Marina Gorbis's Blog, page 1592

Don't Just Create Value; Capture It

In my recent HBR article, The New Dynamics of Competition, I present a new analytical tool called Value Network Maps, which I explain below.

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These Maps are an outgrowth of exciting new work by strategy scholars developing a mathematical model of firm strategy that I refer to as the Value Capture Model (VCM). The VCM calls our attention to three important truths of competitive strategy that other theories obscure. Business strategists ignore these truths at their peril. Value network maps are designed to ensure that your strategic thinking is complete.

The first truth is that, while value creation and value capture are crucial aspects of any strategic analysis, they are different and, as such, must be treated in distinct ways. As the exhibit below reveals, a Map analysis begins by looking at value creation. The center of the Map depicts the firm and the other agents (generally, a supply chain and its customers) who, jointly, contribute to a "pie" of economic value. These agents are called the "value network." This first step in a Map analysis requires managers to think deeply about how with whom they create value for the ultimate end-user. How much of this pie each agent actually captures is answered in the next two stages of the analysis, each corresponding to one of the remaining truths highlighted by the VCM.

The second truth is that competition is symmetric in its operation. This is something of a new idea in strategy. Since the mid-1800s all the way through Michael Porter, people have been encouraged to think of "competition" as a persistent driver of profit erosion - that is, as a threat. But the mathematics of the VCM vividly illustrate that competition works both on the firm and on those with whom the firm must transact in exactly the same way.

The Map captures the workings of competition in two locations. First, it surrounds the firm and its value network with a field labeled the "competitive periphery." The periphery is populated with those agents who generate competition either for the firm or for others in the firm's value network. Agents in a network are guaranteed a share of value commensurate with the intensity of competition for them. An agent's competition-guaranteed share is depicted in the Map as dark shaded slice of the value pie. This balanced view of competition both simplifies analysis (there are not five forces of competition, only one) and makes it comprehensive (by ensuring that the role of competitors for the firm is not ignored).

One of the interesting implications of this view of competition is that market share is not always the unalloyed "good" that many managers assume it to be. Why? Because, when a firm increases its market share it turns potential customers into actual customers. On the one hand, the firm's value network is expanded and more value is created. On the other, in joining the network, these customers leave the periphery, thereby reducing competition for the firm. Thus, while there may be more overall value up for grabs, the firm is guaranteed less of it by competition.

The third truth is that there are two essential ways a firm captures value — either through force of competition or through force of persuasion. This may be the most radical and far-reaching insight for competitive strategy yet to come out of the VCM. Once again, received wisdom in strategy suggests that value capture is entirely determined by competition. After all, prices are determined at the point where "the supply curve intersects the demand curve," right?

Fortunately, perhaps, the real world isn't quite so deterministic. Competition from the periphery for any agent (the firm, its suppliers, or its customers) does determine a minimum share that it must get of the value pie produced by its network, as illustrated by the Map. But competition rarely results in a complete allocation of value — that is, the shares guaranteed by competition do not typically add up to 100%. When they do not, a second avenue for value capture is opened up for the firm.

Imagine negotiating with one of your buyers. If there is a minimum price below which you can credibly walk away from the deal — because there are other deals you prefer to take below that price — then, that minimum is the amount guaranteed by competition. In symmetric fashion, your buyer may have a maximum he or she is willing to pay. Economists refer to these values as "reservation prices" (the VCM helps us understand how, exactly, those reservation prices are determined). Typically, your minimum does not equal your buyer's maximum, in which case the final price will be somewhere in-between.

In the VCM, we refer to all ways a firm captures value from its deals other than competition as persuasion and the portions of value created that are up for grabs through persuasion are shown in the map as the light shaded slices of the pie. In some industries, such as military contracting, this second source of value capture may be dominant.

Firms can be helped in their ability to persuade by a wide variety of factors. They may have superior bargaining skill (e.g., due to an extremely well-trained sales force). Industry norms (such as the structure of a bidding process) can also affect the relative ability of forms and the other agents in the network to negotiate a larger slice of the pie.

Relatedly, firms may forward integrate to a point in the supply chain at which they have "persuasive" advantages. For example, producers of products for mass retail markets can forward integrate into retail distribution. By doing so, they bypass negotiations with big distributors and, instead, deal with individual consumers. Big distributors typically have greater incentive to haggle over their share of the pie than do individual consumers. The latter can still walk away from prices that are not consistent with their alternatives (arising from competition for them), but within that range the firm can make take-it-or-leave-it offers such that the benefit of bargaining to the customer is below the cost of doing so.

