Tuesday, December 28, 2010

Strategist of the Year 2010 – CKP

Happy New Year to our readers, both from the west and the east alike!

With us all getting ready to welcome the year 2011, I see quite a few news clips from various organizations bestowing the “person of the year/decade” awards to those individuals who have influenced certain fields in an outstanding way. More specifically, some of the professional awards include, but not limited to are – artist of the year, scientist of the year, engineer of the year, architect of the year, physician of the year and so on and so forth.

As I was looking at this list, I was surprised to see that there is no award called – “strategist of the year” – and so, wondered if it makes sense to propose a “STRATEGIST OF THE YEAR” award as part of our 2010 year-end blog. As I tossed this idea to my wife – she chuckled –“You aren’t creating an award for yourself? Are you?” Well… although I never meant it that way, it sounded like a good idea as well – given the 2010 career slogan being ”if you do not get the job you wanted – go and create the one for yourself”.

With all the pun aside, we decided to propose the “strategist of the year” idea to our fellow readers – with a noble goal of honoring the legendary strategists who have helped to shape the strategy agenda in the last few decades. As it turned out, developing the selection process to choose the top strategist from the list of 50+ legendary pearls – is not an easy task at all. But, then we remembered the song “no turning back” and so, created a mini panel (with me and my wife as members) and quickly scanned through the profiles of the top 50 legendary strategists from various sources (we have listed few links at the bottom of the page for your perusal as well) within the last 10+ years or so.The only key criteria we used was to honor those strategists whose thinking have helped to shape the world’s purpose agenda - given the theme of our blog being “ strategy with purpose” promoting the “collaboration driven purpose innovation”( http://strategywithapurpose.blogspot.com/2010/10/transforming-so-what-opposites-in-to-so.html).

To our surprise, we quickly learned that the list of renowned strategists who have been repeatedly being ranked in the top 50 list, year after year – by and large remained the same, except for few who have changed their positions relative to others depending upon the criteria in which they have been evaluated in those years.The question however is how to trickle down to the finalist - and that indeed turned out to be even more daunting task than agreeing on the process itself!

This is where we applied our intuition and decided to make the process simple – i.e. decided to honor C.K.Prahalad, who was called home in the year 2010. Although he might qualify to be the “strategist of the year” on his own merits- we decided to bestow the award – primarily based on the fact that he was the only one in the top 50 list who happen to be called home in the year 2010. And so, the Grammy goes to... Oops! the “Strategist of the year 2010” award goes to C.K. Prahalad. I hope you all agree with our intuition as well.

As part of showing our respect to CKP, we decided to re-publish the tribute I had published in Harvard Business Review blog earlier this year, with some minor tweaks. May I request you to observe a minute of silence and recite this poem in the honor of the legendary strategist CKP, the strategist of the year 2010.

Twas the day of a solemn note!

‘Twas the Sunday morning like any other day, (April 18, 2010)
There stuck a solemn note in my heart as the news reverberated far and wide,
Stilling the clatter and traffic of the business world – and made them to pause and look around,
A new sense of new world order, at least for the time being- a new world without CKP,
In its sorrow - yet with its splendor, in its moment of loss -yet with its fortitude.

The light is gone, yet I whispered to myself - I wish I was wrong,
For the strategic light that shone the world was no ordinary light,
That strategy light that illumined this world for these many years,
Will continue to illumine this world for many more years to come,
And hundred years from now, I am sure, that
light will still be seen around the world.

Not an ordinary one, the light that
redefined the word strategy...
The praja that made strategy relevant for the
bottom of the pyramid,
That gravitas that drew us away from the conventional thinking,
That compassionate heart that reminded us to do the right thing,
That simple soul that took the strategic thinking altogether to the new level –
strategy with purpose!

The strategy Guru with his spectacled charm and of happy nature,
The champion of the once alien concept “
core competencies” along with Gary Hamel
Among his virtues, sense of duty still stands out tall –
as teacher and a servant
His courage to go against the odds with
stronger conviction,
That is the character that won the glint of admiration.

That innovator who planted the resource based view (RBV) seed for the swallow-tails
And the milkweed plants where strategists of yester years would lay,
To make this April meadow grass green and the next round of
caterpillar generation to grow
Beckoning the world
to watch the mystery unfold
The metamorphosis of translucent prodigies (us?) giving our golden service for the needy.

The immigrant star smiling with his trademark embed spectacled eyes (from his place of resting)
Like a
immortal who refused to be a mortal,
Realizing how quickly his insights are going to be consumed (for the betterment of the world)
Resting in peace with the assurance of
his prodigies fulfilling his purpose,
Yet, rolling over from his grave once in a while (reminding us that purpose) with his spectacled smile indeed!

PS: The inspiration for this poetry tribute came from the scripture verse– “You are the light of the world. A city that is set on a hill cannot be hid. Neither do we light a candle, and put it under a bushel”



Friday, December 10, 2010

A compelling case for our Purpose-Profit balanced "Portfolio-Thread View"

For those of us who have been following our blogs closely for the last few months would have definitely noticed a key message - that our purpose driven strategy is based on the collaborative “Portfolio-Thread View" (PTV) that is being derived from the nature’s principle of “balancing opposites”. I hear someone surely asking a follow-on question - how is it different from the other predominant views such as - Strategic Positioning view (SPV), Strategy Execution/Operations View (SEV), Resource Based View (RBV) and Design Thinking View (DTV)? Before answering that question, let us refresh our memories with a strategy history refresher.

As practitioners, those of us who have practiced one or more of these dominant views as part of our strategic planning engagements would definitely agree with our observation – that these views, in most situations, end up creating conflicts with one another – thus, resulting in a tension, between the two key opposing business realities of “competitive advantages and aspiration structures”. Interestingly enough – we had depicted this tension with a funny cartoon with a tug- of-war metaphor in one of our earlier blogs (http://strategywithapurpose.blogspot.com/2010/09/what-in-world-is-strategy-pitch.html).

By advantage - we mean the ease in which companies can sustain their competitive advantage for an extended period of time in spite of the emerging challenges like disruptive innovations, globalization, and reverse capital flows etc. By aspiration structure, we mean, how flexible are company’s system (including system wide processes, culture, relationships, and distinctive capabilities that are knitted together uniquely creating their brand identity) structures to help sustain those competitive advantages.

Sustaining competitive advantage for an extended period of time- though sounds easy – in reality, is one of the most challenging things to do- especially within old economy companies - partly because of their rigid system-wide aspiration structures. Trying to change those rigid system-wide aspiration structures (especially after it has been set in stone for 50+ years or so) invariably results in a tension – which has made the business leaders to experiment different strategic views with a hope to arrive at that magical “advantage/aspiration” mix - producing , just the right amount of optimal tension needed to win the game. Nevertheless, most leaders have not been 100% successful yet on that mission – partly because of the fact, these dominant views inherently do not help them to balance these opposites effectively and to arrive at that magical “advantage/aspiration” mix.

Hence, the need of the hour is to develop a fifth strategic view (or framework) called Portfolio-Thread View (PTV) – that inherently helps leaders to balance these opposites (advantage/ aspiration mix and its sub variables) and help them to answer the key strategy question of “How do you win?” along with its three sub-part questions -
  • How do you win or increase the value for your key stakeholders (shareholders, customers, consumers, partners and suppliers alike)?
  • What is the optimal advantage/aspiration mix that uniquely creates the DNA of your brand/firm (or the so called “sustainable competitive advantage/aspiration” mix) that is difficult to be emulated by your competitors?
  • How do you align that DNA with your Portfolio-Thread elements?

PTV is a blended “collaboration driven, purpose-profit balanced, boundary-less based, pull value chain driven, portfolio-theme view” – and, in a way, it is unique, because of its ability to answer these three questions effectively with a set of “what if scenario” based “balancing opposites” type dashboards - that is built on top of the set of interlinked purpose-profit balanced, boundary-less based, pull value chain driven, portfolio structures/ schema (i.e. product, services, experiences, market, investment, process, competency, sustainability, risk etc) that are further knitted together by key strategic themes (i.e. differentiation, low price, globalization, disruptive innovation etc) as outlined in our earlier blog (http://strategywithapurpose.blogspot.com/2010/06/purpose-driven-systemic-strategic.html). This dashboard driven model not only helps leaders to balance these portfolio variables within the context of their advantage/aspiration mix simultaneously, but also help them to arrive at the magical “advantage/aspiration mix” that is custom tailored to their specific set of market, resource, operation and creative needs –so that they can win with an absolute certainty.

