of Amazing People Worldwide.

Charles Margerison has written many books, including one with Dick McCann.

Dick McCann

Dick McCann also grew up in the 1940s, but in Australia. From 1961-5, he studied for a bachelor’s degree in Chemical Engineering, at the University of Queensland. He followed this with a PhD. In 1969, he moved to England, to work for BP Chemicals. There, he worked as a research engineer, and also trained as a certified accountant.

In 1974, he returned to Australia, to become a research fellow at the University of Sydney. In 1982, he started his collaboration with Charles Margerison.

In 1985, Dick McCann became the Managing Director of Team Management Systems in Australia. At the same time, his co-founder focused on European and US expansion.

Dick McCann stepped down from his director role in 2015, but remains involved in research. He is author of four books. They include Team Management: Practical New Approaches, which he co-wrote with Margerison.

Margerison and McCann’s Contribution

Margerison and McCann have developed a fair number of interconnecting models. There is too much to attempt to describe them here. They include work on:

  • Workplace values
  • Influencing skills
  • Opportunities and Obstacles

We’ll focus on their most widely used model, the Margerison-McCann Team Management Wheel. But before we can get to it, we must first understand the work that underpins it: the Margerison-McCann Types of Work Wheel.

Types of Work

Margerison and McCann interviewed with over 300 managers. They wanted to find what made a difference between good and poor performance.

When they assessed the team members’ activities, their data fell into eight work functions. They describe them as:

Advising
Gathering and reporting information

Innovating
Creating and experimenting with ideas

Promoting
Exploring and presenting opportunities

Developing
Assessing and testing the applicability of new approaches

Organising
Establishing and implementing ways of making things work

Producing
Concluding and delivering outputs

Inspecting
Controlling and auditing the working of systems

Maintaining
Upholding and safeguarding standards and processes

From their work, they suggest that different jobs have different critical functions. These need people with the right skills and competencies, to perform them well.

Margerison and McCann present these types of work in a trade-marked Types of Work Wheel, which we present here with a link back to the TMS website.

Margerison-McCann Types of Work Wheel
Margerison-McCann Types of Work Wheel http://www.tmsdi.com

Critical Work Functions

Let’s compare two examples that they offer. For each, they give three ‘critical work functions’. These make the difference between good and poor job performance.

Finance and Accounting
The critical work work functions are: Organizing, Producing and Inspecting.

Design/R&D jobs
The critical work functions are Advising, Innovating and Developing.

Team Management

From here, it isn’t hard to see how Margerison and McCann relate their work functions to individuals’ work preferences.

This creates their concept of ‘role preferences’. These are the roles in a team that people are most likely to enjoy. When people’s critical work functions match their work preferences, they are likely to:

  • be happier in their job
  • perform better

Team Role Preferences

The role preferences are:

Reporter-Adviser
Supportive. Enjoys collecting and sharing information. Knowledgeable and flexible.

Creator-Innovator
Imaginative, creative, and able to embrace complexity and uncertainty. Enjoys researching new ideas.

Explorer-Promoter
Enjoys exploring possibilities, looking for new opportunities, and then selling them to colleagues. Persuasive, fast thinking, and easily bored.

Assessor-Developer
Analytical and objective. Enjoys ideas, developing and testing new opportunities, and making them work.

Thruster-Organizer
Highly results-focused, Likes to set up systems, push forward and see results. Analytical, but quick to make decisions.

Concluder-Producer
Highly practical. Enjoys systematic planning and work processes. Takes pride in efficiency, effectiveness, and quality of outputs.

Controller-Inspector
Enjoys focusing on and controlling the detailed aspects of their work. Good at checking and enforcing standards, but less skilled with informal influencing.

Upholder-Maintainer
Likes to uphold standards and values. Can be conservative in the face of change, but has a strong sense of purpose.

How Margerison and McCan Identified their Role Preferences

Margerison and McCann worked with four measures related to how people approached work. They were strongly influenced in the choices by Carl Jung’s psychological types. So you’ll see a strong relationship to the work of Isabel Briggs-Myers and Katharine Briggs.

Margerison and McCann’s measures are:

  • How people prefer to relate with others
  • How people prefer to gather and use information
  • How people prefer to make decisions
  • How people prefer to organize themselves and others

These measures lead to RIDO scales (Relationships, Information, Decisions, Organization). And the scales showed a strong relationship to the Types of Work.

