Friday, September 12, 2014

Five Classic Competitive Strategy Mistakes

Based on my experience, here are five business strategy mistakes that organizations often make:

1.  Focusing on market share extensively, while not thinking enough about how to drive product category growth - as a result, they miss chances to grow the pie for all

 2.  Paying too little attention to a maturing core business while focusing effort on growth into new markets, resulting in further erosion of the core

3.  Overestimating economies of scale and scope - and forgetting that diseconomies of scale and scope can become substantial

4.  Benchmarking rivals and then imitating one particular activity or capability, while not realizing that the rival's competitive advantage comes from how that activity fits tightly into a broader, integrated system of activities

5.  Resorting prematurely to price as a competitive weapon - not being creative enough to think about other ways to attract customers, deepen their relationship with existing customers, and grow an entire category

Thursday, September 11, 2014

Does Apple Spend Enough on R&D?

Matt Kramer published an article in USA Today this week titled, "7 Companies Outspend Apple on Innovation."  Kramer noted that Apple ranked behind seven other prominent technology companies in terms of R&D spending.  Moreover, Apple ranked 95th  among the S&P 500 in terms of R&D as a percentage of sales.  He found that quite surprising.  Kramer ends the article by saying, "But with the iPad getting stale, and competition in the smartphone arena kicking up, investors might wonder if Apple might need to pick up its R&D game."  The article caught my eye because a great deal of academic research shows that R&D spending is not strongly correlated with successful new product development.  It's not just how much you spend; it's how you spend it!   Kramer's article is thought-provoking, but it would have made for a much stronger piece if he included the research findings about the connection between R&D spending and firm performance.  

Monday, September 08, 2014

Fast Company article: Embracing Failure

Rachel Gillett has written an article for Fast Company titled, "What The Hype Behind Embracing Failure Is Really All About."  She has included several of my comments. The article examines the popularity of the concept of "tolerating failure" - is it overdone? Is it a fad?  What's the true meaning of the concept of embracing failure?  Here is the link to the article. 

Are Smaller Boards More Effective?

The Wall Street Journal reported last week on a new study conducted by GMI Ratings for the newspaper.  The study examined boards of directions, and it took a look at the link between board size and performance.  Here is a summary of the findings:

Among companies with a market capitalization of at least $10 billion, typically those with the smallest boards produced substantially better shareholder returns over a three-year period between the spring of 2011 and 2014 when compared with companies with the biggest boards, the GMI analysis of nearly 400 companies showed.  Companies with small boards outperformed their peers by 8.5 percentage points, while those with large boards underperformed peers by 10.85 percentage points. The smallest board averaged 9.5 members, compared with 14 for the biggest. The average size was 11.2 directors for all companies studied, GMI said.

What are the advantages of smaller boards? Why might they perform more effectively? Here are a few potential reasons cited in the Wall Street Journal article:
  • Decisions can be made more quickly with a smaller team. It can be more nimble.
  • Each person is more likely to be fully committed, prepared, and engaged. There's less likelihood of free riders on a small board.
  • People are more likely to be candid in a more intimate atmosphere than on a large board.
  • A small board can dig into an issue in much more depth. On a large board, you may have a tendency to deal superficially with issues rather than really "getting your hands dirty."
I would add one other reason. We already know that teams tend to focus their discussion on information commonly held by all participants, and they don't spend enough time on information held privately by one or a few members. That challenge becomes even more pronounced as a team becomes larger. Therefore, a smaller board benefits from a higher likelihood that information and expertise from all members will be shared and discussed.

