McKinsey Quarterly Top 10 of 2012

The McKinsey Top Ten Articles of 2012 (registration required) contains a few items of interest for strategy folks.

First, it looks like the “s-word” is coming back into style in the endless wheel of business language faddism. Four of the articles have strategy in the title, and some of the others make heavy use of the term in the text. Birshan and Carr in “Becoming More Strategic” say

We are entering the age of the strategist. As our colleagues Chris Bradley, Lowell Bryan, and Sven Smit have explained in “Managing the strategy journey,” a powerful means of coping with today’s more volatile environment is increasing the time a company’s top team spends on strategy. Involving more senior leaders in strategic dialogue makes it easier to stay ahead of emerging opportunities, respond quickly to unexpected threats, and make timely decisions.

Second, we have Cynthia Montgomery’s rumination on “How Strategists Lead,” which makes a decent complement to Dick Rumelt’s Good Strategy, Bad Strategy and is based on a forthcoming book. It’s mostly wisdom-talk, but of a refreshingly skeptical and thoughtful type that fits many of my prejudices, so I’m endorsing it. One part that will be of interest to many of our readers is her insight that since going into executive teaching she’s found that her students are largely incapable of allowing their analyses to temper their optimism or to link their business plans to their analysis of competitive forces. We want executives with a can-do spirit, but we also want executives who are good at the Serenity Prayer and have the wisdom to know the difference between the things they can change and the things they cannot.

Third, we have “How Leaders Kill Meaning at Work,” worked up from a 2011 book, which is based on a large diary study (“…nearly 12,000 daily electronic diaries from dozens of professionals working on important innovation projects at seven North American companies.”). The article is based on “entries in which diarists mentioned upper- or top-level managers—868 narratives in all.” It turns out that “killing meaning” is equivalent to “interfering with success on projects and thereby demoralizing team members,” so the worker-motivation angle isn’t really necessary to their catalogue of upper-management dysfunction. The main quibble I have with the article is that they make no allowance for the possibility that experimentation and/or creating options might be the right way to go, although in the examples they give, if that was what was going on, communication with the front-line troops was inadequate.

All in all, might be worth registering for.


When Industry Analysis Goes Flat

Barry Lynn, apparently some sort of John Kenneth Galbraith wannabe, has an amusingly cockeyed post over at the Harvard Business Review blog. He seems to think that state regulations protecting local beer distributors from vertically integrated competitors are the font of virtue, preserving needed diversity in the beer market by allowing craft and micro-brewers to get their product delivered. But if the big brewers were legally able (and motivated) to foreclose distribution of the small brands, they would be legally able to do it without vertically integrating into distribution (by requiring exclusivity).

A simpler analysis: When there were many  competing major brewers, independent multi-brewer distributors made economic sense, since they eliminated needless duplication of sales and delivery of all those brands to retail establishments. With the consolidation of the beer industry into two giant companies that own all the big brands (and a shift from on-premises to at-home consumption), a single-brewer distribution firm can now internalize almost all those economies. Then the beer industry starts to look a bit more like the soft-drink industry, where two major firms own and develop all the major brands and we don’t blink an eye at their bottler/distributors having exclusive relationships with the upstream brand owners or even being vertically integrated with them. If your local Costco or supermarket won’t carry a micro-brew or an off-brand soda, it’s unlikely to be due to market power on the part of the distributors.

UPDATE: It seems that AB InBev, owner of Budweiser and many other beer brands, is indeed shifting to more of a product innovation strategy and running into distribution problems with these new products:

“That’s not to say that AB InBev has perfected the process. Profit this year was hurt by higher distribution and administration costs in the U.S. as the brewer struggled to keep up with demand for Platinum and Lime-A-Rita, which required extensive — and expensive — countrywide distribution.”

So maybe there are strategic reasons why AB InBev would want more control over its distribution pipeline.


HP/Autonomy and Public Company Governance Perplexities

I’ve been listening to my good friend Todd Zenger for the last few years explaining that the strategic management field is predicated on the idea that corporate managers know more than the uninformed stock market and its lazy analysts. Dick Rumelt’s Good Strategy/Bad Strategy makes a similar point. The idea is that finding unique resource synergies is a good way to get competitive advantage but a bad way to please narrow-minded investors who hate unique strategies that are hard for them to evaluate. Raghurum Rajan’s recent presidential address to the American Finance Association makes a similar point, although with a much more positive spin on the role of equity markets in supporting the creation of entrepreneurial enterprises. With such an eminent set of eloquent and insightful advocates, it’s hard not to tentatively consider the perplexing idea that stock markets systematically undervalue powerful synergistic corporate strategies.

Then I wake up.

You probably followed the news about HP’s massive writeoff on its perplexing Autonomy acquisition of a year ago. The headline to that story was HP CEO Meg Whitman’s claim that Autonomy had cooked its books and fooled its auditors prior to HP’s purchase of the firm under previous, perplexingly hired, CEO Leo Apotheker. It isn’t clear that the extent of the alleged fraud can explain the gigantic size of the writedown by HP, but in any case outsiders like short-seller Jim Chanos, much of the British tech analyst community, and the very useful John Hempton, proprietor of the Bronte Capital blog, had long smelled a rat. They thought, even prior to the acquisition, and using only the company’s official accounting statements, that there was something fishy about Autonomy’s books. How could HP’s finance team and the outside auditors have failed to notice this at the due diligence stage? It’s perplexing.

