Today might be one of the bigger days in sports, but the results will soon become a statistic.
The right idea can change a company, a life, a future, and have enduring effect so much so that it becomes part of the cognitive wallpaper surrounding a community.
Perhaps one of those ideas is here. I collect and curate ideas daily, and am happy to share them in the hope that they are useful to you. As always, your comments are encouraged and appreciated.
Economy: Greece is screwed and European politicians are in denial. Our banks were not meant to be like this – the last few decades have been an aberration from historical norms. Dr. Doom dishes in Davos on the letter of the alphabet that describes the shape of the pending recovery – I don't think U will like it and there are no "V for victory" moments expected soon. Yet another happy talk by the same fellow… Why models can be a source of economic trouble.
Managing: Some companies are serious when they talk about "the long term". Fifteen CEOs offer advice on what matters most at work. What it would take to reinvent the retail experience. How to make employees happier – just give them a little control. The ten questions that create success. How strangers decide what we buy. But why our tastes don't spread to friends (from Carl Boutet). The global distribution of corruption. How to create money out of rocks. The unbelievable distribution of profits in the global mobile handset industry. Latest trend report (from Viviane Colpron). The cities that will matter in the future.
Improving: How to make better decisions. How we spot good ideas. How to increase your willpower. And a single idea on that same subject. How to train your brain to focus. How to manage time more effectively. How to present data differently so that you can see and understand better. How to get more done. How a little overconfidence might be a good thing. How ignorance helps groups make better choices. How to spend wisely. How to improve your personal performance.
Ideas: Thriving economies are complex economies – meaning that the ability to cooperate with lots of specialized others could be a driver of prosperity. The awesomeness of private equity, and why its critics are wrong. Why higher ed is about to be disrupted (and the sooner the better, IMO). This year's wars. The tweets of Africa (from Elliot Hughes). Why real leaders don't take bonuses. How the internet is affecting our brains. The real genius of Steve Jobs. Scientific ideas that you'll want to understand for 2012. Can we find a better way to measure prosperity? The future of YouTube.
You must reidthis: The psychology of praise. Oldie but a goodie – of use to parents and managers alike. This one changed how I say thanks.
I thought that I had come up with a radical idea (for me, anyway) but discovered subsequently that I had merely rediscovered fire. Actually, I found that my little idea's intellectual genesis lay in an obscure political philosophy called ordoliberalism. So while I can't claim discovery of a new idea, I can at least apply an old and dusty philosophy to a live and troubling problem.
The idea is simple and the problem is huge: It is that an increasing proportion of corporate profits could be a result of market power.
Big deal, you might say. And perhaps you'd be right. But in fact market power is better thought of as a company-consumer relationship continuum anchored, arguably, at one end by overweening service and at the other by indifferent extortion.
As companies increase market power, their responsiveness falls. Worse, you (we!) are paying too much.
Think about your latest mobile phone bill…if you're from outside of Canada, you are rightly appalled by the amount of money we pay in this country for a service that has, for all intents and purposes, become commodified. (Don't even get me started on roaming data fees…)
Or banking. Again, apply the same logic – if you are paying too much for too little, and can't find a provider who gives you what you need at your preferred willingness-to-pay level, it's likely a good sign of market power picking your pocket.
The technical measure used to determine the level of market power is something called the Herfindahl Hirschman Index. Mathematically, it's the summed squares of each company's market share, expressed in percentage terms.
A fully monopolized market (one provider, with tremendous market power) would have a HHI score of 10,000. A fully competitive market (many providers, each with very little market power and likely very low profits) could have a score theoretically close to zero.
In practice, an industry with an HHI of 1,800 or above is thought to be highly concentrated. (Mergers that raise the HHI by more than 100 points are usually given considerable scrutiny.)
The traditional weapon that governments have used to fight concentration has been antitrust legislation. It's long, legal, and requires proof in a court of law. Appeals are possible. Resolution takes years. Customers suffer in the meantime.
My remedy is simple: treat profitability as a sign that something is wrong with a market's structure.
