Friday, August 20, 2010

Strategize From the Core and Innovate From the Edge

“Edge is supposed to transform the Core, and Core is supposed to support the Edge” – Sounds more like the Apple Pie and Motherhood type slogans, isn’t it? Well ….they might sound like one on the surface – but, beneath it- they have a deeper meaning though. While the former is very important to sustain disruptive innovations- in our experience, we have also found that later is equally important (i.e. Core to support the Edge in terms of their influence and resources etc) for innovations to thrive and be successful in the long run. Before I go too far with our hypothesis – let us define few terms. Edges are the "peripheral adjacency seed-beds of innovation where unmet needs meet the unexploited market capabilities" whereas Cores are the "established crops in the inner deltas of the established businesses where market needs are already exploited - thus producing constant revenue streams for the corporation".

While both the Edge and the Core could operate as standalone domains for a period of time, it is important that they collaborate with each other for them to be successful in the long run – as affirmed by these slogans. By its definition- Edges are filled with significant growth opportunities but, to scale that growth (and to reach its full potential); edges indeed need the resources and market strengths of the core. At the same time, Core, although stable, is faced with a different type of pressures - quarter by quarter margin pressures – and so, they are also constantly looking for new growth platforms to sustain (or to exceed) their performance. As it turns out, these pressures also create a “pull-push or love-hate" relationships between the Edge and the Core resources– resulting in a new tension (or a new world order) within corporations. In other words, “Core needs Edge and Edge needs the Core”, but, in reality- significant barriers do exist between the Edge and the Core - for them to collaborate successfully.

The question however is - What's the best way for corporations- not only, to invest in both core and edge initiatives, but also, make them to collaborate with each other with a complimentary collaborative mindset? While the Disruptive innovation practitioners encourage us to bring the Edge to the Core (the push model as it is little easier to integrate), we also have heard others promoting the idea of bringing the Core to the Edge, (the pull model enabling the core participants to participate in disruptive innovations emerging on the edge). While there is merit in both approaches – in reality – “one size does not fit all” – and so, a key“doing both” principle - “Strategize from the Core and Innovate from the Edge" seem to do the trick.

What do I mean? By, “Strategizing from the Core”, we provide the opportunity for the edge participants to get trained in a systematic large scale strategic planning mindset whereas by “Innovating from the Edge”, we provide the opportunity for the core participants to participate in the edgy disruptive innovation methodologies. While it is easy to preach this principle from the pulpit –in reality, it is not easy to practice, especially in large corporations. Choosing the right timing and the right integration mix of edge and core resources within the context of this principle, however - is more of an art than science. A premature integration of edge resources into the core –sometimes outweigh the benefit- and so, leadership must selectively leverage the right type of resources (&processes) to help scale the innovation platforms being developed by edge participants within core operations. This timely, balanced approach not only enables the edge resources to catalyze the deployment of growth platforms within the core, but also help them to fine tune their design within edge as part of the new innovations.

However, I have heard that this principle sounds too good to be true - as there exist still few barriers - from the standpoint of practicing it in reality. The primary dilemma (as identified by Clayton Christenson in his book Innovator’s dilemma) and summarized by Gerald Nanninga in one sentence is the mindset of “Why kill the goose that is laying the golden eggs?” In other words, the way most companies position the edgy efforts within their four walls do not give any incentives for their front line leaders to disrupt their core businesses (or the well secured golden goose egg jobs) and enter in to this risky, unknown, unchartered innovator’s territory. In other words, Core is measured/rewarded on meeting the quarterly numbers -whereas Edge is measured/rewarded on the rate at which they commercialize the next big game changer idea/platforms – all within four walls - and so- these competing incentive/rewarding schemes do not encourage either camp to play well together. In a way- it is not only an innovator’s dilemma, but also, a leadership dilemma – meaning – it is a question for senior leaders to make “Core (golden gooses) and Edge (disruptive innovation)” to play together in a cooperative, collaborative and complimentary fashion to practice this principle in an effective manner.
Under this “doing both principle of - Strategize from the Core and Innovate from the Edge” - there are three potential organization models possible within the context of enabling Core and Edge to play together in a collaborative fashion.
  • Venture a separate start-up for the Edge (with totally new resources/assets) and make it part of the parent holding company.

  • Spin-off a separate start-up for the Edge with selected resources from core and then merge the start-up back to the parent after disruptive innovation is commercially successful.

  • Augmenting Core’s business model/product category with Edge’s business model/products with revenue sharing and/or transfer pricing/bundling scenarios across core and edge boundaries– i.e. bundling core product category with the edge product and over the period of time slowly phasing out the old category very much like how Cisco bundled Tele-Presence (edge) with Call Manager (Core)

Bottom line : Depending upon the growth strategy (i.e. Core/Edge mix) and the culture/stage of the corporation– senior leaders must pick and choose one of the above organization models. Let us face it – Corporations are better of eating their own lunch instead of letting someone else to eat their lunch – when it comes to disruptive innovation. Hence, it is a call to action for corporations to “strategize from the core and innovate from the Edge” with a help of one of these three organizational models – as it not only solves the “innovator’s dilemma, but also, the leadership dilemma”.I guess, it is time to add another slogan to the slogan list at the top of the page – STRATEGIZE FROM THE CORE AND INNOVATE FROM THE EDGE!

