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Entrepreneurs are now having to learn to play by a different set of rules, says Allison McSparron-Edwards, Managing Director of Consultrix Ltd
The strength of destabilizing forces such as digitization, globalization and deregulation are gathering pace and affecting all businesses, making it harder than ever to plan for the future. Competition from Brazil, India and China is intensifying all the time but in new and different ways. These new entrepreneurs are quick to identify market opportunities, do not feel tied to the old ways of doing things and seem able to motivate their employees in new and exciting ways.
CEOs must identify different ways of competing against these emerging, aggressive, innovative global entrepreneurs. They must develop not only appropriate strategies, but also the necessary leadership skills to deliver adaptive corporate cultures, management process and innovation. Without such innovation and strong leadership skills strategic initiatives will fail.
There are many reasons why Western companies are currently failing to compete successfully against these emerging markets. Many large, successful companies have become victims of their own success. CEOs were taught that, to achieve success and profitability, they should design and control their business environment, corporate culture and resources. Although this enhanced profitability in the short term (by driving down costs) it created a culture of bureaucracy and an inability to cope with fast-paced change. They managed the world around them in a regimented manner using data analytics, scenario planning and predictive planning. Unfortunately, what they lost was the ability to adapt quickly to ever-changing environments.
Emerging from a recession CEOs now find that they have fewer resources than ever and that those they have are constrained and overly structured. They have since discovered that what worked in the nineties no longer works in the noughties; e.g. collaborative relationships with suppliers sounded like a great idea but in today’s fast-moving markets these relationships may have become ties that bind and restrict fluidity.
Emerging entrepreneurs don’t necessarily have a past to refer to, or rules to obey. They can innovate, make up the rules as they go along and allow intuition to direct them.
Modern businesses, especially in emerging markets, use the Internet, Facebook, Twitter, e-mail, mobile phones, etc to rapidly communicate with media-savvy customers all over the world. These technologies allow the customer to be in control of much of the purchasing cycle. They can try on glasses in virtual environments (virtual-try-ons), check whether they like design combinations of car trims and colours, or ask online communities for recommendations on what to purchase and for how much. Customers, rather than suppliers, are in control and CEOs need to adapt their companies with great speed to cope with this new paradigm or their businesses will retrench and ultimately collapse.
Part of the ability to survive is to create meaningful, differentiated strategies. Kim and Mauborgne in their book Blue Ocean Strategies explain how CEOs can begin to identify where the next big ideas are going to come from. They use the analogy of oceans to explain that Red Oceans represent all the industries in existence today and the known market space; whereas Blue Oceans denote all the industries not yet in existence and therefore unknown markets.
For Red Ocean companies the competitive rules are known, each tries to outperform the other and grab ever-larger market shares until eventually profits and growth are reduced for all competitors. Products, copied by all, eventually become commodities and cut-throat competition drives down prices leaving even less to allocate to research, innovation and development.
Red Ocean strategies were conventionally built on highly defensible positions within existing industry sectors. They were often based on a military heritage referring to corporate officers, headquarters, troops, front line, wars and constraints on limited terrain. Over time, as they and their competitors grew, supply exceeded demand. This was subsequently exacerbated by globalization, trade barriers being dismantled and information becoming instantly available so that in the end niche markets and havens for monopolies continued to disappear. The result was accelerated commoditization, increasing price wars and shrinking profit margins.
On the other hand Blue Ocean companies, like those in emerging markets, understand how to identify and develop untapped markets, where demand can be created and the opportunity exists for highly profitable growth. Most new Blue Ocean companies are created from within Red Ocean companies by expanding existing industry boundaries and are driven by competition-based Red strategists. They open new and uncontested market space. They understand that creating value without innovation tends to focus value creation on an incremental scale, something that (while it improves the value) is not sufficient to make the products and services stand out in a global marketplace. Innovation without value tends to be technology driven, market pioneering or futuristic, often shooting beyond what buyers are ready to accept and pay for.
To be really successful innovation requires a ‘leap in value’ for both the buyers and suppliers. Red Ocean companies believe that the structural constraints are given and that firms are forced to compete within them (a structuralist view or environmental determinism). Instead Blue Ocean companies believe that market boundaries and industry structures are not given and that they can be changed by the actions and beliefs of the players.