Within that winning spirit – we then did a deeper dive analysis using an Advantage Aspiration Portfolio (AAP) Framework (as outlined in the top of the page) - to gauge where all of these dominant strategy views stand viz-a-viz to our PT strategic view - to help develop a compelling case for PTV. Before going too much further with our analysis, let us reiterate an important fact- that all of these four dominant strategy views are not only being widely practiced within various quarters today, but also have proven to be effective for most companies.

With that said, let us first recap the compelling cases behind each and every one of these strategic views to get a perspective of how the strategy landscape has evolved in the last 50+ years – before building a case for PTV. The Strategic Positioning View (SPV) was developed in the 70’s with a compelling case for choosing the right market entry options (while market conditions are stable) and was heavily promoted by leading thinkers like Michel Porter, whereas the Strategic Execution View (SEV) was developed as a compelling case to answer the criticism of the execution practitioners - who argued that relying too much on market share and financial algorithms have started slowing their productivity and so, they stressed the need for an execution view – with an emphasis on optimization, continuous improvement, quality and process reengineering -and, promoted heavily by leading thinkers like Ram Charan and Larry Bossidy.

While SPV and OTV were still widely practiced within various quarters during the 70’s and 80’s –an economic shift silently happened in the 90’s in terms of the capital moving from the developed economies in to the developing economies as part of the globalization phenomena -and so companies quickly realized the need to scale their expertise and resources for the global market -and hence the Resource Based View (RBV) became the new mantra (promoted heavily by C.K.Prahalad and Garry Hamel) with a compelling case that “effective companies must have set of core competencies” to win with an absolute certainty.

While all of these three views were being practiced in different quarters in the nineties- the dot com era slowly came along - and so did, the compelling case from the “design thinking” promoters – and they argued that all of these analytics driven views (SPV, OEV and RBV) try to put strategy in a box and so they do not necessarily guarantee competitive advantage for an extended period of time - and hence, they proposed a synthesis focused Design Thinking View (DTV) with a mantra – “let out-of-the- box strategic visions and creative ideas bloom with an innovation focus using right- brain based design thinking insights, before we start deciding the patterns of strategic choices” – and most recently, this view has been promoted by Roger Martin and Roberta Verganti.

Interesting history – isn’t it? What does these 50+ years worth of strategy history tell us? - None of these four views seem to meet all the needs, at all the time, for all the markets/industries. In other words, while all of these strategic views definitely have helped companies to devise effective strategic plans, not all of them have equally balanced the “advantage/aspiration” mix effectively – the key prerequisite for winning with an absolute certainty. With this renewed insight and finding – we placed all of these strategic views within the AAP framework – with “degree of aspirations” on X axis and “degree of advantages” in Y axis as outlined below and on the top of the page.
  • SPV – addressing the market centric view – wherein companies can win by selecting the niche market entry options - with a key assumption - that those niche markets eventually can become their stronghold - and pretty much make competition irrelevant for them – which kind of gives a perception that this view can work well regardless of how flexible (or less flexible) their aspiration structures are – and hence, at times, is being misinterpreted to be creating class differences among various markets and industries.

  • SEV – addressing the execution centric view – wherein companies can win by optimizing their processes, practices and eliminating waste/idle capacity with a leading edge analytics/statistics (Six sigma, lean, regression etc) tools and techniques with a value engineering focus – but at times, is being misinterpreted to be resulting in an over engineered initiatives in certain markets/industries that do not produce sufficient returns to justify those initiatives.

  • RBV – addressing the core concentration view - wherein companies can win by focusing on their core businesses i.e. by finding creative ways to unleash the untapped value from their core, with a set of core competencies – but at times is being misinterpreted to be promoting too much cost containment mindset stifling the edge focused disruptive innovation.

  • DTV – addressing the design thinking view – wherein companies can win by “trial and error” based innovation culture and willingness to experiment with “out of the box” ideas and directions, and adjust the efforts based on the experimental learning every step of the way – but at times, is being misinterpreted to be lacking focus, discipline and coherence.

  • PTV – addressing some combination of the above four categories – wherein companies can win by balancing their opposites to their best – i.e. advantage/aspiration mix –that is further custom tailored to suit to their individual market, resource, operation and creative needs with a set of analytics/synthesis focused (left and right brain focused) interlinked purpose-profit balanced, boundary-less based, pull value chain driven portfolio structures and themes – to help face the challenges of 21st century and to win with an absolute certainty (http://strategywithapurpose.blogspot.com/2010/10/transforming-so-what-opposites-in-to-so.html) – but at times, can potentially be misinterpreted as - “being all things, to meet all needs, for all industries”.

As we recognize from these “advantage/aspiration” mix driven strategic view placement analysis- interestingly enough, four of these strategic view categories fell perfectly in to those four quadrants of the framework with an exception of our PTV – which got placed in the centre of the framework covering all the four quadrants. What does this tell us? There is a need for a fifth view with a flexible set of “collaboration driven, purpose-profit balanced, boundary-less based, pull value chain driven, portfolio structures and themes”- to effectively balance these opposites and help answer these three key questions – with an absolute certainty to win at all times. And so, it is time for companies to accept this new reality (i.e. PTV strategic view) and start using them in their strategic planning engagements to help answer these three winning questions effectively - to meet the emerging ever changing challenges of the 21st century and to win with an absolute certainty. However, by no means – we are suggesting that other views have lost its relevance – I guess “doing both” is the way to go in the words of Inder Sidhu and Roger Martin and as summarized in the poem below.

Realizing the need to weed the strategic creed’s advantage-aspiration clutter, (then)
Rebranding that creed with nature’s “balancing opposites’ principle breeder, (by)
Renewing that aspiration fixture (of SPV) with a flexible structure,
Re-energizing that engineering overture (of SEV) with a good-enough engineering culture,
Rejuvenating those core competencies culture (of RBV) with an edge competencies glitter,
Refreshing that free thinking sculptor (of DTV) with a process rigging stature, (by)
Reinvigorating them all with a fifth venture, with an optimal advantage-aspiration mixture, (and delivered by)
Rendering them all with a “collaboration driven, purpose-profit balanced, boundary-less based, pull value chain driven, portfolio-theme structure”, (that is)
Reverberating the corridors of the world’s elite’s strategy theatre,
Raising the bar to a newer glitter with a startling strategy whisper– purpose driven strategy is the new clatter to rattle!

Friday, November 19, 2010

Yet another Compelling Case for Purpose Model Driven Purpose Bundles

On the other day – I had lunch with one of our business network contacts and the conversation slowly turned towards our last week’s blog on sensitivity analysis framework (http://strategywithapurpose.blogspot.com/2010/11/sensitivity-analysis-framework-for.html). More specifically, his hypothesis was that- the granular value drivers covered within our sensitivity analysis framework (e.g. pricing, volume, COGS etc) is useful only to develop “bottom line focused operation excellence strategies” and not the top line focused innovation strategies. While I agreed with him in principle, I immediately pointed out the other variable within the ROIC called “VELOCITY” (or, the capital intensity as some folks call it when we reverse denominator and numerator) is what helps us to develop the top line focused innovation strategies. What do we mean by that? Let us go back to our ROIC formula –

ROIC = NOPAT/Sales x Sales/Capital => Operating Margin x Velocity

While most organizations focus on improving the operating margin within this ROIC equation- few in addition, also simultaneously focus on increasing the velocity to improve the ROIC from both top and bottom line standpoint. They usually do that- either by increasing their top line revenue (using innovative product lines and/or new business models) or by reducing the capital intensity by smart integration strategies (vertical, tapered and/or forward/backward integrations) and/or efficient sourcing strategies.

I ended up convincing him with few real world examples – where one of our client had specifically asked us to help them to increase their velocity – given the fact that consumers in the recent months have started to be very value focused (partly because of the down economy) when it comes to shopping household and personal-care products. One of the biggest conundrums facing this client is - the emerging shift in value perception is no longer a short term phenomena anymore– rather, as most experts predict, it is going to continue to stay even after the economy starts coming back again- which means it is imperative that consumer focused companies to have a value strategy if they already do not have one. For example, Store brand market shares, while stalling in the last spring after a big run up, resumed their growth this summer. While packaged food and beverages did perform reasonably well as people ate out less, store brand shares have grown in F&B categories as well.

When we analyze these store brand growth numbers holistically within its context, there is an interesting dynamics emerging– although consumers have cut back on commodity type packaged goods, they are still spending money on electronic gadgets (Smart phones, HDTV’s and iPads etc) – despite the fact many of them have high monthly subscription fees on top of their already high price tags. What does this tell us? Consumers, of late, have redefined their value equation – i.e. being value minded is not necessarily buying cheaper goods anymore– rather, it is being smart in purchasing products that solve their unmet needs with a longer lasting “higher award status” or experience.

