Take time to think out your business challenges

~ ) P e r g a m o n 0263-2373(95)00038-0

European Management Journal Vol. 13, No. 4, pp. 443--451, 1995 Copyright © 1995 Elsevier Science Ltd

Printed in Great Britain. All fights reserved 0263-2373/95 $9.50+0.00

Take Time to Think Out Your Business Challenges WERNER KETELHOHN, Professor of General Management, and Negotiations, IMD, Lausanne

Werner Ketelh6hn presents a 'Thinkout ' approach to strategic management which results in empowered management teams, able to exploit new market opportunities. Thinkouts involve management teams breaking away from everyday operations to think through the company's strategic challenges under the leadership of an outside facilitator.

The process involves first an industry analysis, and then solving a family of challenges such as: creating customer commitment, lowering delivered costs, rationalizing plant distribution, and managing flows through the company's business system. Task alignment is an important objective of achieving challenges.

The method has been tried and tested with such companies as Norsk Hydro, Uponor Oy, Caterpillar Overseas and several others in Brazil and Latin America.

'So, what are you going to do this week?' I asked the Chairman and owner of Ceval, a Brazilian corporation in the grain and meat industries, in November of 1992.

'You just seem to be asking difficult questions! and so far, haven' t given any answers! ' crossfired the CEO of this US$ 2.2.billion corporation.

'You are right!' I responded -- 'I'll be here precisely because I know what questions to ask! Among the thousands of possible questions, only a few are worth answering. I 'm going to find out which questions are worth asking about your corporation. '

'Maybe', said the CEO, 'but how can you possibly provide us with any value-adding insights in just one week of work? Essentially you know nothing about our industry, company, challenges and what we should do about them!' he concluded.

'I agree', I replied, 'but neither do consulting firms. I believe the most valuable and relevant information about your industry and company is in the minds of your management team. As a matter of fact, here is the

list of the roles we could all play in these workshops' I exlaimed, as I handed over Appendix A.

'What I do is untap the intimate knowledge that your managers have about all angles of your business. I 'm challenging you to exploit this vast reservoir of experiences, share viewpoints and analyze them to extract some meaningful insights on strategy and what to do about it! We're going to start with opinions, and engage your management team in a process of analysis that will synthesize meaningful insights. At the end, these insights will be shared by all members of the management team. Let us take your team of 30 managers out of their every day routines and have them follow a collective thinking process in the form of a ' think out ' . 1 I will, of course, provide them with theoretical frameworks to perform their analysis, but the analysis proper will be conducted by themselves. '

'You flatter yourself, as do many other CEOs, that you can attract the best management talent available in the market. Are you now questioning whether or not your managers are able to analyze your industry and company properly? Consider that the world's top management consulting partnerships recruit the very same people that you do, and proceed to sell their services at premium prices. Why is it then that corporations are willing to pay top prices for the services of people whose talents are no better than those of their own managers?'

'Part of the answer lies in the education received at the work place. That is on the development of their thinking skills. Education is about learning to think critically. Top management consulting partnerships have the systems in place that develop the ability to think critically. A second, and very important, part of the answer lies in specialization. Most consultants specialize in analysis and synthesis, while most managers specialize in getting things done. I propose that this dichotomy is partly at the root of your doubts. '

'I believe you should create the support processes needed for managerical thinking; institutionalize these regular breaks from every day action -- thinkouts -- to engage your managers in strategic analysis and synthesis. Yes! get them out of the office to think about solution frameworks for families of opportunities,

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TAKE TIME TO THINK OUT YOUR BUSINESS CHALLENGES

challenges and problems. Think of the benefits generated: corporate networks are created, common analytical frameworks are applied, managers get used to synthesize knowledge out of facts and information, and most importantly, a common language is used across corporate divisions and functions i.e.: a shared management perspective.'

This was how we began to discuss a series of three successful thinkout workshops which we agreed to deliver to this Brazilian corporation. These thinkouts were designed to: first, review the strategy of the corporation; second, identify its core competences and adjust its organization; and third, create customer commitment.

