Business Is Simple: Until Academics and Consultants Make It Complicated

Copyright © 2014 by Chris Stern.

Library of Congress Control Number:     2014910456

ISBN:                  Hardcover                        978-1-4990-3425-7

                            Softcover                          978-1-4990-3427-1

                            eBook                               978-1-4990-3424-0

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Rev. date: 06/06/2014

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CONTENTS

Disclaimer

Preface

Chapter 1   Pragmatic Strategizing

Chapter 2   What Really Works

Chapter 3   Bad Strategy

Chapter 4   Good Strategy

Chapter 5   The Strategy Process

Chapter 6   Strategy Process Part 1: Business Definition

Chapter 7   Business Differentiation

Chapter 8   Goal

Chapter 9   Future Identity

Chapter 10   Portfolio

Chapter 11   Strategy Design

Chapter 12   Strategy Compilation

Chapter 13   Functional Strategies

Chapter 14   Action Plan

DISCLAIMER

This book is an educational business publication and not a factual report. Unless events, persons, or situations are described and quoted based on public knowledge, all events, persons, or descriptions are strictly fictional. Any resemblance to existing companies, people, or situations is unintended and purely coincidental. Citations for third-party sources used in this publication are available in the publication or available upon request from the author. The author of this book makes no representations as to the accuracy or completeness of any information in this book. The author will not be liable for any errors or omissions in this information nor for the availability of this information. The author will not be liable for any losses, injuries, or damages from the display or use of this information. By reading this book, the reader agrees to these terms and conditions. These terms and conditions of use are subject to change at any time and without notice.

PREFACE

It seems I got a little fame for my claim that business is simple until academics and consultants make it complicated—a statement I wholeheartedly believe in. Another pragmatic opinion of mine is that if I need a calculator to evaluate a business, it is no business for me. The above has worked for me because I am very familiar with a set of tools I am using in any strategic situation.

I have observed lots of talking and little doing in today’s business world; interestingly enough as much in small- or medium-size companies as in large corporations. In my consulting practice, we concluded that a synopsis of the most important tools was missing. So I underwent the effort of creating an innovative strategic management process. This process has been applied in one way or another hundreds of times and it works.

Initially I have been holding back publishing Business Is Simple because I thought there are enough business books on this planet. But when I realized that over the last ten years, sequels of older literature dominated the space, I felt that maybe something structured and new could help mitigate an apparent draught of innovation.

This little book evolved out of a project that I have been publishing on www.BizIsSimple.com since 2012.

Chapter 1 kicks off with an overview of management systems—comprehensive, yet much more pragmatic than what you would expect to read about hard-core business administration.

In chapter 2 the book compares three important business books and uses the contents of What (Really) Works to carve out an easy to use organizational assessment tool.

Before we can discuss good strategies, we have to understand the characteristics of bad strategies. There are two kinds of bad strategies:

-   those crafted by incompetent management or

-   fundamentally good strategies that had a chance to succeed but were later killed by unfortunate circumstances.

Chapter 3 covers these important topics.

Development of a good strategy starts with aligning the three core elements of strategic planning:

1.   Diagnosis—a definition of the nature of the challenge in simple terms

2.   Guiding policy—the overall approach to overcoming the challenge

3.   Coherent actions—steps required to carry out the policy.

Chapter 4 discusses the core of all good strategies.

Chapter 5 lays out the process of strategic management. Yogi Berra once said, If you don’t know where you are going, you might not get there. I propose a structured process to walk the fine line between structured management and trial and error.

Chapter 6, Business Definition, is trying to find answers to the question: in what business are you in? And it also defines what you will not be doing.

Blue ocean or red ocean—that is the question. Chapter 7 is dealing with extreme differentiation.

There is too much confusion about mission, vision, core rules and goals, but finding realistic goals should not be too difficult. All you need to do is envision who the audience will be and tailor the message to them. No big deal. Really? Real-life examples provide a different story in chapter 8.

Analyzing the current situation and determining the distance to the goal is not difficult if you know and understand your business situation and assess the strengths and weaknesses properly. Once that is tackled, all it takes is using the option generator tool from the SWOT to determine the strategy. Chapter 9 is telling us how.

