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!

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.

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.

STRATEGY – IS IT A DECISION, DESTINY OR BOTH?

YET ANOTHER WAY OF LOOKING AT STRATEGY

It is one of those things that keep coming back again and again – Is strategy a decision, destiny or both? While analytics has positioned strategy as a set of decisions – there is also merit in the argument that without a proper destiny, those strategic decisions have no relevance. The question, however, is which one comes first – Decision or Destiny? An insightful analogy- I have come to grips in recent years is that strategy is a “beautiful pottery”– with destiny as the clay and decision as the water - and together they are molded in to a fine piece of pottery called strategy. Before we put the piece of clay (destiny) to start the actual molding process, we need to add enough water (decision) into it- in order to make it pliable and soft enough - for it to be able to actually use it. Without enough water into the clay, the clay will remain too rigid to be able to actually mold it – similarly, without enough decision focus, destiny has no relevance, and without destiny mindset, decision has no meaning. And so, “doing both” is the way to go when it comes to strategic planning in the words of Inder Sidhu and Roger Martin.

DOING BOTH - DECISION AND DESTINY

Now, back to our analogy - after we add enough water (decision) into the clay (destiny) to make it soft and pliable – the next thing we need to do is put them in the center of a electric wheel called analytics (i.e. balanced quantitative and qualitative analytics) before we start the molding process called strategic planning. To get to that “doing both” mindset within that molding process – like most things in this world – strategic planning must also adhere to certain guiding principles for it to align properly within the center of the electric spinning wheel.



DESTINY FOCUSED PRINCIPLES

• Principle of Team – Addressing “who we are” question in terms of forming the right team – get the right people first on the bus - and then (together as a team) formulate the strategy - in the words of Jim Collins.
• Principle of Purpose – Addressing the "why do we exist" question in terms of the purpose dimension.
• Principle of Place – Addressing “where to play” question in terms of market geography.
• Principle of Difference – Addressing “what to play” question in terms of differentiation and exploitation.
• Principle of Value – Addressing “how do we win” question in terms of top line focused innovation excellence ideas.

DECISION FOCUSED PRINCIPLES

• Principles of Talent – Addressing “who we are” question in terms of forming the team with a good mix of skill, talent and gifting.
• Principle of Profit – Addressing the "why do we exist" question in terms of the profit dimension.
• Principle of Focus – Addressing “where to play” question in terms of product and services categories.
• Principle of Conformity – Addressing “What to play” question in terms of prevention and mitigation.
• Principle of Rewards - Addressing “How do we win” question in terms of bottom line focused operational excellence ideas.

As we can recognize from this set of destiny-decision balanced principles, it is clearly evident that balancing them is a key- and so it is all the more important for organizations to use the proper electric wheel (analytics) to solve the right strategic planning issues with a "doing both" mindset. In addition, augmenting these principles with the right set of accountability/governance processes and principles will indeed make our organizations a best in class in our industry vertical.

Where Eagles Dare, Strategies Dare…

In an earlier blog, I had explained the purpose-profit balanced strategy with an Eagle metaphor- to help learn few strategy lessons. Over the weekend, I heard back from some folks (both formally and informally) –more specifically, asking me to expound upon the metaphor little more - from the standpoint of eagle’s directional sensing compassing skills, their effortless energy riding techniques and above all - their master preying skills – as it relates to developing successful business strategies. Given the enthusiasm, I thought that it is worth our time – to clarify and improve upon those lessons with some specific strategy examples- as one of our friends put it - where eagles dare, strategies dare!

1. Eagle’s direction sensing compassing skills are second to none!

While it is absolutely amazing to see how eagles fly under those wind thermals, it is equally impressive to see how eagles learn to maintain their sense of direction – leave alone reaching their final destination flawlessly - in almost all situations. How do they do that? Eagles – apparently, have a lens balancing fluid within their retina - and when they get off their intended track – the balancing fluid senses the misalignment and causes some kind of a pain in their neck- indicating that they have to change their course and get back to their original track. As it turns out – this in-built directional compass is what keeps them staying focused – and equally important – it is a great lesson for us to learn from as well– i.e. to learn to imbibe the directional mindset in our business strategies. Within the context of developing this compass driven strategies using our strengths/opportunities (or wind thermals)– I have put together a 10-box strategy model using the SWOTC analysis constructs - to help develop few laser focused directional strategies (as depicted in the diagram on the top of the page). It is a 5x5 matrix of SWOTC elements for our company on the column side and the competitor on the row side- with each box being filled with one of the following four strategy categories.

