Posts Tagged ‘michael porter’

Looks like operational effectiveness, smells like operational effectiveness…

December 16, 2008

One core strategic management concept that folks often struggle with is the idea of operational effectiveness (OE). OE is the pursuit of such goals as cost efficiencies, quality improvements, and faster speed of delivery. As Michael Porter put in 1996, OE means “performing similar activities better than than rivals”. Such actions are not a recipe for ongoing or sustainable advantage. Instead they are just part of ongoing improvement path that all decent firms should be on.

oe-tiles1The distinction here is between OE and strategy. The latter involves trying to find activities that generate value for customers (or reduce costs) that are different from rival firms, or which tackle the cost, quality and speed goals in a distinct fashion. This may well be the path to sustainable advantage. See a nice expanded elaboration of this distinction on this blog post I found from the dark ages (well, 2005!).

Times of economic turmoil, such as we are witnessing across the corporate arena, often lead to the necessary self-reflection by executives that is missing in the heady good times. This interview with the Chief Information Officer (CIO) at one of the world’s larger oil companies (Sunoco), offers some candid insights into this firm’s realisations:

“I think there is a realization now that competitiveness does not derive from the raw technology. The competitive advantage doesn’t come from having the same set of Lego bricks that everyone else has access to. It comes from taking that set of Lego bricks and understanding how they can be put together to understand specific issues that your business is facing in your industry. And how you put them together will be very different from someone else in a different company, even though they are a competitor.”

“It was only when we were trying to tighten our belts earlier this year that we asked ourselves, “What would happen if we didn’t get new PCs for 15 months? And was anyone actually complaining that they couldn’t deliver a product, that they couldn’t get cash to a bank, that they couldn’t execute a trade because their computer was too old?” Of course not.”

Sunoco have clearly realised that upgrading technology with too little consideration of its usefulness is not even a source of operational effectiveness. It was just a lazy habit of a firm with very healthy cash flows. Now that the bottom line is a core consideration, the firm is starting to examine more efficient ways to handle such technology.

The article mentions the examination of cloud computing options such as gmail. Such shifts in purchasing of IT infrastructure are very unlikely to be a source of sustainable competitive advantage for any firm (other than the firms providing the infrastructure). As more and more firms go down this path, the bar will simply have been raised. Firms will need to look elsewhere for strategy choices…


The perils of income elasticity

December 7, 2008

Upturned champagneA reminder this week of the dangers of selling products that are income sensitive: champagne producers are seeing their sales drop as consumers start to tighten the belts and reduce spending on non-necessities. Four of the five largest producers have reported drops in sales compared to 2007, with one down 30%.

Presumably folks have switched to substitutes that meet some of their celebratory/ commiseratory needs at a lower price. I wonder if it’s beer or chocolates? Either way,  firms like Rémy can build in very few switching costs to prevent such consumer behaviour. Wonder if it will be time for more consolidation in this industry…

What other products are experiencing such drops in sales?

As simple as ABC?

November 7, 2008

Running a business with booming demand (much of it funded through the public purse), and a big lead in market share and accessibility to consumers should be a license to print money.

That was certainly the logic behind the strong growth of stock market darling ABC Learning over the past few years down here in Australia. This firm modernised, aggregated and expanded a previously mum-and-dad (excuse the pun) business – childcare. They eventually ran more than 1200 childcare centres in Australia (upwards of 20% of the market), and another 800 or so in New Zealand, the US and the UK. Alas, it is has all gone very badly in the past 6 months or so for the firm and its founder. As of yesterday (November 6, 2008), they have gone into receivership (comparable to US-style Chapter 11).

So what went right and wrong?

In terms of the external environment in which this firm (let’s use Porter’s Five Forces) operated it looked like a great scenario:

– desperate buyers in the form of working parents often starved of local alternatives and increasingly subsidised by a complicit government

– low-paid employees with limited bargaining power

– a substantial first-mover advantage from securing properties in prime locations (creating a barrier to entry at the local level) and developing arrangements to supply services to corporate clients

– few relevant substitutes (stay-at-home parenting, nannies or grandparents)

– limited industry rivalry due to considerable market share advantage and the localised nature of competition.

So what wrong?

Here we see the issue of inadequate internal resources and capabilities. The systems and routines don’t appear to have been in place to adequately assess the merits of new properties and business lines (the firm had diversified into early primary education and also toys). General mangerial nous seems to have been scarce (it is a much bigger task running 1200 centres and 16000 employees than the 40 centres when the firm first went public). The financial management now looks incompetent (if not downright fraudulent). The international expansion was bold, but here also it may be that the firm underestimated the complexity of engaging in very different institutional environments, and mismanaged the huge financial risks of high borrowing in multiple currencies.

All in all, it turns out babysitting ain’t as easy it looks.