Friday, August 13, 2010

Purpose-Profit balanced Shareholder Value Strategy

After the last week's blog on the topic of consumer value strategy – I heard back from some folks - asking, whether I am going to cover the remaining dimensions of value or not. More specifically, the questions were around Shareholder value and Organizational value – and so, I thought of covering “Shareholder Value Strategy” this week – just to be fair and balanced. Depending upon the interest level - I might also cover the organizational value strategy (employee ethics, code of conducts etc.) in one of the future blogs.

In nutshell, Shareholder’s value is the return shareholders get from their investment – as we had defined in last week's blog. With that said, the overall shareholder’s value is not just the financial return (i.e, capital gains, dividends and proceeds from buybacks etc. ), but also, the indirect value generated from company’s customers, employees/communities and last, but not least, its efficient operations – as they are the foundations for maximizing the shareholder value.

With this renewed thinking, let us develop a balanced score card (BSC) based Value Measurement Framework (VMF) - as outlined in the top of the page to understand, measure and maximize the sub components of value. Emerging methods such as Analytical Hierarchical Process (AHP) can help us to augment the balanced scorecard design using a relative weighting of the performance categories to align strategic objectives with operational processes with an end goal of understanding/measuring/maximizing shareholder value. This Value Measurement Framework (VMF) is a set of management and analytical processes based on a balanced scorecard design to measure shareholder value in meeting their expectations against pre-set strategic goals. In other words, VMF is more about strategic business thinking of interweaving analytics with business strategy.

Unlike other balanced score designs, our VMF approach is a “drill down dashboards” driven balanced scorecard, with a broad set of measures based on the four perspectives of Kaplan and Norton with the end goal of measuring and maximizing shareholder value. In addition, our VMF approach is also built using Lean principles that are being used to increase the efficiency and effectiveness of company’s operations. In their book Lean Thinking, James P. Womack and Daniel T. Jones state that lean thinking can be summarized in five principles: “precisely specify value by specific product, identify the value stream for each product, make value flow without interruptions, let the customer pull value from the producer, and pursue perfection”(italics theirs). Within this context, Lean can be defined as the effective utilization of various tools and techniques in a systematic, customer-focused manner that increases the flexibility of the operational processes with the goal of producing the highest-quality product within an environment of continuous improvement and thereby increasing shareholder’s value. The overarching values of lean are customer and shareholder’s prosperity and the view that the employee’s are the most important resource of an organization.

Within the context of this Lean/AHP/BSC based VMF solution, as a first step, we must determine specific objectives and drivers in alignment with the overall business strategy of the organization to effectively measure shareholder value. A clear linkage of drivers with causal relationship is critical for a successful VMF solution. In addition, our VMF solution will augment the original financial perspectives of BSC with VBM based CVA/EVA to simulate business reality and to help us to effectively measure shareholder’s value. To effectively measure this cause and effect relationship driven perspectives of balanced scorecard, appropriate metrics for each of the objectives and drivers are developed as part of our VMF design. This is where, Analytical Hierarchical Process (AHP) can help us to set the relative importance of the measures from each of the four perspectives within the balanced scorecard. The AHP uses paired comparisons of objects with the relative weighting of the performance categories to provide insights into a company’s strategy. By slightly augmenting the Thomas Saaty’s AHP model with “what if scenarios” in which every scenario has different weight factors for the KPI’s for measuring the performance of our organizations will truly give us the competitive edge we need in maximizing the shareholder’s value.

The VMF solution, in addition can also be designed to be dynamic and multi dimensional so that metrics can be changed or added to reflect the changes that are bound to happen within the business strategy. An example is that - while we are trying to justify a supply chain re-design initiative that may aim at achieving 20% reduction of inventory carrying cost might cause a sharp increase in short shipments with increases in transportation cost. This scenario might make us to create another delivery cost metric within the balanced scorecard. To enable such flexibility, our VMF is designed with a flexible meta-data driven approach in which measures can be added or changed dynamically.

Bottom line

Measuring shareholder value on a continual basis using Lean/AHP/BSC based VMF solution is yet another way we can entice high end shareholders to invest in our businesses. A composite score in a dashboard (along with what-if scenarios) format, will definitely help shareholders and senior management alike to compare the divisional (or LOB) value with other business units and/or with as that of our competitors and give us the true competitive edge we need in the 21st century. This unprecedented edge, not only will help us to increase shareholder’s value, but also will help us to change the rules of the game every step of the way within our industry vertical. In other words, a well established VMF solution, apart from measuring the value will also help us to clarify and update strategy, align organization goals to individual goals, and to learn and improve our strategic objectives - and above all, make our company the investor’s paradise within our industry vertical.