Like the Types of Work Wheel, they present their team role preferences as a Team Management Wheel. Again, we present this trademarked model with a link to the TMS website.

Margerison-McCann Team Management Wheel
Margerison-McCann Team Management Wheel – http://www.tmsdi.com

The Linker Role

At the centre of the wheel is the ‘Linker’ role. Every jobholder needs this role to be successful in their job. It involves integrating and co-ordinating other people’s work. This is both within the team, and with external players.

This role is particularly important for the team leader, as you’d expect.

Linking comprises thirteen skills:

  • six people skills
  • five task skills
  • for the team leader, two leadership skills

These, however, are the subject of a whole other model, the Linking Leader Model.

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Christopher Bartlett & Sumantra Ghoshal: Managing Across Borders

In the 1980s, globalisation was the ‘Big New Thing’. Never mind that Chinese and Levantine traders had traded across half the globe at the start of the first millennium BCE. At the forefront of thinking about how multi-national corporations could organise themselves to prosper were a truly multi-national pair: an Australian, who’d worked in London and Paris and now occupied a professorship in the US, and an Indian who’d studied in the US and was a professor in France.

Christopher Bartlett and Sumantra Ghoshal surveyed the way multinationals organised themselves and categorised when each of the structures would be appropriate. Their legacy is visible on our high streets, in our back-offices, in factories and in building services today. A huge proportion of the goods we use are sold by multinationals.

Christopher Bartlett & Sumantra Ghoshal
Christopher Bartlett & Sumantra Ghoshal

Christopher Bartlett

Christopher Bartlett was born in 1943, and grew up in Australia. He studies Economics at the University of Queensland, gaining a BA in 1964. He worked as a marketing manager for the Alcoa company in Australia, before becoming a consultant with the London office of McKinsey and Co, and then a General Manager in France, for Baxter Laboratories.

But academia called to Bartlett, and he travelled to the US, to do a Masters (1971) and then PhD (1979) in business administration at Harvard, joining the faculty of Harvard Business School in 1979. He remained there and is not an emeritus Professor.

Sumantra Ghoshal

Sumantra Ghoshal was born in Calcutta, India, in 1946. He studied Physics at Delhi University, gaining his BSc. From there, he worked from 1969 to 1981 at the Indian Oil Corporation.

In 1981, a Fulbright scholarship took Ghoshal to the US, where he took a an SM at MIT in 1983, then did something extraordinary. He worked on and completed two different PhD theses at two different universities, at the same time. He was awarded a PhD by MIT in 1985 and a DBA by Harvard the next year.

And in 1985, he took up a position at Insead, where he became Professor of Business Policy in 1992. Two years later, he moved to the London Business School to become Professor of Strategic Leadership. He remained there until his untimely death from brain haemorrhage in 2004.

Managing Across Borders: Strategies for Multi-National Corporations

Surveying 250 managers from 9 multinational companies, Bartlett and Ghoshal concluded that there are three principal models that multinationals followed:

The Multinational – ‘Multi-domestic’ – Corporation

The Multinational structure is a decentralised, federal organisational structure that focuses on local markets and has only loose central control. They later called this model ‘multi-domestic’, and is most responsive to local demand. The corporation looks most like a portfolio of different companies. Now, these will be seen as band portfolios in which the brands have a lot of autonomy and much of their own infrastructure.

Food and drink, and household appliances are products that most need this strategy.

The Global Corporation

The global organisation tries to gain maximum economies of scale by centralising as many of its functions as possible. This often results in brands sharing infrastructure and services, leading to a lot of strategic decisions being driven by functional expertise and priorities. Brands therefore become increasingly global and undifferentiated in local markets.

Plant and heavy machinery, technical equipment, and raw materials production are products that most need this strategy.

The International Corporation

Here, there is a lot more centralisation than in the multi-domestic corporation. But there is also more local autonomy than in the global model. One role of the centre is to facilitate knowledge transfer among the trading divisions, so they can share technologies and achieve economies, while making some of their own choices to optimise use of domestic supply chains and expertise.

Textiles, light machinery, and printing and publishing are products that most need this strategy.

A Fourth Model…

Bartlett and Ghoshal considered that these three models left open the possibility of a new, fourth structure. This would combine elements of all three, and they also assessed which of the four models would work best, according to two pressures:

  1. Pressure for Local Market Responsiveness
  2. Pressure for Global Integration

Their book on this topics, was the 1989 best-seller (often reprinted): Managing across Borders: A Transnational Solution.

