David against Goliath: How can Estonian companies grow by challenging bigger global competitors and conquering new markets Professor Costas Markides London

David against Goliath: How can Estonian companies grow by

challenging bigger global competitors and conquering new markets

Professor Costas Markides London Business School

March 2006

My First Key Point

A tree will not grow tall unless it has healthy roots and a solid foundation


The same applies to a company: A company will not succeed in growing unless it first puts in place “healthy roots”.

My First Key Point



By “healthy roots” I mean the company’s strategy

My First Key Point




A company will not succeed in growing unless it has a healthy strategy in place

My First Key Point




A company will not succeed in growing unless it has a healthy strategy in place

This healthy strategy is the platform from which a company can grow

My First Key Point

Therefore:

Before I talk to you about Growth, I’d like to spend a few minutes talking about the characteristics of a “good” (or healthy) strategy.

What Makes for a Healthy Strategy?

Strategy is nothing more than the choices you have made on 3 issues:

(1) WHO shall we target as customers and who shall we not?


(2) WHAT shall we offer these customers and what shall we not?


(2) WHAT shall we offer these customers and what shall we not?

(3) HOW can we do all this effectively? (what activities do we perform and what activities do we not perform)

The answers to these questions are not immediately obvious and there are no right or wrong answers.

You must therefore make choices: what to do and what not to do.

Please Note

Strategy is not a Goal (e.g. we aim to be the best or no.1 in our Business)

Strategy is not motherhoods (e.g. our strategy is to be a Leading-Edge Provider to our customers, a good employer to our employees and a responsible citizen in our community)

Strategy is not plan or budget.

(1) The Who decision is all about customer segmentation and geography.

(2) The What decision is all about what products/services to offer and what product characteristic to emphasize.

(3) The How decision is all about what activities to perform.

Strategy is all about Making Difficult Choices

Traps to Avoid

(1) The worst strategic mistake that companies make is failure to make choices

(2) The second worst strategic mistake is to dilute your choices in an attempt to grow

(3) The third worst strategic mistake is failure to differentiate ourselves: to be successful a company must find a unique position in the market.

Nothing in life is 100% unique but your goal should be to create as much differentiation relative to your competitors as possible.

What is a Unique Position?

Creativity is Difficult!

Unfortunately, most human beings and companies find it difficult to be creative

We are all “blinded” by our own assumptions, beliefs and things that we take for granted.

Can you think of a word?

__ ANY


MANY


MANY

__ENY

Therefore

Think creatively about the Who-What-How questions and come up with a unique positioning for you.

A Test for You

(1) Can you write down your strategy (that is, your WHO-WHAT-HOW choices) in half a page?

(2) If you ask your employees, can they write down your strategy in half a page?

And Now, Let’s Talk about Growth

After Making your Strategic Choices, how do you Grow?

(1) Very few companies actually have the courage to make the difficult choices that strategy requires.

(2) Even those that succeed in their markets by making the necessary choices will eventually face the question: “How do I grow my business?”

There are Many Ways that you Can Grow

(1) Grow with the Market (even if you don’t increase your market share)


(2) Grow by increasing your market share relative to competitors (by being better than them)

There are Many Ways that You Can Grow



(3) Grow by diversifying into other product markets





(4) Grow by going into foreign markets






(5) Grow by Acquisitions







(5) Grow by Acquisitions

(6) Grow by Creating New Markets

….. and so on

Many Ways to Grow

There is no right or wrong way!

Each one of the options that I listed on the previous page has advantages and disadvantages.

I could spend days talking about each one of these!

For Example

(1) What do we know about the strategy of growing through Acquisitions?

THE TRACK RECORD

Cumulative Abnormal Return

Three years Date of Three Years Before Acquisition After

30%

0

-20%

Acquirees

Acquirors

What Do We Know about Acquisitions?

Acquirers on average do NOT gain anything from acquisitions!