To sum up, the Value Network Map shows how much value is up for grabs, the extended network of agents who interact with the firm to create that value, a periphery of agents who compete for those in the firm's value network and, finally, the shares of value guaranteed to the firm and its network partners by the competition from the periphery. The strategic significance of competitive versus persuasive factors is highlighted by comparing the shares guaranteed by competition to the total amount generated by the value network.

Being Digital Demands You Be More Human

The halls of every marketing organization are filled with rumors about the new crop of hires — computer scientists, math majors and big data experts. For them, consumers are a mass of 0s and 1s that represent online behavior that can be collected, analyzed and targeted.

But the one thing companies seem to keep forgetting is that customers are actually human beings.

The chocolatier Ferrero Rocher learned that lesson recently from Sara Russo, a big fan of its Nutella brand. Such a big fan, in fact, that she started an annual World Nutella Day in 2007. The event, conceived by Russo to celebrate the hazelnut spread, was held in mid-February this year; more than 40,000 fans like the event's page on Facebook. But Ferrero hardly had a positive reaction to the publicity blitz — the company had its lawyers send Ms. Russo a cease-and-desist letter.

Of course, Ms. Russo blogged about the letter and drew a great deal of media coverage. An outcry spread through social media as Nutella fans wondered why Ferrero would want to stop the celebration. Ms. Russo reported on her blog, "They were very gracious and supportive and we were able to have a productive discussion about World Nutella Day living on for the fans, which is the whole point."

I was on the other side of the same kind of interaction a couple of years ago. My son Harry, then 8, sent an airplane drawing to Boeing to see if they'd build his design. We got a very similar letter to the one Ms. Russo received from Boeing asking Harry to stop using the Boeing trademark in his drawings.

I gave my take on the situation in a 2010 blog post titled, "Is Your Customer Service Ready for the New World of Openness?". The dilemma for me was whether to tell Harry about the letter and the cold, hard truth about corporate communications — or lie to him and tell him we didn't receive the letter with the hope of continuing to inspire his childhood creativity for as long as possible.

As you can imagine, the media world blew the story up with articles on thousands of blogs, in hundreds of magazines and even on ABC. While Boeing wanted the story to go away, Todd Belcher, the company's Director of Communications, reached out to Harry personally. After a few chats, Boeing invited the whole family to Seattle to watch planes being built. It was the trip of the lifetime for Harry and it has continued to inspire his creativity.

But Todd's actions weren't only beneficial to my son. By realizing that Harry was just a child with a passion for planes, Todd turned a potentially bad situation into a positive one and Boeing changed the way it responds to the public's ideas.

Nutella and Boeing aren't unique in trying to figure out how to balance their need to control their intellectual property with their desire to connect with fans that demand — and have — more access than ever to corporations and a passion for broadcasting their love of a brand in the age of democratized communications driven by digital technology.

In 2000, Metallica sued 30,000 fans for illegally downloading their music on Napster. Likewise, Mattel has battled fans over making their own versions of Barbies. Fedex even used the DCMA (Digital Millennium Copyright Act) to force Jose Avila to take down a web site that displayed furniture that he'd made out of FedEx boxes.

Like it or not, every brand that has a following will have to deal with this unique digital-age problem.

As companies become more digital and equipped with advanced marketing analytic tools that allow them to know and predict consumers' behavior even better than consumers themselves, they need to be more human as well. It's time to shift the paradigm. Brands need to not only connect directly with their fans but also rethink the concept of brand ownership. Brands can be owned by both the company and the community of customers, fans, and followers that rallies around them.

As new digital marketing tools and systems are implemented they must be balanced by even more analogue systems than before. The ability to reach out, in a human way, to a Sara or Harry can quickly create either positive or negative momentum for your brand. That makes human interaction more important than ever.

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Cosmetic Surgery Is Fueled by a Fear of Dying

People who were instructed to think about their own mortality were more receptive to the idea of having cosmetic surgery than those who weren't (3.57 versus 2.96 on a seven-point scale), suggesting that fear of death is a motivator behind patients' decisions to have tummy tucks, says Kim-Pong Tam of Hong Kong University of Science and Technology. When people experience unconscious death terror, they tend to engage in behaviors that maintain their sense of symbolic immortality, even though cosmetic surgery itself can threaten people's health or even their lives, he writes.