What is the Overall Framework? In my experience, a thinkout process is composed of two one-week workshops. The first workshop is designed to understand the business unit's competitive environment, essentially looking outside the company to understand how to make money in its industry.

The second one-week workshop is then designed to solve a family of challenges. These challenges can be of different types: create customer commitment, lower delivered costs, rationalize plant distribution, manage flows through the company's business system, select an entry strategy into a country, or something else. But the week is centered around solving one and only one of these families of challenges.

Why do we start with industry analysis? The most useful unit of analysis for competitiveness is the industry. Industry analysis provides companies with a systemic view of the world-wide competitive environment. By researching how to make money in an industry, we can determine the strategy that particular companies are following to achieve sustainable world-wide competitiveness. But it also provides country policy makers with decision making choices for resource allocation.

For both, country policy makers and business people, industry analysis provides a useful systemic view for understanding how to allocate country resources among industries, and company resources to compete within an industry. I found, however, that the systemic view used to study an industry makes quite a difference in the insights obtained from the analysis (see Appendix B).

A couple of months after thinking through the industry we proceed to think through the company's challenge. I've found that a prudent hiatus allows managers to internalize concepts and insights gained during the industry analysis. A hiatus provides time to check assumptions, clarify information, and review conclusions and insights.

The objective of the second thinkout is to create task alignment. By taking the people responsible for the

execution out from operations to think through a major strategic issue, we create task alignment. Essentially, we are empowering these people with thinking through the solutions to their issues i.e.: customer satisfaction, managing change, finding core competences, achieving JIT or TQM, or whatever else the challenge happens to be. Task alignment really consists of aligning the motivations of the people in charge of executing the tasks -- they should decide that should be done, how and when!

Thinkouts are building blocks for corporate renewal. By aligning motivations we mobilize teams in desired strategic directions. This means that wisely chosen projects fuel the energy needed to change a huge corporation -- this is the stuff corporate renewal builds o n .

Thinkout: How to Make Money in your Industry Analyzing an industry essentially means 'understanding how to make money' in this industry: Ask yourself, why should anyone buy products/services from this industry? What are the typical ways of making money? We seek answers to questions like: How does this industry work? What are its customers expecting? Who does what to meet these expectations? Answers to these questions help us understand how the industry is evolving and how to improve competitive positions. To achieve these objectives participants are asked to follow the process described below:

Overv i ew In this thinkout, your ad-hoc task force has been asked to analyze a major industry. Your audience will be a committee of senior executives and sponsors who must quickly understand the dynamics of your industry. They must be briefed by your task force so that they can intelligently assess possible generic strategies in this industry, their respective business systems and the key success factors for each strategy. Your mandate is to study the different ways to make money in an industry. It is not to discuss what your company should do.

The emphasis of your work should be placed both on the process of analysis and on the validity of your particular set of assumptions and conclusions. The results of your work will be used in the second thinkout: solving your management challenge.

Detailed Step 1:

Step 2:

activities for industry analysis projects Sponsors and participants agree on a mandate and work plan.

Define the boundaries of your industry, identify the elements of the 'enterprise system' and construct an initial set of hypotheses to be tested. By the end of the day, you should have (i) an industry definition,

444 EUROPEAN MANAGEMENT JOURNAL Vol 13 No 4 December 1995


Step 3:

Step 4:

Step 5:

(ii) a mapping of the 'enterprise system' for your industry,

(iii) an initial set of general hypotheses regarding (a) the evolution of competition in your

industry sector, and (b) how to compete in this industry

sector, and (iv) some preliminary allocation of materials

from the indus t ry ' da ta files' for individual group members to pursue.

Concentrate on identifying generic strategies and the 'business system' used by the group of competitors following these strategies. By the end of the day you should have a ' rough' outline of your presentation along with an indication of which hypotheses need further investigation.

Identify the 'Key Success Factors' (KSF) associated with your generic strategies (what and where are these key success factors within the business system?) Develop strategy profiles (generic strategy, business system, and key success factors) for the most interesting competitors in your industry. Can you 'map' the strategies of individual competitors (or groups of competitors) on a relevant matrix?

Business presentations: all participants attend to debate the presentations in their assigned classrooms.

