Implementation of Organizational Strategy

After a firm develops a strategy, it has to implement it. This usually involves a difficult process of organizational transformation.

Strategy is the notion of the general direction that a firm intends to take using its current, or needed, resources. The first step to implementing a strategy is to perform gap analysis to determine what current resources the firm needs and what resources it doesn’t. This gap analysis gets converted into annual operating plans which might involve restructuring, resizing, raising additional capital, or acquiring another firm.

Strategic decisions can be divided into dimensions of time, resource allocation, and commitment. Tactical decisions are those things that describe what actions are going to take place to implement the strategy: Who is going to do what and how is it going to be done?

The biggest challenge to strategic implementation is changing intangible organizational resources. Frequently, its easier to set up a “green field” operation rather than transform an existing organization. This is the case because its hard to change what people are used to doing; the mindset of the organization must change. Change involves a deceptively simple three step process:

  1. Unfreeze the current organizational mindset and processes.
  2. Change the processes or resources to fit the strategy.
  3. Refreeze the processes and resources so that they become the accepted way that the firm does business.

Ed Shein at MIT developed this model.

Again, a green field project is often easier to implement than going through these steps. An example is General Motors. GM found change to be easier in its Saturn division, a green field project, rather than going through these steps at its existing divisions.

Implementation of organizational change can be thought of in terms of a classic three legged stool model:

  1. Decision Rights – Who has the authority to decide what measures should be taken to achieve the desired change?
  2. Performance Measures – How are the results of these actions measured?
  3. Incentives – What incentives do the decision makers have to encourage them to be most effective?

Performance is almost always measured in financial terms. But, what if it were measured in units of time? Suppose that a firm tries to minimize the time required to do something rather than cost to do it.

Zara doesn’t try to minimize cost. Clearly the small lot sizes it produces in Spain are costlier than big ones it could produce in China. Zara measures performance on the basis of time: how fast they can get information from market place, redesign, and deliver an improved product to retailers. They have changed the dimensions of performance from financial performance to time by complimenting higher development cost with lower waste. This is a different method of operation than most firms.

Large organizational shifts are rare. Most of the time, planning is linear, incremental, and non-dramatic; change is in small “leaps and hops.” The formal term for this is punctuated equilibrium. For example, one year’s plan for market share growth might be 5% more than last years. Every once in a while, there is a significant shift. Typically, significant shifts happen when some development outside of the industry forces the shift.

An example of an industry that has gone from hopping to leaping mode is the power utility industry. In the past, it was virtually impossible for a power utility to fail. The utilities were monopolies and changes occurred slowly. But today, the power industry has largely been deregulated while being subjected to more and more emissions regulations. Competition has increased and the industry is in the mist of significant restructuring.

These shifts are usually dramatic and short lived. Today, the time between the leap intervals is getting shorter and shorter because of globalization, technological shifts, and similar factors.

Dynamic Organizational Capability is a unique resource whereby a firm has the capability to respond to significant and unplanned changes. How long it takes the firm to respond to a shock compared to the next fastest responder in the industry is of utmost importance for the firm’s survival. If a firm’s response to shocks is better and faster than its competitors, dynamic organizational capability can become a sustainable competitive advantage. If its not, the firm will often die.

The importance of dynamic organizational capability has become quite obvious in the financial sector recently. Those financial institutions that have been able to quickly respond to the latest market conditions have survived. Others, like Bear Stearns and Merrill Lynch, have not. The verdict is still out on the auto industry; but the ability of manufacturers like General Motors and Ford to respond to the changing market does not look promising.

Today, more automobile brands are being manufactured in the US than at any time in the last 100 years. Japanese and European firms are prospering by manufacturing in the US. At the same time, Chrysler is very sick. GM is not as sick. Ford is not as sick as GM. But, all three are on the verge of bankruptcy. The difference between the Big Three and their competitors, who also make cars in the United States, is the cost of labor contracts. Bankruptcy is likely the best solution (as opposed to a bailout) for these manufacturers because reorganization under bankruptcy can allow a judge to get rid of the burdensome labor contracts. Somewhat positive results have occurred in the past in the airline industry through Chapter 11 reorganization.

Creating a Focus of Activity to Deal with Change

One way to create a focus of activity for dealing with leaps and hops is to introduce a new product design. This allows a firm to focus its resources and to communicate to stakeholders outside of the firm the direction that its going.