In other words, consumers in their mind have started categorizing the products and services based on their consumption experience patterns as – “value-add vs. non value-add” - not just based on the price tags anymore, but also, based on the perceived long lasting award status those products (and services) leave behind them. Within the context of this renewed insight - the biggest innovation strategy question facing most consumer focused firms regardless of the industry vertical is- how to innovate with an end goal of increasing consumers’ award status, yet increasing the velocity from financial algorithm standpoint?

Before answering that question- first things first – let us recollect the value definition we had laid out in one of the earlier blogs - Value from consumers standpoint is “… the proposition of experiencing the “good enough” product/service consumption attributes (it varies depending upon the product/service) within an acceptable price point that is accessible and relevant to their life situations and experiences.”. In other words, the term value to consumer is the summation of all the experience attributes divided by the price they are willing to pay.

Consumer Value Equation = Top Experience attributes/Price

Within the context of this foundational definition – we sharpened our consumer insight analysis to answer our innovation strategy question using the Award Status Portfolio (ASP) Framework as outlined in the top of the page. Our research suggests that more than 50% of the consumers are looking for better “award status” based value deals when it comes to consumer products/services - followed by another 30% who are willing to exchange their high price commodity products for high price “value-add” products. This is definitely an alarming trend for commodity players and so we did some “deeper dive analysis” on the spending patterns of consumers across various product/service categories.

The insights we garnered was all the more intriguing - that consumers have altered their spending patterns not just based on usage needs, but also based on the way they map their preferred products/services to their personal award status experience. With this new insight and findings – we grouped the products/services under five award status categories and plotted them in the award status framework – with “degree of spending” on X axis and “degree of award status” in Y axis as outlined below and on the top of the page.
  • Commodity – addressing the basic commodity experience -where consumers are cutting down on paying higher prices for national brands as 80% consumers now believe that store brands are made by the same manufacturers that make the national brands - especially when it comes to packaged goods and household items.

  • Standard – addressing the standardized or mechanized product and/or service experience - where consumers, although are less likely to reduce their spending, yet are not willing to increase their spending e.g. some mechanized packaged/ household services and subscription based utility/content/TV services.

  • Transformational – addressing the “inner” soul enhancing experience – where consumers are likely to increase their spending to increase their inner award status e.g. H&W focused nutritional supplements, Workout services, books, CD, music, SPA etc.

  • Value-Add – addressing the “outer” prestige enhancing experience – where consumers are likely to increase their spending to increase their outer award status e.g. electronic gadgets, HDTV, value-add content services like context TV, iPads etc.

As we recognize from these “award status” based category maps – consumers are likely to increase their spending on higher award status experience providing “value-add” categories than other categories– and above all – consumers are also trying to balance their consumption experience portfolio on a daily basis to arrive at their personalized “Blended value” category. This is where our concept of “inter industry vertical” based purpose bundle strategy - of bundling commodity and standard products with transformational and value-add categories-come in to the picture. As it turns out, it is also a win: win strategy (as outlined in one of our earlier blogs), for both consumers and providers alike – as consumers see the synergistic value of the “cross industry” purpose bundles - i.e. sum of the total bundle award status is higher than the individual part’s award status.

What does this tell us? There is a new reality or an “award status based value equation” seems to be evolving when it comes to consumer spending - and so, it is time to accept this new reality and devise an appropriate “purpose model based purpose bundle strategy” to answer this emerging award status perceptions of 21st century consumers. However, by no means – we are suggesting that commodity products and services have lost their relevance – rather, it is time for commodity players to come up with more of value-add/innovative products and services with a higher award status – where, historically, CPG/Retail firms have been lagging behind the electronic gadget firms. I guess the right answer is “doing both” (i.e. innovating commodity product categories and formulating purpose bundles) is the way to go in the words of Inder Sidhu and Roger Martin and as summarized below.

To whom shall we ask… and whom shall we send (to find)
Those who are seeking for this “award status”?
Pay attention pals
, sit tall, and don't look so content!
For it is an honor coveted by us all, the normal consumers
It’s been dreamed of and prayed for so long …
Reflecting the true inner self esteem of the highest scale
No bribes, no pleas, no threats will prevail – and so,

It is time that we fulfill that dream, by

Balancing "value with spending" to achieve that aim,
Reducing the “commodity” quadrant as there exist few choices to claim,
Keeping the “standard” quadrant as basic necessities remain the same,
Sustaining the “transform” quadrant to enhance the inner exclaim,
Increasing the “value-add” quadrant to enrich the outer fame, (yet with a goal of)
Reclaiming the “blended value” quadrant as it is the ultimate acclaim, (so…)
The name of the game tomorrow is for "purpose bundles" to proclaim!

Friday, November 12, 2010

Sensitivity Analysis Framework for Improving Profitability and Valuation

Some of the ideas we have been promoting in the last few weeks – appear to have caused some buzz within the blogosphere- more specifically, our sustainable valuation formula, definitely has caught the attention of few readers (http://strategywithapurpose.blogspot.com/2010/11/purpose-profit-balanced-sustainable.html). One of our fellow readers made a casual observation - “our simplified valuation formula [i.e. V= NOPAT x (1- g/ROIC)/ (WCCP-g)] does not seem to take in to account the impact of all key value drivers (e.g. pricing, margins, volume, COGS etc) –and, hence it trivializes the whole valuation exercise”.

While we agree that it is a simple formula, it is an accurate one from financial algorithm standpoint. The reason we took McKinsey’s “Zen of Corporate Finance” as the base in our article last week was -to build a simple yet compelling case for discounting the free cash flow with a purpose value driver (WACP) very much like how WACC is used to discount the free cash flow. At the same time, we definitely empathize with our readers –who, otherwise perform the detailed valuation exercise with multiple spreadsheet pages of DCF cash flow projections and value driver assumptions. We still recommend our readers to go through the similar DCF process and validate the result with our summarized formula. In other words, our formula is more of a validation formula than a working formula.

The question however is – does that mean our sustainable valuation formula do not take in to account the impact of those granular value drivers? Before answering that question, let us first dissect ROIC within the valuation formula

ROIC = NOPAT/Sales x Sales/Capital => Operating Margin x Operating Velocity

As we further inspect the Operating margin and its sub components– some of the key value drivers that contribute towards the operating margin are – Price, COGS and Volume - which are further dependent upon promotion scenarios (including their depth and frequency), competitor responses, elasticity and boundary conditions to name a few. We sure can expand our formula mathematically to explain how these value drivers are indirectly accounted for within our valuation formula. However, it does not communicate the causal chain relationship effectively, and so we thought that it is a worthwhile exercise to come up with a sensitivity analysis framework to show the impact of these value drivers on margin using a real world case study – clearly showing the impact of price changes on volume (& hence on margin and the overall NOPAT/enterprise value).

Our goal for this case study is to develop a flexible framework model from the methodology we had used for one of our client CPGR-Co Inc. (our fictitious CPG/Retail Corporation pronounced as ZipGyarCo) who had asked us to help them to increase the profit by 10% (& hence enterprise value) by increasing (or decreasing) price by a certain percentage, yet without substantially impacting the volume.

The Working Framework Model

As part of that exercise, we decided to develop a working framework model (and a mathematical formula) of linking all the input and output variables that contribute towards increasing the operating margin, profit and valuation as outlined in the schematic at the top of the page. With all things being equal (consumer purchase criteria, brand perceptions, trade promotion rates and efficiency etc), we quickly realized that there still exists few cost differences (e.g. supply chain/distribution costs) across the market regions and hence we decided to develop a region specific pricing model (as opposed to one mammoth corporate model) to better simulate the real world business conditions. Within that approach, we then divided the CPGR-Co’s markets in to 5 RMA’s (East, West, Central, South and North) selling all of their top 5 Product models or package sizes (P1, P2, P3, P4, P5) – resulting in 25 model cells (i.e. one model each for each cell). Please note that the more granular we divide the markets the more accurate our models will be.

The objective of our case study was to develop an analytics based pricing model with a regression based mathematical formula producing the following projected results.

• Recommendation to price up or down in each cell.
• Projected volume, profit, share and valuation outcomes from price changes.
• Optimization recommendations for competitive response scenarios.

