The Strategic Advantage of the Upstart Competitor by Mark Rhodes

From the days of ancient warfare, large armies have struggled with an inherent disadvantage: Sheer size presents an easy target for a quick and nimble attack force. The red-coated, regimented British struggled to fend off undisciplined American revolutionaries. The Vietnam era Americans could not defend themselves adequately from the pesky, unpredictable Viet Cong. In the modern strategic arena, an upstart company can gain advantage over larger and well established rivals by identifying an attractive and profitable niche of their rival’s customers. “Cherry picking” initiatives seek to snatch away the most profitable customers from a market leader, while leaving the other company with the more cumbersome and less profitable dregs among their customers.

Have you seen the Progressive Insurance commercials touting the way their service people will provide you not just with a quote from Progressive, but also with sometimes even more desirable quotes you might receive from their competitors?

Altruistic? Hardly. Because of their superior information technology, Progressive is able to sort the customers they do want from the ones they don’t. That is, if you as an automobile driver are likely to drain off more money in claims than you’ll restore by paying premiums, Progressive will gladly help you find a nice insurance provider down the street… one who’ll give you a lower fee than will Progressive. If you are recognized by the company as a safe driver – meaning Progressive is safe from the risk of having to pay you for a claim – then Progressive wants you and will compete aggressively to get you. For Progressive as the smaller attacker, that’s cherry picking the profitable customers while saddling the larger opponent with an ever more needy and draining customer base.

In recent years, Progressive has reinforced the notion of the insurance business as a free wheeling “marketplace,” as characterized by their “store lady” hosting a grocery market of insurance products, encouraging us all to “shop” for the best deal. Allstate’s notion of “good hands”? The comfort of a long and trusting relationship as touted by State Farm? Well, that’s defensive strategy as the insurance behemoths of old urge us to stay in place. By way of contrast, the Progressive lady wants us out shopping for new and exciting relationships so the company can pry loose the most desirable customers.

What to do? Let’s look to the ancients for advice… The most influential treatise on military strategy between the age of the Romans and the Napoleonic era was written by the Roman citizen known as Vegetius in the fourth century A.D. His writing was cherished as the Bible of Strategy by Charlemagne, Richard the Lion Hearted, and England’s Henry II. Vegetius’ De Re Militari contains insight into strategic and operational planning that are relevant still.

By Vegetius’ time, the great empire of Rome was in its waning days, its once mighty military descending into atrophy and decay. The days of Julius and Augustus Caesar were a vague memory, having passed four hundred years earlier. Vegetius wrote about “the ancients,” the generals and leaders of Rome a centuries before his time, and sought to capture and share concepts of strategy that had put Rome civilization into its long-held position of dominance. Despite his aspiration to help restore Rome to its days of glory, Vegetius came along too late to make an impact, and he was little noticed by Romans of the time. In the centuries to come, though, his work became a staple for strategists and leaders throughout Europe.

Among the key advice we receive from Vegetius: Avoid unnecessary impedimenta. Impedimenta, the encumbrance of supply trains and support people and materiel, impedes the ability of an army or organization to move about the strategic space in a nimble, flexible manner. Clearly, for example, Southwest Airlines has sustained its success for decades in competition with the so-called “major” air carriers because its leaders have minimized impedimenta, while American, Delta, United and the others remain encumbered by large “hub” airports, a variety of planes and equipment requiring redundant teams of pilots and technicians, and large, entrenched, and increasingly inflexible workforces.

Vegetius said this: “An army too numerous is subject to many dangers and inconveniences. Its bulk makes it slow and unwieldy in its motions; and as it is obliged to march in columns of great length, it is exposed to the risk of being continually harassed and insulted by inconsiderable parties of the enemy. The encumbrance of the baggage is an occasion of its being surprised in its passage through difficult places or over rivers. The difficulty of providing forage for such numbers of horses and other beasts is very great.”

