Tag: Michael Porter

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Blog 13 of the REBOOT Business Strategy Series

This is the first blog discussing a new strategic framework relevant for the world we now live in.  To date, I have covered off some background on how the world is getting increasingly complex from a societal, environmental, technological and disruption perspective; and the implication of this is a need to look at business strategies from a system based perspective so that business are aligned with economic, society and environmental goals.  Critically, linked to this are that the general consensus on these goals globally are best defined by the 2015 UN Sustainable Development Goals for 2030, which also link in with the 2015 Paris Climate Agreement.

The next section then went on to cover off 8 gaps in traditional strategic thinking that need to be covered off for a strategy in the 21st century.  These gaps were driven by deep interconnections of a business with their environment, which is not just their business sector.  These interconnections are vital to understand as there is continuous change and ongoing disruptions that are and will be affecting a business.  These factors include societal and economic factors as we can see now with the Covid 19 pandemic and ‘Black Lives Matter’ movement, the impact of new technologies, and most importantly the need to globally address the challenges of climate change and other key environmental issues. 

This new framework tries to create a shift in how we think about our business, away from just profitability for shareholders to goals that are also aligned other stakeholders including the public, consumers, suppliers, communities and governmental interests.  It is worth noting that investors are now requiring this shift given that the long term interests of businesses are for a sustainable world and they can see real business risks on the horizon from climate change.

The traditional stand alone thinking (Figure 13-1) can be summarised by, firstly, a virtually exclusive focus on the shareholder as Milton Friedman had summarised,”the social responsibility of business is to increase its profits”. Secondly, an industry and competitor analysis as defined by Michael Porter’s five forces analysis matched to an understanding of the business’ internal capabilities.  Thirdly, profit and market based key metrics.

Figure 13-1

A  new system based framework needs alignment from the business through to the economy, society and to the environment (Figure 13-2).

Figure 13-2

To create alignment a business needs meaningful purpose that aligns with the business on delivering against both its own economic goals as well as creating impact (Figure 13-3).  This is the challenge of strategy design, to cover the needs of both profitability and impact.  

Figure 13-3

Clearly, this can add complexity as the performance measures are now broader; however, it also creates opportunity and new ways of differentiating and competing.  For deeply entrenched players in the market who have adverse impact on the climate/environment, they are going to have to think about how they will use their resources and market position to evolve to a new sustainable strategic position and focus.  For the younger and nimbler companies, they will need to think about how to use their speed and flexibility to create a stronger positioning ahead of their key competitors.  If you are already there, then take advantage of your position.

A key part of this system-based framework is that it is relevant for all types of organisations whether in business, government or as an NGO.  Clearly, each type of organisation, as with each business, has to be clear on their economic model and what their impact targets are in order to get clear on what delivery model they need.  In the government and with NGO’s, they will have very different sources of funds; but, in any event they need to solve a sustainable financial model to survive rather than to make a profit.  A governments whole raison d’être should be impact; although, for many of us it may well be that their targets and metrics of achievement are unclear!  

Surrounding these triangles are three components that need to be full addressed within a strategy (Figure 13-4).  Firstly, having a clear view of the key stakeholders of the business.  Secondly, the business must be built to last – it must be sustainable.  This means the business must be able to continuously deliver value to it customers, it must deliver the right economic performance for investors, and it must provide the appropriate impact for other stakeholders. And, the business must be able to adjust, adapt and move forward in a way that this continues over time.

Thirdly, the business must be resilient and thus have the capability to withstand and manage through different scenarios of disruption from the 5 types of macro forces – societal, environmental, economic, technological, and geo-political – to the core challenges specific to the   

Strategic Framework
Figure 13-4

There are six tests of a business strategy:

  1. Is the business Purpose Driven?
  2. Can the business create real differentiated value for its target customers over time?
  3. Can the business perform at a level to attract and retain investors?
  4. Does the strategy integrate generating economic, social and environmental impact at ambitious levels for key stakeholders?
  5. Does the business strategy create sustainability and resilience?
  6. Does the strategy have ambitious and achievable triple bottom line metrics covering profit and impact targets?

