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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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Look forward to 2014

Tomorrow, it is 2014 and the Pocket Correspondence course resumes with Volume 3: Organisational Management. It will cover operations, strategy and project management in the first quarter, and business services, finance, sales and marketing in quarter 2.

So, some of the topics you can look forward to are:

  • Procurement
  • Supply Chain
  • Lean Management
  • Process Mapping
  • Porter’s models of competitive advantage
  • Project Management
  • Stakeholder engagement
  • Finance for Managers
  • Sales
  • Customer Services
  • Marketing Strategy
  • Complaints handling

And, keep an eye open for a special announcement…

We’ll say no more at this stage.

If you are reading this:

Happy New Year

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Listening to your Customer

Steve Jobs famously eschewed focus groups and market research in designing new Apple products.  He did not want to supply what customers wanted.  He wanted customers to want what he created.

Whether Apple will be able to sustain that level of creativity is a question only time will answer.  But Jobs’ attitude did not mean that Apple was deaf to its customers – quite the opposite.  Having created the kind of loyalty that just about any other corporation can only dream of, everything Apple does has been tailored to retaining that crazy loyalty.

Marketing departments typically spend their time and resources looking for ever better ways to ensure that potential customers hear their message.  Customer service departments focus on fixing customer problems.  Who in your business is dedicated to listening to the customers you have, to build loyalty?  It’s cheaper and easier than acquiring new customers, and it’s cheaper and easier than fixing relationships with disappointed customers.

The big question is ‘How?’

How can you really listen to the voice of your customer? 

Surveys are great – especially low cost, easy-to-implement online surveys using tools like Zoomerang or Survey Monkey.  These have the benefit that they take little effort from your customer (and why should they make a big effort?) and can be supported by an appropriate incentive like a small reward or a competition entry.

The gold standard for good feedback on what you do (and don’t do) is follow-up calls or meetings from someone separate from the team that serves your customer.  To make it work for both you and your customer, you must welcome absolutely frank assessments and ask good questions to secure details that make appropriate actions easy to target accurately.

But what if your customers won’t talk to you?  You can always employ a ‘professional customer’ – mystery shoppers.  They are great for thorough, detailed and accurate assessment of what you do.  Unlike real customers, however, they cannot give you information about what else they want, from your product or service lines.

Customer focus groups or ‘customer panels’ can do that.  They are a lot of work to plan and organise and expensive too – often requiring specialist consultants, room hire, and inducements to participate.  This is a form of market research and the Marketing Pocketbook offers eight more variants on what we have above.

The forgotten question is Why?

In case ‘why would you listen to your customer?’ seems like a pointless question with an obvious answer: ‘of course you must’ – stop for a moment.

Of course you must, but unless you know why you are going to do it, you rune the risk of asking the wrong questions, choosing the wrong format, and mis-using the answers.  It is all too easy to feel like you are doing something useful by sending people out to listen to your customers, but before you do so, make sure you have a purpose and design the process accordingly.

A Paradigm Shift

Michael Porter identified two sources of competitive advantage:

  1. Industry Cost Leadership
  2. Product Differentiation

Arguably, Apple has neither, with high prices for products that are being successfully emulated by their main rivals.  So how are they succeeding?  I believe by a third source of competitive advantage: brand loyalty.

As a prevailing business strategy, this is new force in big business, but one we can all exploit, by building an organisation that excites and values its customers so much that we win the kind of fanatical following that Apple has.

If you can do that – with or without one of Porter’s two other sources of competitive advantage – you have the basis for a long-term business.

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On Competition: Internal Forces and the 7-S Model

Tom Peters is a maverick thinker with a provocative style and use of language.  We introduced his work in October 2011.  However, far earlier in his career, while he was still at international consulting firm McKinsey, he co-developed a tool that rapidly fell into the mainstream.

Like last week’s Five Forces Model, the McKinsey 7-S model is provocative in a conservative sort of a way: it can provoke deep insights into your organisation, but is far from revolutionary.  It is radical in the true* sense of the work, rather than in the ‘way out’ sense it has come to adopt.

* Radical, from radix, meaning root.  As in radish.