Thursday, August 5, 2010

Purpose-Profit balanced Value Strategy

If you have been following my last 10+ blogs closely –You would have observed a consistent message – Purpose-Profit balanced strategy. On the other day, one of my friends, outside the business world made a casual comment – “It all sounds great to keep pounding on this purpose message – but what does that mean to us (the normal consumers) in terms of us getting a better value from the products/services we buy from these corporations/retailers”. On the surface – it sounded like a casual statement – but when I looked at it carefully- I quickly realized that this is a key question most consumers across the board are asking today - and so, I spent some time analyzing - what do consumers mean when they say "Value". More specifically, what is Value and where does that fit in to this purpose-profit balanced strategy? Is value and low cost are synonymous?Does that mean Corporations need to cut corners and sacrifice quality to offer their products/services at a lower price point? Does that mean every corporation/retailer must have a purpose-profit balanced value strategy?

With all of these questions in my head - I stepped back and classified value in three dimensions from any corporation/retailer standpoint –

  • Value to external stakeholders (investors, suppliers and partners) – P&L or PROFIT focused.

  • Value to internal Stakeholders (ethics, sustainability) including the code of conduct – Employees and Community (E&C) or PURPOSE focused.

  • Value to consumers/customers – Products and Services (P&S) focused with emphasis on both PURPOSE & PROFIT.

Within each of these dimensions – the degree of value again varies depending upon how it is being perceived by the players/owners of the respective dimensions. For example, some products/services are perceived more valuable than others depending upon how consumers view them within the context of their ' life situations and experiences -and so, value is not necessarily always low cost or lower price point- which made me to realize the importance of coming up with some common value definitions in these three dimensions.

  • Value from consumers standpoint is “… the proposition of experiencing the “good enough” product/service consumption attributes (it varies depending upon the product/service & for food/beverages it includes, but not limited to - taste, texture, nutrition etc.) 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

  • Similarly, value from external stakeholders or P&L dimension standpoint is spread across four perspectives (as identified by Kaplan and Norton in their BSC) with a chain of cause and effect relationship: The continuous improvement in core business portfolio elements (internal business processes, products, services and assets etc) creating an improved financial value to key stakeholders (investors, suppliers and partners).

External stakeholder Value Equation = Financial KPI from the four perspectives as outlined in the balanced scorecard design from Kaplan and Norton.

  • Similarly, value from internal stakeholders or E&C dimension in nutshell - is employee productivity – i.e. the way employees conduct their business across various profit and purpose focused initiatives – thus creating the 5P (Purpose, Profit, People, Planet and Passion) effect within the communities.

Internal stakeholder or E&C Value Equation = Employee productivity KPI and Sustainability Indices in business and people related areas.

With this foundational definition background – I did a deeper dive analysis on the larger consumer value question using a Value/Experience based Spending (VES) framework as outlined in the top of the page. With the tough economic conditions still lingering- most consumers, of late, have started changing their spending patterns when it comes to buying various P&S categories. Our research also suggest that more than 50% of the consumers are looking for better value deals while buying consumer products/services - followed by another 30% who are willing to sacrifice their preferred brands for better value brands. This is definitely an alarming trend for the branded players - and so I did some “deeper dive analysis” on the spending patterns of consumers across various product/service categories. The insights I garnered was all the more intriguing - that consumers have started altering their spending patterns, not only based on value, but also, based on the way they map their preferred products/services to their personal consumption experience life cycle.

For example, consumers are not likely to reduce their spending on certain essential products/services (like utility services and house-hold items, even though they see them as less valuable) -whereas, they are more likely to reduce their spending on categories like Books and CD’s albeit their higher value. With this renewed insight and findings – I grouped the products/services under five experience categories and plotted them within the VES framework – with “degree of spending” on X axis and “degree of perceived value” in Y axis as outlined below and on the top of the page.

  • Essentialize Me – addressing the basic experience -where consumers do not even think of reducing their spending as they believe that these products/services are essential for their livelihood even if they are not highly valuable.

  • Energize Me – addressing the nourishment and Health &Wellness experience where consumers are less likely to reduce their spending as they see the value in these products/services serving their body, soul and spiritual needs.

  • Enrich Me – addressing the “educate/enhance me” experience – where consumers are likely to reduce their spending, although they recognize the value.

  • Entertain me – addressing the relaxation experience – where consumers are kind of divided 50-50 when it comes to value and spending patterns.

  • Exuberate Me – addressing the luxury or feel great experience – where consumers are more likely to reduce their spending on these products/services as they do not see much value.

Interestingly enough, four of these experience 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 value based experience equation” evolving when it comes to consumer spending. This new reality - is indeed a wake up call for the corporations and retailers alike – and so, it is time to accept this new reality (i.e. placement of their products and services within this VES framework) and devise an appropriate value strategy to answer this emerging spending patterns and value perceptions of the 21st century consumers. However, by no means – I am suggesting that super premium strategies have lost its relevance – I guess “doing both” is the way to go.