At the heart of a business lies its purpose.  It is the driving force and acid test of all business decisions.  It is what attracts and retains employees, customers, other participants in the supply chain and investors.  Sitting above the strategy are three components Vision, Mission and Values.  There are a lot of different views about how to define vision and mission, and sometimes they are combined; so to clarify, I have created definitions that fit with this strategic framework.

Figure 13-5

Within this strategic framework, the purpose defines how the world will be a better place as a result of the business.  The first component of the purpose is the Vision.  The Vision is the business’ view of the better world that the industry or sector will contribute to.  The Mission is the part of the vision that the company is targeting to fulfil.  I like to describe the Mission as the North Star that the company wants to be continuously moving towards.  Finally, the Values defines behaviourally how the Company‘s operates – what drives it, what motivates it, and how it will behave with its employees, customers, suppliers, communities, society and environment.  The combination of the vision and mission should be something that engages, and gains agreement from, all key stakeholders.

Here are some examples of the vision and mission, or a combined statement, for purpose driven companies.  

Orsted

Our vision is a world that runs entirely on green energy.

Mission: “We want to be a company that provides real, tangible solutions to one of the worlds most difficult and urgent problems.”

This is a Danish Company that started life as a state owned organisation focused on coal and oil.  Most recently it has been recognised as ….

Within this strategic framework, the purpose defines how the world will be a better place as a result of the business.  The first component of the purpose is the Vision.  The Vision is the business’ view of the better world that the industry or sector will contribute to.  The Mission is the part of the vision that the company is targeting to fulfil.  I like to describe the Mission as the North Star that the company wants to be continuously moving towards.  Finally, the Values defines behaviourally how the Company‘s operates – what drives it, what motivates it, and how it will behave with its employees, customers, suppliers, communities, society and environment.  The combination of the vision and mission should be something that engages, and gains agreement from, all key stakeholders.

Here are some examples of the vision and mission, or a combined statement, for purpose driven companies.  

Orsted

Vision: “Let’s create a world that runs entirely on green energy.“

This is a Danish Company that started life as a state owned organisation focused on coal and oil.  Their current primary focus is on offshore and on shore wind farms. Most recently it has been recognised as the most sustainable company in the world in the Corporate Knights 2020 Global 100 Index.

Novo Nordisk

“Our purpose is to drive change to defeat diabetes and other serious chronic diseases such as obesity and rare blood and endocrine disorders. We do so by pioneering scientific breakthroughs, expanding access to our medicines and working to prevent and ultimately cure disease.“

How many other pharmaceutical companies have a missions to ultimately cure diseases where it derives all its revenues from?

Unilever

Vision – “to make sustainable living commonplace.”

Mission – “To add vitality to life. We meet everyday needs for nutrition, hygiene and personal care with brands that help people feel good, look good and get more out of life.” 

Tesla

Mission: “To accelerate the world’s transition to sustainable energy“

We all know Tesla for it’s pure electric vehicles; however, it now has a full suite of energy products that incorporate solar, storage and grid services.

Ikea

Vision: “To create a better everday life for the many people”

“Our business idea supports this vision by offering a wide range of well-designed, functional home furnishings products at prices so low that as many people as possible will be able to afford them.”

Microsoft

Mission: “To empower every person and every organization on the planet to achieve more”

“Our platforms and tools make small businesses more productive, multi-nationals more competitive, nonprofits more effective and governments more efficient. They improve healthcare and education outcomes, amplify human ingenuity, and allow people everywhere to reach higher.”

Patagonia, an outdoor clothing company, has had a sustainable mission since the beginning and has self imposed an earth tax of 1% of revenues for support activities to save the planet.  It has a very broad mission, “we’re in business to save our home planet”

It has defined it values in a different way to most companies that state the obvious ones of honesty, integrity, etc.  Their values are more action oriented, very honest,  and I think much more engaging:

“Build the best product – Our criteria for the best product rests on function, repairability, and, foremost, durability. Among the most direct ways we can limit ecological impacts is with goods that last for generations or can be recycled so the materials in them remain in use. Making the best product matters for saving the planet.