The Real Reasons Chinese Firms Have Weak Branding

In a recent column for the New York Times, David Brooks posited that the U.S. has one clear advantage over Chinese competition: branding. He notes that U.S. firms are powered by "eccentric failed novelists" (presumably from agencies and consulting firms that are gifted at brand positioning and execution) and "visionary founders" (think Steve Jobs) who have created exceptional brands. This talent is lacking in the Chinese market where "executives tend to see business deals in transactional, not in relationship terms," as Brooks says. This observation is important because there are Chinese firms that seem to have everything to win globally except for branding and marketing.

Speaking as a long-time observer of brands and brand strategy, I believe that Brooks is correct but his analysis is incomplete. China's lack of people with brand instincts is not the only or even the main brand challenge of Chinese firms. Further, he does not address the big questions: How, and when, will they overcome this deficiency?

Brooks left out at least three important weaknesses in Chinese branding. First, other global firms have a deep bench of seasoned brand strategist supported by rich and varied set of brand management systems and tools that are lacking in Chinese firms. Both are largely based on the brand management effort pioneered by P&G some 75 years ago and extended by the many P&G progeny. Approaches to brand management have been created, tested, and refined by decades of smart people from varied perspectives and contexts. The talent and brand-building capability go far beyond a few brilliant strategists or inspired founders with their wonderful stories.

Second, there has been little motivation for Chinese firms to develop branding capability, in part because most top companies have not been in a competitive context in which branding was important. Many of these firms, such as China Mobile and Bank of China, are current or ex state-owned enterprises who have been successful because of the government's assistance in one way or another. Further, many of China's sectors have been blessed with high growth so that success is a matter of delivering on manufacturing and distribution, not branding. In addition, most of the very large firms in China are content to compete as B2B players where the value of branding is not obvious. The change in the competitive context will occur but very slowly.



Third, Chinese firms lack not only talent to develop and implement brand strategy but also the will to do so at the top. Most top managers in China are not trained in marketing and, are more focused on operations, costs, and delivering functional benefits, so report my colleagues at Prophet working closely with Chinese firms on branding issues . Further, as a group, they are much less global in first-hand experience, in understanding of marketplaces, and in their orientation than their counterparts in other global firms and this will take generations to change. Their instinct is not to build a global business based on strong brands or even long-term customer relationships. It is a different mindset. The absence of support for branding at the top is magnified by the fact that Chinese firms are run in a highly autocratic manner and there is seldom an effective program to communicate the business vision even when it exists. Employees do not speak out, and the executives are not to be questioned. How can employees be energized to pursue branding a vision they don't understand?

Chinese firms may be decades behind most global firms, and have a long way to go with respect to brand strategy development and execution. So what are the prospects of their catching up in branding enough to become global brand players like Samsung, GE, or Nestle?

It is likely that brand building will hold back China's global prospects for some additional decades to come. But Chinese firms to not have to create a branding capability from scratch. Based on what the best global firms have done, there are at least two approaches that could accelerate the process:

One approach is to buy firms with strong brand management systems and people and leverage that IP and talent. One example may be the purchase of Volvo by the Chinese car firm Geely, although notably there were other more important motivations for that acquisition. A key challenge for such an acquisition would be to provide an organizational acceptance of the new capability.

Another approach is to rely on consultants and new hires to upgrade their capabilities. Haier, the appliance and consumer electronics manufacturer, might be in that category. In essence they can attract talent and knowledge from those that have those assets. It is definitely easier to copy what works elsewhere than to develop it from scratch. But most Chinese entrepreneurial firms that are candidates for this strategy are likely too frugal to have the big vision needed to execute it.

There are also a few potential role model firms that do get branding and innovation with a "copy but then improve" philosophy. There is the low-cost smartphone brand Xiaomi with its direct-to-customer online sales channel (think how Dell changed the PC channel) and a host of accessories and services that click with customers. And Tencent, a large Internet service portal, has branched out to other countries like Malaysia with services such as their WeChat free app, which is reported to have over 200 million users worldwide and is supported by very good brand advertising.