Another way to create a focus of activity is to exploit right to left information flow (flow of information from consumers to the firm) and data mining. In the US in particular, supply chain management is becoming much more important than manufacturing. Organizational boundaries are becoming more fuzzy as more and more pieces of the supply chain are outsourced. Time to market for most products is rapidly shrinking. The need for right to left information flow necessitates efficient distribution channel alignment with the firm’s strategy.

An example of the importance of distribution channel alignment is the competition in the PC industry between Dell and HP. Dell triumphed over HP for many years because its direct marketing strategy allowed it to glean critical information from its customer base and to act on that information. HP, on the other hand, has been stifled by poorer information flow due friction in its distribution network.

A firm must be able to use right to left information flow to fit its existing capabilities into the needs of the market. They must also be adept at stretching resources to meet the market. This stretching requires development of new capabilities. But, developing new capabilities is inherently risky. Often, organizations, especially small ones, can find themselves stretching too far. So, there must be a balance between appropriate reactions to market forces and what is possible (and reasonable) given the firm’s history and limited resources.

A new company doesn’t initially have as much of a stretch/fit problem since it often has better focus. But, as time goes on, new opportunities arise and the firm is tempted to chase them. Small companies get in trouble by continuing to focus solely on the customer (in a Market Based View) rather than on its unique capabilities. Suddenly, the firm may find itself trying to satisfy a myriad of customers. – Remember that “strategy” tells a firm whom it wants to serve as well as whom it doesn’t want to serve. If a firm tries to be everything to everyone, it has no strategy.

Of course, at some point, a firm might decide to stop serving one group and pursue opportunities serving another. But, if it tries to serve everyone, it has stretched too far.

As stated in a previous post, the Resource Based View of the firm is usually more important than the Market Based View. A firm should start by looking at its unique resources and then build on them to form a strategy. It may find that it makes sense to serve many different customers. That’s acceptable as long as it has a focus on building a unique resource. For example, Honda makes many varieties of power equipment: motorcycles, cars, leaf blowers, and lawn mowers. But, its focused on products that contain motors. Motors are its core competency.

For organizational change to be successful, organizational leaders (a subset of managers) must guide the firm to develop unique resources to allow the firm to compete. Unique resources should not be confused with essential resources. For example, in the case of Zara, its unique resources include the capability to quickly meet changing market conditions in the fashion industry. That’s its focus. An essential resource for Zara is production equipment such as sewing machines. While maintaining its unique resources is essential, it may and should obtain essential resources such as sewing machines from other sources rather than developing them internally.

The Venetian Blind Effect

Allocating resources over multidivisional operations and projects presents a challenge for a firm – particularly when there is consistent under performance. This often leads to the Venetian Blind Effect:

In organizations experiencing the Venetian Blind Effect, projections of future growth are made which show that the product development or market will start off slowly and then suddenly take off at a rapid rate at some point in the future, such as later in the fiscal year. When the fiscal year comes to a close, the firm is either still in the slow growth phase or the rapid growth phase has not taken off nearly as fast as expected. Yet, projections for the next period are made based on the current status of the project and the same faulty assumptions are made over and over again:

Startup businesses and venture capital businesses see this all the time. The problem occurs when overly optimistic projects become a recurring event in the organization. When this happens across an organization and management attempts to deal with it, stretch targets begin to become par for the course. Management acceptance of failure breeds an organizational habit of failure and the expectation of failure becomes a self fulfilling prophesy. This leads to a real organization sickness. The firm has built a scheme where its not being honest with itself and doesn’t know how to effectively allocate resources.

In reality, only 63% of strategic forecasts are realized in most firms.

A case in point is Kodak in 1982. Kodak was going through tough times and its stock was not doing well. Kodak kept estimating its target stock price based on strategic plans. Yet, the stock price was 1/3 lower than they thought it should be. In 1984, they looked at how well they had met their strategic plan. They missed the strategic plans by 1/3; in retrospect, that’s why the market valued the stock the way it did.

When examining why strategic forecasts often fail to pan out, one has to ask whether the failure was due to poor strategy or poor implementation. The answer is usually not obvious. Perhaps there are external factors that the firm misses when developing the strategy. Perhaps resources within the firm are misallocated. In other cases, the market is simply delayed; the firm has precisely estimated what the market is, but its timing is off by a year or two.

One reason for market delays may be a delay in the availability of complementary products. An example of this appears to be electric automobiles. There appears to be a large demand for electric cars. But, a complementary product (batteries) just is not ready. So, the introduction of viable electric vehicles is slow and not exciting as some had imagined because of lack of good battery technology.