“Cause no unnecessary harm – We know that our business activity—from lighting stores to dyeing shirts—is part of the problem. We work steadily to change our business practices and share what we’ve learned. But we recognize that this is not enough. We seek not only to do less harm, but more good.

Use business to protect nature – The challenges we face as a society require leadership. Once we identify a problem, we act. We embrace risk and act to protect and restore the stability, integrity and beauty of the web of life.

Not bound by convention – Our success—and much of the fun—lies in developing new ways to do things.”

With a broader awakening of Boards and executive teams, as well as investor pressure, we should expect an increasingly rapid shift to much more purpose driven vision, mission and values? The companies not moving in this direction will inevitably be left behind.

The overall strategic framework tries to achieve 3 core objectives. Firstly, to ensure the business is systemically integrated into its economic, social and environmental situation context. Secondly, provide absolute clarity that the business is also focused on impact as well as profit to meet the needs of all key stakeholders. Finally, to have a true longer term perspective that considers both resilience and sustainability.

In the next two blogs, I will fill out the other components of the framework.

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REBOOT Business Strategy

Blog 8 of the Business Strategy Series

To date I have addressed 3 of the strategic topics that are integral to strategic thinking going forward.  The topics have been ‘from shareholders to stakeholders’, ‘from Michael Porter’s five forces to macro models, and ‘from risk monitoring to business resilience’.  In this blog, I will cover ‘from product – market fit to customer – product fit’. 

A more detailed understanding than product market fit is required in assessing the full  opportunity for a business.  Marc Andreessen, co-founder of influential Silicon Valley venture capital firm Andreessen Horowitz, coined the term product-market fit in a 2007 blog post, defining it as “being in a good market with a product that can satisfy that market.”  Traditionally this has been from primarily looking at the existing market.  In the venture capital world, this usually involves market testing to confirm that an exciting market opportunity exists which is the right place to start.  Unsurprisingly, with existing businesses this examination of an existing market is also done but often with not enough rigour on looking at the future.  

Customer – product fit is the matching of a product or service proposition with the needs of a large, and ideally growing, set of customers that will underpin a thriving business over time..  The reason that I choose to call it customer – product fit is that the critical thing is that only by truly understanding the customer will you match a need with the right product fit.  In addition, in an established business having a proper detailed understanding of market dynamics, opportunities and how they will evolve is mission critical to investment decisions.  Customer fixation is critical to success.  With markets evolving at increasing rates of change, too many companies are overly focused on competitors vs. customers.  

In an interview with Inc. magazine in 2019, Jeff Bezos talks of 4 key principles that drive Amazon’s business – Customer obsession, eagerness to invent, long-term thinking and operational excellence.  He says, “The first and by far the most important one is customer obsession as opposed to competitor obsession,” he says. “I have seen over and over again companies talk about being customer focused, but really when I pay close attention to them I believe they are competitor focused, and it’s a completely different mentality, by the way.”  He then goes on to say ” If you’re competitor focused, you have to wait until there is a competitor doing something. Being customer focused allows you to be more pioneering”.  Finally, this customer focus is encapsulated by a quote of his in Blomberg Businessweek, August 2014, “We don’t want to start with an idea and work toward the customer. We want to start with a customer problem and then invent to a solution.” – Jeff Bezos, Bloomberg Businessweek, August 2004

There are a number of factors that are creating a need to think differently by looking at customer – product fit (Figure 8-1).  Let me first talk about all the influencing factors and then I will come back to talk more specifically about customers.  Firstly, the need to focus on climate and environmentally sustainable products and services will be critical for all sectors with varying degrees of urgency.   With climate, leglisation, investor and public demand will be changing the shape and size of many consumer and b2b segments and the specifics of the product and service offers. For example, will your sector need or want to move from short cycle products (use – dispose) to long cycle products (eg. use – upgrade – resell – recycle), or go from a product purchase model to an asset sharing model.  Understanding how market segmentation will change as a result of both customer purchasing habits responding to the issue and other market requirements is essential to explore.