But instead of using antitrust legislation, governments should avoid courts entirely, and take an active role to enable more competition. The express aim of such activity should be reducing aggregate profits within a high-profit industry.
This effort should include measures that encourage the formation of domestically-domiciled new entrants, and in lowering barriers that prevent foreign companies from considering entry. Other measures might be needed, depending on the chracteristics of a particular industry. Regardless, the goal should remain the same – to create more competitors.
The rationale: today, technologies, education, and access to information are more evenly distributed across countries. (No, it's not a perfectly flat world…)
Second, information moves essentially at zero cost.
Third, due to these two factors, fewer companies have genuine core competencies (rent-generating capabilities – they have to be valuable, rare, hard to imitate and lack a substitute) that justify above-normal profits.
So where else could profits come from?
To be fair, I haven't factored in two other potential sources of excess profitability – valuable brands and network effects. But not all industries have customers who are brand-sensitive. Nor do network effects exist everywhere either.
If companies can only earn profits by coercion, governments can and should act as counterweights in favour of customers. The quid pro quo for companies? Lower taxes on those profits earned honourably.
Recently, the Economist published a series of excellent articles on the growth, variety, and shortcomings of state-owned enterprises (SOEs). Given the source, it's no surprise that the critiques played strongly on the idea that government preferences and policies skewed the direction of the animal spirits behind capitalism and yielded a suboptimal result.
Feeling somewhat cognitively dyslexic that day, I played with the term SOE and quickly came up with another – EOS – the enterprise-owned state. This seemed overreaching – countries can't be "owned" by companies (yet). However, there is an intermediate-level idea, regulatory capture, that makes a fairly convincing case that companies can at least exert controlling influence over *parts* of countries (agencies, boards, commissions and other regulators).
So if states can own companies and companies can own parts of states, there is likely a meta-category that includes both forms of businesses. I call them NSEs, or Nationally Significant Enterprises.
All state-owned enterprises are NSEs by default. This is tautologic; if a state bothers to own something, its function must be significant to that state. Hence the linkage between formal state power or influence (e.g., via diplomacy) and the business aims of the SOE makes perfect sense.
But the NSE form also includes companies in which governments don't own shares, but upon whom they depend in some way. In Canada, every successive technology industry "champion" becomes an NSE. Remember the angst displayed by the Government of Canada about the fate of Nortel? That will pale before the angst they're going to display within a few months when RIM fails.
Or when Air Canada reaches gridlock – again – with its unions and seeks help – again – from the federal government? (I did research for my MPA 15 years ago that showed governments disproportionately gave bailouts to companies that were dominant in their communities and were highly visible in the media. Not much has changed.)
In the US, Boeing is the archetypal NSE. Boeing has managed to enlist the highest level members of the US government in promoting their aircraft to foreign purchasers. When Cabinet Secretaries make sales calls to foreign governments, it's clear that something bigger than promoting exports is at work.
And there is: each foreign sale of a Boeing jetliner offsets that company's fixed costs – and, in effect, reduces the cost of each subsequent military aircraft purchased by the US government. Of course jobs are created in the US, but most US companies sell overseas unaided by senior government officials.
Given the response of governments worldwide to the 2008 financial crisis, many banks are also NSEs. They have an implicit claim on government resources, whether in the form of cash, regulation, or influence.
Or interference. In 2006, the US Congress erected roadblocks to prevent the sale of port management services in six US seaports to a SOE owned by the government of the United Arab Emirates (this was the so-called Dubai Ports World controversy).
None of this might matter to the average CEO who is just trying to keep his/her company afloat. But it does give some insight into whose supplications for government help get heeded, and why. More needs to be done to characterize the NSE, but it seems to have some instantly visible traits:
- Importance to some policy aim of government, whether that is employment, infrastructure delivery, or security.
- Highly visible, and ideally (from the company's perspective) associated with some aspect of national pride or achievement.
- Takes advantage of the fact that the permanent campaign present in many democracies means that incipient failure of a company with the above two traits is instantly defined by media as a failure of an incumbent government.
I suspect that it is difficult to become a nationally significant enterprise. In competitive markets, this should be virtually impossible. However, Google has existed for only 14 years, and one could imagine the furore if a Chinese company – SOE or private – launched an acquisition bid.