RULES for the acquiring firm to “beat” the market

Rule # 1: Search for UNIQUE synergies

Rule # 2: Keep information away from other bidders

Rule # 3: Keep information away from target about its full value

Rule # 4: Never win a bidding war

Rule # 5: Close the deal quickly (… but integration problems!)

Rule # 6: Search for thinly traded markets

On Average, These are the Acquisitions that Create Value

(1) Friendly ones

(2) No other competitive bids

(3) Unique synergies exist

(4) Targets have had good corporate governance

(5) Smaller targets

(6) Acquirer has experience in acquisitions

(7) Acquirer comes from concentrated industries

(8) Cash acquisitions

(9) Acquirer has good corporate governance

(10) Acquisitions made in countries where the market for corporate control is weak.

What Do we Know about the Strategy of Entering New Markets?

You can enter a new market by diversifying from one industry to another

You can enter a new market by moving into another country

Market entry = Attack

1. On average, MANY firms enter a given industry in any given year (200 - 400 firms per year)

2. A large number also exits in any given year (150 - 300)

3. Most entrants FAIL within a year (85% in 4 years)

4. Average market share penetration of about 5% in 5 years

The probability that the No. 1 firm will survive as No. 1 was about 96% -- an almost certainty

Why such a bad record?

First-mover advantages

1. LEARNING!

2. Economies of scale

3. Control of scarce assets (e.g tech. space)

4. Switching costs

5. Resources to attack

Successful Market Entry

1. To successfully attack an industry leader:• Do not attack head-on• Re-define the market (e.g USA today)• Create competitive variety by changing the value chain (e.g. Canon)• Exploit opponent’s weaknesses• Attack opponent’s blind spots• Attack areas where competitor cannot respond• Be focused and consistent• Get allies• Do not imitate• Be very good in something• Impede retaliation• It takes time• Get to know your competitor

2. It takes time to build up skills and competencies

3. Focus your efforts by having a clear superordinate goal, that has been communicated to your employees

4. Size is not important. It is momentum that counts.

(1) Values drive behaviour (e.g. Charles Schwab’s e.schwab decision) … and values get diluted as we expand abroad

• “adapt” values abroad• grow by making compromises• Physical distance: out of sight, out of mind• Other priorities

(2) It takes time to build an international operation … you will not do in 5 years what took you 50 years to do at home

• Inappropriate mindsets• Inappropriate measurements & time-frames

The Global Organization

(3) Yes, you have a successful strategy at home but we need to adapt to the local environments…

Yes, you need to adapt to the local environments but beware of the NOT invented here syndrome (e.g Dove soap)

(4) Companies make the same “mistakes” again and again! (Why? What drives behaviour is the “underlying structure of the system”.

(5) People will make all the difference: give your people the freedom and autonomy to challenge the status quo and take the initiative … BUT:

* all this must take place within certain parameters (values & strategic decisions) which are (few) and clear to all … AND

* these parameters get diluted as you go global!

The Global Organization

Let’s Focus on One of these Growth Options

Like I said, I can spend days on each one of these strategies for growth but I’d like to focus on one of them.

One option that you have is to create new markets.

The question is: “How can you adopt this Growth Strategy Successfully?”

How Can you Create New Markets?

(1) The first point to appreciate is that to create a new market, you do not necessarily have to discover a new product or service!

(2) Often, companies create huge new markets using the same product as everybody else.

Consider this Example

Which company is the biggest car-rental company in the world?

Value-chain activities

Location Airports Downtown

Push Marketing by Travel Agents Mechanics and Insurance Companies

Delivery: Airport Parking Lots Home Pick-up

Car Drop-off: Airport Home

Organisation: Centralized Decentralized

Customer Segmentation: Business and Pleasure Replacement andTravellers Discretionary

Age of cars in fleet: Mainly New High Average age

Price: On average, high Low

Hertz/Avis Enterprise

Compared to the traditional car-rental companies, Enterprise has a different customer in mind.