Figure 8-1

Secondly, the need to think about fit requires evaluation in the context of different time horizons.  For example, music has shifted in delivery format from LPs to cassettes to downloadable to live streaming.  With the acceleration of new technologies emerging many sectors will see fast and significant changes in what needs can be met, the design and delivery of the product or service, the payment models, the post-sale experience and the after-use experience.  The time between ‘new normal’ customer and market environments will shrink from a combination of technological shifts, climate change and other major disruptions.  

Thirdly, customers increasingly care about the sourcing of products; being on top of shifts in this thinking will be critical.  This care, and ultimately how they vote with their pockets, can link to environmental concerns (eg. deforestation), social concerns (eg. fair trade, child slavery, desire to buy local) and geo-political views (eg. anti-China).  

Fourthly, creating scenarios of potential market and competitive environments in the future will be more important than deeply understanding the current competitive environment.  The combination of new technologies, adoption curves of existing known technologies and the shift to sustainable businesses will change the shape of many markets.   You just have to think about how different your life was in 2007 when there were no smart phones and apps, limited bandwidth broadband, low data storage, much more limitations to on-line shopping and the use of social media was just starting!  When the key success factors, skills and capabilities change for a market sector, there will be changes in competitor sets and the dynamics between them.

Finally, with your customer – product focus what kind of innovation cycles will you need to stay relevant?  This isn’t just what we think of in terms of rapid ongoing upgrades to an existing product; rather, it is thinking about the time periods and likely fundamental shifts that the product or service may require to stay relevant.  All these factors can have a material bearing on customer – product fit going forward which is where strategy is focused.

Now back to the core thinking about customers.  I will focus on thinking about the dynamics in consumer markets, and then discuss business to business (B2B) markets.  I am amazed at how many people rely on impressions of what is happening that may well be 20 years or more out of date.  Two great books that deal with this are Enlightment Now by Steven Pinker and Factfulness by Hans Rosling. Challenge your executive team, and Board, to go through the 13 questions that Hans Rosling asks to see how current your thinking is on the world today.   Most groups that do this will be surprised by how much their knowledge is out of date.  Our knowledge base tends to be heavily biased by what is newsworthy as opposed to what is actually happening.  Up to date facts and knowledge is critical to picking the right geographies and customer groups to focus on; and, deeply understanding target customers and the potential market and product dynamics linked to them is fundamental to growth.

At the macro level, the global population continues to grow.  We are now approaching a global population of 7.8 bn people and we expect to hit 10 bn people by 2055. The dynamics of this growth have changed and will change significantly over time (Figure  8-2).

Figure 8-2

This is a growth rate of about 1.05% per annum currently which is expected to decline on an ongoing basis until population growth has virtually stopped by 2100.  The population growth rate was as high as 2.05% in the period between 1965 and 1970. A tremendous change occurred with the industrial revolution: whereas it had taken all of human history up to year 1804 for world population to reach 1 billion, the second billion was achieved in only 123 years (1930), the third billion in 33 years (1960), the fourth billion in 14 years (1974), the fifth billion in 13 years (1987), the sixth billion in 12 years (1999) and the seventh billion in 12 years (2011). During the 20th century alone, the population in the world has grown from 1.65 billion to 6 billion. (Source: worldometers.info, UN Nations – World Population Prospect: the 2019 Revision (June 2019)). In the 21stcentury, the population is expected to grow to about 11 bn by the end of the century at which point the population will have probably peaked.

If we then look at sources of population growth from 1950 to 2055 forecasted levels, the sources of growth evolve significantly by both geographic region (Figure 8-3) and by World Bank income classification based on the 2018 country classifications (Figure 8-4).   Firstly, from a geographic perspective, the combination of North America and Europe represented 28% of the global population in 1950 and by 2055 it will only be 11% of the population.  Europe will start to decline as of 2025, and North American growth will be very slow.  Asia will continue to grow through to 2055 and then start to decline; although, the sources of growth will change between countries.  Africa will continue to be high growth, and then effectively be all the growth from 2055 to 2100.  From an income growth perspective these growth patterns will be exaggerated further as income growth rates are higher in lower income countries.