To achieve these objectives - we went through a systematic problem solving process with the following steps.
  1. Calculate VCOGS matrix – at the product model level for each RMA.
  2. Arrive at the optimum adjusted trade price (from retail price) to better negotiate with retailers/vendors.
  3. Load the Product/RMA matrix with historical volume and price data from IRI/Nielson.
  4. Develop the analytics based CORE Pricing model with all the inputs, outputs and their interdependent relationship.
  5. Develop the equivalent log-log form mathematical equation simulating the core model- more specifically, develop a formula to arrive at the unit volume – which is a function of
    • Current price (e.g., P1)
    • Previous period’s price (e.g., P1_PriorPeriod)
    • Price of our other pack and/or model sizes (e.g., P2, P3)
    • Price of our competitors (e.g., CPCp1, CPcp2,C Pcp3, CPcp4)
    • Brand Equity impact
    • Other ancillary variables (e.g., Holiday, Trend etc)

The corresponding equation format is

New Volume = e0 + b1*ln(PP1) + e2*ln(PP1_Prior_Period) + e3*ln(PP2) + b4*ln(PP3) + …
e5*ln(CPCP1) + e6*ln(CPCP2) + e7*ln(CPCP3) + e8*ln(CPCP4)…
e9*Brand Equity + 110*Holiday …


  • e1 - own price elasticity (negative) - “If we raise P1 price by 1%, P1 volume will change by e1%”.
  • e2 - lagged price impact (positive) - “If we raise P1 price by 1% this period, next period’s P1 volume will change by e2%.
  • e3 and e4 - own model size cannibalistic -elasticities (positive) - If we raise P2 price by 1%, P1 volume will change by e3%.
  • e5-e8 - competitive elasticities (positive) - “If competitor raises CPcp1 price by 1%, P1 volume will change by e5%.
  • e9 - Brand Equity impact (could be negative depending upon the depth and frequency of the promotion and where the firm is on the innovation maturity curve) - Every additional period we move forward in time, we expect P1 volume to change by e9 * 100%.
  • e10 Holiday impact (positive) - For holiday periods, we expect P1 volume to be e10*100% higher than for non-holiday periods”.

6. Calculate the price elasticities for three scenarios (SELF, SELF CANNIBALISTIC and COMPETITIVE) based on IRI/Nielson data.

7. Adjust the results based on competitor responses.

8. Adjust the results based on boundary condition analysis.

9. Use economic model to further optimize the results across various regions/accounts.

10. Finalize the projected volume, profit, share and valuation changes from price changes.

Value Driver Strategy Execution Considerations

As we can recognize from the steps above, we can easily extend this working model and mathematical formula for other value drivers like COGS containment, inventory cycle reduction, idle capacity containment (& few more) as well for arriving at a similar set of recommendation/results for improving profitability and valuation. However, one of the big challenges in implementing those recommendations within large organizations like “CPGR-Co” is building the consensus across various stake holders – from the standpoint of - first identifying the right set of appropriate value drivers, developing the right framework, arriving at the the action plan and finally implementing them.

For example, although there is a substantial opportunity to achieve profit/valuation goals by making the pricing changes as identified by our analysis - executing those price changes in a timely manner, is not an easy thing to do- given the fact pricing is embedded in a wide range of broader business decisions like strategy development (e.g., capacity utilization, new product pricing), price optimization (e.g., average price targets) ,trade strategy and sales execution (e.g., EDLP vs. HiLow) scenarios. In addition, the optimal pricing decisions require the input and expertise of a wide range of domain “experts” from both business units and front line sales strategy teams.

To circumvent these execution challenges, we made a recommendation to our client “CPGR-Co” to form few cross functional Value Driver Councils (VDC’s) to coordinate and proactively shape these value driver decisions (e.g. pricing decisions) across accounts, channels and brands. More specifically, within the context of our value driver council for pricing, the VDC will be chartered with the following
  • Define pricing strategies/moves across the portfolio.
  • Identify other value drivers that compliment pricing.
  • Communicate approved pricing strategies to the field.
  • Ensure region/account-level trade policies fit with strategy.

In addition, create a forum or platform for regular review of pricing trends, and other value driver needs by analyzing

  • Market trends, competitor behavior
  • Performance of new products
  • Performance of competitor products

Finally, also act as the steering committee or governance layer for long-term pricing improvement

  • Identifying “next level” pricing challenges
  • Pricing pilots/tests—spreading best practices
  • Upgrading analytics foundation (tools, processes, techniques, policies and organization models)

“Winning by Analytics” Considerations

As we can clearly recognize from the framework model steps and VDC’s governance layer requirements, Analytics is critical for successfully executing the tasks in every step of the way. We cannot stress the importance of analytics enough - that we encourage organizations like CPGR-CO to develop a solid analytics foundation with a right set of tools, techniques and templates to reach the winning level of "Level 5 analytics maturity" as promoted by Davenport & Harris and as explained in some of our articles published by Academy of Business Strategy (http://theacademyofbusinessstrategy-businessanalytics.com/). Within the context of that winning spirit, we specifically encourage our client CPGR-Co to develop the following set of tools.
  • RMA/Product Matrix level optimization tool, techniques and templates to develop tailored pricing decisions across pack and model sizes and RMAs.
  • IRI /Nielson price elasticity tool, technique and templates to estimate profit and volume impact of these decisions across competitive scenarios.
  • Average price to trade calendar tool, techniques and templates to estimate impact of trade calendar scenarios on average price/unit.
  • Category management tool to develop compelling cases to support field execution of pricing decisions.
  • Forecasting and sales management tool to provide input to financial management system and to track progress against pricing targets in the form of “what if analysis based” drill down dashboards.

Bottom Line:

At the end of the day – developing winning strategies is definitely a great thing to do – but, institutionalizing them is all the more important - as strategy in its "execution form" is what brings the tangible outcome to stakeholders. Let us face it - fully empowered price strategy decisions (or for that matter, any other value driver strategy decisions) requires extensive consensus building in most organizations- and this is where- our Value Driver Councils (VDC) come in to the picture. So, it is a call to action for our client “CPGR-Co” and other similar clients-not only to develop winning strategies to improve profitability (and valuation), but also, institutionalize them using VDC’s.

Friday, November 5, 2010

Purpose-Profit Balanced Sustainable Value Equation Framework

Happy Diwali (or the festival of light) to our readers from both east and the west alike!

Based on the extensive coverage of purpose-profit value concepts in the last few weeks - one of our fellow bloggers posed an informal observation – "while it all sounds great to talk about the purpose agenda, the thing that matters the most at the end of the day is just profit – as profit is the primary variable within the valuation formula". As we thought more about this observation, there seems to be some merit in that argument- given the fact, most of the modern day valuation frameworks are being built with just profit variables- and so, we decided to come up with a valuation hypothesis - with an enhanced WACCP (Weighted Average Cost of Capital and Purpose) that is calculated as a weighted average of WACC and WACP.

Let us face it – the reason we discount the free cash flow (FCF) with WACC within the valuation formula is - that it does not make sense to valuate (or run) a business that does produce the minimum hurdle rate of WACC- like wise, our hypothesis also proposes that - it does not make sense to valuate (or run) a business that does not meet the minimum purpose hurdle index of WACP. Assuming we have a behind-the-scene formula for accurately arriving at the WACP index (using the purpose scores we had proposed in our previous blog) that is further "weight averaged" (with WACC and WACP) with appropriate weight factors– our renewed sustainable value equation will look as outlined on the top of the page.

At this juncture, we also would like to remind our readers that this is a hypothesis based formula and so will need lot more analysis and research before we can publish this as a working formula. Under the normal circumstances where WACC and WACP happen to be the same (say 10%) with an equal weight factor(say, 0.5+0.5), then our sustainable value equation formula will indeed work like the Mckinsey’s valuation formula. On the other hand, on scenarios( with ROIC of 15% , growth rate of 5% and WACC of 10%), where WACP is changed by a percentage point, we have seen the valuation changing by (+ or - ~10%), the intended effect we were hoping for. However, lot more regression testing and research needs to be done before proposing this as a working formula - and until that time, please treat this as a hypothesis formula.

With this renewed sustainable value equation definition as the foundation– we then did some more qualitative analysis to strengthen our hypothesis using the Purpose-Profit balanced Value quadrant framework as outlined on the top of the page. With the tough economic conditions still lingering- most of the H&W/Green minded consumers, of late, have started changing their buying patterns - that they have started to buy their products and services only from those corporations whose purposes and values align with that of theirs. In addition, our research has also found that over 35% consumers say that they are likely to do business with only greener brands (source: “2010 ImagePower Green brands Survey) and among them, a substantial percentage of consumers are also looking for a better value deals while buying their products/services.

This is definitely a new trend and another compelling reason for corporations to be purpose minded - and so we did some more “deeper dive analysis” on the extent of purpose adoption within various corporations. The insights we garnered was all the more intriguing - that most corporations, not only have started pursuing purpose initiatives , but also have started revising the way they measure their internal successes. In other words, corporations have started measuring their performances with both profit and purpose KPI’s like corporate sustainable index and corporate social responsibility index etc.- which is very encouraging.

At the same time, with all things being equal, the extent of the purpose adoption, however varied from corporation to corporation (and industry to industry) - and rightfully so, our valuation numbers did end up being all over the map as well. With this variety of values in our findings – we then grouped the resultant values under five value categories and plotted them within our framework – with “degree of profit” on X axis and “degree of perceived purpose” in Y axis as outlined below and on the top of the page.

