MANTIS: Business Strategy Observed

Commentary: Strategic Planning is Out?

In their article "Strategic Plans Lose Favor" published January 25, 2010 in the Wall Street Journal  Joann Lubin and Dana Mattioli  described company experiences where the state of the economy had made them abandon their strategic plans, and even their plan-producing thought-process. These companies probably had rather poor plans to begin with.  

A well-thought-out strategic plan is not derailed by an economic surprise, because a well-thought-out plan has provisions for surprises already built in.    The oldest commonly-used provision for surprises is the so-called “flexible operating budget”,  which predetermines, among other things, what the adjustment to surprisingly low market demand would be (in a way that preserves to the maximum attainable degree the attainment of the long-range strategic objectives).  In fact, a well-thought-out strategy would not have been chosen in the first place if it didn’t contain from the start the required degree of flexible budgeting.        

It is commonly thought that one benefit of an economic recession or depression is that it cleans out the Augean stables:  poor products, poor production systems, poor managers, etc., which survived in good times only because a rising tide raises all ships, even leaky or slow ones.  Now apparently poor strategic planning gets cleaned out as well.  Hooray!  That’s good news for the future usefulness of strategic thinking in industry.    

Many of the companies that use unwise short-cuts in their strategic planning really know better.  But they don’t do the complete job because they believe that to actually do so would be very time-consuming and very expensive.  Well, it used to be, but certainly not any more.  The availability of the required software tools for ex ante strategy stress-testing makes well-thought-out planning not only possible but also fast and inexpensive.  There just is no excuse any more for not doing the strategic planning job properly.

Commentary: Afghan scenarios tested in war game

Today's Washington Post features an article by Greg Jaffe and Karen DeYoung describing two Afghan military scenarios a war game designed to assist the Administration determine its course of action in "the faltering war in" Afghanistan. War gaming exercises like this are often used by the military and business leaders to help think through the consequences of strategic decisions.

Two important aspects of the war game are highlighted in the article; 1) a war game may not provide the answer, and 2) the benefits of looking at a strategic decision from many viewpoints and putting your team in to the minds of other "competitors". Both these aspects are discussed in the article and  highlighted by the authors. First,  "The Pentagon war game did not formally endorse either course; rather, it tried to gage how Taliban fighters, the Afghan and Pakistani governments and NATO allies might react to either of the scenarios". Second,  "We were running out the options and trying to understand the implications from many different perspectives, including the enemy and the Afghan people," said a senior military official, who was granted anonymity to discuss the classified game.  

Managers who war game their businesses can apply the same lessons as described in this article. Based on our extensive experience designing and facilitating war games it is critical to prepare for a war game by:

• identifying the key constituents or stakeholders who have a role in the outcome of the strategy
• assembling accurate description of the current situation or environment
• building likely scenarios that are likely or may have high-impact outcomes
• assembling teams to assume the roles of stakeholders 
• determining how to measure or quantify results

With these foundation components in place a war game can be effectively used to stress test a strategy, help identify gaps in knowledge, improve strategic thinking, and provide quantitative results to compare strategies and scenarios.

Commentary: Better times for Ford or just table stakes

In his July 21^st post in Business Week, David Kiley describes how Ford Motor finally beat the competition. In a survey conducted by RDA Group that looks at the number of problems among auto manufacturers. Ford came out on top even besting Toyota. In addition, in J.D. Power’s Initial Quality Study, which sets the industry standard Ford was in a “statistical dead heat” with Toyota in Things Gone Wrong (TGW) in the first three months of ownership.

Quoting from the article Business Week cites an internal memo describing how it feels to be on top. “We’ve been tied with Toyota before, but it sure feels better to be on the top!” wrote Bennie Fowler, Ford’s global head of quality, in a memo to employees.

This is no small accomplishment and Ford should be congratulated. Now, Ford must determine if these improvements will result in improved competitive position. If so, Ford will reap the rewards of its determined efforts. If not, and IMP doesn’t help increase Ford’s visibility in the market or isn’t an important factor in the customers decision process the company’s accomplishment may only be a table stake to keep Ford in the game.