Figure 8-3 Figure 8-4

If you look at growth using World Bank Income Groups as defined in 2018, both high-income and upper middle income group populations growth will have peaked by 2050 and all the growth will be in the lower middle income and low income group countries to 2100.  

Behind these numbers, there is the other dynamic of population breakdown by age (Figure 8-5).  These trends can also cause tremendous shifts in spend as populations age.  Figures 8-6, 8-7 show how different the dynamics can be when you compare Japan (the oldest average age country and a declining population) with a large high growth country young country such as Nigeria.

Figure 8-5
Figures 8-6, 8-7

Clearly these dynamics then need to be overlaid with consumption patterns and income availability to really understand and define opportunities.

The last aspect of B2C customer – product fit that I want to talk about is customer purchasing behaviour.  In consumer markets, we have gone through the different generations from Baby Boomer to Gen X, Y and now Z (Figure 8-8).  There have been massive shifts in attitudes, behaviours, purchasing and consumption.  These shifts cause great challenges across many businesses ranging from hiring, to work expectations and work environment practices, and clearly also to consumer spend on product and service offers. 

Figure 8-8

Through the generations, and with technology changes, we are seeing major changes to consumer spend in a number of ways.  Firstly, in the mix of spend such as shifts from products to experiences and trends towards wellness.  Post Covid 19, I think we can expect some further shifts in the mix of spend, perhaps less travel and more spend on the home. Time will tell! Secondly, there is the evolution of functional needs within product categories; for example, towards organic in food, or simplicity, time saving and integrateability in more technical products.   The functional elements then also blend in with the emotional factors, the third category.  These would include the potential need to express individuality, badges/brands for association, design, local vs. mass produced, etc.  Finally, there are some overall higher level themes that would go across sets of product categories linked to social responsibility and ethics such as climate, ethical sourcing and fair trade.  Being on top of these trends and understanding the link back to customer needs and segmentation is critical strategically.  

As with consumer purchasing, B2B markets have similar complexity and an ever greater importance of understanding technology and innovation trends that will affect a companies mix of spend and specific purchase criteria.  Bain & Company, my alma mater, has done some excellent work analysing and categorising the most important elements for a purchasing decision.  Figure 8-9 is their Elements of Value pyramid for B2B buyers.  Across industries, the most important factors will vary; and then, within an industry, markets will segment against certain clusters of factors.  

Properly, identifying these market segments and then understanding them is essential for properly mapping customer – product fit.

In summary, focusing on a clear existing market is essential; however, understanding how the market will evolve and purchasing patterns may change is what will drive the sustainability of your market opportunity.  All of this starts with truly understanding a company’s target customers and their needs and problems that they are trying to be solve.  This knowledge will drive investments, how you organise and focus your innovation initiatives, and your ability to compete and outperform.  

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“The future depends on what we do in the present”, Mahatma Ghandi

Blog 6 of the Business Strategy Series

‘From Michael Porter’s Five Forces to macro-models’.  In the last blog, we talked about the need to shift from a shareholder perspective to a stakeholder perspective.  In this article, I want to cover off the importance of overlaying onto Michael Porter’s 5 forces industry analysis two factors (Figure 6-1).  Firstly, an understanding and integration of what is happening in the macro environment into the strategic thinking and planning for a business.  In broad terms, these macro factors can be put into one of 5 categories – Economic, Environmental, Geopolitical, Societal and Technological.  Secondly, a detailed analysis and assessment of the threats and opportunities that could come from technology.  

Both of these factors need to be looked at from a multi-time horizon perspective. The external dynamics impacting a company can be significant on all these horizons; therefore, scenario modelling on each of these horizons is essential. As examples, in the short term, we are seeing how a pandemic can have dramatic effects on our business. In the medium term, the movement of a technology into a growth phase of rapid adoption could have a signficant effect on a competitive environment and customer purchasing dynamics. In the longer term, climate change is affecting most businesses and sectors, and may affect longer term investment decisions. Superior understanding about how an industry could be affected provides a real opportunity to outperform and improve business sustainability.