Portfolio management as commonly conducted by strategy consultants is useless. Chapter 10 clearly shows why the tool is dangerous and misleading. There are better ways to segment and strategize.

Designing strategy without considering systemic and competitive risk is very dangerous. Chapter 11 discusses two very important tools of risk management in this chapter.

Putting it all together on one page is an art very few organizations are good at. Chapter 12 demonstrates on a few impressive examples how to do just that.

We all know that it is easy to screw up even the best strategic plan. In chapter 13 we discuss how to make sure strategies have a better chance to get implemented.

Chapter 14 is critically dealing with strategy implementation. As described in chapter 3 already, people issues are the root cause for most strategic failures. As always in this book, we are calling things by name.

Acknowledgments go to Eva, my soul mate, wife, and business partner. Without her continuous care about details and her impeccable business acumen, neither this book nor other ventures in my life would have happened the right way. Running a small business as we do together is the privilege of true partnership, and I would never want to miss that.

Teaching and consulting are deeply fulfilling activities, and I feel obligated to make my over thirty-seven years of hands-on business experience available to the many diligent students and dutiful executives I had the privilege to meet in my classes and as clients. Their overwhelmingly encouraging feedback motivates me to continue to develop new methodologies, provide pragmatic advice, and most importantly, propose feasible solutions.

CHAPTER 1

Pragmatic Strategizing

In this chapter we will explore what I believe is an extremely pragmatic yet comprehensive management system. Business administration academia typically uses more complex systems to illustrate current and future challenges of an organization. My derivate is based on what is widely known as the St. Gallen Management Model, named after the methodology originally developed by scholars of the Hochschule St. Gallen (HSG) in Switzerland. Because it views an organization from every possible angle, the St. Gallen methodology is probably the most compelling business model published. But due to its comprehensiveness, it is probably also the most complex model. Some publications go on for five hundred plus pages trying to explain why and how the system should work. Who would ever read that? I favor a different approach, and from my executive experience, I know that if something does not come across in an hour, it will never come across. After more than seventeen years of lecturing this concept in senior management seminars, I have found ways to simplify the message while retaining the core.

Operative Performance

Figure 1-1. Business Foundations

Any structure will be more stable and sustainable if it is built on a solid foundation. Build it on sand, it will shift and fall; build it on rocks, it will be rock-solid. So, why are so many businesses neglecting the importance of the two main components of a foundation? The answer is very simple. The core purpose of the business shifts over time, and the core competencies change along the way. But if either purpose or competencies get out of sync with each other, problems are on the horizon. Look at department store icon Sears. Originally a mail-order business for watches and soon the first discounter of products for farmers, former railroad station agent Richard Sears and his business partner Alvah Roebuck changed the retail world of the late nineteenth century. Clearly stated prices and a growing variety of products were the core competencies of Sears & Roebuck. Staying true to its competencies, Sears offered thousands of products on hundreds of pages of catalog. The business diversified adding major brands (Craftsman, Kenmore) and even insurance (Allstate), financial services (Dean Witter), credit cards (Discover), and real estate (Coldwell Banker). By the late 1980s, there was literally nothing you could not buy at Sears. The company, however, was far away from satisfying the core customer and market need: great retail products at clearly stated prices. Consequently, in the 1990s, Sears started divesting nonretail entities and even stopped its catalog in favor of the website. Complexity of the business model had become uncontrollable, and in 2004, Kmart was able to acquire Sears. The new Sears Holdings Corporation became an even more ambiguous business model, and only a minor part of its income today comes from retail operations.

Any business needs to be built on the foundation of a distinguished market need that it can satisfy with specific competencies. If the market need is attractive enough and with competencies sufficiently developed, a firm may be able to find a sustainable position. It then has found a reason for being, or in other words, the market gives the business a mission. Sears clearly had one in 1895.