Strategic Options for Multi-National Corporations - Bartlett & Ghoshal
Strategic Options for Multi-National Corporations – Bartlett & Ghoshal

When both pressures were high, their new model would be most suitable:

The Transnational Corporation

The transnational corporation is the most complex. It balances widespread global integration of technology and supply chains against the need to adapt products and services to local market preferences. It is supported by a strong central headquarters, that is able to move managers around to gain international experience and share knowledge.

Cars, consumer electronics, and pharmaceuticals are products that most need this strategy.

From Systematic Efficiency to Responsive Innovation

Bartlett and Ghoshal also discerned powerful shifts in the fundamental needs of a business strategy. Where Michael Porter had laid out strategies that would allow companies to win the largest share of a market, Ghoshal and Bartlett argued that corporations need a strategy to create value anew, and grow their market as a way of winning business. They said companies need to innovate their way out of market pressures, rather than push against them.

They also challenged the orthodoxy that began with the Scientific Management movement of Taylor, Gantt, Adamiecki, and the Gilbreths,  and then the efficiency drives of people like Ford and Sloane. Sloane’s approach of Strategy, Structure, and Systems became the McKinsey 7S model. But Bartlett and Ghoshal wanted to replace Strategy, Structure, and Systems by Purpose, Process, and People.

The three Ps were the new building blocks of a corporation. In a series of articles for the Harvard Business Review, they placed responsibility for each of these firmly on the shoulders of top management.

So here we are, in 2017. And our world is dominated by a range of global, multinational, and transnational corporations, whose focus is on process and whose mantra is people. Not a bad body of work to act as a symbol of what multinational collaboration can achieve!

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W Chan Kim & Renée Mauborgne: Blue Ocean Strategy

So here are your primary strategic choices:

  • Exploit an existing market and beat your competition
    – or –
  • Find a whole new market where there is no competition

These two approaches have been championed by some of the greatest management thinkers and corporate leaders. W Chan Kim & Renée Mauborgne gave these strategies compelling names, and championed the latter in in a phenomenally high-selling book. They called it the Blue Ocean Strategy.

W Chan Kim & Renee Mauborgne
W Chan Kim & Renee Mauborgne

W Chan Kim

W Chan Kim was born in Korea, in 1952. After studying at the University of Michigan’s Ross Business School, he joined the faculty, becoming a professor. In 1992, he moved to the prestigious European Business School, INSEAD, in France, where he is The Boston Consulting Group Bruce D. Henderson Chair Professor of Strategy and International Management and Co-Director of the INSEAD Blue Ocean Strategy Institute.

Renée Mauborgne

Like Kim, Renée Mauborgne studied and taught at the University of Michigan Ross Business School. They moved together to INSEAD. Mauborgne is an American, born in 1963 (AVGY). The two have been long term collaborators, and their primary work together has been the research and writing about corporate strategy, which led to the concept and book, called Blue Ocean Strategy.

Blue Ocean Strategy

The 2004 HBR article, Blue Ocean Strategy, and the 2005 book of the same name are both best-sellers. The book’s sales are approaching 4 million. So clearly, if you’re a manager with any interest in business strategy, you need to know about this idea.

The concept is disarmingly simple.

A Blue Ocean Strategy sees a business finding a new market that is unexploited, and creating a market space for itself. Kim and Mauborgne’s metaphor is that Oceans represent market spaces.

They contrast new market spaces (blue oceans) with existing markets (red oceans). Companies that adopt a red ocean strategy focus on beating their competition and for this, an understanding of strategic concepts like Porter’s Five Forces will help.

The critique that Kim and Mauborgne level at red ocean strategies is that they often operate in crowded (or overcrowded) markets, offer limited opportunities for growth, and require lower profit margins. The bottom line impact of a red ocean strategy is, at best, conservative.

Instead of this ‘market-competing’ approach, they advocate a ‘market-creating’ strategy, which places an emphasis on ‘value innovation’. This strategy should see customer value increasing, while costs drop, because (in Porter’s terms) you are targeting differentiation, rather than cost leadership. Differentiate yourself, they say, by finding new demand that competitors cannot yet address, and meet it.

As you’d expect from two leading academics, Kim and Mauborgne have created a Blue Ocean Strategy Institute, which they co-direct, and built a suite of analytical tools for companies to draw down on.