Thinkout: How to Create Customer Commitment In a thinkout to create customer commitment we essentially choose a market segment and align the business system to serve it. It is as simple as that. The process is similar to the one described for thinking through how to make money in an industry. Here, we first ask the group of managers to look outside the company and choose a market segment to serve, and then we ask to look inside the company, review the capabilities needed to serve the chosen customers, and invest in filling in capability gaps.

From comparing the capabilities needed to serve the chosen market segment with the company's existing capability set, we identify capability gaps, if any. Clearly, these capability gaps provide us with investment projects to analyze (see Figure 1).

Market Segment Choice The underlying assumption behind the search for market segment is that there are dissimilar customer needs in the markets being served. Any product offering can satisfy only a part of these needs.

Analyzing a market sector essentially means 'finding meaningful ways to segment the market and understand

Figure 1 Building Capabilities

the capabilities needed to serve the different sectors', ask yourself: What is going on in this market? What are its customers expecting? Who does what, to meet these expectations? What are the effective ways of serving different market needs?

Companies benefit from choosing target market segments. This helps them understand how their capabilities should evolve and how to improve their offerings. We seek the foundations for a better understanding of the 'business unit capabilities' and 'strategic investment decisions' needed to serve chosen market segments. Let us understand: What is our unique selling proposition? Why should anyone buy from us?

We have to find the market segmentation that makes more sense to us, in terms of customer needs to satisfy; company capabilities utilized; and competitors chosen to be outperformed. We have to explain the different attractiveness of these market segments and our choices. We must justify our market segment choices over other alternatives.

Building New Capabilities The way in which the resources of a company are deployed is a consequence of decisions taken in the past. Similarly, the way a company's capabilities are being exploited in the market place, also depends on decisions taken in the past. Clearly, capabilities should be deployed so that they actually help achieve the company's strategy.

The objective is to understand and explain the way in which our company should deploy its resources throughout its business system, in order to successfully compete in the chosen market segment. We also seek to understand how well we execute the KSF corres-



Performance Building future competences

/,~nnovation ~,~ !gains

leashing / , ~ competence

/ /Competence / / gains Process re-

/ ~ c y engineering

~ , ~ ~ r ~ - gai-~ ns Doing the right things

Getting our act ~ Completeness together ~gains

h Today Future Time

Figure 2 Performance Gains

Market segments

New

Old

Co oe,ence I gains gains II

• [ i i : i : : : : : : : : . : : : : : : ::: :: •

. . . . . . . . . l i i : i : ! i ! i i i :~::~:! ~ •

Efficiency " ~ Completeness gains . . gains

Old New

u a p a D i i l i l e s n e e o e o

Figure 3 New Segments Foster Innovation

ponding to our company's strategic posture (High Perceived Value -- HPV, or Low Delivered Cost -- LDC). Furthermore, we ask, what new capabilities do we need to develop in order to serve our chosen market segment as we position our unit 's strategy. There are four levels to the answer (see Figures 2 and 3):

First, what capabilities are we missing to complete the activities in our present business system? Development of these capabilities generates completeness gains• These are obtained from mastering the activities needed today, to serve a chosen market segment. We improve the performance of our unit, by completing its business system. So, we review our product line and explain how our unit addresses the demand for resources along its business system. We diagnose how our company deploys its resources along its business system vis-a-vis what is needed• We explain how the company's new vision, and specific objectives for our different product lines, are served along its business system, in terms of

sourcing, processing and delivery activities, technologies employed, and people skills needed•

The second point deals with achieving efficiency gains through cost rationalization in all activities in the business system, i.e. engaging in business process reengineering• Efficiency gains are the most popular approach to increase the bottom line. Cost reduction programs are often introduced without reviewing the company's strategy, rethinking customer segmentation, or assuring that managers first identify the capabilities needed to serve the market. This is a sure recipe to cut muscle with fat, crippling the organization, rather than improving its efficiency.

The third point is whether or not there are unused competences that we can now unleash on the chosen market segment, i.e. unleashing the competence that our company has inherited in selected activities: this we call competence gains.