Advice for the strategist: heed the direction of Vegetius. Smaller, ambitious businesses should and will identify desirable niche markets and pursue them aggressively and precisely. You cannot take on the established competitor full force to full force. But you can win a niche and establish a beachhead from which to pursue future expansion.

If you are the entrenched but wary player, then as strategist you must slow the erosion of advantages, and continually seek new high ground representing future competitive advantage. Good strategic thinking for established businesses means scanning the competitive environment for unwanted challenges, and staying nimble enough to do battle in the niches that count. Moreover, the strategist must erect “barriers to entry” to protect present advantages.

Planning for Disaster: from Oil Spills to Credit Crises

In preparing for battle I have always found that plans are useless, but planning is indispensable.

Dwight D. Eisenhower

One of the ironies of the recent oil spill debacle in the Gulf of Mexico is that it is the oil industry that is most often credited with devising and putting to use a strategicplanning tool meant to anticipate major changes in the environment – from disaster to depression – and to enable organizations with plans for immediate strategic response. The tool is called scenario planning.

Scenarios are “alternative futures” that cannot be predicted due to uncertainty.  The term is borrowed from the world of drama, since each alternative future is described in the terms of a “story” or scenario.  Scenario planners identify clusters of events that could happen, and imagine how things would be impacted should these events actually occur.  The story is then shared as the beginning of a long range planning exercise.

In order to respond to undesired happenings such as the collapse of credit markets or the recent oil spill, strategic leaders must devise and develop flexible, adaptive, nimble organizations ready to change and respond as circumstances dictate. Noted economist and strategic thinker James Bryan Quinn said that “The essence of strategy – whether military, diplomatic, business, sports [or] political – is to build a posture that is so strong (and potentially flexible) in selective ways that the organization can achieve its goals despite the unforeseeable ways external forces may actually interact when the time comes.”

Scenario planning as we know it today got its start in the 1970s.  Though oil prices had remained stable since World War II, leaders at Royal Dutch Shell worried that disruptive change could happen with severe adverse effects on their business.  Among the disruptive events they feared was a sudden increase in the price of oil sparked by the rise of the Organization of Petroleum Exporting Countries (OPEC).

The price increases did happen in October of 1973.  Many oil companies struggled with the effects of the new competitive dynamics.  Shell thrived.  They had prepared a plan – a scenario plan – for what they would do as these circumstances unfolded, and they implemented their plan while others were just gathering to deliberate on next actions.

Today Americans are deeply concerned with another sort of oil crisis -- the disastrous and seemingly unstoppable gusher in the Gulf of Mexico.  Many are outraged that BP had no apparent contingency plan for dealing with the crisis.  Though the oil industry is known for thinking out plans for dealing with price changes or the introduction of alternative sources of energy meant to challenge dependence on oil and gas, it is now apparent that the hunt for oil at increasingly remote or deep places led to risk-taking without appropriate contingency plans.

Eventually, the unexpected is going to happen.  That, we can expect.

Scenario planning has been the topic of numerous books over the past twenty years.  Numerous companies have been touted for their use of the technique – Novo Nordisk, Electrolux, AT&T, BellSouth, Nissan, American Express, IBM, Cisco, Ford, and on and on.  One survey indicated that as many as 50% of Fortune 500 companies have incorporated scenario planning into their broader strategic planning efforts.  The extent to which these companies have heeded their scenario planning process is likely somewhat less than so many authors would have us believe, but examining possible scenarios as alternate futures is invaluable as one seeks to build strategic flexibility.

Before beginning scenario planning, remember that it is often the planning process per se, rather than the resulting articulated plans, that matter most.  Dwight Eisenhower, as general in charge of the D-Day planning process, said “in preparing for battle I have always found that plans are useless, but planning is indispensable.” By involving a broad swath of people in the planning process, the intent of the plans will be etched in their hearts and minds, allowing people the flexibility to make wise and well-reasoned decisions once a crisis occurs.