Critique of the Blue Ocean Strategy

The first critique could equally be seen as an endorsement. Their idea is not new. Numerous business strategy thinkers have developed and published similar ideas, like Gary Hamel, C K Prahalad, Kenichi Ohmae, and even the venerable Igor Ansoff.

The second critique is harder for Kim and Mauborgne to shake. There is little or no empirical evidence that their strategy works, in the sense of creating lasting competitive advantage through its deliberate application.

Without a doubt, businesses have innovated throughout history, creating new markets from nowhere. And many of them have gone on to maintain dominant positions for many years. You cannot argue with the thesis that finding a Blue Ocean and quickly becoming the top predator there works. Their book is full of modern case studies.

But, who has read the book, decided to launch a blue ocean strategy, applied the tools, found some blue ocean, and created a dominant position?

The counter to this argument is: ‘it’s only been a few years’. But as time goes on, we are waiting for the evidence.

So, what is Blue Ocean Strategy?

Is it an innovative management theory that contains a deep new insight backed by rigorous research?

Or is it a brilliantly packaged re-casting of familiar and self-evident ideas, illustrated by a number of compelling case studies?

I leave you to judge.

 

 

 

 

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Jim Collins: Corporate Comparisons

Jim Collins has built an astonishingly successful career as an author, speaker and corporate commentator, on a simple methodology. Pick the best, compare them with the rest, and find differences in behaviours that appear to explain the causes. It is a methodology that has created simple, coherent lessons and led to vast book sales, in the millions.

Jim Collins

Short Biography

Jim Collins was born in Colorado in the USA, in 1958, and lives there today. He studied at Stanford University, where he earned a BSc in Mathematics and an MBA. He then went to work at management consulting firm McKinsey, before moving into industry as a product manager for Hewlett Packard. He returned to Stanford as a lecturer in the Graduate School for Business, and then, in 1995, returned to Boulder Colorado to found his own ‘Management Laboratory’.

This move followed the success of his second* book – and the one that made his name – ‘Built To Last: Successful Habits of Visionary Companies‘, which he co-authored with Jerry Porras. It has sold over 4 million copies. In his management laboratory, he works with a research team, gathering and analysing the data that form the basis of his books:

Jim Collins’ Ideas

In Built to Last, Collins and Porras established a simple methodology: hypothesise a reason why some companies endure and thrive, identify a set of thriving, enduring companies and compare them with others that are not, and look for evidence to confirm your hypothesis. Their hypothesis, for which they found ample evidence, was that corporations with a strong vision, purpose and value set that would guide all of their choices would endure and thrive over a long period. Each of their prime examples were industry leaders and had been since  the 1950s. Each was compared to a similar competitor that had not fared so well and was far less admired. Each was shown to have stronger, more immutable core values, a central raison d’etre, and a clear sight towards its future, guided by them.

In Good to Great, Collins went on to look at why some companies perform and achieve results that are markedly superior to direct competitors and others in their sector. Again, Collins’ research, with a team of 20 researchers, identified their best performers, paired each one to a similar but lesser performing comparator, and also compared them to other players in their sector. His research data found seven characteristics that distinguished the great from the good:

  1. A distinctive style of leadership, which they described as Level 5 Leadership: with a drive for the company to succeed paired to a personal humility
  2. Starting with selecting the right people and then deciding on their roles; ‘First Who, Then What’.
  3. A climate of tough conversations that face realities and move forward with deliberate optimism: ‘Confront the Brutal Facts’.
  4. A real sense of focus on one thing, rather than dissipating efforts across many: ‘The Hedgehog Concept’. Collins illustrated this with three overlapping circles of passion (‘What creates real passion?’), excellence (What can you be best in the world at?), and infrastructure (What drives your economic engine?)
  5. A ‘Culture of Discipline’ that means people follow the rules yet paradoxically are freed up to innovate.
  6. Careful adoption of technology that deepens their success in the three circles: ‘Technology Accelerators’.
  7. Continual innovation and change that constantly improves the business (within the constraints of the Hedgehog concept): ‘The Flywheel’.

A Critique of Collins’ Methodology

Collins’ books are readable and their logic is compelling. However, he misses one key point: correlation does not imply causation. Because there is a pattern, we cannot be confident that any one element of that pattern has caused the differences. Both Built to Last and Good to Great contain exemplars of excellence that have since declined and even failed. Collins and his supporters assert that this is because they deviated from what made them great. Critics would say that the examples were little more than the tail of a distribution of poor, good and great data points.