Despite the success of these tactics, it is unlikely that Chinese firms will employ these practices on a significant scale in the near future. First, top management would need a new mindset, one free of the legacy of the government's high-growth, protectionist strategy. Without that, China's ascent to global business leadership will continue to be held back by their weakness in branding and marketing.

The Bedraggled Return of the Organization Man

In 1956, journalist William H. Whyte described the American worker — in particular the white-collar worker — as an "organization man" out to build his career and his life around a single corporation. These conformist sorts, living in tidy new suburbs like Park Forest, Illinois, which Whyte described in depth in his classic study, The Organization Man, looked happily upon the steadiness and predictability of their lives:

For them society has in fact been good — very, very good — for there has been a succession of fairly beneficent environments: college, the paternalistic, if not always pleasant, military life, then, perhaps, graduate work through the G.I. Bill of Rights, a corporation apprenticeship during a period of industrial expansion and high prosperity, and for some, the camaraderie of communities like Park Forest. The system, they instinctively conclude, is beneficent.

Nowadays, of course, only a small percentage of Americans have military experience, colleges leave graduates with unpayable debt burdens, the economy keeps trying and so far failing to bust out of a post-crisis funk, and 18.8% of the population of Park Forest is below the poverty line. It is a very different, less beneficent era from the one Whyte described.

Yet one thing is similar: Americans seem to again be looking for the security of long-term corporate jobs. The Wall Street Journal reported this week that Americans are starting fewer businesses, are becoming more reluctant to change jobs, and are likelier than ever to work for a large (500+ workers) employer.

One should always a be a bit dubious of sweeping claims about national-level changes in behavior. But a little digging through the data does seem to back up the Journal's claim.

For example, the percentage of workers who are self-employed, which usually rises during and immediately after a recession, has been falling steadily since 2006. Then there's the trend in median job tenure, measured by the Labor Department in a biennial survey and shown in the chart to the left.

Men saw a decline in median years on the job in the 1980s and 1990s, in keeping with media narratives of declining job security and rising entrepreneurialism. For women, tenure kept rising as they became more ensconced in the workplace.

Then, in the early 2000s, the declining tenure trend for men bottomed out; since 2006 it's been on a steady upward path.

This doesn't mean times are good for male workers. The employment-to-population ratio — the simplest of job-market metrics — shows a sharp drop for men in particular in the last recession.

Basically, a American man is less likely to have a job these days than at any time in many, many decades. But if he has a job, he's becoming likelier to stick with it. These are organization men out of fear, not of a belief in the beneficence of their employers. And while the longer-term trend for women is basically just toward a deeper involvement in the workforce, the last few years seem to indicate a similar quest for security in a tough environment.

Given the beating the U.S. job market has taken since 2008, this is understandable. What's curious, though, is how at odds these trends are with the portrayals of modern worklife that you read in, well, HBR. In our pages, the business world is transforming into one where work is split into ever tinier, easy-to-contract-out chunks, where supertemps are on the rise, where two-or-three-year tours of duty are replacing long-term jobs, and where of course building a personal brand separate from that of your employer is essential to career success.

When economic data and media portrayals conflict like this, I have learned to trust the data on relatively stable phenomena, but pay attention to anecdotal evidence that something new and different is happening that doesn't show up yet in the data. In this case, though, it's the economic data showing a new trend — toward longer job tenures and less risk-taking — while the business-media narrative is still mostly about job-hopping and free agency and entrepreneurship.

So what's up? I've got two hypotheses. The first is simply that the changes in the job market from the early 1980s to the early 2000s were so dramatic that we're still catching up with their consequences.

One can see this better by looking at the job-tenure data for older men since the 1950s. The Labor Department has only been doing its biennial tenure surveys since 1983, but it did ask about the topic occasionally before then, and the Employee Benefit Research Institute has dug up the old data used in the chart to the left.

As the chart shows, men over 45 experienced rising tenures in the 1950s, 1960s, and 1970s, then a big dropoff starting in 1983. The uptick since 2006 looks pretty modest in comparison.