They have strategically innovated because they discovered a new WHO (customer segment)

The Secret of Success

Enterprise Rent-A-Car

travellers

replacement

discretionary

Creating Huge Markets by Redefining Who Really is the Customer

(1) Enterprise

(2) Bright Horizons

(3) Canon

(4) Honda

(5) IKEA

(6) CNN

(7) Edward Jones

(8) Wal Mart

(9) Progressive

(10) easyJet

How Can You Create New Markets?

(1) Obviously you can create new markets by redefining who the customer is in an existing market.

(2) But you can also create new markets by redefining what you really offer the customer.

For Example

(1) Did Swatch discover the watch?

(2) Did Starbucks discover coffee?

(3) Did LVMH discover handbags?

(4) Did Nespresso discover the coffee machine?

These companies did not discover new products! Yet, they created huge markets by redefining what benefits they were offering the customer.

Other Examples of companies that Created New Markets by Redefining what they offered the

Customer

(1) Charles Schwab

(2) The Body Shop

(3) Apple i-Mac

(4) Krug Champagne

(5) Rosenbluth Travel

(6) USA Today

(7) Federal Express

How Can You Create New Markets?

(1) So far, I’ve said that you could create new markets by redefining who the customer is and what you offer the customer.

(2) But you can also create new markets by redefining how you play the game in your market.

How Do You Play the Game?

Dell Computers

Toyota

Taco Bell restaurants

Cemex

Wal-Mart

K-Mart (in the 1960s)

General Motors (in the 1940s)

Apollo Synthetic Diamonds

easyCinema

Summary So Far

(1) So far, I have said that you can create new markets by thinking creatively and redefining:

a) Who really is your customer?b) What really you offer the customer?c) How you play the game in your

industry?

(2) From now on, I will refer to this way of creating new markets as “Strategic Innovation”

(3) But obviously, this is not the only way to create new markets!

How Can you Create New Markets?

1) Sometimes markets get created in a “supply-push” manner when we discover a new technology which is then used to create a new product

examples

The Television Market The Post-It note market

The i-pod Market The handheld computer market The car market

2) Please note that this is a different kind of innovation from “Strategic Innovation”.

3) I will call this kind of innovation: “Radical Product” Innovation.

How to Create New Markets

1) What you need to do to create new markets through “strategic Innovation” is different from what you need to do to create new markets through “radical product” innovation.

2) Let’s examine each one in turn.

How to Achieve STRATEGIC INNOVATION

How to Achieve Strategic Innovation

(1) There are many things you can do to help your company become more innovative.

(2) Probably the most crucial thing you can do is to put in place an “Organizational Environment” that promotes innovative behaviors from everyone in the company

(3) Let me explain what I mean

To Understand How you Could Promote Innovation in your companies, consider the following exercise

You have a cake and a knife. You are allowed to cut the cake four times in straight lines. What is the maximum number of pieces that you could cut the cake into (in one minute)?

What Determines Behaviours?

Solving the exercise individually

Time-pressure



Time-pressure

Mindsets, assumptions, beliefs



Time-pressure


Psychological pressures



Time-pressure



Structure



Time-pressure



Structure

Incentives

Putting it all Together

There is a reason why people behave the way they do.

If we want people to change their behaviours, we should not just tell them. We should change the underlying reasons that drive their behaviours.

The question, then, is: “What drives human behaviour in organizations?”

Downtown Calcutta

Versus

Downtown Fontainebleau

What Drives Behaviours in Organizations?

Sumantra Ghoshal

The Moral of the Story

The underlying environment of your organization creates the behaviours that we/you see in your organization.

The Right Underlying Environment for your Organization

How we Behave in

our company

How we Behave in

our company

Structures and

Processes

People, (skills, attitudes,

mindsets

Culture and Values

Measurement and

Incentives

The Importance of Incentives

What gets measured gets done

The Importance of Values

Imagine being behind enemy lines. Would you shoot innocent

children & women?