Indeed, as a scientist, it seems clear to me that, no matter how compelling Collins’ evidence is, it conflicts with the scientific method. Data analysis alone does not make good science. In science, we form a hypothesis and then try to disprove it. We shake it, test it, challenge it and try to break it. The more resilient our hypothesis is to these insults, the greater confidence we can have in its predictive capacity. Collins, on the other hand, forms his hypotheses and then builds ever more evidence to support them. He does not try to break them, and so falls into the trap that cognitive psychologists refer to as ‘confirmation bias’. Indeed, one of his strongest critics is Nobel Prize-winning psychologist, Daniel Kahneman.

It seems to me that it is events and time that will shake Collins’ hypotheses and test what stands or falls. I don’t feel confident enough to critique his findings, but I do worry that I find his answers compellingly plausible. This is far from proof and we must accept that there may be an equally large role for contingency in the levels of success of some businesses. However, I will make my last words in support of Collins’ analysis. Luck or design: it is hard to see how adopting his ideas can possibly harm a business; it seems to me that all of Collins’ seven Good to Great characteristics are self evidently ‘good things’. You makes your choices and you takes your chances!

More about Jim Collins’ Work on Pocketblog


 

* Collins’ first book was 1992’s Beyond Entrepreneurship: Turning Your Business into an Enduring Great Company, co-authored with William Lazirer

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Philip Green: Risk & Control

Sir Philip Green is rarely out of the news. A self-made business man, he has long been a dominant figure in the UK retail scene and a figure with much to admire and much to criticise. When a TV audience is split 50:50 in loving and loathing a programme, it usually becomes a hit. On those grounds, Philip Green is a business hit!

Sir Philip Green

Short Biography

Philip Green was born in the Surrey (now South London) town of Croydon in 1952, where his parents were both involved in property and retail businesses. At the age of twelve, while at boarding school, his father died, leaving his mother to continue to run the family businesses – something she carried on into her eighties. Green, who had been used to earning money from a young age on the forecourt of the family’s petrol (gas in the US) station, left school as soon as he could, to enter the world of work.

His endeavour allowed him to work his way up through all levels of a shoe importer, to discover a real talent for selling. When he left the company he travelled the world, learning practical lessons in business, which he brought back to the UK. Through the late 1970s and early 1980s, he became adept at deals involving buying stock nobody else wanted and selling it quickly. He operated primarily in the retail apparel market. He then turned this acumen towards buying and selling companies. His deals got larger and more profitable, his reputation for rapid deal-making grew, and so did his asset base.

In 2000, Green acquired BHS – the former British Home Stores – which he rapidly transferred to his wife, Tina Green. He followed this acquisition in 2002 with the purchase of the Arcadia Group of fashion retail companies, that included some of the big names on the UK high street: Topshop, Burton, Wallis, Evans, Miss Selfridge and Dorothy Perkins. This was also transferred to his wife’s name. As a Monaco resident, the tax implications of this ownership structure have attracted much criticism in the UK.

Already owning the second largest share of the UK clothes retail market, Green tried in 2004 to acquire Marks & Spencer – the largest clothes retailer. His bid failed with much vitriol between him and the then M&S boss Sir Stuart Rose. In 2006, Green was knighted for services to the retail industry. The 2010 general election saw him coming out strongly for the Conservative party – a move that was reciprocated by the new Conservative/Liberal coalition with his appointment to chair a review into Government procurement – of which he was highly critical.

Perhaps Green’s largest business was BHS, so his business story is not one of total success. By 2012, the company’s fortunes were waning and in March 2015, Green sold the now loss-making business – debt free but with substantial pensions liabilities – for £1.

As a multi-billionaire (with his wife), Green’s spending and tax affairs attract as much media attention as his business activities. He is famed for lavish parties (spending several million pounds at a time) and equally known for his charitable and philanthropic spending. Forbes rate the couple’s joint wealth in 2015 at US $5 billion.

Business Lessons from Sir Philip Green

Whatever your view of him, Sir Philip has a talent for making decisions and turning a profit. Here are some lessons I draw from his experiences and choices.

Pace and Decisiveness

Green built his business on fast deals: rapidly doing the deal (often making a multi-million pound acquisition in days) and quickly turning that deal into a profit. Yes, Green is adept at risk taking, but taking risks is not a secret to success. Quickly assessing the risk and understanding your own capacity to handle it is what matters, and Green was a master – particularly during the 1980s and 90s.