Resource Allocation

As mentioned above, implementation depends on resource allocation. Assume for a moment that a project manager has agreed to lead a very important project. She has identified resources and developed a reasonable schedule. She’s given the go ahead to commence development, but then she realizes that she needs the talents of a particular individual. Unfortunately, her supervisor says “Wait until he’s done with his present project in 6 weeks.” Now, the project manager does not have the resources to get started.

On short projects, delayed resources like this put a project manager in great jeopardy. Her manager will remember that she promised to deliver but didn’t. The lack of resources will be totally forgotten and only the failure will be remembered. So, a project manager must strive to get the necessary resources lined up before making a delivery commitment.

From a personal standpoint, a manager should try to work on one of two kinds of projects:

  • Very good, successful, projects.
  • Projects that are great but in trouble.

Senior management spends its time with projects that are in trouble. So, a project manager who can successfully bring a troubled project to completion will stand out. A leader of a fairly trouble-free, successful, project will also stand out. However, a leader who works on a so-so project is unlikely to be noticed.

Changing Strategy At the Right Time

Often, the need for strategic change is not obvious. When David Kearns was CEO at Xerox in the 1980′s, he realized that, if Xerox didn’t make some significant changes, the company would be in bankruptcy in a couple of years. This was an astute observation because, at the time, Xerox was quite profitable. Kearns addressed this issue by starting the quality program at Xerox. The quality program created a sense of urgency and formed a focal point that the company could rally around.

Unfortunately, Kearns also bought insurance companies. His reasoning was that Xerox was in a cyclical business. He noticed that insurance industry was counter-cyclical. He felt that level earnings would help with analysts’ recommendations. It turned out that he didn’t know anything about running an insurance business; so the experiment failed.

Besides creating a sense of urgency and a rallying point, its important that a management executing strategic change form a powerful coalition. She needs a group of people who understand and are supportive of what she’s trying to do. When thinking of the players needed to form such a coalition, we usually start by looking at the players on the firm’s organizational chart. But, typically, the influential leaders are not on the organizational chart. For example, in a company like Xerox, they might be an senior inventors. Or they might include a loner or eccentric employee who is very insightful and comes up with many new successful things. Or, perhaps, there are people in the marketing organization that understand trends. People turn to them and value their judgment. The new strategy must be created and communicated and leaders should be delegated to carry out the new vision.

In carrying out a new vision, its important to plan and create short term “wins.” Typically, strategy is long term. But, people tend to focus on short term results. Short term successes to keep people focused.

Implementing Change

The most important part of implementing change is to “keep it simple” and to link the firm’s operating plan to its strategy. As mentioned, first look at the firm’s resource gaps and then determine if new implementations address the gaps. Al Simone, the President Emeritus of the Rochester Institute of Technology, did this well. In the early 1990′s, he put together in a notebook describing the university’s strategy. When people came in with proposals, he ask them to show him where it was in the strategy. If it was there, it was easier to convince him. If it was not in the strategy notebook, he could still be convinced to implement the proposal; but, would be hard. Within a year, people recognized that they had to be aligned with the strategy in order to get something done in the university.

As mentioned in Coordinating a Global Brand Strategy, its important to develop a common language and analysis framework across an organization. This is particularly important because it is a prerequisite to effective performance measurement of identified metrics and priorities. If a firm does not measure its performance, it will not improve. If it does, it will. Once performance is weighed against the metrics and priorities, resources can be allocated based on performance.

When you get into uncertainty, debate the assumptions and not the forecasts. Forecasts can always been tweaked if assumptions are correct. But, incorrect assumptions can never be used to create valid forecasts.

Of course, assumptions can be proven incorrect. This makes robust adaption to changing circumstances imperative. Sometimes the external environment changes. Sometimes it just looks hard to go the direction the firm is going and it needs to reevaluate its strategy. Flexibility and recovery are valuable management capabilities. But, leaders must be careful not to merely cop out of a tough situation.

Finally, postmortem project analysis is important if a firm is to learn from its mistakes. Yet, very few companies conduct postmortems. The general tendency is not to do a postmortem and just start again with a new project. The reason is that postmortem analysis is uncomfortable because the manager is associated with failure.

Private Labels

There are 800 categories of Private Labels. These categories include medications, vitamins, pet foods, apparel, and grocery items among others. Private label products are a large part of many stores’ products: 55% at Sears. 20% at Kohls.

Private label products are typically positioned as cheap, generic, substitutes for other products. They generally have similar quality and lower price.

The following are typical characteristics of Private Label Brands:

  • Mimic brand name packaging.
  • Products similar to major brands – including quality.
  • Associated with a particular store.
  • The actual manufacturer is hidden from the end consumer.