Figure 6-1

Starting with the macro environment, the World Economic Forum ‘Risk Trends Interconnection Map’ (Figure 6-2) illustrates well the range of macro factors that a business may need to watch and monitor. This will help a business decide how to adjust its strategy as these factors and their interconnections wax and wane over time.  

Figure 6-2

Just since February 2020 and the emergence of Covid 19, businesses are having to deal with a combination of many factors including the need for remote working, limited ability to make sales, massive financial pressures from the financial crisis, a collapsing oil price, increasing trade tensions between the US and China, increasing national sentiment, potential implications of greater control being put on Hong Kong by the Chinese government, and in some sectors a heightened level of cyber attacks.  Do any of these have any bearings on your strategy going forward?  This level of challenge to a business will not go away and for many the issue of climate change will only create even more profound challenges.  Thinking about these potential risks in different scenarios over the short, medium and long term is vital.  The key is really to solve how to take advantage of the situation to strengthen the performance potential of the business and strengthen its competitive position.

Secondly, it is vital to look at the threats and opportunities of technological change.  It is easy to forget the accelerating speed at which new technology is adopted at scale (Figure 6-3). For businesses, it affects what products and services can be provided, how businesses operate, which markets they can reach and focus on; and, it results in whole new market sectors being developed.

Figure 6-3

In addition, the speed at which new technologies are being developed and related products are being introduced is astonishing (Figure 6-4, 6-5).  In the research world, there are unprecedented levels of information sharing and collaboration coupled with increasing speeds of access to new research through digitization, open access and data sharing.  Over time, the profile of research is showing higher levels of collaboration and higher levels of cross border research cooperation.  As long as the world keeps opening up this will only accelerate; and in turn, continue the acceleration in the development of new technologies.  

Figure 6-4
Figure 6-5

The biggest challenge emerging from new technology being adopted to its full potential is the ability of individuals, businesses and governments to understand its potential and reap the full benefits (see illustrations in Figure 6-6, 6-7).  Increasingly we are also going to find that many high value applications involve the convergence and integration of multiple technologies. For example, an autonomous driving vehicle combines the use of recent and emerging technologies including AI, robotics, battery storage, big data and sensing.

Businesses need to be more focused than ever on understanding technology based opportunities and innovating new products and services. The old fashioned approach of driving leadership from focusing on primarily driving down its cost position or innovating within its existing knowledge and parameters will not survive. 

Figure 6-6
Figure 6-7

In the analysis of the potential impact of technology, a key factor to assess is the speed of adoption of new technologies.  Despite the potential for high speed adoption, this is not always the case. It is particularly important to analyse in sectors where there is a high concentration of market share among a few companies.  In these situations, there are two factors that affect the speed of change.  Firstly, for any of the key competitors is there a bigger profit opportunity in the short or medium term of adopting new technology?  If the business model of these competitors could be disrupted and their could be a leak of profitability then, depending on the level of competitor concentration, the adoption could be slowed significantly.  Secondly, once one of the big players makes an aggressive move to shift to adopt new technologies and adjust their business model, perhaps from shifting to a long term view of how they need to compete, then the rate of change in the industry is likely to change.  

This slowing down of the potential rate of adoption, was very prevalent in the research publishing sector with the likes of Reed Elsevier (now RELX plc) and Springer (now Springer Nature).  The rate of adoption of the real potential of digital technologies and its full implications to benefit the sector probably took at least 10 years longer than it could have.  Time bought them the ability to search for new sources of profitability before any core compression of performance in their core business. It would also be interesting to speculate what the energy sector would look like today if one of Shell, BP or ExxonMobil would have made a strategic commitment to commit to clean(er) energies say 15 years ago; after all, they knew about global warming in the 1980’s.  

Overlaying onto an industry analysis, how to take advantage of an increasing rate of technology introduction, understanding factors that may delay technology adoption, and managing continuously changing dynamics surrounding a market is fundamental to strengthening the performance potential and competitive postion of a business.

In the next blog, we will look at shifting from risk monitoring to business resilience.