• Differentiation strategies are the “edgy” disruptive innovation strategies leveraging company’s strengths.


• Exploitation strategies are the “edgy” growth strategies to exploit competitor’s weaknesses/constraints.


• Prevention strategies are the defensive/preventive strategies to overcome company’s weaknesses/constraints.


• Mitigation strategies are the risk mitigation strategies to reduce company’s vulnerability from competitor’s threats.
  

2. Eagle’s effortless energy riding skills are one-of-its-kind!

Speaking of eagle’s energy sustaining effortless riding skills – as it turns out - this is one of the most important skills companies must learn to master at – learning to execute (or ride) the 10 box strategies efficiently - using repeatable processes, tools, techniques & templates very much like how eagles learn to ride the wind thermals effortlessly. More specifically, I recommend us taking a holistic energy/effort portfolio approach within the strategic planning process to effectively optimize the energy efforts (& sources) with a 3P (people, profit and purpose) mindset to get to that effortless riding mode. Following are the few pragmatic strategies to help us to get to the “almost zero marginal/emotional equity cost model” from both purpose and profit algorithms standpoint.

2.1 People dimension – leading to "almost zero marginal cost model" within profit algorithm

• Form teams with “right person for the right job with complementary skills” mindset with differentiated nurturing/reward schemes. Learn to differentiate skills from talent and talents from gifts and nurture/reward them accordingly. Please see my comments at one of the recent HBR blog (http://blogs.hbr.org/bigshift/2010/04/are-all-employees-knowledge-wo.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+harvardbusiness%2Fbigshift+(The+Big+Shift+on+HBR.org)&loomia_ow=t0%3As0%3Aa38%3Ag4%3Ar2%3Ac0.000000%3Ab0%3Az6.


• Encourage people to use repeatable processes, templates, tools and techniques in every part of their job within the value chain to achieve economies of scale and scope benefits.


• Develop the lifelong learner and train-the-trainer culture and encourage/reward knowledge management/sharing behaviors i.e. promote “not reinventing the wheel” mindset.

2.2 Profit (or Plant/Equipment) dimension - leading to "almost zero marginal cost model " within profit algorithm

• Classify the business processes within the value chain in to commodity, standard, transformational and value-add - and move towards the tapered integration based virtual enterprise model - i.e. leverage best in class providers to perform standard/commodity processes with well defined engagement model and service level agreements.


• Optimize the value chain – more specifically, focus first on the manufacturing and supply chain processes (including GTM) with measurable KPI’s - as performance is as good as your weakest link and so identifying those bottlenecks using techniques like lean/six sigma are paramount for achieving efficiency/effectiveness goals.


• Innovate with disruptive business models – specifically, by reducing the idle capacities resulting from seasonality, infrastructure gaps and the emerging equipments miniaturization trends (similar to what happened in computer industry).

2.3 Purpose dimension - leading to "almost zero emotional equity cost model " within purpose algorithm

• Energize the bottom of the pyramid with “social enterprise” minded product/service bundles they can afford. Project Shakti by Unilever is a great example (http://www.unilever.com/sustainability/casestudies/economic-development/creating-rural-entrepreneurs.aspx).


• Encourage healthy products and herbs from the region’s native plants and medicines and make it part and parcel of the products and services your firm sells.


• Elevate global understanding of critical externality based environmental issues (pollution, waste etc) with timely and functional innovative solutions. Please see some of my comments within the context of the recent externality debate within HBR (http://blogs.hbr.org/what-business-owes-the-world/2010/06/bp-the-gulf-and-the-great-exte.html).
  

3. Eagles preying skills are unmatchable!

As a result of flying under the wind thermals,-as it turns out- eagles can fly to heights that no other bird can. Apparently, eagles can fly as high as some of the modern airplanes can fly under perfect conditions. Equally interesting is the fact that eagles are also masters at zeroing in on their prey from a far apart distance (in some cases up to a mile apart) and then swooping down to catch them. In a way we can call them absolute masters at hunting down and catching their prey, whether it is on the land or in the water. Just as eagles are considered to be masters with how they can catch the prey (fishes in water or birds at land) – our strategies must outsmart our competitors with a perfect accuracy.