  • Surviving Value – addressing the “ordinary outcome” quadrant -where most corporations start (or arch) their purpose journey from. As the name suggests – although most corporations can survive by being on this quadrant for a period of time, they are advised to move on to other quadrants to be relevant in the 21st century.

  • Sacrificial Value – addressing the “extraordinary" outcome” quadrant where purpose driven corporation’s angle there for a period of time, before moving on to the other quadrants. These are corporations who go the extra mile to fulfill their mission – at times even at the cost of not meeting their profit goals. Although not a place to be in for a longer period of time, definitely a worthwhile quadrant as it teaches us the discipline of what it takes to practice what we preach.

  • Startling Value – addressing the “aggressive outcome” quadrant – where corporations aim to achieve the startling profit performance with “just good enough” purpose agendas to keep the momentum going. Although, it is a good path way quadrant to be in, sustaining the profit performance without sufficient purpose agenda for a longer period of time is not an easy thing to do -and so, they are advised to move on to other quadrants!

  • Soaring Value – addressing the “utopia” quadrant – where corporations aspire to achieve the perfect performance numbers in both purpose and profit dimensions. Although, an ultimate path to aspire for, a very difficult quadrant to sustain the numbers for a longer period of time!

  • Sustained Value – addressing the “optimal outcome” quadrant – where corporations ace towards achieving the optimum values in both purpose and profit dimensions and it is indeed a perfect quadrant to be in - as it produces "sustainable purpose profit balanced value" for the long haul!

Interestingly enough, four of these value categories fell perfectly in to the four quadrants of the framework with an exception of one category – which got placed in the centre of the framework covering all the four quadrants. What does this tell us? There is a new reality or a “new sustained value equation formula” seems to be evolving within the context of corporations balancing purpose and profit when it comes to assessing their intrinsic value. This new reality - is indeed a wake up call for most corporations – and so, it is time that corporations to reevaluate their internal business units and capital investments with this sustained value equation mindset to respond effectively to the emerging consumer spending pattern changes towards purpose brands. This does not mean that businesses have to become charitable organizations – rather, the optimal goal is acing in to the sustainable value quadrant as outlined in the framework and summarized in the poem below.

We have a dream, where all businesses bubble up by,
Balancing profit with purpose as their ultimate way, (via)
Arching in to the “surviving” quadrant as the initial lay,
Angling through the “sacrificing” quadrant as the mid day, (yet)
Aspiring to the “soaring” quadrant as the ultimate way, (but),
Aiming for the “startling” quadrant as a path way, (yet)
Acing in to the “sustaining” quadrant as the best way,
That’s the dream; we wish that it comes true today!

Monday, October 25, 2010

Is Strategy the Salt of the Business?

With our “so that” strategy - called purpose innovation- receiving some positive reviews in the last few days, one of our fellow bloggers came up with a yet another “so what” question – i.e. “What if, our competitors also come up with a similar “so that” strategy? We agree that it is valid question - as most corporations these days invariably try to emulate the successful strategies of competitors, with a hope to reap the benefits of the second mover advantage. The question however, is how do we devise a holistic, yet well guarded strategy framework - that makes it difficult, or at a minimum prevents them from encroaching in to our first mover advantage. While no one can guarantee a 100% bullet proof strategy framework- ours, perhaps comes close to it, given the fact, it is being derived, not only from our unique purpose driven strengths/core competencies, but also, from our weaknesses - that are then balanced using nature’s principle of “balancing opposites”.

As it turns out – our strategy framework is built using our earlier “so that” strategy (i.e. purpose innovation) as the cornerstone – that is further augmented by three of its sister strategies - knitted together by PURPOSE in the middle balancing them using the “forces of attraction” -as outlined in the picture on the top of the page. Sounds too abstract, isn’t’ it? Well… as usual, we searched scriptures and few other sites for an appropriate metaphor to explain it – and the SALT metaphor fitted the bill this time, and so, salt is the emcee today for our additional inspiration.

Rightfully so, James Beard proclaimed - Where would we be without salt? - And, I couldn’t agree more. Without salt, our taste buds indeed will become senseless – and equally so, the seasoning of the food, as such, will also become meaningless! With that said, it is also fair to ask ourselves - while we all enjoy the seasoning flavor of salt in our foods- not sure, how many of us have paid a closer attention to some of its other remarkable usages!

With “Saltiness” as its core feature, salt exhibits itself in four different usage dimensions depending upon the way it is being used. First and foremost - salt is the primary ingredient of food seasoning as echoed by James Beard. In addition, as a preservative, salt prevents the decay & degradation of food –and as a disinfectant, it prevents the body parts from becoming septic (and even heals some ailments)-and, finally, it also acts as a thawing agent melting the ice on the roads, thus helping us in our busy morning commutes. I am sure- if we inventory some more, there will be few more ancillary usages as well.

Interestingly enough - our 10-box strategy model (http://strategywithapurpose.blogspot.com/2010/07/where-eagles-dare-strategies-dare.html)
aligns perfectly with this salt metaphor - and rightfully so, our strategy framework is a logical extension of the 10 box strategy model – that is further enhanced by “PURPOSE” in the middle balancing the four profit strategy dimensions – using nature’s “forces of attraction” principle -as listed below (and on the picture on the top of the page).

  • Differentiation strategies (e.g. our “so that” strategy called purpose innovation) to help us to stand apart in the market place leveraging our strengths and core competencies - equivalent to the seasoning dimension of salt (Offensive growth strategy).

  • Prevention strategies to overcome/hide weaknesses with one’s strengths (and thereby preventing the onslaught from competitors) – which is equivalent to disinfectant dimension of salt (Defensive strategy).

  • Exploitation strategies to exploit competitor’s weaknesses – equivalent to the “Thawing Agent” dimension of salt (Offensive growth strategy).

  • Mitigation strategies (i.e. risk mitigation strategies) to reduce one’s vulnerability our weaknesses – equivalent to the preservative dimension of salt (Defensive strategy).

This all-inclusive, well guarded strategy framework - not only helps us to go on the offensive, but also helps us to defend ourselves from the offensive onslaught of the competitors. Yet another insightful part of this framework is the way, PURPOSE manifests itself in four profit strategy dimensions within the context of its seasons - very similar to- how salt, with its core feature of SALTINESS (symbolizing purpose) manifests itself in four different usage dimensions within the context of its seasons. As it turns out, salt with its core feature of saltiness - manifests in four usage dimensions simultaneously, within the context of its seasons-symbolizing the need for us also to “execute both” offensive (differentiation and exploitation) and defensive (prevention and mitigation) strategies simultaneously, as advised by Inder Sidhu and Roger Martin.

At the same time, it is equally important to highlight couple of seasonality insights we had covered in one of our earlier posts – a) balancing opposites does not necessarily mean assigning equal weight and b) seasonality also has other dimensions(place, money, markets etc.),apart from the primary dimension of time (http://strategywithapurpose.blogspot.com/2010/10/within-eagles-fine-nest-strategy-is-at.html). With that said, it is important to highlight yet another important seasonality insight – that, even a simple misstep of executing a wrong strategy within a wrong season at times could also cost us fortunes – given the fact profits do not flow equally to all players in all seasons. This is one of the reasons, that we might be better of assigning more weight factor for defensive strategies (than offensive strategies) especially in those markets where our competitors are very strong (which perhaps is their forte). In other words, choosing the right strategy mix (with the right weight factor for the four strategy buckets within the context of its seasons) is both an art and science, as there is no silver bullet for thriving in this highly competitive, yet ever changing business environment of 21st century.

As we further observe the characteristics of our strategy framework within the context of this salt metaphor – salt with its saltiness, not only, just seasons the food, but also, serves other needs( disinfectant, preservative and a thawing agent) by renewing/maintaining (i.e. “not losing” to be precise) its SALTINESS. Speaking of salt "not losing" its saltiness – let us not forget the fact that – if salt loses its saltiness, it cannot be made salty again. In other words, saltiness is what makes salt to perform all of its usage functions, and so, if it loses its saltiness- it is worth nothing. Similarly, if our strategy, for some reason loses its purpose, it is very difficult to regain the confidence in the minds of our stakeholders , and so, it is important, that corporations pay a closer attention to the process of continuously renewing (or maintaining) our purpose – to keep the four dimensional holistic profit strategy cycle moving – very much like how saltiness is constantly renewed (maintained) to continue its four dimensional salt usage cycle moving- as summarized in the poem below.

