issue 1 - Roland Berger

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p business culture constantinos markides “ Despite the potential conflicts, opposing business models can be combined to counter strategic innovations.” Constantinos Markides pressure by Southwest Airlines, which was playing a totally different game—the game of low cost, point-to-point, direct flights. In response, Continental created a new subsidiary, Continental Lite, which ultimately PORTER IS MISTAKEN—STRATEGIC INNOVATORS NEED TO BE IN TWO PLACES AT THE SAME TIME failed, since the internal conflicts could not be resolved. What are these conflicts that Porter talks about? One such conflict is the risk of mutual cannibalization between parent and subsidiary. There are problems of overlapping distribution. And there are organizational conflicts. Established companies have a culture and structure that have been built up over a long period of time. But companies that implement strategic innovations need an entirely different type of corporate culture and organization. My own position is that Porter is wrong in advising companies not to play two different games. I agree with him that playing two games is very difficult given all these conflicts. But it is not impossible. Companies have four strategies available using two business models—one conventional, one unconventional (see matrix p. 53). Separation is the preferred strategy when the new market is not only strategically different from the existing business but also when the two markets face serious tradeoffs and conflicts. The Swiss food company Nestlé experienced this first scenario when it set up a separate unit called Nespresso in the early 1990s. Nespresso, an exclusive brand for young urban professionals, actually had an adverse impact on its traditional instant coffee sales. For this reason, Nestlé moved the new unit to a different town, assigning it full autonomy. Nespresso is now one of the most profitable units within Nestlé. Separation is unnecessary if the new market is very similar to the existing business area and holds little prospect of conflict. In this second category, it is better to integrate business models into the existing structure. Merrill Lynch, for example, created an online-trading niche within its existing business. Old and new customers alike could make their own decisions about the type of advice and trading they wanted. A third scenario emerges when the new market is strategically similar to the existing business but the two face serious conflicts. In such a case it might be better to keep the concepts separate for a period of time and then slowly merge them. When the Danish bank Lan & Spar decided to set CONSTANTINOS MARKIDES is a management professor at the London Business School (LBS). Born in Cyprus, Markides studied economics at Boston University and received an MBA and doctorate degree (DBA) from Harvard. Before teaching at LBS, he worked for the Cyprus Development Bank and Harvard Business School. Markides has published numerous articles in major magazines, including the Harvard Business Review and the Sloan Management Review. up a direct bank alongside its branch network, it kept the two concepts separate for three years before merging them into one. It then carefully completed the transition. The challenge the firm faces here is to keep the new business model protected from the mindsets and policies of the existing business, while at the same time exploiting synergies between the two businesses and preparing them for the eventual marriage. The fourth scenario arises when the new market is fundamentally different from the existing business but the two do not conflict seriously. In such a case, it might be better to first build the new business inside the organization so as to leverage the firm’s existing assets and experience and learn about the dynamics of the new market, then separate it into an independent unit. This is exactly how Tesco, the UK’s biggest supermarket chain, approached its online spinoff, Tesco.com. The company started a home delivery service in the mid-1990s under the name Tesco Direct. The first trials involved making small deliveries to pensioners. Later, customers ordered from a paper catalog, then from a CD-ROM, and eventually through the company’s Web site. By 2001, Tesco Direct was reorganized as a full subsidiary of Tesco and was renamed Tesco.com—the first step in the divorce proceedings. In 2003, Tesco’s executive board announced that Tesco.com would be spun off. The online arm had become a different business and had to be given the freedom and autonomy to develop as it saw fit. The decision about when to separate and when to keep a strategic innovation inside the organization is obviously important, but it is equally important to appreciate that this is only part of the solution. Having decided which of these strategies a firm will adopt, the key question that must be addressed is this: “How can I manage the 52 think: act