People who study and teach about ideas such as strategy do not always help increase understanding or usefulness. Virtually every textbook in the field has its own definition, or uses one that is so exotic – but academically precise – that it is not useful at work. Even a common first starting point for most people seeking to understand business strategy generates more confusion than insight.
So, in this two-part post, let me help make this concept useful and relevant by sharing a simple way to understand and apply it. I guarantee that it will take less than a minute to understand, and it will work.
The first part needs to establish a critical point of understanding and then provide a few definitions. The second post will explain the business strategy concept as it's used in practice, and how you can use it in your business.
Here's the critical point of understanding: when most managers talk about strategy, they mean "business strategy". This is how a company beats a rival through competition that takes place within a single industry. It's the type of strategy that most managers care about because it's the one that leads most conclusively to results. And it's the one I'll discuss in the next post.
What is an industry? Again, there are many definitions, but here's one you can use right away. Think of an industry as the collection of companies that a customer decides he or she could hire to solve a particular problem.
For instance, if I need to call a friend in Vancouver, or in Lagos – I could use long distance service provided by Bell Canada, and be prepared to pay a fee for what is likely a good quality line. Or, I could use Skype, for free, but settle for a call that might be less than perfect. So Bell Canada and Skype are competitors, even though stock market analysts might classify Bell as a "phone company" and Skype as a "software company". That's why defining an industry from the customer perspective is so important – it brings the world that the company under study experiences to bear on deciding its direction.
There are two other types of strategy that managers need to understand. One type is called "corporate strategy". This is, essentially, how a company decides which industries to enter. Most companies in the world seem to have a simple corporate strategy – stick in one industry. In this way their corporate strategy is irrelevant to their business strategy. Those companies that compete in two or more industries usually select industries that are somehow related, or at least where the expertise needed to compete in multiple industries draws on the same set of skills.
Let's stick with Bell Canada and Skype. Bell competes in local telephony, long distance telephony, mobile telephony, internet service, and the distribution of TV signals. Each could be considered a separate industry. But each draws down on core skills, such as network management, plus assets that it owns, such as a deployed network infrastructure and significant retail presence. Moreover, the sale of one service creates the basis of selling another. Bell's corporate strategy is to tie together networked businesses, and, more recently, attempt to secure content.
Skype, on the other hand, uses a "freemium" business model, and sells only computer-to-telephone voice connectivity (SkypeOut). Its free service, Skype, is there to attract customers.
In corporate strategy terms, Bell is diversified, has chosen to do so by picking related industries. Skype competes within a single industry.
The final type of strategy is called "functional strategy". This is the type of strategy that a particular department of a company uses to support the company's business strategy and, occasionally, its corporate strategy. I don't know much about functional strategy, and it's better handled by experts in finance, marketing and IT anyway.
The concluding idea in this post is vitally important, and answers a vexing question in business: how is strategy implemented? Here the answer is true for corporate, business and functional strategies: all are implemented through the allocation of company resources. Allocation means channeling resources toward intended goals, through uses. Budgets and project selection are key tools in resource allocation.
But what are resources? All organizations in the world – companies, governments, not-for-profits, clubs, religions, and everything else – are composed of only three resources . I categorize them simply as:
Money – this includes things such as brands, intellectual property, licenses, machinery, permissions, databases, and the like. "Money" can also include cash and cash equivalents. In general, money means all non-human assets that an organization owns. (It's just a short form.)
People – instead of head count, think of skills. Why should you think this way? Because customers don't hire your headcount, they hire what your headcount can do, enabled by your money. Want a great 2012 business improvement project? Answer this question: what skills work for you?
Time – the duration, choices, and sequencing of projects to which you apply the money and people you have. This is managerial judgment in action.
In practice, this means you can identify a organization's strategy perfectly by examining its allocation of resources. Resource allocation – not an organization's claims about its priorities – reveal its true strategy.