Bottom line: Why should we exhaust our energy when we can do that effortlessly by coming to terms with productive people, efficient processes and sustainable environments?

Strategy is like Eagles mounting up with its Purpose-Profit balanced wings?

It is one of those dilemmas that keep coming back again and again – Is our strategy supposed to be purpose focused, profit focused or both? An insightful analogy- I have come to grips in recent days is that - Strategy is like the eagles mounting up in to the skies without them actually flapping their wings. What does that mean? Eagles - as part of God’s creation are gifted to fly without them actually flapping their wings as long as they are flying under the wind thermals. A wind thermal is a big gust of tailwind coming out of the warm atmosphere - that helps eagles to latch onto it - and thereby making the eagles to fly along its gradient (or riding the wave) without them actually flapping their wings (and thereby conserving less energy).

What does it have to do with strategy? Well, hold on a minute…the analogy does not stop there – the eagle insights also expand to their wings, eyes and above all to their directional focus -as outlined below. Hopefully, we can use this analogy as the lynchpin for the next few blogs – perhaps one lesson each week - as we have lot to learn from this analogy - as it relates to developing impactful business strategies.

1. First of all, strategy as a whole is the eagle.
2. Its wings represent Purpose and Profit dimensions respectively.
3. The wind thermals represent the tailwinds helping the eagles to soar without flapping their wings– representing strengths/opportunities part of our business strategy.
4. The normal winds are the headwinds that help eagles to take-off initially- but, after a while, slow them down if they don’t latch on to the wind thermals quickly – representing the weaknesses/threats/constraints facing the business strategy.
5. Direction sensing large eye (with dual cones and fovea) that is used by eagles to differentiate and stay focused on its journey - representing our differentiation strategy against competitors.
6. Prey protecting/sensing eyelid that is used by eagles to sense their prey at a far distance - representing the prevention/mitigation strategy against competitors.

With this analogy as the foundation – we are going to focus on three key take away messages as part of this blog- besides the fact that strategy is the eagle.

• Balance the purpose and profit part of the strategy equation.
• Lead your industry vertical with your wind thermals (tailwinds like strengths/opportunities)
• Learn to stay afloat (under) the wind thermal and flap like eagles with less energy(i.e. leverage the strengths/opportunities to get to the almost zero marginal cost or emotional equity cost model - as we saw in the Degree of Operating leverage(DOP) and Degree of Purpose Leverage (DPL) measures in the previous blog ( http://strategywithapurpose.blogspot.com/2010/07/what-in-world-is-world-class-purpose.html ).

In other words, if our strategy does not have the well balanced purpose and profit agenda- that is tightly latched on to the wind thermals (tailwind like strengths/opportunities), it is impossible to stay float with less energy. As it turns out - if the eagles do not latch on to those wind thermals quickly when they come up on them, they will forever stay perched. In the same way, if our strategy does not take off quickly on those tailwinds (or strengths/opportunities), we might never learn to stay float (i.e. with the almost zero marginal and emotional equity cost model) - and our strategy will eventually perish right before our own very eyes.

Bottom line – Strategy is like the eagle - with its wings representing the purpose-profit dimensions - and the wind thermals representing the strengths/opportunities that make the strategy to soar very much like how wind thermals make eagles to soar. Not only that - this tailwind driven strategy -with almost zero marginal and emotional equity cost model (like eagles flying without flapping their wings) —is indeed the best in class strategy that is guaranteed to succeed. Isn’t God creations wonderful?

What in the world is a “World Class Purpose Model”?

Courtesy : Google Images



One of the "golden rules or the litmus tests" investors apply before investing in a firm is the sustainability of its business model (or) the ability of its business model to make money for the long haul. As a matter of fact, investors value the business model more than anything else (even more than the financial plan itself) as– at the end of the day – a sound business model is the one that is going to guarantee the sustainable value or return for their investment. Speaking of this sustainable value/return – most recently, investors also have come to grips with the reality that long term value is not just achieved by the money making guarantee of the business model - but also, by the purpose criteria (KLD scores, sustainability indices, corporate governance scores etc) on top of the profit metrics - as outlined in one of my earlier blogs. In other words, these purpose criteria enabled business models are the ones that is going to give the sustainable value for the investors (& to all the other stakeholders/society alike) as opposed to the mere profit metrics based business models - and I call them as purpose models (http://strategywithapurpose.blogspot.com/2010/06/purpose-driven-strategy.html) as they re-purposes the vision/mission/value/BHAG of the firm within the context of the cross border industry boundaries with a 3P (people, planet and passion) based purpose mindset.