Friday, September 05, 2014

Stihl: Making Tradeoffs

Great firms make tradeoffs; they choose what not to do.   One key tradeoff that firms make is about the channels through which they decide to sell their products.  Premium brands often make an explicit choice to restrict distribution of their products, so as to maintain service quality and preserve the reputation of their brand.  As an example, consider Stihl.  They are quite blunt about their strategic choice to only sell their products through licensed dealers and not through big box retailers such as Home Depot, Lowe's, or Wal-Mart.  Here's an except from their Canadian website:

We can give you over 1,000 reasons - our legion of independent STIHL Dealers nationwide. We count on them every day and so can you. To give you product demonstrations, straight talk and genuine advice about STIHL products. To offer fast and expert on-site service. And to stand behind every product we carry, always fully assembled. You see, we won't sell you a STIHL in a box, not even a big one.

In addition, here's an advertisement that they ran several years ago.  

Thursday, September 04, 2014

First Movers Don't Always Have the Advantage

Many entrepreneurs fall into the trap of believing that being the first mover always conveys a formidable advantage.  The first mover myth trips up many business people. Who was the first player in social media?  Not Facebook.  It was Friendster.  Who was the first mover in the browser market?  Netscape.  Who was first in search?  Not Google.   According to Kellogg Insights, “One study showed, in fact, that pioneers were more successful than late movers in just 15 of 50 product categories.”  

What are the key sources of first mover advantage?  If substantial economies of scale, network effects, and a powerful learning curve exist, then first movers have an advantage.  However, there's downside to being the first mover.   Being the pioneer in a new market can be expensive and challenging.  You make all the mistakes that a pioneer is likely to make.  Others watch and learn from your errors, and then they leapfrog past you.  At the same time, entrepreneurs who move first can then get stuck in the sunk cost trap.  They can become resistant to adapting their strategy that enabled them to gain some initial traction.  Fast followers then pass them by.   Entrepreneurs need to look carefully at a particular market and understand that simply being the first mover may not convey substantial advantage and protect them from competitive threats.

The Everything Store: Interesting Read

Several weeks ago I finished reading Brad Stone's book, The Everything Store: Jeff Bezos and the Age of Amazon.   The book generated some controversy when MacKenzie Bezos (Jeff's wife) posted a scathing review on the Amazon site.  She claims that the book contains a number of factual inaccuracies.  Her real concern, though, is that the book does not always paint a very flattering picture of Jeff Bezos.  Nevertheless, I found the book to be interesting, and I read it with the understanding that it may not be a completely accurate picture (as is true of many of these types of books).  Here's an interview with the author on CBS: 

Tuesday, September 02, 2014

A Few Nuggets of Advice for College Students at the Start of the New Year

As students arrive on college campuses throughout the country this time of year, I would like to share a few words of advice.  I hope that students, particularly first-year students, find these comments useful.
  1. Ideas don't sink in through the process of re-reading the book and your notes.  You need to actively work with the material.  Writing is much more useful than reading in this regard.  When studying, try writing a synthesis of your notes.  Boil the extensive notes down to a 5-10 page outline of the course, and then to a 1 page outline.   This process will enable you to synthesize and integrate what you have learned.  If applicable, do practice problems as a means of studying.  Practice beats reading notes any day of the week. 
  2. Go to class!  It's so easy to skip class when you are tired.  However, going to class is more than half the battle. You will find it so much easier to excel if you aren't trying to make up for absences. 
  3. Find a mentor.  I'm not talking about going to office hours just to try to improve your grade.  I'm talking about a true mentor, someone can offer you guidance about your studies as well as your career.  Use that person as a sounding board.   In your early days at college, you should begin trying to identify who that mentor might be.
  4. Explore topics beyond your area of specialization.  Take courses in multiple domains, and broaden your knowledge.  Many creative ideas come from the process of reaching outside one's area of expertise.   Thus, building a broad knowledge base is important.  Moreover, you will be much more interesting at dinner if you can have a conversation that spans many topics.  You'll find that ability to be an important life skill!
  5. Find opportunities to develop as a leader.  Those opportunities typically come outside the classroom. The primary way to become a better leader is to practice.  Thus, seeking out opportunities to lead groups, student organizations, and the like is crucial.