So – this post has set the stage for understanding business strategy by
- defining and distinguishing between business, corporate and functional strategies;
- defining an industry from a real-world (i.e., customer) perspective;
- identifying and explaining the three kinds of resources that every organization possesses; and
- explaining strategy implementation as a process of resource allocation.
Next post…a working definition of business strategy, that you can use immediately, and that you can teach to others.
Most professional service firms (accountants, management consultants, etc.) are happy captives of a very powerful idea articulated by management guru David Maister. He claimed that an ideal positioning of a professional service firm (PSF) was as a "trusted advisor" to its clients.
Today, that's table stakes, and in fact, has been for a long while. So why is "trusted advisor" still an aspirational positioning for many professional service firms? Logic says one is needed, as "trusted advisor", however worthy, indicates competitive parity at best. There is no differentiator present that drives up customer willingness to pay. So of course conversations gravitate to price, and firms look increasingly homogeneous.
What exists beyond "trusted advisor"? These days, I think companies need "active advocates", that not only fulfill basic mandates in their core disciplines, but increasingly, act as an outside provider of R&D about things that their clients don't know about or don't understand. That's where the PSF's networks matter.
So in the future, the winning PSF is more than just a provider of trained people to fulfill a particular mandate. They will be network brokers, validating experts who are affiliated but not employed by them, and who contribute an increasing part of the intellectual DNA that the PSF will need to remain relevant to those it serves.
Image source: See-ming Lee 李思明 SML
- We'll always be learning.
- Good ideas will come from everywhere.
- When we think we are on top, we're almost surely wrong.
- Humility and striving are better guarantors of enduring relevance than arrogance and self-congratulation.
- Fresh from today's NY Times – Tom Friedman tells a story of pure necessity-driven innovation: the Aakash, from India. A bottom-of-the-pyramid story that proves why, when thinking big, that resource constraints rather than resource abundance are essential. Makes me wonder – what could each of us to do innovate a stripped down-open source product that costs half our current fully-loaded price, but which would open up big markets?
Relatedly, Mukund Chopra sent along this great story – another about India – that showed how one company, Bharti Airtel, managed to turn the constraints that it faced into huge innovation advantages.
- What language will matter most to the future? English, but with a spin. See the article from the WSJ to discover how you can learn tomorrow's lingua franca.
- Toss out the bad apples. Bob Sutton continues his campaign against the a-holes that make work awful (and they exist in universities, too!) in this great, short read in the WSJ. Point: fire these people. Getting rid of them will raise performance (because the rest of us will be so grateful!). Forward this one to your CEO…
- Steve Jobs is dead but Apple will live on. But as what? And who can we learn from Jobs' own choices – can Steve Jobs make our organizations better? A post mortem round up courtesy of two of your fellow readers…
- I'm a fan of Occupy Wall St., mostly because of the arguments made in this book about the societal, health and personal consequences of diminished social inequality. But as business people, we have to probe deeper. Is there a danger that the inequality that the current system of capitalism has bred will lead to undesirable outcomes? Read on and you choose…
- from economist and gadfly Nouriel Roubini: inequality breeds instability. Instability is bad for business.
- From Salon: the roots of Occupy Wall St.
- From Scientific American: the remarkable psychology of this movement. If you read nothing else today, read this one!
- System crash: how a rogue trader blew up UBS. Not surprisingly, such individuals are, apparently, more reckless than psychopaths. So who's in the office next to yours…?
- How Apple's supply chain creates advantage. (So it's not just great design, a terrific OS, and cool stores?) Point: you can build advantage anywhere. Apple is what happens when you build it everywhere.
- Is a drug dealer's business model ethical? Or a tobacco company's? Or gambling, or any other industry where addiction is possible? Spending is an addiction too. Here's the science behind it. On a related note, here's what marketing and advertising do to keep that addiction going.
- Reinvention corner: how to make pizza grow. Thanks to Niral Vora for finding this one…
- Business is about decisions, right? Often, that's true. But are there good heuristics available to us about decision making, and should we be aware of mental traps that get in the way? Yes!
- That's the good news. Here's the bad news: many people are massively and falsely overconfident. Don't believe me – but believe the guy who changed how the world thinks about rationality and managed to win a Nobel prize in the process…