The Origins of the 7-S Model

The 7-S model was created by Tom Peters and Robert Waterman (and, I am sure I read once, somewhere, another colleague, un-credited in the book) and was published widely in their business best-seller, ‘In Search Of Excellence: Lessons from America’s Best-Run Companies’.  The authors do credit Anthony Athos and Richard Pascale for their help in developing the model.

They acknowledge its ‘obviousness’ but rightly, I think, assert its great utility.  In last week’s Pocketblog, I suggested that Porter’s Five Forces Model needed an additional element to account for the forces within a business.  I think this is a great model for that purpose.  It also serves very well for non-profit organisations in the public and charitable sectors.

The Seven Ss

Okay, the authors also recognise that, at times, they needed a shoe horn to force the model into Seven Ss, rather than, say 4 Ss and a few other letters.  But it works very well, and the alliterative nature makes it memorable and therefore more useful.

McKinsey7S

The fundamental tenet of the model is that, for an organisation to succeed, it must bring seven dimensions into good alignment.  Gaps and mis-alignments will be sources of failure or, at least, internal tensions and therefore performance challenges. Let’s illustrate this with an admired company.

Shared Values

At the heart of the model is the need for shared values.  Apple’s whole business is aligned around the values of design and user experience.

Style

Led by  Steve Jobs, the business had a style that combined ruthless attention to detail, with an entrepreneurial flair that encouraged ideas.  People have been free to innovate – as long as they met Jobs’ exacting standards.

Staff

Consequently, Apple is able to attract the very best staff, and is very demanding of them.

Skills

Staff come with passion and a lot of skills, but Apple invests massively to keep staff at the peak of product knowledge and technical excellence.

Structure

I can only speculate about the business structure, but I would expect it to echo the style – loose in the sense that alliances and collaborations are promoted in the development arena, but tight around the operational details, like supply chain and retail.

Systems

Apple’s procurement and supply chain systems have become legendary as they have built capacity for launching and supplying huge new market-dominating products.

Strategy

Under Jobs, the strategy was to focus on a small number of products and to make them innovative and excellent – enabling the business to capture a huge market share relative to its size, and build a loyal customer following.

The 7-s model is represented by seven inter-connected circles arranged with six spaced around the seventh (Shared Values) in the centre.  This networked ‘Atomium-like’ image illustrates well, the network nature of these dimensions and their inter-relatedness.  There is also a big © symbol attached to it so, notwithstanding the numerous reproductions in derivative books and websites, we’ll settle for our alternative representation and a picture of Brussels’ Atomium!

Atomium

The Atomium
by o palsson

Rights granted under Creative Commons Licence

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On Competition – The Far End of the Value Chain

Back in August, we met Michael Porter – a professor at Harvard Business School, and an authority on competitive strategy.  In a blog called ‘On Competition – Five Forces’ I described his best known ‘Five Forces Model’ and also his model of three sources of competitive advantage:

Porter's Three Generic Business Strategies

The Whole Picture?

At a recent seminar, I challenged participants to identify any additional business strategy that can deliver competitive advantage.  After all, in my August blog, I did assert that this model is showing its age.

Could a business outcompete rivals with a higher cost product, that does pretty much the same as its competing products, and has no niche focus?  The answer takes us into a fascinating debating point, by way of another powerful model with which Porter is closely associated.

Competitive Advantage

Porter’s 1985 book ‘Competitive Advantage’ gives you a pretty thorough précis of his earlier ‘Competitive Strategy’ in Chapter 1 – focusing on the three strategies – and then takes off.  Competitive advantage, Porter says, comes from understanding the ‘value chain’.  This is the full set of activities that company undertakes, to create value.  It is illustrated below.

Porter's Value Chain

Competitive advantage is about understanding the Five Forces model and the sources of cost advantage and product differentiation in terms of these nine activities.

The Far End of the Value Chain

The five primary activities form a chain of value-adding processes, supported by the four secondary processes that provide the necessary resources to make the value chain work.  Each can be a source of competitive advantage, most obviously through cost differentiation.

I want to focus on Marketing & Sales, and Service.  My argument is that a company can differentiate its product – to give it competitive advantage, through these two, without focusing on a niche, delivering a substantively different product, and with no cost leadership.