Oh, Salt of the EarthAren’t you the Strategy of the business also? With your,
Seasoning strength, you source the sustaining secret -for differentiation,
Thawing tactics, you tweet the tooling technique -for exploitation,
Disinfecting defense, you draft the deviation detour- for
power, you plant the precautionary prescription -for mitigation, yet, by
Renewing your “saltiness (purpose)”, you improvise our innovative iteration,
Oh, Salt of the business…Without you where will we be?

Tuesday, October 19, 2010

Transforming the "So What" Opposites in to a “So That” Strategy called Purpose Innovation

The last few posts on the topic of “balancing opposites” have definitely made our blog readers to pay a closer attention to the ideas we have been promoting in the fast few weeks. Coincidentally enough, on the other day, one of our readers came up with a “So What?” question– which, in our opinion is a great sign – as, it is just a matter of time that they will transition from the “so what” camp in to the “so that” camp, as alluded in one of our earlier posts (http://strategywithapurpose.blogspot.com/2010/09/transforming-what-aboutso-what.html). With that said, we are going to dedicate this post to answer that specific question- i.e. how do we transform these “so what” questions in to a “so that” strategy called “purpose innovation” within the context of balancing opposites?

First things first... what is this purpose innovation? As depicted in the graphics on the top of the page– when core and edge (or, in general, when opposites) are balanced , the “forces of attraction” from the core and edge participants of various related and unrelated industry verticals come together to unleash their synergistic purpose value in the form of a powerful innovation called - purpose innovation - with its three sub components -
  • Boundryless purpose models - A stirred up view of edge opportunities, in the form of a “pull value chain” disrupting the traditional boundaries of related and unrelated industry verticals (CPG, Retail, Telecom/Hi-Tech, health care, Pharma, Insurance, Banking etc.) – who are knitted together with a “forces of attraction” from the “purpose value opposite pairs” such as Health &Wellness/Taste & Beauty, Sustainability/Maintainability, Mass Market/Personalized, Shareholder value/Community value and Externality/Internality - to name just a few.

  • Boundryless Purpose bundles - A “causal chain” based dynamic bundle of products and services with a set of positive value incentives that are shared among all the players of the pull value chain (consumers and participants alike) who helped to create them- as incentives help catalyze collaborative action.

  • Boundryless Purpose platforms* - A flexible foundational platform design that help to change the characteristics of the underlying product and services without changing the platform design significantly using the emerging technology and manufacturing/supply chain best practices - a huge capital cost saver.

I hear someone asking - how is this purpose innovation different from open or institutional innovation? In our opinion, purpose innovation is much broader. While open innovation focuses on leveraging third party resources to support organizations’ product and/or business model innovations, institutional innovation, in some cases, also expands the scope to include the core operating processes of partner’s value chain – but, still within a single or related industry verticals. On the other hand, purpose innovation goes few steps further – by creating a “pull value chain” across both related and unrelated industry vertical boundaries in the form of purpose models, purpose bundles and purpose platforms – that are knitted together with a powerful “forces of attraction” from the consumer consumption driven, causal chain based, “purpose value opposite pairs” as listed earlier.

Pull Value Chain - Explained

This "pull value chain", unlike the push model encourages decentralized, yet loosely coupled interactions among its players from both related and unrelated industry verticals facilitating much broader type of collaborative innovation, using the “forces of attraction” from the purpose value opposite pairs. This attraction in turn inherently makes the participants to come together with a causal chain relationship, thus making them highly scalable with diverse, yet complimentary set of talented resources. This type of unprecedented scalability is being achieved because of the “distributed talented workforce"- regardless of their location or country where the pull value chain’s operations are predominantly executed.

Granted – in some situations, we will need the push management techniques for better control - however, they are used only on a case by case basis, and not as a norm. Hence, the push model organizations –typically go through a mindset shift to effectively harness the potential of pull value chain –which brings up another point - that the purpose innovations, in some cases also might override local product and/or business model innovations within the context of creating big picture value for all the participants - instead of creating the value for just one participant.

Pull value chain, in addition also pulls consumers with the same forces of attraction by providing valuable incentives in the form of purpose bundles. In other words, pull value chain makes consumers as passive virtual business partners within the value chain, thus making consumers as their lifelong partners creating a different kind of consumer loyalty -called “composite brand loyalty”.

The 3P’s (Purpose Models, Purpose bundles and Purpose platforms) Explained

Purpose models are the revolutionary game changing business models that not only just reinvent the firm from product/business model innovation standpoint, but also, mutate the DNA of the brand at the nucleus level and make them to be a part of a “pull value chain” composite brand. In other words, business models usually shuffle the value chain activities of the firm within the four walls of the firm (or at the maximum within the industry or related industry verticals) whereas, purpose models go few more steps further - shuffle the value chain activities of both related and unrelated vertical boundaries– and, then re-purposes the vision/mission of those brands (as both standalone and composite brands), with a causal chain based purpose bundles- that are knitted together by the “forces of attraction” resulting from balancing the “purpose value opposites” (i.e. the example value pairs as identified earlier).

Similarly, Purpose bundles are the causal chain based “consumer consumption” driven “day in the life” type dynamic bundles of products and services from variety of related and unrelated industry vertical providers that are bundled together by the “forces of attraction” from the “value opposites” – thus, providing a better value for the purpose minded consumers who are committed to a leading a purpose life style. For example, under this model, a Health and Wellness/Green minded consumer (who is also a passive partner of the pull value chain), will get a better value when they purchase a dynamic purpose bundle of “health insurance along with a variety of H&W based durables and non durable P&S and workout services” in a price that is in proportion to their purpose scores. The causal chain relationship rationale here is that- those consumers, who eat healthy organic food, apply natural beauty treatments to their bodies and exercise well will have a healthy life - and hence they deserve a better health insurance premium and so on and so forth. Extending the context of the this causal chain rationale, one can also say- that the more products and services consumers add to their causal chain - the more their purpose scores - and hence, better the value.

Likewise, Purpose Platforms are the foundational infrastructure enablers of the purpose models (and purpose bundles) providing the flexible platform design (with principles like JIT, lean manufacturing, tapered integration etc.) to help change the “relevance, access and value” characteristics of the underlying products and services - without significantly changing the platform design. This is a great value-add feature – that these purpose platforms are designed with a flexible design using emerging cloud based miniaturized manufacturing technologies (& nano- technologies) - as they help to change the characteristics of product and services without changing the underlying platform design – which is huge capital cost saver for the "pull value chain" participants.

Bottom line: History is filled with many examples of business concepts becoming successful – only when they “go along with the gradient” in alignment with the nature’s principles. And so, if history repeats itself (as it has done in the past), our purpose innovation has a great potential to be the next wave of disruptive innovation -as it, not only just disrupts the current “push value chain model”, but also, goes along with the gradient (in alignment with the “forces of attraction” principle from balancing the “purpose value opposites”) – as outlined in our blogs -and summarized in the poem below.

Opposites attract opposites for creation to procreate,
Positives exert negatives for the creature to illuminate,
Profits revert purposes for corporations to innovate,
Yet, likes retract likes for them to continue to be unlit,
Like the unlit* Almighty- as He has no opposites!

* That’s why Solomon among other wise men/yogis of yester-years, depict the Almighty to be residing in the inner most court in utter darkness- in alignment with nature’s “forces of attraction” principle -as evidenced in the scriptures of both west and east alike!

Tuesday, October 12, 2010

Within Eagle’s fine nest, Strategy is at its finest… on its crest, Innovation is at its best!

Courtesy - Google's eagle images assembled/modified with our inspiration

Over the last few days, I have received quite a few informal questions - the most notable one being is about -the recent “Redefined Value equation” principle, not complimenting our earlier principle of “Strategize from the Core and Innovate from the Edge”. In other words, how is it possible for “Core and Edge” to perform their respective “strategize and innovate” functions, and yet balance each other as a “cohesive whole” simultaneously?

While these principles might sound like a paradox on the surface –beneath them, they indeed complement one another. As I was thinking about the best way to explain this paradox, I was immediately reminded of our Eagle metaphor (http://strategywithapurpose.blogspot.com/2010/07/strategy-is-like-eagles-mounting-up.html) -and so, decided to go back to the eagles for additional inspiration. With most of eagle’s characteristics being already covered in our earlier blogs, I was definitely challenged to come up with yet another compelling inspiration to explain this paradox. However, with eagle being symbolized to the “Almighty God” in the scriptures- the mother eagle did not disappoint us again- with her never-drying reservoir of compelling inspirations!