The basic steps of scenario planning include:

1. Identify the uncertainties that could affect your company.  Uncertainties can come from the worlds of politics, technology, economics, government & regulation, societal, as well as the cataclysmic or climatic changes that can happen in the natural world.
2. Identify possible futures that would present change from the status quo.  Ask “What events, whose outcomes are uncertain, could have significant effects on the implementation of our strategic plans?”  Drilling down (please excuse the phrase) you may ask “do we know what we’d do if the economy enters a recession or depression?”  “Do we know what we would do if a natural disaster destroys our headquarters?”  Are we prepared for changes in the market should a competitor introduce a new and highly desirable product?”
3. Formulate plans for dealing with each scenario.  Identify key departments and resources throughout your organization who must know ahead of time what would be expected of them.
4. Craft overall strategic plans that will allow your company to stand prepared in case each of the scenarios comes to fruition.
5. Monitor the environment and watch for carefully identified trigger points that will tell you when a given scenario has arrived.  In the classic case of Royal Dutch Shell anticipating the manipulations of the market by OPEC, trigger points were based on the price per barrel of oil.  Obviously, quantitative triggers are easiest to monitor and recognize, but not all scenarios come with neat and apparent warning signals.  Rather, strategic leaders must have thought about each scenario before its arrival, and must learn to observe clues of its arrival.
6. As scenarios become more plausible with time, increase investment and preparation for the scenarios that are becoming more likely.  Embed scenario planning into organizational development and corporate education programs.
7. Continue to assess what you do and don’t know about what will happen in the future, and shape strategic plans accordingly.

Mark Rhodes. Ph.D.  consults on strategic planning and decision making.  He has facilitated dozens of scenario planning exercises for clients in a variety of industries.  See his website, Strategic Thinking.

A Key Strategic Choice: When to Outsource Work by Mark Rhodes

Nike makes shoes, right? Well, not exactly. Nike is a wonderful company with superb marketing capability. But Nike outsources the actual manufacturing process to someone else. So in that sense, Nike does not make shoes. Nike’s competitive work is the design and marketing of athletic shoes. Obviously, the company has succeeded for years at doing just that. Knowing when to outsource work and when to keep it in-house is a key to successful strategy. The underlying principle of business strategy is that you cannot excel at everything since resources are always finite and limited. Instead, you must make strategic choices. Key among these choices is a critical decision: which elements of work must be done by the company itself, and which elements should be outsourced? To make a sound decision of this sort, begin by identifying the work of the organization that is "mission critical." Mission critical work cannot be trusted in the hands of another organization.

As a start toward culling the mission critical work from work that can be outsourced to others, it is helpful to perform and assessment of all the work processes performed by your company and sort each into one of three categories. Once work is categorized, the organization can be aligned to properly support the requirements of each type of work. These three categories are:

Competitive or Strategic Work. This is mission critical work. It is the core competence of the organization. Strategic work is that which creates sustainable competitive advantage and distinctiveness. For example, Nike differentiates itself through its strategic marketing work (sending non-core work such as manufacturing overseas), while Apple excels at product design. Competitive Work is always performed and managed in-house.

Competitive Enabling Work. This work “leverages” the competitive work, or enables the competitive work. Companies that stake their reputation on the excellence of their personnel will often consider employee development and education to be Competitive Enabling work. As another example, while Wal-Mart's strategic differential and competitive work is considered operational excellence -- managing information and keeping stock ever present on its shelves – the company’s competitive enabling work is both the development and maintenance of their state of the art information technology (IT). If Competitive Enabling work is done better, the Competitive Work becomes more distinct in the eyes of stakeholders.

Business Essential Work. This work must be done to stay in business, but is work that customers don't really value. Even if done at a world-class level, business essential work does not create sustainable competitive advantage. Nonetheless, if done below industry standards, the outputs of business essential work can cause disadvantage and/or poor performance. Business Essential work includes “compliance” work which is performed to comply with governmental regulations or to mitigate legal risk to the organization. Designers of high performance organizations should heed this important guiding principle: Business Essential work, if left unabated, will consume the organization’s competitive work. That is, people can get so consumed by the busy work of the company that they put off and lose focus on the organization’s truly strategic endeavors.