How can Ford determine the potential impact of these changes? One of our firm’s analytical approaches is Relative Perceived Quality (RPQ) that quantifies customer needs and perceptions of competitive offerings. Using this framework we can determine whether Ford derives a meaningful benefit in the eyes of customers when making purchase decisions. As a simplified example, let’s look at a set of five decision factors and three competitors for the family sedan market. The five factors are Initial Manufacturing Problems (IMP), Design, Features, Miles-per-gallon (MPG), and comfort.

 

In Exhibit 1 we compare two examples (A and B) of how customers might weigh five decision factors. Initial Manufacturing Problems (IMP) has a weight of 5 in Example A, the least important factor, and a weight of 30 in Example B, the most important factor. The other factors are Design, Features, MPG, and Comfort. In the Example A, customers are unlikely to base their car buying decision on IMP because it is much less important than the other factors. In Example B customers will likely base some of their buying decision on IMP because it is so important.

We can extent the analysis to add the competitive ratings (Exhibit 2) of Ford and two competitors using a 0 – 100 scale with 100 representing perfect performance and 0 poor performance. Drawing from the studies cited above, the scores indicate Ford has little advantage on IMP despite its number one ranking and in fact the company is about even with two leading competitors. If IMP is the only factor in the purchase decision Ford has a nominal advantage and regardless of its importance is unlikely to gain or lose market share based this factor alone. Management might argue that its efforts have reduced its costs or that longer-term the improvement in IMP will bolster its ratings on the other factors. A counter argument is IMP is a table stake that allows Ford to be in the consideration set rather than a decision factor.

Purchasing an automobile is a complicated process involving both price and non-price factors. In these examples we have simplified the automotive purchase decision process; however, simple or complex managers must insure they measure what is meaningful for their market to drive their success. Ford’s ratings on the other factors may vary from better than to worse than competitors. A more comprehensive analysis will consider multiple factors and provide a clearer picture of Ford and its competitors and their position relative to each other.

Commentary - Cracking the Value Code

The July 21^st Business Week Blog on Innovation by Jessie Scanlon described Caterpillar’s roll-out of the new Hybrid D7E diesel-electric tractor which the company anticipates will be a hit with customers and enable gains in market share and drive the company’s recovery.

Caterpillar is making a strategic bet that the strategy will succeed. The payoff of this strategy won’t be known for some time; however, Caterpillar has spent years working with key customers to understand their needs and their perception of the value of its large tractors. Tractors in this size category sell for $500,000 or more and in the case of the D7E $603,000, a 20% premium.

Caterpillar is basing its pricing and value on the life-cycle “price” of its tractor instead of the initial price or the product. The company’s design team has worked with its customers to develop the D7E and believes that productivity improvement (10%), combined with greater (30%) fuel efficiency, and lower (10%) operating costs will motivate customers to pay the initial price premium over competing products. If Caterpillar has accurately understood how its customers perceive value the D7E should drive market share growth.

Value, the combination of price and non-price factors comprises a one element of a customer’s purchase decision when comparing competitive offerings. To justify a 20% price premium a product/service’s relative performance on the non-price factors must be superior especially for the most important factors. A review of  MANTIS research shows that businesses with high value gain market share and those with low value lose share.

When deciding how to position your product two important questions you should consider are:

• How do customers define price?
• How important are the non-price factors to customers where your business has an advantage?

If customers don’t accept life-cycle pricing and look at initial price your product will be over-priced and provide poor value. Some examples include; 1) the decision maker is the purchasing department and is rewarded on negotiating the best initial price, 2) customers agree with life-cycle pricing but put a lower premium on the benefit, and 3) other cost factors change the economics of the decision lessening the benefits of your product or service. Finally, if competitor’s match your product your advantage is dissipated and ability to maintain a price premium lessens.

Businesses that successfully Crack the Value Code will accrue the market and financial rewards and move ahead of the competition. In addition to thoughtful and thorough market research there are tools that provide a framework and insight for measuring Value perceptions.

 

MANTIS - Tools for Managers

Achieving Business Potential

Frequently we are asked by managers how to meet the need to develop sound strategies and reasonably quantify financial results that will provide the earnings and growth required to meet company goals. MANTIS believes that the process of strategy development should include the following:

• In-depth knowledge of the competitive position of your business, and your competitors' businesses.
• An understanding of the economic drivers of your business and its market.
• Insight into motivations, personalities, and likely actions of competitors under various scenarios.
• Utilization of a powerful framework accompanied by analytic techniques that capture the complexity of today’s competitive markets.
• Analysis that provides insight and action steps to implement strategic decisions.