The actual manufacturer is usually hidden from the consumer to prevent cannibalization of the name brand. For example, assume that Kelloggs is producing a store brand for Wegmans. Consumers won’t see any reference to Kelloggs on the box; if consumers knew that Wegmans and Kelloggs cereals were identical, they would never buy the higher priced Kelloggs brands.

Of course, not all private labels share the above characteristics. For example, Marks and Spencer has the store brand St. Michaels. Until recently, their products were not sold as a “national brand” in other stores. However, Marks and Spencer products are medium to high priced; they are not inexpensive knockoffs of major brands. St. Michael is an example of a Premium Private Label. Premium Private Labels have superior standards. They are most often seen in the apparel industry; but they can be seen in the packaged goods industry as well.

Packaged goods are the place where private labels create the most havoc. In retailing, a “detailer” is a person who works for a national brand whose job entails stocking shelves in retailers. The detailers ensure that the national brands gets its products to the location or aisle where it will do best. Such positioning is extremely important for national brands. The most valuable spots are at the end of the aisles. Its also critical that a brand be placed at the customers’ eye level. By having detailers stock the shelves, national brands are more able to control where private label competitors are positioned relative to them in stores.

Of course, the retail establishment has a competing interest if it sells private labels. The retail establishment’s strategy might be to get consumers hooked on a private label with the store name. Then, the person feels she has to go to that store to get the product she wants. This can be a double edged sword because the brand reflects the store and the store reflects the brand. A brand with a bad reputation reflects badly on the retailer. Likewise, a good product carrying the label of a retailer with a bad reputation is likely to be poorly perceived. Yet, such a product can be effectively used to build up the retailer’s reputation.

Given current growth rates, improving quality, and lower prices, private label products are likely to continue gaining market share in the future. However, national brands, arguably, keep product categories alive since they provide category awareness through advertising.

In some cases, private labels have actually become the dominant product. A case in point is generic drugs. In some cases, its not even obvious that a particular drug is a generic version of a brand name drug. Today, there is a whole set of prescription drugs now sold only under their generic names. HMO’s will typically insist on generics once patent protection expires.

Supplying Both Brand Name and Private Label Equivalents

When a firm supplies or manufactures both brand name products and private label equivalents, its quite important (as stated above) that it keep secret the fact that both products are the same.

Another thing to be concerned about is maintaining a strict price premium. This becomes increasingly difficult in cases of fierce private label competition. An example is Coke and Pepsi versus grocery store brand soft drinks. At any given time, Coke or Pepsi seem to be on sale. The sale price is similar to the price of the grocery store brand. Unfortunately for Coke and Pepsi, such regular promotions erode the perception of added value for their brands. After all, if Coke/Pepsi sells for the same as a brand like W-Pop every two weeks, many customers will not consider it to have higher quality or market position than W-Pop.

The problem is that, once a national brand starts such a cycle of promotions, its difficult for it to break out. Customers will wait to purchase the products until they go on sale.

Advantages for the Retailer to Sell Private Labels

Margins on private labels are better for the retailer. Typical margins for private labels are 35% compared to 25% for national brands. But, comparing these two numbers directly is not possible because national brands significantly contribute to the overall market for a category through advertising.

When a retailer sells private labels, it is able to increase its bargaining power with national brands. As a purchaser, the retailer can threaten national brands by either introducing private labels or promoting them more heavily.

Private labels can be used to differentiate a retailer from its competition. For example, W-Pop is only available at Wegmans. Competing grocery stores do not sell W-Pop.

Finally, private labels can be used effectively to reposition a retailer in the market. This repositioning is most often seen when premium private labels are used to promote the store as an exclusive outlet. In addition, private labels can be promoted through other channels (for example, President’s Choice is promoted through many retailers as is Safeway’s organic brand, “O”.) In the case of President’s Choice chocolate chips cookies, the private label brand has repositioned the retailer as a seller of high quality food items.

From suppliers’ point of view, there are real advantages to private labels.

One advantage is Economies of Scale. Making another brand of corn flakes imposes very low extra cost to the producer. By not making private label, a firm may very well be giving business to a competitor who is welling to make it.

The big problem, though, is that cannibalization of the national brand can occur even if the private label agreement is secret. The reason is that a successful private label will effect the pricing of national brand.

Concept of a “Fighting Brand”

A “Fighting Brand” is new brand that’s positioned half way between a firm’s national brand, a private label, or another brand. Fighting brands are often used when it’s difficult to differentiate between the attributes of various brands. Fighting brands can provide a buffer between brands, but often lead to brand cannibalization.