It’s critical for leaders to understand that by categorizing work as Business Essential, it doesn’t mean that this work is not important to the organization. On the contrary, it is essential to the organization to stay in business. In fact, if Business Essential work is done below the industry standard, it can lead to disadvantage. At the same time, if leaders invest a lot to get this work above a level at parity with competitors, it will never lead to distinctiveness in the eyes of the customers.

Outsourcing selected business processes has become an important strategic option for companies wanting to maintain a focus on their strategically important or competitive work. Resourcing decisions should be dictated by the type of work and the nature of the individual skills and knowledge required to perform the work.

Work that is not categorized as competitive work is subject to consideration for outsourcing of one sort or another. To determine the best possible distribution of work, we use the following model

——————————————————————————— Mark Rhodes is a highly experienced organizational strategy and design consultant with Strategy By Design. You can reach him via email at markrho@mindspring.com..

Five Essentials of an Effective Strategy by Mark Rhodes

The principles of strategy are timeless.  The following notes on the essentials of strategy are drawn from the great works of strategy… Sun Tzu’s The Art of War, Napoleon’s Maxims, Clausewitz’ On War. Though dating up to 2,500 years ago, the advice of these strategists is helpful today no matter your competitive landscape, from high tech to agriculture, from manufacturing to government.

1)  An effective strategy is deeply understood and shared by the organization.

Genghis Khan’s Mongols defeated far larger armies because they were able to make adjustments on the battlefield despite ancient systems of communication that limited the way orders could be delivered to warriors already in action.  The secret was instilling battle strategy in the hearts and minds of all soldiers so that they could make correct tactical decisions without direct supervision or intervention.

Like the mission statement published in your annual report or guiding principles framed in your lobby, a strategic plan itself accomplishes nothing.  What matters is whether the people of your organization understand and internalize the strategic direction you have articulated and can make tactical choices on their own.  Strategic plans must be articulated in a manner such that operational and tactical decision-making can follow suit.

As a strategist, you must count on the employees or members of your organization to make sound tactical and operational decisions that are aligned with your desired strategic direction.  To ensure that these decisions are well made, your articulated strategic direction and strategic plans must be applicable and clearly related to the issues that people face.

Remember that an effective strategy provides a picture of the desired long term future.  In order to make sound day to day decisions, all members of the organization must be able to begin with the end in mind.  All steps must ultimately keep the company on course toward the long term objective.

2)  An effective strategy allows flexibility so that the direction of the organization can be adapted to changing circumstances.

Watching the rise of Napoleon’s French empire in the first decade of the 19^th century,  the Prussian generals were anxious to do battle with Napoleon’s army because their soldiers were highly trained and disciplined in battle tactics that had succeeded for Frederick the Great fifty years before.  It turned out, though, that the Prussian army was designed to fight “the last war” while Napoleon’s innovations, including soldiers carrying their own provisions instead of the supply train of impedimenta typical of the traditional European armies, allowed Napoleon’s troops to react and adapt to conditions far faster than could the Prussians.  When the Battle of Jena-Auersted occurred in 1806, Napoleon’s army out-maneuvered their slow and plodding enemy and destroyed the Prussians in that pivotal confrontation.

A rigid strategic direction seldom turns out to have been the best course of action.  To assure that your business is nimble and able to react to changes in the marketplace, it is essential that your strategy is flexible and adaptable.  As a strategist, you will count on timely and accurate information about market conditions.  It is essential to build and employ effective mechanisms for observing and listening to what is going on in the competitive environment.  Real-time information, in turn must feed on-going strategic and operational shifts and deployments.

3)  Effective strategy results from the varied input of a diverse group of thinkers.

