Tuesday, May 22, 2012

The Two Levels of Strategy

Very interesting and I think critical to understanding the role of the corporation to the businesses.

"The word strategy has many modifiers in the business world: portfolio, diversification, differentiation, growth, market share, shareholder value, customer, brand, product, pricing, cost, manufacturing, supply chain, channel, distribution, sourcing, IT, digital, people, communications, investor relations, and M&A among them. All of these forms of strategy are variations of the two most fundamental types: corporate and business. Typically, corporate strategy is seen as being relevant to a company as a whole, whereas business strategy is reserved for the individual businesses within a company.
But things get more complex when you consider the most fundamental questions that a strategy needs to answer:
1. Who is the target customer?
2. What is the value proposition for this target customer?
3. What are the essential capabilities required to deliver that value proposition?
In considering a company operating in multiple businesses (think Siemens, UBS, Unilever, Reliance, and Saudi Aramco), these questions are difficult to answer for the company as a whole — if not meaningless. They can only really be answered for each of the individual businesses within a company. Does this mean that a company’s corporate strategy is just a rollup and integration of the strategies for its individual businesses? No, not at all. A corporate strategy adds two more critical questions to the list:
4. What businesses should the company be in?
5. How should the company add value to those businesses?
Adding value to the businesses means contributing to the ability of each business to outperform its peers. In other words, the individual businesses should be able to draw on some distinctive capabilities that are available to all parts of the enterprise, and that give the businesses an edge in their own target markets. For PepsiCo, direct store delivery is one of these enterprise-wide capabilities; corporate sales and marketing is one for IBM; General Electric has a distinctive capability in developing general managers; and so on."

Tuesday, May 15, 2012

Delta Buys Refinery to Get Control of Fuel Costs
Published: April 30, 2012

Interesting idea. We'll follow it to see if it has the intended benefits
"Delta said that it would spend $150 million to acquire the Trainer refinery, which has been shuttered for six months, after receiving $30 million from the state of Pennsylvania as part of a deal to support job creation. 
The airline said it would spend $100 million more to refurbish the plant to increase its output of jet fuel. 
Richard H. Anderson, Delta’s chief executive, said the investment was a modest one, equivalent to the list price of a new wide-body plane like a Boeing 777. The company estimated that it would reduce its annual fuel expense by $300 million, once the refinery was refurbished and operating again. 
To achieve similar fuel savings, Delta would have to buy 60 new-generation narrow-body planes like the Boeing 737, a capital investment that would total $2.5 billion, according to a regulatory filing. 
Delta said it had also struck a three-year agreement with BP to supply crude oil to the refinery.... 
....Combined with the jet fuel produced at Trainer, Delta said these deals would provide 80 percent of its fuel needs in the United States. The purchase “is an innovative approach to managing our largest expense,” Mr. Anderson said in a statement.... 
.....These rising fuel costs have forced painful restructurings for airlines in recent years, helping to push many of them into bankruptcy and spurring consolidations across the industry. The airlines have set up elaborate hedging strategies to try to counter the rising fuel costs. But the hedges backfired when crude oil prices rose or fell in unexpected ways. Buying a refinery will not erase Delta’s fuel bill. The airline will still need to buy crude oil at world market prices. But in justifying the purchase, Delta said the cost of manufacturing jet fuel had risen more rapidly than crude oil costs. It also said that demand for jet fuel and diesel, both by-products of the refining process, had been rising steadily in recent years, while demand for gasoline was falling, adding to the pressure on jet fuel prices."

Tuesday, May 08, 2012

Pull Platforms for Performance
   John Hagel

Interesting concepts. I suggest going to Hagel’s site to see how he suggests focusing on these measures to enhance performance:

"We live in a world of mounting performance pressure. OurShift Index reveals that return on assets for all public companies in the US has eroded by 75% since 1965. Companies clearly are failing to respond effectively to these mounting pressures. If we hope to turn this around, we need to step back and take a systematic look at the performance levers that drive these results and question the approaches of the past. 
What drives company performance? It’s actually quite simple.Most businesses can be understood as bundle of three core operating processes, each driven by a unique performance lever. These three operating processes are: customer relationship management, product innovation and commercialization and infrastructure operations. 
Each of these core operating processes is under increasing pressure. Let’s look at each one in sequence. 
Customer relationship management
Customer relationship management is all about connecting with a set of customers, getting to know them deeply and delivering more and more value to them.  The metric that drives the performance of this core operating process is simple: customer life-time value. Customer life-time value itself is a function of three variables:
[(Profit generated per year) x (years of relationship)] – cost of customer acquisition
 While simple to state, these variables are more and more challenging to manage.  In fact, each one is under growing pressure.  In most industries, customer loyalty is eroding, leading to a significant reduction of the average life of a customer. To make matters worse, margins are eroding as well, diminishing the profit generated per year of a customer relationship. In many industries, the cost of customer acquisition is also rising. Other than that, everything is find with the customer.
Product innovation and commercialization
This core operating process focuses on the research and development required to generate innovative new products and services, getting new products and services quickly into market, accelerating adoption of these products and services and then striving to extend their lives in the market as long as possible.  Similar to customer relationship management, the metric that drives this core operating process is simple: product (or service) life-time value.  This metric can also be decomposed into three variables:
[(Profit generated per year) x (years of market life)] – cost of developing the product 
Once again, each of these variables is under increasing pressure.  Across virtually all industries, product life cycle compression has become a fact of life.  Product margins are under increasing pressure. Greater efficiencies in procurement can help to offset these growing margin pressures to some degree.  Brand used to help a lot in charging a price premium, but the brand premiums are rapidly eroding in most industries.  As if that is not bad enough, the cost of developing new products and services is also increasing in many industries. And yet we keep churning out more of them.  In many cases, we seem to be compensating for diminishing product profitability by making more of them - we desperately hope to make it up on volume. 
Infrastructure operations
Most businesses require some type of asset intensive infrastructure to operate.  The nature of the infrastructure differs significantly across industries.  In many product businesses, it might be factories to produce the products. For retailers, it would be the physical store fronts. For banks and brokers, it could be the back office processing facilities that they operate to execute transactions, not to mention the branch offices to engage with customers. Even digital Internet businesses typically require large data center operations.
Whatever the physical facilities, they typically consume significant assets and require substantial operating expense. In this context, managers tend to focus on asset life-time value:
[(Profit generated per year) x (years of asset operation)] – cost of building/acquiring asset 
By now, the story becomes monotonously similar. Margin pressure reduces profit generated per year, accelerating technology and consumer preference changes diminish the average years of asset viability and cost of building/acquiring assets tends to increase.  In this particular case, asset utilization can also have significant impact on profit generated per year.  Finding creative ways to increase asset utilization can often help to offset increasing margin pressure"

Tuesday, May 01, 2012

Microsoft Hooks onto Nook
Software Maker's $300 Million Deal Gives It a 17.6% Stake in Barnes & Noble Subsidiary

Microsoft continues to try to fill huge gaps in their business vs. highly entrenched competition (Apple, Amazon, Google) via alliances or acquisitions over the past 2 to 3 years. I guess the key question is, since most of the acquisitions or partnerships are with relatively weak players in the markets Microsoft hopes to penetrate, can Microsoft leverage their technology base to really step change their performance in these markets? The chart at the end highlights that they are usually starting from a very weak position.

"The tie-up with Barnes & Noble also furthers Microsoft's strategy to move beyond its Windows and Office software franchises and invest its growing cash pile in businesses—some $60 billion at the end of March—that it failed to capitalize on in recent years.
Those deals have yielded mixed results. Last year, for example, Microsoft agreed to supply the mobile operating system for smartphones sold by struggling Nokia Corp., but those products so far haven't gained a large foothold in the market. An Internet search partnership in 2009 with wounded Internet company Yahoo Inc. was designed to help Microsoft catch up to Google, though its Bing search engine hasn't gained much ground.
The software maker last year also bought Internet-calling service Skype for $8.5 billion after Google and Facebook showed early interest. That deal was the biggest acquisition in Microsoft's history and another whose payoff remains unclear.
Despite those efforts and years of acquisitions, Microsoft continues to generate more than 85% of its annual operating income from the Windows software and services, and its Office software suite. 
By taking a minority stake in a new subsidiary that will market the Nook, Microsoft gains several footholds in e-reading. For starters, Barnes & Noble committed to creating a Nook e-reading app for Windows 8—a forthcoming Microsoft operating system that will be used in tablet-style hardware and PCs—and for smartphones powered by Microsoft software. The Nook, like Amazon's Kindle Fire, runs on Google's Android software."