Marketing, Sales and Service are about Myth-making

Hello Kitty is a trademark of SanrioIf you can create a compelling narrative about your product, people will want it, to associate themselves with the myth you have created around your brand.  My daughter loves ‘Hello Kitty’ – I don’t know why.  As far as I can tell, the Hello Kitty brand started life as nothing more than a motif, appearing on a range of products.  Now, not just children, but adults too, want goods just because they have the face of a little white cat (with no mouth) on them.

The products are no better, no different (unless you include the motif) and certainly no different functionally, and definitely no cheaper.  There is little niche focus beyond, as far as I can tell, females.  Hello Kitty thrives in most cultures and at many age groups from 2 to forty, at least.

I think the source of Sanrio’s competitive advantage is nothing more than marketing.

Would I fall for such a ruse?

Of course not.  Unlike some grown ups, I would never have Hello Kitty nor any other character on my iPhone case…

‘Hold on Mike, did you say iPhone?’

iPhone certainly has no cost advantage and it now has many competing products that offer the same functionality.  And as a niche, iPhone users are pretty hard to define: old and young, across social and cultural spectra…

So how does marketing create competitive advantage?

It seems implausible that three sources of competitive advantage could be all there is.  Yet I have come to the conclusion that I haven’t yet found an exception.  Despite arguing that marketing is that exception, let me explain.

What does marketing do that creates such loyal followings for Hello Kitty and iPhone (and, indeed, for both – I saw someone with a Hello Kitty iPhone cover, which was the nudge for writing this blog)?

I think the great marketing that Sanrio and Apple create, builds a loyal following for their products.  Many people will identify themselves as iPhone users – in a way that others would not identify themselves as Wildfire or Galaxy users.  What great companies can do is use marketing and service to create a ‘tribe’ of people who are loyal to their brand – or to a part of their brand.

What this relatively new form of marketing is doing is building a niche focus that is defined by the products and services of the company.

So, Porter was right after all.  Now we need to look at this concept of ‘tribes’.  More next week.

Management Pocketbooks you might enjoy

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On Competition: Five Forces

On a high shelf in my study are the books I rarely refer to.  Some turned out to be a disappointment after I bought them, but some, however, are old friends.  It’s just that I no longer need to refer to them much.

Years ago, when I was asked to develop a seminar on business strategy, three of them were my constant companion as as I thought through and planned the session.  And the first model I thought of back then features at the start of Chapter 1 of one of those books, Michael Porter’s ‘On Competition’.  This is, by the way, a hefty hardback (lovely to use).

I’ve been re-reading parts of it in preparation for a new seminar: ‘the Three Hour MBA’.

Michael Porter

Michael PorterThe same model appears in the delightfully neat ‘Strategy Pocketbook’ by Neil Russell-Jones.  In it, Jones describes Porter as ‘one of the most influential strategic thinkers and writers’ and his classic book ‘Competitive Strategy’ is required reading on just about every MBA course.

 

Porter’s Five Forces

Not surprisingly, Michael Porter starts his book (which collects a dozen or so of his best articles) with the model that bears his name: Porter’s Five Forces.

Porter's Five Forces that govern competition

Porter analyses the basis of the power behind each of these five forces, and the barriers to entry of new players or substitute products.  The model forms a basis for developing a strategy that positions your company and influences the forces around it.

Three Strategies

Porter suggests three generic business strategies to position your company to take advantage of your competitive environment.

Porter's Three Generic Business Strategies

Systems Thinking

Perhaps Porter’s model is showing its age.  In the 1980s, the world seemed a simpler place.  Now, we understand far better, how inter-connected things are.  Suppliers are dealing directly with customers and business are making ever-more complex alliances.  How does access to capital (the last couple of years worth of headline news) affect competitive forces, and what about other resources, like people and energy?  And what are the affects the forces of social responsibility and regulation?

So here’s the deal

Porter’s Five Forces is an entry level strategy tool.  It is a valuable insight into the workings of a competitive market and a great starting place.  But do consider the lessons of Richard Rumelt, who argues that a good strategy starts from a robust understanding of the situation, with which this model can help, but needs much more in addition.

Some Management Pocketbooks you might like.

The Strategy Pocketbook

Neil Russell-Jones’ Strategy Pocketbook is stuffed full of handy tips and strategy planning tools, including Porter’s Five Forces and a ‘competitive intensity’ tool that is based on it.  It also has lots of other valuable tools and models.

 

Also take a look at:

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