Moreover, participants in strategic decision-making must be unafraid to state contrary opinions.  In Doris Kearns Goodwin’s excellent book Team of Rivals, she explains how instead of bringing in a cadre of leaders whose thinking closely matched his own, Lincoln made a point of surrounding himself with his political rivals, naming William H. Seward, Salmon P. Chase, Edwin M. Stanton, and Edward Bates – all of whom had opposed Lincoln in a bitterly fought presidential race – as members of his cabinet.  Despite initial misgivings, this unlikely team learned that Lincoln valued their opinions, would consider and reflect on their disagreements and challenges, and would not stick unnecessarily to preconceived notions.  Though the mix of personalities and opinions inevitably led to debate and verbal conflict, Lincoln was able to facilitate and mediate, tapping into a rich variety of ideas in order to find the optimal solution to political and military issues.  Goodwin attributes this ability to manage disagreement and lead an effective decision-making process as perhaps Lincoln’s greatest strength as he led a troubled nation.

To ensure that your strategic team is ready to make effective decisions, look carefully in the mirror.  Do you encourage debate, even argument, among your team about key decisions, or do you encourage toeing the company line?  Remember that the well documented occurrences of groupthink – Kennedy’s ill-fated bay of Pigs invasion, NASA’s decision to launch the Challenger space shuttle, Bush’s reaction to presumed weapons of mass destruction in Iraq – occur not because of oppressive or stifling leaders.  Rather, groupthink tends to occur when leadership groups enjoy collegial and fond relationships, leaving deliberants unwilling to rock the boat, or to voice contrary opinions.

4. An effective strategy follows a thorough and deep analysis of both the external environment and the internal capabilities of the organization.

This is the essence of the famous SWOT model  (Strengths, Weaknesses, Opportunities and Threats).  The strategist must understand the effects and dynamics of external entities such as competitors, suppliers, regulators and strategic partners.  A sound assessment of these external factors leads to a rich understanding of threats to ward off and opportunities to pursue.  The strategist must also understand the internal capabilities of his or her organization.  A realistic self assessment enables the organization to leverage the strengths of the organization and to shore up areas of weakness.

To take advantage of intelligence gained through a SWOT analysis, the strategist must ensure that intelligence does not sit idle, but is immediately mined for insight that can be used in strategic and operational decision-making. All historical stories of the great strategic achievements of history – from D-Day and the Normandy invasion to Napoleon’s greatest campaigns – include anecdotes of decision-makers poring over maps and data and striving to find the optimal course of direction and events.

5. An effective strategy identifies areas of Competitive Advantage

Writing in The Art of Wart of War some 2,500 years ago, Sun Tzu postulated two dialectic forces:  Zheng is the “ordinary” element that fixes the enemy in place.  Qi is the unexpected and devastating blow. Qi is indirect, unorthodox, extraordinary. Qi does not work, though, unless Zheng is able to hold the opponent in place until the decisive blow is struck.

To put this in the context of today’s competitive dynamics, understand that many aspects of business  must be held at parity across a wide swipe of the competitive landscape. In business, this is called the “business essential” elements of organizational design.  You don’t need to be world class at mundane business practices that are not your distinctive competence, but you must maintain standards of work equal to that of your competitors.  That is, the organization must maintain parity with competitors in the ordinary and mundane matters.

But at the same time, every successful organization is able to explicate an audacious Qi or extraordinary force.  You must be world calls at something that differentiates you from the competition. Moreover, all members of the organization must keep the uniqueness of their company in the forefront, always keeping competitive advantages unharnessed in order to compete in a vigorous manner.  In short, every strategic plan must educate the full organizational team how it must use carefully identified competitive advantages in order to compete and win.

What do you think?

--------------------------------------------------------------------------------- Mark Rhodes is a highly experienced organizational strategy and design consultant with Strategy By Design. You can reach him via email at markrho@mindspring.com.