creating a credible enemy is part of the solution business culture f Strategic innovations: new objectives and a new way of thinking Five rules for how companies can find ways to compete that others have missed strategic innovation so as to ensure its successful implementation?” What can upper management do? I believe it has to take the organization through a four-step process. The first is to sell the new strategy to employees and generate some passion. But knowledge does not create passion. So the next step must be to explain why it is so important both for the employees and for the organization. The first reaction will be, “This is impossible.” Therefore the third step is to make it believable. One IN THE LAST, DECISIVE STEP, MANAGERS NEED TO WIN THE HEARTS OF THEIR EMPLOYEES way to do this is through early victories. Success will slowly turn people around and will have them thinking, “Maybe, after all, we can do this!” And the final and most important step is to transform it from a rational to an emotional process. The first three steps involve showing employees what the strategy is and convincing them that it is important and achievable. Now management has to win over their hearts too. Managers have various ways at their disposal to gain this emotional commitment: make the employees feel special; p reinforce that feeling of uniqueness by being very selective about who is invited into the team; p instill the feeling of being part of a special team by creating team symbols; p allow them to participate in the setting of the objectives; p empower them to go out and do things toward achieving these objectives; and p create a credible enemy for them. These are all tactics that will help teams and entire companies come together in trying to achieve very ambitious objectives. They are tactics that help management seize upon strategic innovations effectively, enabling them to practically be in two places at once. 1) Redefine the business: A company should constantly ask itself what business it believes it is in. Companies have traditionally defined themselves by product (car companies), by customer function (transportation) or as a portfolio of core competencies. Most importantly, a company should go through a four-step procedure in defining itself: it should list all possible definitions; evaluate each in terms of customers, competitors and market barriers, etc.; choose one; and ask how competitors are redefining their businesses. 2) Redefine the who: A company should constantly ask itself, “Who is my customer?” Companies can identify customers who are good for the business and those who are bad. And they can identify customer priorities, which can change more often than needs. But, to be successful, a company must choose a niche that eventually grows to become the mass market, and the company’s way of playing the game becomes the new game in town. 3) Redefine the what: A company should first decide strategically what products or services it should be selling to its customers. Then it can determine whom to target. To become a strategic innovator, a company has to be the first to identify new or changing customer needs and priorities and then find better ways of satisfying them. 4) Redefine the how: A company can build on its existing core competencies to create a totally new product or way of doing business. It can share competencies across business units, reuse a competence from one unit to create a new business and expand competencies as it learns new skills. 5) Start the thinking process at different points: In thinking of new ideas and ways of doing things, managers need to broaden their perspective and change their angle of focus. If a company usually thinks first of the customer, it should start thinking first about its unique capabilities or about what needs it could serve. Success matrix for the management of strategic innovations Companies can select among four strategies using two business models. Serious Type of conflicts between established companies and disruptive innovations Minor A Separation D Phased separation B Phased integration C Integration Low (different markets) High (similar markets) Similarities between established companies and disruptive innovations think: act 53
Page 1 and 2: DOSSIER: How companies are able to
Page 3 and 4: think: act the executive magazine f
Page 5 and 6: contents f food for thought dossier
Page 7 and 8: 315 million chinese have mobile tel
Page 9 and 10: the dragon prepares to leap food fo
Page 11 and 12: 89.5 percent of all young chinese w
Page 13 and 14: 30 percent of all workers in the un
Page 15 and 16: the profit-revenue ratio is 18 perc
Page 17 and 18: Dossier #01 THE FORMULA FOR GROWTH
Page 19 and 20: The formula for growth DOSSIER #01
Page 31 and 32: Trust DOSSIER #01 How trust drives
Page 33 and 34: Commentary DOSSIER #01 Seven surefi
Page 35 and 36: Interview DOSSIER #01 »The stabili
Page 37 and 38: Interview DOSSIER #01 What does tha
Page 39 and 40: ireland’s public transportation i
Page 41 and 42: automotive industry report f Togeth
Page 43 and 44: automotive industry report f Tremen
Page 45 and 46: nearshoring industry report f Howev
Page 47 and 48: “Competencies count” Companies
Page 49 and 50: in india a heart operation costs on
Page 51: constantinos markides business cult
Page 55 and 56: paul newman’s sauces have earned
Page 57 and 58: a global average of 30 billion sms
Page 59: ZAGREB OFFICE, ROLAND BERGER TOP MA

issue 1 - Roland Berger

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