The Importance of Structures & Processes

The priest experiment

(a) Attitudes

The Importance of People

Attitude

“They” will do it

OR

“We” will do it

OR

I thought somebody else will do it

5

4

3

2

1

1 2 3 4 5 6 7 8 9

X

X

X

XX

Group Size

= shoutingX = clapping

So

un

d p

ress

ure

per

per

son

Social Loafing

(1) The murder of Kitty Genovese, New York City, 1964

(2) The death of Marco Moretti in an Italian tunnel and the “adventures” of his 6-year old daughter, Vanessa

(3) Experiments by Latané & Dabbs (1975) in elevators

Examples of Social Loafing

a) Attitudes

b) Mindsets

The Importance of People

By the Way – The Answer to the Cake Exercise is not 8 Pieces!

It is Not Eleven Pieces!

1

2

34

56

8

79

10

11

It is Not Twelve Pieces!

It is Not Sixteen Pieces!

Cut the cake into two pieces. Put one piece on top of the other and cut in two again. Put all pieces on top of each other and cut in two again. Put all pieces on top of each other and cut in two again.

24 = 16 times

SUMMARY

What have I really said so far:

(1) The Underlying Environment of your organization drives the behaviours that you see in your organization.

(2) The underlying Environment is made up of four inter-related components: incentives, culture, structure and people.

Why is this Important for Innovation?

You will not get innovation in your companies unless you first put in place an Organizational Environment that supports Innovation:

Culture and values

Measurement and Incentives

Structures and Processes

Mindsets and Attitudes

A LAUNDRY LIST OF IDEAS

1) Allow people to experiment2) Do not punish failure3) Learn from mistakes4) Remove bureaucracy5) Reward good ideas6) Work in project teams7) Flat structures8) Facilitate the flow of info9) Risk-taking attitudes10) Open & questioning culture11) Make your strategy process democratic12) Bring capitalism inside13) Encourage ambidextrous mindsets

What innovative companies do?

Innovation at 3M

Structure• 3M utilizes cross-functional teams

to work on research projects

• Each team is headed by a “product champion” who is responsible for building culture.

• One of 3M’s top managers becomes a “management sponsor” who helps the team secure resources and overcome bureaucratic obstacles

• Divisions within 3M are run as separate companies. Divisional VP’s have the same responsibility as a CEO in many other companies.

• Hierarchies within divisions are kept flat.

• The Annual Technology Fair allows scientists to showcase their latest research findings and exchange ideas and information.

Culture• 3M policy allows employees to spend 15 percent

of their time developing projects of their own choosing

• Employees are encouraged to take the initiative and are empowered to make decisions. Failure is accepted.

• The pervading culture is characterized by the rule that you have to kiss a lot of frogs to find one prince

• A flat hierarchy makes people feel responsible for everything that goes on in their divisions.

People• By virtue of its incentives and

culture, 3M attracts top scientists and engineers

• The company is able to recruit and retain creative people with an entrepreneurial mindset

• Because of its dual career ladder, top scientists can coexist with top managers without internal competition

Innovation

Incentives• The company has established career ladders for

scientists that are separate from those for managers

• Teams that introduce successful new products are rewarded.

• Successful new products can be spun off as separate divisions with their own profit and loss statements. The original product champion becomes divisional president

• 3M has set a formal goal that 25 percent of sales must come from new products. Managerial performance is measured and rewarded according to this goal.

What Else Can You Do to Promote Innovation?

Remember from the cake exercise how the assumptions that we make condition how we think and how we behave.

To promote Innovation, we must challenge and question the things that we take for granted in our markets (i.e. question our assumptions and sacred cows).

Remember the Cake Exercise?

How many Assumptions Did we Make in thinking about this exercise?