Read the rest of this entry »


Am I missing something?

I just came across this item from WSJ online: Best Buy Founder Gets Green Light to Pursue Buyout. I’ve long been a Best Buy customer — it is typically my go-to store for need-it-right-now purchases of not-too-exotic electronics items. Lately, the firm has been having financial trouble, consistent with the now-familiar story of bricks-and-mortar succumbing to online competition.

What’s interesting is that Richard Schulze (the original founder of 46 years ago) is considering buying back the company as part of a turnaround effort. This is interesting because, as a strategy scholar, I cannot help but wonder what, exactly, he thinks he can do to return the firm to health that couldn’t be done without him. According to this article, his plan is: cut prices to be competitive with online retailers like Amazon.com, improve the customer experience, and avoid cost reductions. Am I missing something or does this sound akin to making up for negative margins with increased volume?

Stay tuned.


Twittering Strategy Profs

For those of you who also follow twitter, LDRLB, an “online think tank that shares insights from research on leadership, innovation, and strategy” has just posted a list of Top Professors on Twitter. The categories are Leadership, Innovation, and Strategy (15 profs in each category). Good lists — all good folks with thoughtful views on the world of strategy. Nice to see a number of StrategyProfs bloggers listed.


New Resource: Carpenter’s Strategy Toolbox

Some of you may remember Mason Carpenter’s old teaching web page with experiential exercises, videos, and other tips for teaching strategy. I’ve repackaged his content, added some of my own materials, and it can now be found at:

CarpenterStrategyToolbox.com

A quick tip is that you can now sort the resources by topic (click the category list on the right). I included the most common broad topics in a core strategy course so this should get you to something useful quickly. Probably most importantly, there is a mechanism so people can submit new tools and comment on exiting tools to keep the site fresh.

To give you a feel for it, here are links to a few exercises and resources that you might find particularly useful:


Uber innovation: say goodbye to bricks and mortar taxi service

My colleague Josh Gans recently turned me on to UBER, a smartphone-based taxi service. I used it for the first time yesterday to get to the Toronto Airport. I’ll be surprised if this technology doesn’t eventually kill the taxi business as we know it. 

From the user’s perspective, you simply download an app and sign up for the service online. When you want a cab, you open the app. It shows you all the Uber vehicles around you on a google map. It tells you how many minutes it will take for one to get to you (in my case 8). You hit a button and, if you are so inclined, you can watch your car approaching on the map. A few minutes later, viola!, you receive a message telling you your cab has arrived. Our car was a spotless black limo-style sedan. The transaction is handled through your account with them via your credit card. No money changes hands with the driver (tip is included) and a detailed receipt is immediately emailed to you (great for expense reports). The cost in our case was identical to the standard fare + tip.

As far as I’m concerned, the experience dominated that of the status quo by a significant margin. It got me to thinking about the business model. As an investor, I would always be wary of any business 3 computer science grads from MIT could replicate in a basement. I can’t imagine there is anything in the Uber technology that creates a meaningful entry barrier. Moreover, unlike a Facebook type business, there don’t seem to be any network externalities working to the advantage of the first-mover. 

On the other hand, there are non-technology features of the business that are central to its success and, perhaps, not so easy to replicate. The most obvious is setting up a base of independent drivers. I was chatting with our driver and learned that substantial resources are devoted to vetting drivers and, once they are on board, regularly checking up on them to make sure the standard of service (car cleanliness and so on) remain high. That requires some infrastructure and know-how. 

Then, there are the reputation effects. Strong reputation is going to be a substantial benefit on the supply side – i.e., recruiting and maintaining good drivers. Plus, for the first time, a supplier of taxi services can build up not just a national but international retail brand. That’s a big deal. Apparently, Uber does not have to contend with local medallion laws — the cars are not marked and cannot be hailed from the street. This will help them a lot in expanding their business.

Still, the service only works for people with smartphones — a big limit to growth, at least for now. Also, it is hard to imagine that one or two competitors won’t take a run at them, especially if (as I suspect) this business really takes off. When that happens, who is going to appropriate the value? What is scarce in this situation? There appears to be no shortage of taxi drivers, though being able to find and maintain top-quality ones should confer some advantage. Also, my intuition is that the market will support two or three such businesses, not tens or hundreds. So, oligopoly prices under constrained capacity, at least for the high-end, high-quality version of the service, are likely to obtain.

Yet, the arrival of competition will surely send some additional value the consumer’s way in the form of lower prices. And this is not exactly a high-margin business to begin with. Therefore, at some point in the future, expect to see an established Uber lobbying local governments to regulate its segment of the business — waxing poetic on why it is in the public’s interest for cities to issue them some form of competition-inhibiting, medallion-like licenses of their own.


Follow

Get every new post delivered to your Inbox.

Join 139 other followers