The Rich get Richer

Money begets money, and Green used a very simple ploy (conceptually) time and time again, to grow his wealth. He would convince banks to lend him money to make his acquisitions – of stock in the early days and of businesses later – and then turn a profit and repay his debt quickly. On one occasion in 1985, he bought a bankrupt business with a large loan, traded for a short while and sold it six months later for nearly twice as much as he’d borrowed.  He then went to his bank and asked ‘what do I owe you?’ They replied ‘3 million 430 thousand pounds’ and so Green wrote a cheque there and then, putting it on the counter and saying ‘Done.’

Discipline and Control

Green has a fiendish attention to every detail of his business, devoting much of his energy to driving efficiency into every last nook and cranny. Why did BHS fail, then? I wish I could ferret that one out, because his regal processes through his London Oxford Street empire of shops are well known within the business for ferreting out even tiny discrepancies in the selling process.

Customers first: Owners second

Perhaps Green’s most closely held business belief is that shareholders drive the wrong decisions. Everything should be about giving your customers what they want, rather than pandering to shareholders. This is why he turned both BHS and Arcadia from publicly listed to privately owned companies. Maybe it is also why BHS failed for him: he could no longer figure out how to give customers what they want in a general purpose multi product store. It will be interesting to see if and how its new owners can square the circle that Green could not.

And…

Of course there are other things too, but most of them are what any manager would tell you are obvious ‘no-brainer’ habits; like: know your business inside out, respect and trust your people, keep working hard, stay alert for opportunities, and protect your supply chain. But the fact that Green does all of these does not make him different from many other successful business leaders. It’s the fact that he does them well and consistently, on top of the differentiators that make him exceptional.

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Anita Roddick: Ethics Sells

Anita Roddick transformed cosmetics retailing in the UK with one simple idea: it was time for overtly ethical retailing. Her legacy was one of political, social, medical and environmental campaigning.

Anita Roddick

Short Biography

Anita Perilli was born and grew up on the South Coast of England in the Sussex town of Littlehampton.After college, she did many jobs, including spells with The International Herald Tribune and the United Nations. She also travelled the world, including a visit to South Africa, from where she was deported under the then Apartheid race laws. When she returned to Littlehampton, she married Gordon Roddick and they started a family. They also opened a small hotel and a restaurant. When her husband decided to embark on a travel adventure, Roddick used the hotel to fund her first cosmetics shop, which she opened in the fashionable town of Brighton, in 1976.

Her vision was to sell products with natural ingredients, ethically sourced, and simply packaged. Early on, she offered refillable bottles. She made no hyperbolic claims for her products, nor advertised. It turns out she didn’t need to. She quickly took a business partner, Ian McGlinn, to fund her second shop, in Chichester. By 1978, with her husband back in England, the Body Shop was growing so fast that they started franchising the business to create more shops across the UK, and then across Europe and globally. Many of her early franchisees were women, making many Body Shop stores unusual in a time when most retail shops were owned and run by men.

In 1984, Body Shop was publicly listed  and had around 1,800 shops world-wide. Roddick continued to run the business until 1998, when she stepped down to focus on writing and campaigning. Her books include:

In 2003, Roddick was made a Dame in the New Year’s Honours and then – a bombshell for many of the business’s supporters, Body Shop was sold to L’Oréal.

In 2007, Anita Roddick died of a brain tumour linked to Hepatitis C, which she contracted from a blood transfusion during one of her pregnancies.

What Managers can Learn from Anita Roddick

In reading about Roddick and her story, six lessons come to mind, for both entrepreneurs and managers launching new products, services or businesses within a larger organisation (intrapreneurs).

  1. Start small and simple
    Roddick started with the core of an idea. She had a minimal stock range (15 items, I have read) and the simplest of packaging. Focus on that core, and then…
  2. Make the simple idea a strength
    Roddick kept a lot of the pragmatic simplicity of the early days and made it a feature of the Body Shop’s offering.
  3. React nimbly to opportunities
    The Body Shop idea worked, so Roddick went with the flow and grew the business organically, but quickly.
  4. Be prepared to give up a lot to make it work
    Roddick sold half her business for £4,000 in 1977 (to Ian McGlinn). This is around £25,000 (or US$40,000) in today’s money. But if she had not done so, Body Shop could not have opened its second store – or certainly not for several years. Put simply: 50% of millions beats 100% of thousands!
  5. Stick to your ethics
    Roddick found a market for ethical products and stuck to it: not for her customers’ sakes, but because she believed in it. And that, in turn, is what delivered the customer faith in her brand.
  6. Ethics sells
    There will always be a market for ethically sourced, carefully made, environmentally sensitive and socially responsible products and services. If there is no competitor offering this in your market place, then there must surely be an opportunity.
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Eiji Toyoda: Yes we can

Eiji was not a management theorist and neither did he found a business. His genius lies in his absolute determination to take on a huge challenge and do difficult things… and he did it twice.

