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Corporate strategy: the need for flexibility

When markets are changing rapidly and unpredictably, strategies and tactics must also be flexible.

So revolutionary companies, within a broad visionary context, delegate strategic planning to business units which are able to adapt swiftly to shifting markets. Using IT, the centre controls without interfering. One of the key controls is planning itself.

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President Eisenhower, in his military capacity, once famously observed that he had never found plans any use, but that planning was indispensable. These wise words are essential guidance for the Triple Revolution. Its mainline companies (even Microsoft) still make business units construct three-year plans, even though everybody knows that their realisation, as written, would be a miracle.

At least the plans are devolved, as they should be, to the units. If the strategy is likewise devolved, the company has a good chance of success. But that imposes a changed duty on the centre. Top management remains the guardian of the strategy, but is no longer its sole, dictatorial creator. You decide, as the senior group, say, to engage fully in the Triple Revolution, to convert old businesses to on-line operation, to develop new ones, to bind the company into a whole, linked internally and externally by the latest technology. That decision, though, is confirmed by discussion with those who must implement it.

The implementation, including the how and other specifics, is left in their hands. The centre is kept fully informed of progress, and may need to give it a forward push from time to time. Its main strategic function, in fact, is to close the management gap - to insist on movement from knowing what to do, and how to do it, into the absolute necessity of actually getting it done.

Boards and executive committees have been among the main culprits (and victims) of the Unclosed Gap. For example, Western car manufacturers knew they needed to emulate Japanese methods to raise quality and speed new model development. But for years nothing was done - and most of the firms concerned still lag behind Toyota in significant respects. Complacency and inertia are natural but unacceptable concomitants of the cloistered nature of top executive life.

It's hard to evolve an intelligent Internet strategy if you have never used a PC. Nobody can blame a middle-aged director for ignorance of cyberspace technicalities and technologies. But ignorance of their business relevance is inexcusable, and could well have fatal consequences. So far, the ignorant and the apathetic have been protected by the ignorance and apathy of their competitors. Sooner or later, however, someone breaks out of the pack, or breaks into it: and disaster must follow for the unwilling and the unready.

In theory, a typical board could revolutionise itself. You can teach old dogs new tricks, but teaching themselves is another and more difficult canine strategy. Soichiro Honda, the brilliant and eccentric strategist who, against all the odds, transferred his success from motor-cycles to cars, retired at only 63. Even though his role had not been operational for a decade, Honda thought that his unfamiliarity with computers debarred him from carrying on (to be fair, he also mentioned his declining prowess at sex and sake-drinking).

That act of abnegation took place long ago. The same disqualification would rule out many board-level managers, perhaps the majority, as the Millennium begins. Some very large companies may have digital war-rooms, capable of displaying and manipulating the latest statistics and asking 'What if?' questions, etc. These can be mightily impressive. One chief executive spoke with awe of the whole company 'coming alive' before the eyes of the board when the chief technologist unveiled the war-room. I later learned how often it had been used: once.

As it happens, this group's strategy has so far failed conspicuously, despite (or because of) some violent changes of direction. The more dominant the influence of the top stratum of an established company on the formulation and execution of strategy, the harder it is for that strategy is to succeed. Even so plainly able a chief executive as John Chambers of Cisco cannot conceivably devise the strategy for every one of his hundreds of business units, and it would make no sense to try.

MONITORING THE STRATEGY

With the aid of a 'digital nervous system', however, the CEO can find out what is happening on the strategy front - and on all others. That is in itself one of the key strategic issues. Can you monitor strategies and their outcomes whenever you want, wherever you want? The answer cannot be 'Yes' unless the nervous system is comprehensive, giving positive answers to a dozen other critical questions:

1. Has e-mail become the major internal communications system?
2. Can you get sales data on-line?
3. Are PCs used for business analysis?
4. Does the network enable teams to work together across functions, departments and units?
5. Are you using the digital system to eliminate paper and bureaucracy?
6. Have you redesigned processes to eliminate single-task jobs for multi-functional tasks?
7. Does the system monitor and improve quality and efficiency?
8. Do you have and use customer feedback in real time, on-line?
9. Are your customer relationships built into the system?
10. Do you communicate via the digital system with all suppliers and partners with the aim of shortening cycle times and accelerating processes?
11. Have you eliminated the middleman, substituting direct, digital control of deliverables?
12. Have you automated customer processes so that, wherever possible, they are handled digitally?

