Strategies for Success

Global business strategists have many tools to win and conquer the global battles of business. Here are a dozen lessons that deserve attention in strategy development. 

Innovation means more than invention

Put simply, innovation means doing things better. Henry Ford did not invent the car. Karl Benz did. Ford’s innovation was the assembly line, which allowed the Model T to roll off the production line every three minutes, cutting production time from 12.5 hours to 93 minutes. By 1914, Ford was making more cars than all other automakers combined, and at a much lower cost.

Innovation is not just about technology or product development.  It is about rethinking business. Ford saw the “business opportunity” of meeting the growing demand for cars by using an assembly line. 
Innovation can take many forms. It could be through the invention of new technologies and products, more efficient and effective supply chains, better customer service, experience and engagement, improved product designs and renovations or more effective solutions.

What is business model innovation?

Business model innovation is the process of finding new and better ways to create value for customers and extract value for firms and their business partners.

Creating value requires investing in assets and capabilities that offer better solutions for customers and provide sustainable competitive advantages. Value extraction is about making a business profitable. Toyota, a generalist, focuses on competitive advantages through economies of scale. Its business model relies on high volumes or market share and low margins. Porsche, in contrast, focuses on product differentiation and branding.

Value extraction strategies also require balancing profitability, growth, and risk. A company may choose to forgo short-term profits to grow its market share. If it can defend this position, it may lead to higher levels of long-term profits. Businesses can also reduce risks by improving customer experience and engagement or introducing product innovation and differentiation. This balancing act is a matter of strategy.

Business model innovations require finding new and better ways of creating and extracting value. Uber and Airbnb are examples of companies that focus on managing relationships rather than owning assets. They do not invest in tangible assets like cars or homes. Instead, they invest in technology to connect service providers with users. Their financial success comes from intangible assets like brand value, customer relationships, and intellectual property—things that do not appear on a balance sheet.

Value creation strategies and market evolution

Companies must develop an ‘organisational capability’ for innovation to create value if they want to compete in global markets. The basic questions underlying value creation are: Which segments should they serve (or not serve)? What products or services should they expand globally? How should they reach customers through supply chains and distribution channels? And where (geographical markets) should they operate?

Let’s take the automobile industry as an example of how these strategies evolve. Ford’s focus on productivity led to a business model where the competitive advantage of lower costs and prices resulted in greater market share and, subsequently, even greater economies of scale . But these advantages dissipated over time as other manufacturers adopted assembly lines.

Alfred Sloan, the founder of General Motors (GM), moved the automotive market competition from cost/price minimisation to differentiation and branding. It was no longer enough to have any car as long as it was a black Model T Ford. Customers could start with a Chevrolet, get an Oldsmobile as families grew and income increased, migrate further to a stylish Buick, and finally to a Cadillac. This use of differentiation and branding allowed GM to capture higher prices and margins as customers moved through their lifecycle but collapsed decades later when in the name of efficiency and cost management GM used the same chassis across Chevy, Olds, and Buicks. Their new business model failed to understand what made GM great in the first place.

European companies such as BMW and Daimler-Benz, lacking the scale of US automakers, relied on product performance and premium pricing. The Japanese, who were late entrants in the global market, focused on longevity (reliability and quality) to deliver value. They introduced service guarantees and extended warranties to enhance customer switching costs and loyalty.

In the automative market, business model innovations evolved over decades. In consumer electronics, however, the cycle is much faster. The smartphone market, for instance, changes every few months. Failure to innovate—to do things better—is a free gate pass to exit.

Value creation

Anything that offers benefit is value and different firms create value in different ways. For instance, Intel and GSK  rely on technology, research, and engineering to create value. Dell, Indigo, and Flipkart’s 'corporate DNA' rely  on efficiency and speed as the major determinants of value. Brands like Coke, Microsoft Windows, and Google rely on customer experience, aspiration, and hedonistic brand appeal as value drivers in the marketplace even though each invests extensively in R&D.

Some firms are endowed with the ability to succeed in multiple areas. Apple is known for its aesthetic design, but it also excels at customer experience and branding. It works with Foxconn, the world’s biggest contract manufacturer, to ensure efficiency in production. Samsung is adept at integrating semiconductors and display technology with customer-facing processes, such as design, supply-chain management, and marketing. It is another firm that has excelled in several dimensions, keeping cash registers pleasantly ringing across global markets.

Companies that innovate across multiple areas through consistent innovations make it harder for competitors to catch up. These firms create market positions that are more sustainable.

Create future value

Past performance matters, but investors care more about future potential. In the second half of 2013, Apple’s operating income increased, but its stock value came down. Meanwhile, Google saw growth in both profits and stock price. Both firms differ on product portfolio: One is a product-based company while the other is software and service-based. Perhaps Apple’s weakness was its overreliance on iPhone as a value-generator while Google diversified itself across multiple markets. According to valuation charts and ratios of both firms, investors preferred Apple for short-term, retrospective performance measures but placed greater faith in Google for forward-leaning valuation metrics in the long run. Hence, firms should strive to create future value.

Anticipate the future

When asked how he scored so many goals, the Canadian ice hockey veteran Wayne Douglas Gretzky said, “I skate to where the puck is going to be, not where it has been”.

The same philosophy applies to business. Companies must focus on where the market is headed. It is also easier to capture shares in a growing market. Incumbents tend to protect their home turf when markets and margins are shrinking.

Nurture off-balance sheet, market based, intangible assets

For companies in the S&P 500 list, only 25%  of their value appears on the balance sheet. The remaining 75% comes from intangible assets like brand value, customer loyalty, distribution networks, skilled employees, and intellectual property. Firms that nurture only those assets that appear on the balance sheet risk falling behind. For instance, Microsoft’s customer base for its Office Suite is the prime determinant for its off-balance sheet assets. Flipkart’s valuation comes from future earnings from the customer base served by affiliated vendors on its online platform with pay-on-delivery and delivery/logistic capabilities. Most of these assets do not appear on financial statements, but they drive long-term success.

Market-based assets and ecosystems: Collaborate to compete

Successful companies know how to collaborate with competitors. In its early years, Microsoft collaborated with hardware manufacturers like Dell, HP, and IBM to get Windows pre-installed on computers, which oriented Microsoft into a B2B firm. From its earlier avatar, the company gradually evolved into a dominant B2C firm. To increase its consumer base, MS-DOS users were migrated to Windows and free samples of the operating system were distributed. This in turn forced application developers to focus more on the Windows platform, which owned a massive consumer base using the Windows OS. Even competitors like Lotus 123 and Novell had no choice but to make their software ‘Designed for Windows 95’. Microsoft twisted the collaboration dimension in its favour as it had known how to nurture market-based assets.

Competition between Google and Apple reiterates the same phenomenon. The consumer pull for Google Maps was so high that within a month of discontinuing it, Apple had to revert to Google Maps. Here, the innovation was in realising and understanding ahead of competition about the importance of market-based assets like consumers. At the industry level this phenomenon, referred to as competition, enables businesses to sustain and grow as “You can’t win on your own”.

Disclaimer: This article was first published in ISBInsight on June 1, 2016. It has been repurposed for availability here.

Author: ISB Editorial Team