This is an individual exercise

The pieces have to be equal

The cuts are vertical

You cannot move the pieces

The shape of the cake

The shape of the knife

Just Think: In such a simple exercise, we made all these assumptions! Can you imagine how many assumptions we carry in our heads every day?!

Three Key Points

1) The assumptions that we make determine what we

do.

Three Key Points

1) The assumptions that we make determine what we do.

2) We make our assumptions based on past experiences & past knowledge.

Three Key Points

1) The assumptions that we make determine what we do.

2) We make our assumptions based on past experiences & past knowledge.

3) Most of these assumptions are Implicit: we are not aware of them until someone points them out to us.

Exercise

Arm-wrestle for 30 seconds. The winner will be the one that manages to push his/her opponent’s hand down most times in the 30 seconds.

The Winner is …

Those people who do not compete with one another but cooperate instead.

Assumptions or corporate orthodoxies are not necessarily bad.

They simply act as the filters through which information passes. As a result, they determine what we “hear” or “see” and so influence how we behave.

Strong Assumptions and Beliefs

Help us decide quickly (and act). In other words, they make us Efficient.

Unfortunately, Strong Assumptions also have negative side effects

For example, answer the following question in 30 seconds.

30 SECOND EXERCISE

If I count between 1 and 100, how many times will I find a number that has a 9 in it?

A Simple Exercise

A father and his son are driving on the motorway. They are involved in a terrible accident. The father is killed and the son is in critical condition. The son is rushed to the hospital and prepared for an operation. The doctor comes in, sees the patient and exclaims: “I cannot operate on this boy; he is my son!”

Is this scenario possible?

What Effect Do Assumptions have on Us?

They make us efficient

They make us “passive thinkers”

What Effect Do Assumptions have on Us?

They make us efficient

They make us “passive thinkers”

They make us reject information that does not fit with what we already believe in.

Organisational Mental Models

• Just like individuals have mental models, so do organisations.

• Over time, members of an organisation come to believe similar things and begin to take the same things for granted (e.g. LBS faculty).

• These shared, unquestioned beliefs and assumptions exist, even though nobody tried to “teach” them to us.

• These unquestioned beliefs and assumptions are the organisation’s orthodoxies. They allow employees to behave like monkeys.

Problem: How can we overcome our pre-existing mindsets and assumptions

Think Outside the Box

Is this useful advice?

Question your Assumptions

Is this useful advice?

Antony and Cleopatra

Antony and Cleopatra are lying dead on the floor in an Egyptian villa. Nearby is a broken bowl. There are no marks on the bodies and they were not poisoned. No person was in the villa when they died. How did they die?

My Point

We can’t question what we cannot see!

We cannot “think outside the box” if we are not even aware that we are in the box!

Before we can question our assumptions, we must find out what these assumptions are!

Summary: Killer Assumptions

We make assumptions without even thinking

This means that we are not aware of the assumptions we make.

This implies that the advice: “Question your Assumptions” or “Think Outside the Box” is not useful advice!

We cannot question what we cannot see.

The Biggest Sacred Cows of Any Company

1. The definition of its Business

2. Its company policies

3. Who it thinks its customer is

4. What it thinks it is offering that customer

5. How it thinks it should play the game in its industry

Question Your WHO-WHAT-HOW

Companies that “strategically innovate” in their businesses are those that question the things that the rest of us take for granted.

In particular, strategic innovators question what business they are in and their existing WHO-WHAT-HOW.

How to Achieve “Radical Product” Innovation

Creating Radical New Products

(1) Most radical new products are supply-pushed onto the market (rather than being demand-driven)

(2) Think, for example, how television or the walkman got created.

(3) This implies that to create new radical products, a company must spend money on R&D.

(4) However …

R&D is not always necessary!

The evidence shows that for many new radical products, the companies that discovered the product were not the ones that created the market for the product.

For examples, who discovered the computer and who created the market for computers?