The questions are adapted from Bill Gates's Business@ the Speed of Thought. They are not what are commonly thought of as strategic questions. It requires no understanding of the technology to see the advantages that getting the right answers must confer. It needs no remarkable business awareness to see that having the wrong answers greatly reduces the effectiveness of an organisation. Nor do you have to be a great strategic thinker to understand how the right answers underpin strategic efficiency.

This is the platform for what we call 'zero-based strategy'. You devolve ZBS to the front line of implementation. Possessed with full information, unit managers can place themselves in the position of a newcomer who's tackling your market without preconceptions, without fixed assets, without the hampering baggage of the past. It has to be said that the example of a relatively small piece of strategy given by Gates shows that the system can result in centralised over-management.

The issue was where to direct Microsoft's sales activities among small to medium-sized customers. It took two months to work out the answer with great precision, using the in-house data warehouse, the Internet and much work on PCs. The answer? The best strategy was to invest in new marketing programmes for cities where there were currently no marketing activities at all.

To be brutally honest, that should have been obvious intuitively. A simple test of the proposition would have checked the viability of the intuition, and roll-out would have confirmed the conclusion. Great care is needed to ensure that the powers of the system are used economically, and that thought does not come to a halt while you grind out data. But Microsoft even had Steve Ballmer, the company's president, 'critiquing plans' for the above project 'by e-mail from Europe'. That is evidently the Gates way. It isn't the new way.

In the new methodology, units work out their own strategic objectives in the light of the general strategic direction agreed by and with the top management. Take a financial services business - Fuzzy Financial - which is losing old customers at a rate of 600,000 a year and gaining new ones at only 400,000. Worse than these numbers is the loss of profit. Not only does it cost more to recruit customers than to retain them, but the old departures have more profitable contracts than the new recruits.

THE THREEFOLD STRATEGY

In this situation, the strategic need is obvious, simple, compelling, and threefold. Stop the bleeding, raise the recruitment and elevate the profitability. You ask each of the units into which the organisation is divided to develop its own strategy to meet the three targets. If they cannot meet the dozen Gates criteria, above, however, they start with tremendous disadvantages.

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Typically a financial services company will hold details of the same customers on different databases that cannot communicate with each other. The company may not even know that the customers are the same people. And the customers have no efficient means of contacting the businesses. As Gates told some banks in Canada, that deficiency could hold the answer:

'Today [banks] have back-end database systems that store information, and they have applications for people doing customer service on the phone and for tellers and for branch banks. Now they're looking at adding new systems to present customer with data over the Internet. They said, 'We don't want to pick up the additional cost and complexity of still another interface. I told them that the solution was simple: They should build a great interface for customers to see data over the Internet, then use the same interface to view data internally'.

Gates adds that the 'new interface becomes the bank, both inside and out'. Without such a solution, fuzzy financial companies cannot optimise their strategies. Given the necessary information, though, they can use the customer data, and facts about the popularity and profitability of existing products and marketing methods, to construct plans for new customers and old. They can test those plans by simulation before incurring any real costs. And they can monitor the results of implementation in real time.

The centre will tap into the monitored results to get an overview of progress, and to ensure that the units are sharing each other's experiences and helping each other, where needed, to meet their individual targets. Above all, the centre will watch for evidence that the plan is being constantly revised and reviewed as actuality tests assumptions and expectations. In uncertain times, nobody expects outcomes to appear exactly according to plan. But you must expect management to react to the certainty of uncertain events.

They must operate in the spirit of Gates and 'the two years from disaster' which he regards as Microsoft's perpetual condition. Every strategy has the same inherent weakness: the conditions under which it was formed will inevitably change, perhaps profoundly: witness, the switch to digital technology which caught Motorola sleeping and gave its world market lead in mobile phones to Nokia. Since such Titanic changes are bound to happen, constant monitoring of the strategy and the marketplace - an Iceberg Watch - is essential.

Collection and analysis of the data will establish the dimensions of the problem and reveal its root cause. In Motorola's case, the cause almost certainly revolved round attachment, both psychologically and financially, to the old technology, coupled with refusal to take seriously enough the inroads of upstart digital competitors. Any firm, of any size, can kill or be killed through...