A firm must be very careful with introduction of a fighting brand because the linkage between fighting brand and flagship brand is hard to protect. When word gets out, a substitute has been created with the flagship brand at a lower price.

A good illustration of this is Kodak in its fight for market share of film with Fuji in US. Fuji’s film was not quite as good when they first began selling it in the US market. But, it was fairly low cost and Fuji had 10% market share. Kodak had 80% margin on its consumer film products. Kodak began asking itself how it should deal with Fuji. Kodak talked about making a fighting brand. But, what would happen if people found out that Kodak was making the fighting brand? Customers would know that the product would be high quality because it came from Kodak. The debate went on within Kodak for a decade.

Another big problem for a firm supplying both brand name and private label products is distraction and inadequate economic analysis of the true cost of supplying the private label. Too often, firms simply look at the low marginal cost of supplying the private label and, based on that, decide to produce the private labels. For example, a firm might say, “Our factory is operating at 75% of capacity. We can produce produce private labels at marginal cost to bring the factory up to full capacity.”

The problem with this approach is that, over time, the firm will have to add or replace capacity with capital investment. When that happens, the capital investment involved in continuing to produce the private labels can be substantial. Yet, firms often just look at the capital investment in relation to the national brand. They make the investment. Then, they have even more excess capacity which is used to produce even more private labels. So, when making a decision about adding or replacing production capability, its imperative that the firm analyze the trade-off between yet more capability and just giving up private label production altogether.

Another problem for suppliers producing private labels is that it is difficult to take price action on a customer; raising the price charged for a private label may cause the retail to find an alternate supplier for the private label product. So, suppliers lose bargaining power with retailers. Not only do they lose bargaining power with private label, they also lose bargaining power for their name brands. For example, if Kelloggs produces private label cereal for Safeway, Safeway can demand a reduction in the price it pays for name brand cereals or, else, the private label contract will go to General Mills. In an extreme case, the supplier becomes a commodity supplier and most of the bargaining power goes to the intermediary (the retailer.)

Private label management can also take up a significant amount of senior management time. Senior management time is one of the most scarce resources in a firm, but its use rarely shows up in the accounting/economic analysis of private labels.

Private Labels in Recessionary Economies
The market penetration of private labels goes up and down with the economic situation. Private label penetration does not change at a constant rate. As private labels get better, however, substitution improves. The key for a private label is to try to get customers to try it. This is especially true for packaged goods since packaged goods are high experience products. At every downturn in the economy, more people try private labels. When the economy improves, some consumers stick with the private labels. So, over the long run, economic downturns are good for private labels.

What is a “Brand”?

Brand is a name. Brand is a shape. Brand is a design. Brand is a logo. Brand is a color. — All of these aspects of a brand are trademarked and are fiercely protected.

Think of the generic attributes of a product:

  • Search
  • Experience
  • Credence

“Brand” is a shorthand for all of them and provides a notion of the characteristics of the product. Of these generic attributes, brand tells us the most about the experience and credence attributes. The importance of the brand with respect to each of the attributes depends somewhat on the product. For Coke, brand tells us about experience. For Apple, it tells about experience and maybe credence.

A few years ago, Microsoft had a glitch in a new version of Windows whereby the calculator which didn’t always give the correct answer to simple arithmetic. Microsoft tried to assure its users that the glitch didn’t occur often. However, people were up in arms! The Microsoft brand is largely about credence. So, a rare problem with the reliability of the calculator function destroyed some of the credence in the Microsoft brand name; consumers couldn’t be 100% sure that the calculator issue was really as rare as Microsoft said it was. In addition, perhaps there were other things wrong with Windows that hadn’t been discovered…

Since brand is an asset, it can appreciate over time if it is invested in. And it can depreciate over time if investment in it is neglected. Brand value is usually built over a long period of time and is a unique resource that creates value as long as it either exists or is perceived to exist. This perception is very important because a brand can continue to convey a desired message about a product that is no longer really up to standards whereas marketing communication (such as advertising) is only a way of communicating what the characteristics of a product actually are. The same idea holds true for differences between products. Whereas marketing efforts cannot describe a product as being different from another if there really isn’t any difference, the brand name can be a powerful differentiator for a very long time after the differences goes away.

An example is of this is Coke. In a variety of blind taste tests, consumers don’t really prefer Coke over other cola soft drinks. But, when the labels are visibile during taste tests, people usually prefer Coke. That means that the Coke brand is valuable and that there’s brand equity.