Figure 1-2. Business Pillars

Someone who must have been locked up in a scholar’s chamber for too long once said that senior executives should spend 80 percent of their time strategizing and 20 percent of their time supervising the business. This could not be farther from today’s real world. Business today is so hyperinteractive that any senior executive needs to be everywhere at all times and certainly needs to be involved in daily activities. One misstep and the virus of social media can destroy a company. One trend missed, and an icon goes down the tubes. When I wrote this paragraph, Kodak was preparing their filing for chapter 11 bankruptcy and was trying to sell off their vast intellectual property to save itself: selling the future to retain its leading role in celluloid film photography. One could also say slaughtering the future on the altar of today. There is only one place where you can find out what is really going on in the marketplace, and that is the marketplace itself. The senior leader needs to be capable of building a business on four symmetric pillars. The leading and guiding pillar for all other pillars is the market position, and that comes from superior sales. IBM is a prime example for a company that always has predicted what will sell next, and their business model has lived up to it. The sales-management gurus from Miller-Heiman predict that organizations where executives are systematically involved in closing deals have a 50 percent better performance than those firms where executives strategize. This says it all.

With sales up through the roof, an organization has a fair chance that financial stability, its second pillar, is solid and in sync. Financial stability is measured in a simple way: cash. Current disposable cash divided by operating expenses per day measures the lifeline of the company in days. I was widely ridiculed for this finding until a major tsunami hit Japan in 2010. Needless to say, only those Japanese companies with enough cash at hand made it through the disaster and the subsequent time needed for cleanup. I think you got the message: cash!

Operative efficiency and continuous process improvements are measured in the third pillar. Again, this is something that is done at the shop floor and not remotely. The employee on the line is almost always most qualified to suggest improvements to the line. When I was a consultant for process improvement in the early 1990s, listening to people down the line was all I needed to do in order to become one of the most effective consultants of my firm. Of course, I did not dress in a suit to do that, but when I sat down with a supervisor or specialist and listened to their needs and suggestions, I almost always found ideas no other major consultancy would ever find in their structured analysis. There is no need to hire consultants for that. Just walk the line, shop floor, or office suite twice a day and listen to your folks.

Finally and most importantly, the fourth pillar is people performance. Motivated people perform better. Many companies treat people like a resource and get what they deserve for that. I have always tried to be a fair and open superior to my people. I have not always been rewarded for that, even made some real bad experiences, but I would never change my opinion that performance comes from people. Over time, every executive needs to build principles for people management and stick to those. All my disappointments in the past came when I violated two core principles: (1) Never hire a person when there is no clear position for him or her. (2) Never hire the person next in line, just because he or she is just there. Always conduct a full evaluation for every position.

If all four pillars are in sync, and they are built on a solid foundation, they can carry the future of your business. That is why it is so important not to belittle operative business as a chore for middle or lower management.

Current Competitive Position

Figure 1-3. Current Competitive Position

The stability of the four pillars can be measured with the balanced scorecard. If the balance states that the pillars are level, one can start building the first strategic layer on them. This is what we call the current competitive position of an organization, and it answers what the firm will do eighteen or twenty-four months from now and how it intends to accomplish that. In the current competitive position, an organization is typically simultaneously and continuously exposed to four competitive battlegrounds simultaneously.

1.   Products and offerings are continuously improved or renewed. Either you innovate or your current or future competitors will do so. In this respect, the question relates to what kind of product at that level of price you should have relative to competition.

2.   Bargaining power or your commercial proposition. Typically that is the price tag for your offerings minus your direct costs, i.e. your gross margin. The higher the margin, the better your bargaining power will be because you could—but do not have to—give margin to still secure a deal. Worst case is having an average product at a tight margin—there is no bargaining leverage left.

3.   Marketing power or marketing budget. Of course, when there is more cash, there tends to be more marketing power. Ideally, a firm wants to use marketing power most efficiently. Brand recognition and brand referrals are effective ways of achieving that. A company with no brand recognition needs to spend a lot more effort and money to convince customers to spend their budgets or impulse purchases for them than a company with a stellar brand.

4.   Ability to influence demand or loyalty. All marketing power is useless if the customers are loyal to another brand. Dell and HP