With that said, I must admit that it is not an exaggeration to say that eagle’s life is full of poetical inspirations- whether it be their structural beauty, rhythmic energy or inspirational insights - and, today’s inspiration is no exception either–as it is about “the mother eagle stirring up her nest” within the context of its seasons. As I started visualizing this stirring up event in eagle’s life – I was amazed how God’s creatures are wonderfully made to be the best strategy teachers. In other words, the mother eagle herself has become our strategy teacher today, explaining this seemingly opposing paradox, with an eagleical* poetry –

Transforming our quest in to her inspiring thirst, by
Turning her fine nest in to strategy’s fine nest (finest),
Making her crest as innovation’s bee nest (best), yet
Sustaining her thirst without going to rest, until
Re-cycling our (strategic) zest in to her seasonal quest!

With all the pun aside, I guess it is time to stir up our inspiration! We all have seen eagle’s nest being knitted together very high on the branches of a tree or in the edges of a cliff. However, not many of us, perhaps, have had the opportunity to glimpse at it from inside though. Apparently, the mother eagle starts the nest knitting process with wild thorns, broken branches, sharp rocks, and a number of other construction materials like a seasoned “strategist/operator” from “Eagle Nest Inc”. But then, she lines up her nest with a thick padding of wool, feathers, and fur from the wild animals on top of them making it soft and comfortable for the eggs. By the time, the eaglets reach the flying age, the comfort of the nest make them quite reluctant to leave the nest. That’s when the mother eagle decides to stir up the nest. With her strong talons, she begins pulling up the thick carpet of fur and feathers, bringing the sharp rocks and branches to the surface. As more and more of the comfortable cushion gets plucked up, the nest becomes uncomfortable for the young eaglets to live there anymore– and eventually, making them to move on to its crest.

Similarly, by the time the core reaches its maturity (or the flying stage), the comfort of the nest, or the so called, continuous revenue streams indeed make them reluctant to innovate. That’s when our “purpose-profit balanced strategy” (like the mother eagle) must start “stirring up the core” with its strong talon like “differentiating strategies” -and pull up the thick carpet of “easy revenue streams”, thus bringing the reality of disruptive innovation opportunities (or threats) to the surface. As more and more of these opportunities come to the surface (both from within and from the competitors), the nest becomes uncomfortable for the core, and eventually making them to re-examine their successful products and business models- and to prepare them to innovate with an edge.

Yet another insightful part of this stirring up event is- how the mother eagle starts the stirring up process within the context of its seasons. As it turns out, the mother eagle takes good care of its eaglets during their growing up stages with a fine nest –symbolically making - “strategy to be its finest” (or in alignment with the strategize from the core principle). However, as the season starts changing – the same mother eagle, starts stirring up the nest (or disrupts the core) - symbolically making –“innovation to be its best” (or in alignment with innovate from the edge principle).

The stirring up event does not stop there either. The mother eagle (after stirring up the nest), apparently starts walking down deep in to its nest (eagle’s nest can be of 10 feet deep!), gathers all of its eaglets on to its wings, and then starts the flight to its crest. What happens in the air is all the more intriguing – the mother eagle, apparently starts shaking those eaglets off -just to teach them the strategy lesson– “what it takes to be an eagle”– symbolizing, how a “purpose-profit balanced strategy” is supposed to use an edge (or disruptive innovation) opportunity to disrupt the core. On situations, when those eaglets slip and fall – the mother eagle,apparently stoops down below, lifts them back on to its wings - and the acrobatic flight lesson continues till the eaglets start flying on their own.

As we observe this this end-to-end stirring up event - the mother eagle, not only, stirs up the eaglets, but also, shakes them off in the air, until they start flying on their own. Let us face it – had not the mother eagle started stirring up those eaglets (and shake them off in the air), those eaglets would be just enjoying the cozy life, never would have learned to fly at all (as there is no incentive for them to leave the nest). And, above all –they never, ever would have got the opportunity to build the nest of their own in the future (symbolizing the edge becoming the core in the following season) and make the eagleical cycle moving - very much like the” redefined value equation”, balancing “core and edge” within the context of their seasons- and, yet continuing the seasonal value equation cycle- (http://strategywithapurpose.blogspot.com/2010/10/balancing-opposites-using-redefined.html) as outlined in our earlier blog.

A point of clarification about seasons - seasons, (although primarily are defined with a time dimension), also have other dimensions (i.e. place, money, opportunity etc.), and so, our concept of seasons should take in to account all of those dimensions in a holistic manner. For example, while it might be relatively difficult to balance “core and edge” simultaneously within the time dimension, under the place (or opportunity) dimension, they both can be easily balanced simultaneously , provided they are executed in different business segments/geographical places (or different opportunity spaces) using one of the organization models, we had laid out earlier (http://strategywithapurpose.blogspot.com/2010/08/strategize-from-core-and-innovate-from.html) .In other words, within the time dimension of the seasons, we are better of sequencing core and edge -whereas within the non-time dimensions, we are better of executing them simultaneously.

Yet another point of reinforcement within this context is- our principle of “redefined value equation” is not at all against structuring the businesses in to core and edge (or stars and dogs etc.) – as these structures are very much needed for better manageability and faster decision making. On the other hand, what the “redefined value equation” encourages is that core and edge should be treated or given its due importance (not necessarily equal importance)- very much like how the mother eagle does both (caring and stirring/shaking) within the context of their seasons to make them to be part of a cohesive whole – which, by the way, was exactly the key complimentary point intended by our paradox (with those two principles) as illustrated on the “eagleical picture” on the top of the page.

Bottom line: The principle of “strategize from the core and innovate from the edge” is relevant only when we have the “redefined value equation” mind set - of balancing core and edge as a “cohesive whole” by giving their due importance within the context of their seasons -very much like how the mother eagle does both “caring and stirring /shaking” of their eaglets within the context of their life seasons- to keep the eagleical* cycle moving. With that said, I guess it’s time to come up with yet another poetical slogan – “Strategize from the nest, for the strategy to be its finest- and innovate from the crest, for innovation to be its best - all within the eagleical* seasonal quest”!
Source: Scriptures and few other Eagle research sites

Tuesday, October 5, 2010

Balancing Opposites Using a “Redefined Value Equation”

For those of you who have been following my blogs closely perhaps would have noticed a follow-up question that was asked within the context of my last week’s blog– how does this concept of “balancing opposites” work in the real world from strategy execution standpoint? Although, I had answered the question at a high level within the comments section (http://strategywithapurpose.blogspot.com/2010/09/strategy-is-it-marathon-sprint-or-both.html), the more I thought about it- the subject of “balancing opposites” is a much deeper one -and so decided to write a separate post.

As I started reading more on this subject- to my amazement, I quickly learned that the philosophers of yester-years from both the west and the east alike (Yin-Yang, Ayurvedha, Feng-Sue, UMO, Greek basic elements, Qur’an’s tenets, Sun Tzu’s art of war, and Solomon’s wisdom etc.) have not only used this concept to explain the ultimate meaning of life, but also, have used them to explain the ultimate reasoning behind the existence of human race - which clearly suggests that “balancing opposites” is a mystical process that is filled with enlightenment and wisdom -and so, leveraging their work to explain the relevance of this concept within the business world (using a “redefined value equation”) is more appropriate within this context.

Although, these opposites are distinct things on their own right, it is important to recognize that each of these opposites coexists by consent of their other half. For example, as we saw earlier in one of my previous blogs - the “concept of seasons” is what gives us the confidence that every opposite or down cycle in life or business has a beginning and an end. In other words, happiness cannot exist without sadness; therefore if we seek happiness, we are also destined to encounter sadness (in another season) because both depend on each other for their existence. Analyzing these interdependency of opposites with a key natural principle “Like repulses like and opposites attract each other ” – will clearly help us to come to the conclusion that “balancing the opposites” within the context of their respective seasons is critical for us to maximize life or business’s outcome.

For example, on the surface, cost containment (bottom line focused) and innovation (top line focused) strategies might sound like seemingly opposites -very much like the opposing pairs of Solomon. But, if we think about them within the larger context or objective (say, to turnaround and grow the company) — cost containment (for a season) is indeed a stepping stone for innovation (for a new season) – which kind of implies that “balancing opposites” within the context of the larger objective is the way to go, as long as we do not mix them up within the same season– in the words of Solomon. In other words, both of these strategies might sound like polar opposites when we weigh them in isolation- but, when we look at them within the context of the larger purpose governing those seasons — we can clearly recognize that they are complimentary to each other provided they are executed within the context of their respective seasons as a stepping stone for each other.

The question however is – why most corporations, still struggle to balance these opposites? What is preventing them from balancing these opposites? The answer in my opinion is “misplacement of value components within the value equation”. In other words, the value equation, in its current form, in most corporations create divisions by dissecting businesses into opposites –the core and edge, the stars and the dogs, purpose and profit initiatives so on and so forth -from the standpoint of achieving quick wins. Don’t get me wrong, that these structures and quick wins are absolutely necessary for better manageability and for meeting the quarter numbers; however, in most situations we get carried away with this short sighted quick win focused mentality and fail to recognize the larger context or purpose wherein these opposites (e.g. core and edge) are part of a cohesive whole. In other words, we cannot have an edge without a core and cannot have a core without an edge, therefore, to try and label a particular facet of business as being more important than the other half is illogical and self-defeating – and, so, corporations must redefine their value equation with an end goal of arriving at that mystical centre point where these opposites are balanced and executed within their own respective seasons.