1. New technological developments
2. New forms of competition
3. Different methods of supplying and serving the market
4. Emergence of new customers and channels
5. Alternative market and product strategies
6. Emergence of new markets

These were among the actual issues explored at one company, not in crisis, but after five years in which sales had risen five times, profits ten times, and the stock eight times. The object was to prove that dominant firms can fight the inertia of success, and that 'stretching the organisation brings out the best in it'. In Straight from the CEO, a collection of pieces orchestrated by Price Waterhouse, the company's CEO drew on experience when he wrote:

'People respond to a bold, well-defined vision and adjust swiftly to its demands. Don't rely on incremental steps - they're just an excuse not to change. When you reach one goal, pursue an even bolder goal.'

Boldness and escalation are vital to the killer apps approach: so is speed. Typically companies take a long and leisurely look at these matters. If you take 18 months to study your strategic options, say, that has one blatant drawback. Nothing will be the same in 18 months' time. Moreover, if radical change is needed, you have lost 18 months of valuable time. You can't afford that in any business, electronics above all. In personal computers, with their life-span of six months or so, 18 months is three generations - the equivalent in human terms of a century.

PROJECT MANAGEMENT

The CEO mentioned above couldn't wait that long. So he gave his project, code-named 'Crossroads', just eight weeks. The technique applied, mentioned earlier in this book, is called 'project management'. Its principles are simple: our KAITs (Killer Apps Implementation Teams) take a very similar approach. It is the epitome of devolution. You divide the task into separate components and give each to a cross-functional team. The teams (15 in the Crossroads case) are coordinated and facilitated by higher management, but are self-contained and responsible for meeting their own deadlines and targets.

The swift Crossroads findings gave top management the material with which to debate and devise 'a new three-pronged strategy.' All the same, they did not devise a 'digital strategy for market dominance'. The company is Compaq and the CEO, Eckhard Pfeiffer, who was ousted in April 1999, partly for failing to match the sensationally low costs of direct-seller Dell; partly for other failures, including the halting execution of the mega-merger with Digital, a top-down strategy which the 15 teams doubtless did not consider.

Compaq has floundered against Dell's killer app: what founder Michael Dell calls 'virtual integration.' He argues that a normal $15 billion company - the level that Dell has reached in merely 13 years - would employ 80,000 people. That compares with an actual roster of 15,000, a mere sixth of Compaq's size. As Dell sees it, the more people you employ, the more time you spend managing them, as opposed to managing the business.

Moreover, building your own capacity to cope with expansion dodges what MIT professor Peter M.Senge calls a limit to growth: 'If we had to build our own factories for every component of the system, growing at 57% per year just would not be possible.' Virtual integration is more than simple outsourcing. It is finding reliable partners who act as part of your business system. Dell says that 'regardless of how long these relationships last, virtual integration means you're basically stitching together a business with partners that are treated as if they're inside the company.'

You share information with them in real time, which is how you place your very specific orders: 'Tomorrow morning we need 8,562, and deliver them to door number seven by 7 am.' Using state-of-the-art IT, 'supplier-partners' can be incorporated into the system in a way that 'creates a lot of value that can be shared between buyer and supplier.' Much of that value is created by speed. Taking supplies on a daily basis, Dell fills customer orders with only five or six days of lead-time, while its on-hand inventory of raw materials is measured in a few days, even a few hours.

This means that Dell doesn't get caught by falling prices or rising stocks, and can move much faster. Dell told the Harvard Business Review that if 'I've got 11 days of inventory and my competitor has 80, and Intel comes out with a new chip, that means I'm going to get to market 69 days sooner.' No matter what Compaq or any other competitor does, they won't be able to match Dell without matching its corporate model.

The very word 'model', though, can be a trap, one which Dell is determined to avoid. He says that people in the company talk about 'the model' as if it were 'an all-powerful being that will take care of everything. It's scary because I know that nothing is ever 100% constant, and the last thing we should do is assume that we're always going to be doing well.'

The paramount issues are not the specific challenges and changes (which you should, of course, respectively meet and make), but whether you are prepared to kill your old systems with new apps - and when. The inhibition is understandable if you are serving the existing customers brilliantly in every respect with highly profitable products. So there is no economic case for change - at present. There never is until rivals with better systems have taken over the market. By then, of course, it's too late (as for Pfeiffer's regime at Compaq) for anything but epitaphs.

Robert Heller

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