Another possibility (my second hypothesis) is that different kinds of workers are competing in very different labor markets. HBR and HBR.org readers are a rarified group, after all. You're concentrated in professional and managerial jobs, and a significant percentage of you don't reside in the U.S. Then again, tenure in managerial and professional jobs has risen more sharply over the past decade (from 4.6 years in 2002 to 5.5 in 2012) than for workers in general. And a quick look at job tenure data from around the OECD mainly shows a lot of stability (percentage of German male workers with 10+ years of job tenure in 1992: 21.9; percentage in 2011: 21.9).

Maybe it's just that HBR readers tend to aim high. CEO tenures are significantly lower than they used to be, and many of the most impressive and acclaimed careers of our day were not built within a single organization. If your goal is reaching the top, the path nowadays is anything but straight and narrow.

But most people don't want to be CEOs, or world-changing entrepreneurs. What they really want, apparently, is a steady job.

Focus Your Strategy By Assessing Others'

There's a well-known anecdote about Gil Amelio, the CEO of Apple Computer just before Steve Jobs' return in the late 1990s. In a conversation with a reporter, Amelio compared Apple to a ship loaded with treasure, but with a hole in the bottom, leaking water. "My job is to get everyone to row in the same direction."

When Steve Jobs later recounted the story at a conference panel in 2010, the audience erupted in laughter. But the metaphor, while it may seem bungled at first glance, actually describes the way many leaders approach strategy. There's a big hole in the enterprise — a gap that, until it is filled, will not let them meaningfully execute any strategy. Instead of trying to figure out what they're missing, and solve their biggest issues, they focus on finding a direction, any direction, to try to steer their ship.

The history of business strategy — which is still a relatively new field, emerging only in the last 50 years — is essentially a series of theories of how to create value. Most strategists through the years have been similarly focused on picking a direction and getting everyone to steer in harmony. While the many schools of strategy, from adjacency positioning ("we'll expand to similar markets") to the search for blue oceans ("we'll serve a market no one else does") have different ideas about what direction is best, most of them involve the same underlying quest for some sweet theory of success that, once it's found, will be all leaders needs to know where to steer the company. It's understandable that decision makers want to start there, because most business choices seem, at first glance, to deal with the destination: Where shall we grow? Which industries should we expand to? What markets should we serve?

But in the real world, the choice of a direction is just one element of strategy. It must be integrated with choices about one's identity, purpose, and capabilities. Strategy is what Harvard Professor Cynthia Montgomery calls a "fundamental question that any company's leader must ultimately answer: What will this firm be, and why will it matter?" The value proposition may be based on a theory of success, but it can also be based on a company's capabilities — what it does particularly well — or on some other aspects of a company's history and proficiency. If there's an internal gap, or an internal problem preventing the company from realizing its potential, that can be as powerful a strategic barrier as any market failure.

Those who want to be effective strategists thus have a lot to sort through — multiple value creation theories, and scores of approaches on creating strategy (with hundreds of books with advice on the topic). What if, instead of looking for one solution that works for everything, business strategists looked for ways to improve their own judgment and strategic focus? We think one approach to building this judgment is to look more freshly at the companies in your own industry. Who is winning and how are they doing it? What are the key drivers of your company's success? These are not simple questions, and that is why the topic of strategy still seems quite unsolved to many. But if you spend some time thinking about companies this way, you will find your own discernment — of internal and external factors — can improve.

We've discovered that, for ourselves, in an online survey we designed in which we invite people to look at company strategies. Most people, for example, recognize that different companies in the same industry approach strategy in very different ways — and this difference, in itself, drives their competitive advantage. This has been particularly evident in the personal computer industry, where Apple's success, is generally attributed to its capabilities — including its innate, artistic understanding of design and human behavior — while Microsoft's success is driven by great market resonance of a few powerful products. Or consider the financial services and insurance sector, where companies may, in the future, owe their success less to their ability to manipulate capital, and more to their abilities in customer service and product innovation. Perhaps that's why we're finding that many respondents believe that most of the companies in their industry — including their own company — lack what they need to compete and create value in the marketplace.

We invite you to join us in learning more about the fundamental strategic choices companies make and how successful these have turned out to be. The survey that we developed — which takes about 10 minutes to complete — poses the question "What drives a company's success?", based on the companies that you observe (and that you work for). If you take it, we'll provide you with an analysis of what you and your competitors see as the key strategic success factors in your industry. As a side effect — or maybe as the primary outcome — you will be able to test your strategic judgment against those of others, and perhaps gain a better sense of the right direction for your enterprise.

Click here to take the survey.