Who discovered the handheld computer (Apple) and who created the market for it (Palm)

Innovation is two things:

Examples

Apple vs Palm

Osborne vs IBM

? vs Ford

Creating a new product, that if

successful, grows to become a niche.

Scaling up this niche into a big mass market

SCALING UP

It’s not just imitation!

You need to get the idea of somebody else and convert it from a niche into a big mass market.

Build the product economically and sell at mass-market price (it doesn’t have to be technologically the best!)

Build consumer confidence in the product (Brands!)

Build the distribution for the mass market

Help grow complementary products

Scaling up a market

What Do We Know

Innovation requires two activities: (a) coming up with a new idea and creating the initial market niche; and (b) scaling up the idea into a mass market

Both activities are equally innovative. Unfortunately, there is a cultural bias in favour of creation


What Do We Know


The skills needed for creation are different and often conflict with the skills needed for scaling up. The two cannot co-exist in the same organization


What Do We Know



Big established firms have the skills of scaling up


What Do We Know



Big established firms have the skills of scaling up

Most of the value in a market goes to those that scale up the market (not those that create them)


What Do We Know

A Proposition

Each should focus on what they are good at!

Small, start-up firms are good at creation

Big established companies are good at scaling up

A division of labour

At the same time, they should develop a network of “feeder” firms – these are the

small, start-up firms, all trying to discover new markets.

Big established companies should focus on exploiting their existing businesses

When promising new markets gets discovered, the big established firm should move in and scale them up.

An Example

Procter & Gamble in 2005: Fifty percent of all new discoveries in P&G must come from outside P&G

Such Division of Labour Already Exists in Creative Industries

Film/Movies

Theatre

Music

Art Galleries

Book Publishing

Implications for you

If you come from an established firm, don’t try to be a small one – act your

age!

If you come from a small firm, don’t try to be a big one.

My final word on Innovation

This does not mean that you should not keep on trying to make your firms more innovative.

But when it comes to creating new markets through radical product innovation, you should focus your firms on that component of innovation (creation versus scaling up) that you are good at.

And Now for my Last Word

I have told you many things about growing your businesses and about innovation.

Hopefully, you now “know” some new things that you did not know when you came here.

However ….

Will you Do Any of this?

MESSAGE

Even though I know that you accept many of my previous messages you are still NOT going to anything!

Knowing is not Enough!

Most times, we know what we have to do.

We simply do not do it.

The Knowledge - Doing Gap

Time

B

ProfitsA

The Sources of this “Disease”

(1) “Spies” that prevent us from doing what we already know we should

do.


(1) Spies

(2) Time Pressures = Priorities


(1) Spies

(2) Priorities

(3) Downtown Calcutta vs Downtown Fontainebleau

The Underlying Environment of an organisation

• Culture/values

• Incentives

• Structure/processes

creates the behaviours of people in that organization

From Knowing to Doing

Successful organisations talk a lot about changing but don’t do anything.

To get action, you must create a sense of urgency in your organisation.

Creating a Sense of Urgency

Exercise – 30 seconds

Add all the numbers from 1 to 100 and tell me the sum total

Stretch Goals

a) If you give people an “impossible” task, most of them will say: “My God, this is impossible” and stop doing it

b) Some people will say: “My God, this is impossible to do if we use the same old ways. Maybe there is another way to do it”.

The art of leadership is to get people to go from attitude (a) to attitude (b).

Create a Sense of Urgency (or a positive crisis)

(1) Develop a challenge for your people

(2) Sell it!

Building Commitment in StepsI know

I understand

Yes I think I can

I will

What are the physical symptoms when you have actually been successful in winning your people’s emotional commitment?

• Energy

• Passion

• Fun

• Pride

• Working together as a strong team

Is this Enough?

Of course it is not enough! But it is a start.

And Remember: The future belongs to those who dare take chances!

Documents

David against Goliath: How can Estonian companies grow by challenging bigger global competitors and conquering new markets Professor Costas Markides London