MANTIS brings years of expertise in business and corporate strategy analysis, design & implementation of analytic and simulation tools, combined with consulting expertise with large companies worldwide to assist your team develop sound, successful strategies?

MANTIS’ StratLab is a major step forward in the field of Business Strategy analysis and development. It is a reliable, efficient tool that fosters team building and preparedness by:

• Identifying and quantifying the effect of a wide spectrum of strategic alternatives and underlying economic performance. Based on your current competitive position, it helps identify the tactics and strategies that will drive business success. It will also identify from conflicting and ambiguous possible futures, which are worth worrying about as significant threats or opportunities. It employs a standardized high-level language to structure the management discussion and learning to build a more successful team.
• Identifying pre-emptive counter-measures, by identifying threats you can implement before-the-fact. These enable you to minimize the likelihood of being caught off-guard and minimize the impact of events once they unfold. [Example: Based on its understanding of your and your competitor’s competitive personalities, StratLab might identify the key strategic and tactical conditions which might lead to a price war in the first place.]
• Proposing actions you should implement once the threat unfolds. [Example: If a price war breaks out, how should your business respond to minimize damage to its performance with respect to quality, marketing expenditures, pricing, staffing and performance targets, etc.?]

A cutting-edge, well-tested approach

StratLab™ has been used successfully by major organizations (including Dell, Coca-Cola, Ernst & Young, Digital, IBM, Compaq, Baxter, Corning, Verizon, Yale New Haven Medical Center, Perclose, and AMP). Our approach builds on earlier research conducted at The PIMS™ Program. The program originated at General Electric and later expanded at the Harvard Business School.

StratLab works by incorporating three analytical approaches widely employed in other fields.

• Computer simulation.
• Genetic algorithms (GA) for finding an optimal solution
• Cross-sectional empirical research

Computer simulation pierces the fog of the marketplace

StratLab’s simulation utilizes a common language to streamline the task of describing:

• Your proposed strategy. These are the variables you can control.
• A scenario you might face. The scenario consists of variables you do not control. These include competitors’ strategies, customers’ preferences and investors’ requirements.

Once you describe your strategy and scenario, the simulation projects how each player will likely evolve, quarter-by-quarter, over the next three to five years. It generates various financial performance measures for your business and for your competitors. The process takes but a few minutes, encouraging a “let’s try it and see what happens” approach to planning. The benefit: rapid learning about what is likely to work, and what will not—and why.

Genetic algorithm helps discover superior strategies

One of StratLab’s most valuable features is a proprietary technique called a genetic algorithm that identifies coping strategies to help you deal with potential crises.

How does it work? As a starting point, StratLab’s GA develops a population of randomly-generated strategies. The financial performance of each is evaluated. Next, the better strategies are recombined with each other to form some new solutions. Finally, the new solutions are used to replace the poorer of the original solutions and the process is repeated. Through the processes of breeding, mutation, and natural selection, better and better strategies gradually evolve.

StratLab’s GA has successfully developed novel solutions to some extremely complex problems. One of North America’s largest energy companies used it to “discover” two radically different, but very profitable marketing approaches for participating in regulated/deregulated retail electricity.

The strategies nominated by the GA improve financial returns for most users by at least 30-50% above those projected for their initial business plan.

Cross-sectional empirical research enables you to learn from other firms’ experiences

StratLab has embedded within it the experiences of thousands of real-life businesses, operating under a wide variety of circumstances. So, even though your business may confront a novel situation, the model can apply the experiences of other businesses with a profile similar to yours that have faced something similar.

For example, say that your largest competitor has installed new, capital-intensive, cost-reducing production technology. You are wondering whether to follow suit. You have a weak market share and sell a commodity-type chemical product, in a market growing two percent per year. What would be the effect of such a move on your return on investment and cash flow?

Extensive research indicates that you can get a more accurate answer by examining the effects of capital intensification on businesses outside your industry rather than on those within your industry. One reason: your competitors don’t have your strategic position. What works for dominant competitors often doesn’t work for weaker rivals. The right approach: search for businesses with market positions similar to yours that have already made the move you are contemplating, in other slow-growing, commodity industries. What happened to them is a pretty good predictor of what will happen to you.