Eiji Toyoda

Brief Biography

Eiji Toyoda was born in 1913 and grew up near Japan’s third city, Nagoya. There, his father had a textile mill, so Toyoda grew up surrounded by the potent combination of engineering and business that was to define his life. He studied engineering at Tokyo Imperial University and, upon graduating in 1936, he joined his cousin’s Toyoda Automatic Loom Works business, where they set up an automobile works and soon changed the name to Toyota.

Toyoda took on a number of roles in setting up research and production planning, but the steady growth of the business was interrupted in 1941, when Japan entered the war. The General Motors car parts they needed were no longer available, and besides; the country now needed trucks. So Toyota became a truck manufacturer. In the early years after the war, trading was tough and Toyoda was heavily involved in the inevitable lay-offs. But he also decided to diversify the company’s future by establishing Toyota Motor Sales.

But there was still precious little to sell. In 1950, Toyoda visited a Ford plant in Dearborn, Michigan. In the time since Toyota had produced their first car in 1936, they had built around 2,500. What Toyoda saw was a plant producing 8,000 every day. He saw immediately that this was the future and determined to revolutionise Toyota’s manufacturing.

Toyoda – like many of his Japanese contemporaries – was often described as under-stated, or taciturn. This was characterised by his outward response to his experience in Michigan. He wrote back to Toyota headquarters that he ‘thought there were some possibilities to improve the production system.’ He brought a manual of Ford’s quality-control methods, which he had translated into Japanese, changing all references to Ford to ‘Toyota’.

This was the start of his first big challenge.

In 1955, Toyoda led the introduction of Toyota’s first mass production car, the Crown. It was a huge success in Japan, but in serving the Japanese market, it was poorly suited to the US Market, where it failed to gain a foothold. That came in 1960, when Toyota launched two new models, the Corona and the Corolla. Both sold massively in the US and, by  1975, Toyota overtook Volkswagen as the largest car importer into the US.

By then, Toyoda had been appointed president of Toyota, serving for longer than anyone to date, from 1967 to 1981, when he stepped into the newly created role of Chairman. It was as Chairman that he really took on and equalled the US, forming a joint venture with General Motors in 1984 to manufacture Toyota cars in the US.

But it was a year earlier, in 1983, that he kicked off his second big challenge: to create a luxury car to challenge the best.

This was to become the Lexus, which later grew into a new brand, to create a clear marketing distinction between the mass-market Toyota cars and the elite Lexus vehicles. His success was complete. Lexus regularly competes with prestige German marques Audi, BMW and Mercedes.

In 1984, Toyoda resigned from the Chairmanship although he continued to go into the office (where all three of his sons are executives) into his nineties. He died, shortly after his 100th birthday, in 2013.

Challenge 1: Become a World Class Manufacturer, to rival the US ‘Big Three’ auto manufacturers

Toyoda set out to take US mass-production ideas and fine tune them to the point where he could out-compete the US auto giants. He worked with a veteran loom engineer, Taiichi Ohno (who deserves, and will doubtless get, his own Pocketblog one day). They created together the ‘Toyota Production System (TPS)’ which is now more generically known as ‘Lean Production’. It rested on three core tenets:

  1. Just in time (JIT) production
    Ohno extended the concept of quality to reduction of waste and asked ‘why stockpile components?’. The result was a revolution
  2. Value Stream – also known as Value Chain
    To make JIT work, you need to see the production process as a part of a longer stream of activities from procurement to production to delivery. Customer demand drives ordering.
  3. Kaizen and Responsibility
    TPS makes everyone responsible for quality. While Toyota did not invent continuous improvement, or Kaizen, it is only when everyone takes responsibility for quality that it can really work.