Within the context of this renewed purpose inspired thinking – it is equally important for business models to have a balanced purpose/profit formulas to qualify itself as a purpose model- as corporations are not in the business of running charities. In other words, purpose models must augment the “value based purpose metrics” with “cash flow based profit metrics” to position the firm on a solid ground for the long term sustainable success to further qualify it as the world class purpose model. Speaking of a world class purpose model – we are going to come up with two more complimentary metrics (one for profit and one for purpose) to help investors to evaluate whether a given purpose model can qualify as a world class purpose model.


With the fact that “cash is the king” in today’s business context – we have chosen “operating leverage” as the key measure to assesses the overall health and wellness (& risk level) of the purpose model and to qualify whether it can become a world class purpose model from profit sustainability standpoint. Similarly, with our mantra being “purpose is the queen” – we have chosen “purpose leverage” that assesses the overall purpose and values (& tolerance level) of the purpose model and to qualify whether it can become a world class purpose model from purpose sustainability standpoint.


Operating leverage in my mind is the relationship between fixed and variable cost – the higher the operating leverage, higher the cash flow and vice-versa. In other words, those purpose models with a higher operating leverage and lower marginal cost are the world class purpose models from profit sustainability standpoint. A quick degree of operating leverage (DOL) measure, which shows the extent to which operating profits change as sales volume changes can be calculated as outlined below . More specifically, DOL is the percentage change in income (or EBITDA) divided by the percentage change in the sales output.

DOL = (Q (P-V))/ (Q (P-V) – F)

Q= Quantity produced or sold
V=Variable cost per unit
P = Sales Price
F=Fixed Operating Costs

So, higher the DOL leverage, higher the change in operating profit and better the purpose model is. In other words, in actual numbers, let us say we have a purpose model with a DOL index of 2 along with a 25% change in sales volume - the potential change of operating profit for this purpose model will be 50% (2*25%), a great number, which will definitely make it as a world class purpose model from profit sustainability standpoint.

Purpose leverage, on the other hand, is the relationship between fixed and variable emotional equity – the higher the purpose leverage, higher the emotional attachment of the stakeholders (consumers, investors and suppliers) to the firm and vice-versa. In other words, those purpose models with a higher purpose leverage and lower emotional equity cost are the world class purpose models from purpose sustainability standpoint. A quick degree of purpose leverage (DPL) measure, which shows the extent to which purpose inspired profits change as sales volume changes is can be calculated as outlined below from purpose sustainability standpoint. Specifically, DPL is the percentage change in income (or EBIT) due to the purpose inspired emotional equity divided by the percentage change in the sales output.

DPL = (Q (P’-V))/ (Q (P’-V) – F)

Q= Quantity produced or sold
V=Variable cost per unit
P’ – Purpose inspired marked up premium sales price (i.e. higher sales prices consumers are willing to pay for the super premium products/services because of the firm’s purpose agenda or their emotional attachment/equity to the brand or firm. For example, a Health and Wellness/Green minded consumer will be willing to pay higher price when they know that the firm’s purpose align with their personal purpose/values.
F=Fixed Operating Costs

So, higher the DPL leverage, higher the change in operating profit and better the purpose model is. In other words, in actual numbers, let us say that we have a business model with a DPL index of 5 along with a 10% change in sales volume - the potential change of operating profit for this purpose model will be 50% (5*10%), a great number, which will definitely make it as a world class purpose model from purpose sustainability standpoint.

Bottom line: As represented in the justice model picture at the top of the page, the DPL-DOL balanced purpose model that gets us the repeat customers - where the cost to deliver incremental products/services for an incremental customer approaches almost zero, where the cost needed to bind additional customer’s emotional equity to the firm’s brand approaches almost zero, and where we get a lots of the cash up front and where we have lots of good will and emotional equity on the purpose bank—is what makes a purpose model a world class purpose model. What more can we ask for?