Incidentally, for this example, the move is usually contra-indicated. By raising fixed costs you and your competitors will become more anxious about capacity utilization. Therefore, you will more likely engage in profit-destroying price or other types of marketing wars. The usual pattern is that you give up all, if not more, of the cost reductions in the form of price reductions.

StratLab guides you to business strategy success

StratLab investigates how your strategic position and financial results will change if your assumptions about competitors, customers, suppliers or the economy (real activity, money supply, etc) prove wrong. The benefit: You focus on monitoring the things that really matter.

StratLab’s benefits recapped

By combining (a) cutting-edge simulation technology and (b) disciplined empirical, cross-sectional research on the consequences of business strategies, StratLab offers:

• A process that promotes rapid management education about competitive interplay. It encourages rapid experimentation and provides a common language and structure for describing complex strategies and scenarios. The process is valuable for experienced managers dealing with unfamiliar possible scenarios and for new staff, to accelerate learning.
• A tool for realistically (a) quantifying the impact of a wide spectrum of potential strategy risks to your business (b) developing contingency plans (at least in broad outline) for responding to each significant potential crisis and opportunity.
• A comprehensive, empirically tested, understanding of the performance risk profile of your business and your competitors businesses, under current and potential future market conditions and contingencies.
• A “best practice” that can be presented to investors as part of your investor relations program.
• Suitable analytic technology for doing the above quickly and reasonably accurately, without placing undue strain on your resources.

In the end, the real value of StratLab is that it integrates management knowledge and strategic analysis. Aligning the two functions causes your team to focus on events and strategies that really matter. The benefit: a better mix of “expected” results and risk, and thereby an increase in the projected total returns to your company.

Commentary - Bing versus Google: So Far Not So Good

In the July 8, 2009 New York Times, David Pogue compares Microsoft’s new search engine Bing to Google. He describes Microsoft’s history as “Wait until somebody else has a hit. Then copy it.” Is this a good strategic approach for Microsoft? Perhaps, but it is inherently risky because a competitor with a strong competitive advantage may be difficult to overtake.

Pogue looks at the features and benefits of Goggle and Bing and concludes that in many ways Bing is superior to Google and points to www.bing-vs-google.com where you can conduct your own comparison. If this is the case you might expect Microsoft to be making significant gains in market share. In fact Microsoft's share gains are modest rising from 3.3% in April. To 8.23% in June according to the web firm StatCounter in their latest report for June 2009 and compares to Google’s 79% share. 

So why hasn’t Microsoft with its deep market knowledge, strong position in adjacent markets, and big pocket book garnered larger share gains? If Microsoft has achieved minimal market share to date, will the company be more successful in the future? What insight can thoughtful strategy analysis tell us about Microsoft's Bing strategy?From a customer perspective strategy analysis suggests that Microsoft must succeed in three areas if it hopes to achieve a substantial market share and effectively compete with Google. The three areas are:

• Awareness - Creating sufficient buzz and awareness in the market to cause customers to try Bing.
• Value - Providing a compelling experience so that customers value Bing over Google, Yahoo, or other browsers
• Ingrained habits - Breaking usage habits or loyalty to Google, for example, taking Google search function off your browser and putting Bing there instead

The results to date suggest Microsoft has fallen short on all three counts.

First, even with Microsoft making bold efforts to generate awareness with advertising estimated at $80 - $100m, as of June 8, only 7.9% of consumers had heard of Bing though that rose to 25.2% by June 24th according to YouGov’s brand index reported by AdWeek. 

Second, although Microsoft has incorporated new and interesting features into Bing including its cash back feature, the additions don’t appear to be ground breaking or market shaking. Customers’ perceptions of Bing’s value should be dramatically better to cause consumers to switch. While some features are superior to Google according to Pogue, they aren’t of the breakthrough variety that Google made with its entry in to the market.

Third, if Microsoft doesn't succeed in the first two areas consumers who are satisfied or very satisfied with Google and Yahoo aren’t likely to change their habits.  Microsoft faces a difficult challenge with Bing. Time will tell if the company can make real progress in each of these areas but for now the future looks to be a continuation of the past.