However, arriving at that mystical centre point (where these complimentary opposites are balanced) is both an art and science - and so, we may have to get some additional inspirations from the following five underlying natural elements that were used by the philosophers to represent our universe’s value equation.

Water soaks and descends; Fire blazes and ascends; Wood bends and straightens; Metal holds its shape and is malleable; Earth takes seeds and gives crops”

As we can see from this causal chain, it contains natural elements that are representative of different stages of an ongoing process of transformation within this universe’s seasonal causal chain as discussed earlier in one of my previous blogs (http://strategywithapurpose.blogspot.com/2010/09/transforming-what-aboutso-what.html). On a deeper philosophical level, these transformations are balanced on a continuous basis by the dynamic interplay between complimentary opposites within their respective seasons. Interestingly enough- Sun Tzu leveraged inspirations from these five natural elements as well, while forming his five strategy system elements – i.e. mission, ground, climate, command, and methods.

With this prelude- let us leverage the inspirations from both “five nature elements” and Sun Tzu’s “five strategy element system” to redefine our value equation to help balance these complimentary opposites: i.e. with “purpose & profit," at the center of the equation balancing the remaining four opposites with a causal chain based creation and destruction cycles. The remaining elements are imagined to be part of a circular causal chain similar to the natural element causal chain, as outlined below.

Water creates wood by growing trees. Wood creates fire. Fire creates earth by transforming wood to ash. Earth creates metal, which is why metal, is mined from the earth. Metal creates water, as we can see by condensation on metal surfaces”.

Likewise, within our redefined value equation,

Environment or competitive advantage analysis” creates winning strategies, and then, those strategies in-turn transform the “current state business” in to “Purpose-profit balanced future state business”(center) using the execution focused leadership skills, strategic positioning and expert knowledge. And then, those renewed execution leadership skills, propel forth newer visions and continue the transformation process of turning the environmental conditions in to winning strategies”.

And, the cycle continues – and, gets refined every iteration- by continuously balancing these complementary opposites – thus creating the ultimate business harmony (or optimal outcome) as outlined in the picture at the top of the page.

Bottom line: The ultimate success of businesses lynch on this key principle of “balancing opposites” within the context of their respective seasons using this redefined value equation. However, to reach that success in reality, we need to be practicing this principle on a daily basis using our redefined “causal chain based value equation” –which not only will help corporations to become the experts in this balancing act (of opposites), but also, make them the purpose leaders of tomorrow -in accordance with the purpose, wisdom and spiritual principles of the world renowned philosophers.

Source: Scriptures, Ancient literatures and Sun Tzu's art of war

Monday, September 27, 2010

Strategy – Is it a Marathon, Sprint or Both?

Courtesy: Google Images

While we have used quite a few metaphors in the past to explain the purpose-profit balanced strategies – the one, that has caught my attention the most, in recent days is – “Is Strategy, a marathon, sprint or both?” Granted, the street often pushes the firms to run the race with a sprint like mentality producing quick wins– yet, history is also, filled with examples of firms fading away in to the doldrums (after producing those early quick wins)- partly because of their lack of marathon like mindset. Hence, the question before us today is -do we execute our strategies with a sprint mindset, marathon mindset, or both?

Solomon – the wisest man ever lived – once, said -“There is a time for everything, and a season for every activity”. In other words, the appropriate speed in which we react to business situations depend upon the seasons of the business cycle - and so it is important that we get in tune with the business seasons first - before deciding whether to execute our strategies with a sprint or marathon mindset. What do I mean by that?

As it turns out - the concept of seasons is what gives us the confidence that every down cycle in life or business has a beginning and an end. In other words – if situations like misfortunes, misunderstandings, quarrels, failures, disappointments, profit or loss -have no end, our life will be totally meaningless (and perhaps even boring). As a matter of fact, if there is no down time – we will not be able to even appreciate the goodness of up time – much less experiencing them.

Likewise, if we look at the characteristics of sprint and marathon races – we can clearly understand that - both have start and finish lines, and yet – what happens between their start and finish lines are a different story. In a sprint, the effort is focused on reaching the finish line in seconds or perhaps in minutes, and so the runners push hard, giving the whole energy they’ve got till they reach the finish line. Also,the timely start is critical, as it makes up the huge percentage of the race, and even a tiny stumble can cost them a heavy damage much less winning the trophy. On the other hand, in a marathon, runners know that they’re going to be running for a long time, and so pacing is critical for them to reach the finish line much less winning the trophy. While the start is important, it is secondary in comparison to sustained progress and so, one can even recover from a large stumble as long as it doesn’t result in any physical injury.

Similarly, those who approach strategy execution as a sprint quickly burn out. They run the first few days, maybe even the first month or two, like a category 5 hurricane that seems unstoppable by their competitors. And yet, as time wears on, they lose their strength (stamina), well before the finish line. On the other hand, those who approach it as a marathon, though, they get off to a good start, and yet oftentimes fall far behind the sprinters. So, the question of the day is - how do we get to that optimum speed that helps us to win the race at all times? I guess the answer lies in Solomon’s words of wisdom within the context of the sprint-marathon metaphor –“run the business race like a marathon, yet sprint up, once in a while as needed-as per the seasons – and, then scale back after the sprinting season is over”.

This does not mean that we have to be wiggling like worms for every environmental change -on the contrary, we need to be steady and manage the execution speed (or momentum) by proactively choosing the optimum speed, as per the seasons of business realities. The optimum speed is what going to help us to transcend over the minor changes of the environment – thus, giving us the control over the future ( i.e. leading to superior results) vs. letting the environment controlling our future without our proactive intervention. That being said, we cannot, however, blindly ignore the seasonal challenges as well- as adjustments (like speeding up once in a while like a sprint) are absolutely needed to react appropriately to the seasons (e.g. missing a quarter numbers). Without such minor adjustments, our strategies can quickly become irrelevant to the moment and actually end up hurting our long term success.

In the final analysis - it is a balancing act -and so depending upon the seasons- we need to pick and choose the optimum speed (as a sprint or marathon) as needed by the business realities of the seasons to sustain the momentum for the long haul. Without such speed, we might even miss the mark on some business situations – and likewise, with too much speed, we might even lose the stamina (needed for the long haul) - and so “doing both” is the way to go when it comes to strategic planning in the words of Inder Sidhu and Roger Martin. To get to that “doing both” mindset within the strategic planning process – like most things in this world – we need to adhere to certain principles to help arrive at that optimum speed.

Marathon principles

  • Principle of "high energy" – Addressing “who we are” question in terms of forming the “spirit-soul-body” balanced high energy team – or hire the right people who can execute with high energy for the long haul.
  • Principle of "sustainment" – Addressing the "why do we exist" question in terms of sustainment based purpose dimension.
  • Principle of "endurance" – Addressing “where to play” question in terms of overcoming the early painful situations (i.e. anything is worth chasing after it creates some pain) or chasing the right market track/geography.
  • Principle of “never giving up” – Addressing “what to play” question by overcoming the early brick walls with “never giving up” type differentiation and exploitation strategies.
  • Principle of "dream" – Addressing “how do we win” question by “keeping the dream of finish line in mind” or with top line focused big bet ideas.

Sprint Principles

  • Principle of "unstoppable force" – Addressing “who we are” question in terms of forming the team with a good mix of "skill, talent and giftings" who can execute with a great force for a higher first mover advantage or business impact.
  • Principle of "early start" – Addressing the "why do we exist" question in terms of hitting the quarterly profit numbers quickly.
  • Principle of "focus" – Addressing “where to play” question in terms of being laser focused with the right set of product and services categories.
  • Principle of "finish" – Addressing “What to play” question in terms of “getting to the finish line” quickly mentality.
  • Principle of "trophy" - Addressing “How do we win” question in terms of “keeping the trophy in mind” type bottom line focused operational excellence ideas.

Bottom line: As we can recognize from this set of marathon-sprint balanced principles, it is clearly evident that “there is no silver bullet” -especially when it comes to arriving at the optimum speed using these marathon-sprint balanced principles - and so, it is all the more important for organizations to properly balance these principles with a “doing both” mindset. In addition, augmenting these principles with the right set of accountability/governance processes will not only make our organizations a best in class in our industry vertical in terms of exceeding the profit numbers, but also, make them the purpose leaders for the long haul.