Challenge 2: Create a World Class Luxury Brand, to rival established German auto manufacturers

From a top secret meeting to a world class luxury marque, Toyoda created a new brand from nothing but determination and around $2 billion of investment. Well, you can do a lot with $2 billion (I think – I’d love to try). But who, in 1983, would have thought that a Japanese car maker would out-engineer the German luxury brands? To do this, Toyoda’s engineers had an eye for detail that today reminds me of Apple. They tested the Lexus on Japanese roads, but knew that Japan would not be their primary market if they were to succeed. So they built new roads in Japan, mimicking roads in the US, UK, and Germany, and tested the Lexus on these. In the process of building the first Lexus, Toyota innovated and experimented like never before.

And what did Toyota get for their 200 patents and 450 prototypes? The Lexus LS400 and the start of a whole new world class business.

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Kathryn Harrigan: Decline and Join

There are two main themes in the research and writing of strategic management professor, Kathryn Rudie Harrigan. First is businesses in decline and how mature businesses can remain profitable in contracting markets. The second is around strategies for businesses joining together in more or less formal and complete ways from full mergers and acquisitions at one end of the scale through joint ventures, to strategic alliances. These two areas of interest offer much to learn from and, if your business interests lie in one of these directions, you can be assured of rigour and subtlety from her: in the past, she has lambasted quick-fix easy solution business books and models, describing her work as being for thoughtful managers.

Kathryn Rudie Harrigan

Brief Biography

Kathryn Harrigan was born in 1951 and grew up in Minnesota. Her initial training was in the theatre, taking a Bachelor’s degree in Theatre Arts at Macalester College and starting a master’s degree in Fine Arts. Early in her career, her entrepreneurial inclinations led her to create a theatre company. In 1976 she gained an MBA from the University of Texas (Austin) and went on to study at Harvard, with Michael Porter, for a DBA.

After a spell as a junior faculty member at the University of Texas (Dallas), she moved to Columbia University in New York, where she is now Henry R. Kravis Professor of Business Leadership.

Declining Businesses

Harrigan’s first research at Harvard was into declining businesses and led to her first book, Strategies for Declining Businesses, published in 1980. She returned to this topic in her 1988 book, Managing Maturing Businesses: Restructuring Declining Industries and Revitalizing Troubled Operations, and then again in her last book to date*, Declining Demand, Divestiture, and Corporate Strategy, published in 2003.

Her core thesis is that decline is inevitable if a business fails to constantly renew and refresh itself. Growth is nice to have, managers should not underestimate the challenge and rewards of properly managing a business in a mature or even diminishing market. In her 1988 book, Managing Maturing Businesses, she sets out four strategic options:

  1. Divest quickly and be the first player to exit a declining market, maximising the price you can get for any assets, intellectual property and good will you can sell off.
  2. Shrink your business selectively, divesting the weakest parts and focusing on the most lucrative areas of business, leaving your competitors  to fight over the rest.
  3. Milk the business. Adopting the BCG metaphor of a ‘cash cow’, she offers the option of continuing to manage it as well as you can, as the market declines, to drain every last dollar of return from past investments.
  4. Be the ‘last iceman’ – serve the few customers who continue to want legacy products and make this a profitable premium niche.

Strategic Alliances

In Harrigan’s other work, she has focused on the variety of alliances that companies can make, which to select, and how to do it well. Her books on this topic started with 1983’s Strategies for Vertical Integration, and continued with Strategies for Joint Ventures (1985), Strategic Flexibility: A Management Guide for Changing Times (1985), Managing for Joint Venture Success (1986), Vertical Integration, Outsourcing, and Corporate Strategy (2003), Joint Ventures, Allliances, and Corporate Strategy (2003), and looks set to continue with future work*.

Her earlier work emphasised the dangers that vertical integration of the value chain (supply and distribution) hold by limiting a company’s strategic flexibility to rapidly adapt to market changes. She saw co-operation in the form of joint ventures and strategic alliances as the key to success in future changing world markets.

This is despite the fact that the concept of joint ventures goes back to antiquity and the maritime trading of the Egyptians and Phoenicians, and continued through the great mercantile revolutions of 16th century Europe. Harrigan defines a joint venture as ‘separate entities with two or more actively involved firms as sponsors’.

It is my sense that her predictions of the 1980s are coming true: that constellations of firms working in alliance will compete with one another, rather than individual corporations. This is clearly visible in the consumer electronics industry, where systematic outsourcing creates strategic flexibility, commercial efficiency, and the capability to take on vast projects.


* I believe she is working on a new book, Strategies for Synergies.
This  emphasises the intellectual debt she owes to Igor Ansoff.

 

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