Are we exaggerating this corporate ability to be innovative and to develop untapped markets? Proof that it is possible can be seen from the new industries that emerged over the past 100 years, including automotive, sound and picture recording, petrochemical, health care, management consulting, etc. When everyone thought there were no new markets to create, radical new ones were invented, e.g. mutual funds, mobile phones, gas-fired electricity plants, discount retailers, express package, snowboards, coffee bars, home videos, etc. Is this rate of innovation slowing? Not if the emergence of new products such as Twitter, Facebook, iPhone, iPad, etc are anything to go by.
The future is in your company’s hands; avoid fixating on analysing the past and predicting the future otherwise your company will remain a Red Ocean company and you will be left behind by emerging, nimble, intuitive Blue Ocean companies.
Kim and Mauborgne recommend that companies wishing to create Blue Ocean strategies understand in detail how their products/services perform against the market in order to understand what value the ultimate customer derives from acquiring them. They encourage companies to understand what the trade-off is between differentiation and low costs in order to create new value curves. Ask what factors, which your industry takes for granted, could be eliminated, or could be reduced below the industry’s standard; what could be raised above the standard; and what factors could be created that the industry has never offered. Their Eliminate-Reduce-Raise-Create Grid pushes companies to understand the opportunities facing them and to develop innovative strategies to find their very own clear Blue Ocean Strategies.
You can tell if your strategy is a good one ii it has the following characteristics:
Doz and Kosonen in Fast Strategy point out that people are not interested in products per se but in solutions to problems. They note that IBM sells business ‘improvement solutions’ and Nokia sells ‘experiences’ not computer software or mobile telephony. CEOs must, therefore, begin by asking themselves whether they are selling products and services that customers really want.
Both Chip Conley who, in his book Peak, focuses on explaining how Maslow’s hierarchy of needs can be applied to Clients; and Barnes, Blake and Pinder, who wrote Creating and Delivering Your Value Proposition, have developed methodologies for analysing the customer journey to ensure that a company truly understands what psychological value the customer obtains from buying their products and services. Companies must be ‘tuned into’ customers’ needs and react amazingly fast to fill the gaps if they are to be successful. Remember; if you don’t identify the gaps then someone else will.
As Drucker wrote, in the Harvard Business Review (November 2009), not everything a company produces is actually wanted or is profitably produced. He recommended that to be more focused companies need to ask themselves what they should ‘stop doing’. Just because you know how to make something does not mean that someone wants to buy it. Companies shouldn’t try to offer everything to everyone. Instead they should focus on a few distinctive competencies, as suggested by Prahalad and Hamel, that can be redeployed and leveraged. They need to continuously redirect and/or reinvent their core business without losing momentum. To compete with fast-moving companies the new goal should be to make what people want (profitably) or stop doing it; after all, successful companies are unlikely to be making something that other people don’t want.
New ways of thinking are becoming ever more important. To deal with the fast pace of change fast pattern recognition becomes more important than the ability to analyse preconceived scenarios and historical datasets. CEOs are the people who have to create the future and shape the market and competitive forces to their advantage. They will need to employ people with different talents who see change as a challenge and can cope with it; who see competitors in emerging markets not as threats but as something to understand and potentially emulate.
In the past, to change cultural attitudes, managers would have followed Conventional Wisdom focusing on trying to align the attitude of large numbers of employees to new strategic objectives; often requiring steep resources, over long time frames. This is a Red Ocean strategy and it won’t help deliver your new Blue Ocean strategy in a timely and convincing manner. Consider instead Tipping-Point Wisdom (as demonstrated by Malcolm Gladwell in his seminal work Tipping Point), which instead focuses on individual people, on acts and activities that can exercise a disproportionately positive influence on performance, achieving a faster strategic shift at a lower cost. To keep up with your competitors you need to change the minds of the few who can influence the actions of the many as fast as possible.
In the end, to be competitive, perhaps the most important strategy of all will be the ability to recruit and develop the very best of the worldwide talent. Seek new recruits from other cultures, and other markets; learn from their behaviours and incorporate the very best of what they do into your corporate cultures so that your company can become nimbler, more intuitive, innovative, commercial, competitive and profitable.
Allison McSparron-Edwards, managing director of Consultrix Ltd, began life as a chartered accountant before training to become a business psychologist. She has worked at board level in companies of all shapes and sizes using strategy and psychology to improve commercial returns. Allison combines a shrewd business sense with the ability to understand the human issues involved in leading and managing companies: honest and forthright, she tells it how it is. Consultrix Ltd works with creative and knowledge-based companies improving profits and capital values. For more information contact: Allison on email@example.com; tel: 01793 726128; or see the website:www.consultrix.co.uk.
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