Releasing old capabilities to create new value, can be achieved through business system re-definition. For instance, a management team looking for business opportunit ies in the shipping industry, already identified developed capabilities in another business unit serving the automobile industry. To unleash these capabilities in the industry it was a question of creating and coordinating a new business system• So, we reviewed the options available for each activity in those two business systems•

The fourth point deals with innovation gains, that is, investing in capabilities and technology that will create the sources of future profitability. This is in line with what Derek Abell at IMD means by 'dual strategies': a strategy for today's business and a strategy for tomorrow's business -- Peter Lorange at IMD calls this ' today for today and today for tomorrow•'

Managers are asked to assess where markets and technology are moving to, so that new capabilities can be developed to preempt future demand• By thinking through where technologies, markets and products will evolve to, leaders and technologists shape non-existing and unforeseen markets and products• Future market needs evolve out of exercises in strategic will -- calculated economic gambles. This is the stuff visionary leaders excel at.

In all these four types of gains, the question that usually arises is whether or not these capabilities are already deployed so as to support a strategic intent• To answer these questions participants are asked to follow the process described below:

Overview A selected group of managers and executives of your corporation has been assembled to unleash the competences of the corporation in the market place. We will do it in this workshop.



Your objective is to develop a better understanding of how to improve your business unit 's capabilities for serving its chosen market segment. Explain this view to the rest of the group, and discuss what has to be done to exploit today's capabilities by introducing new products in selected market segments.

Your ad hoc task force has been asked to analyze a major market sector. So, during this workshop seek to answer four questions:

Whom should we serve? Whom not? How should we serve them? How not? With whom should we compete? With whom not? How can we outperform our chosen competitors?

Your audience will be a committee of senior executives who must quickly understand the dynamics of your assigned market sector and what you propose to do to exploit it. They must be briefed by your task force so that they can intelligently assess possible market segment choices in this sector and the capabilities needed to serve each segment. Finally they expect you to recommend what to do in each one of the projects.

Detailed Step 1:

Step 2:

activities for building capabilities projects Sponsors and participants agree on a market definition.

The objective is to understand and explain the market segments available to your business. The logic is simple: define the boundaries of your market, analyze the market; identify criteria for segmenting it, divide it into meaningful clusters (segments) of buyers; and select the segments that your unit should target.

Start by defining the boundaries of the market which you will study; what products, technology, geographic markets, customer segments does it include (and, if necessary, what does the market definition not include.) Avoid d i scuss ing p roces se s and t echno log ies employed, concentrate only on the market 's characteristics.

Market segmentation is about classifying people, their buying criteria and behavior. We want you to decide which people belong in our potential customer set. Ask yourself, who are we trying to serve? Who is our customer? And ask as well, who is not our customer? Market strategy is about choice of customers in market segments, and this requires also knowledge of who we are not going to serve. Understanding when to say no is as important as seeking business in our chosen market segment.

Once you have chosen your segmentation, decide how our company should compete in

Step 3:

Step 4:

Step 5:

Step 6

the target market - - i.e. through a strategic posture best described as HPV or LDC. Note the different requirements of each of these strategic postures and recall the key success factors that pertain to our chosen posture. What are your recommendations? By the end of the day, you should have (i) market definition, (ii) a set of criteria for segmentation, (iii) an initial set of general hypotheses

regarding market segments: (a) the evolution of products, services and

customers, and (b) a preliminary market segment choice

for your unit, and (iv) a preliminary allocation of materials from

the 'data files' for individual group members to pursue.

Explain how our company should deploy its resources, throughout its business system, to effectively serve the chosen market segment. Targeting a segment of customers is the most important marketing decision (choice). It forces us to understand the customer's problems and how the resources of our company should be deployed to serve these needs. By concen- trating our company's efforts on serving these needs we develop distinctive competence over less focused rivals (see Figure 4).

Draw out the four capability gaps and prepare a business plan, with an execution calendar, that will complete your unit 's business system and allow it to serve the chosen segments.

Project presentation: All Unleashing Com- petences Project teams attend and debate the presentations to sponsors and advisors

Debriefing by sponsors and advisors occurs in designated rooms.

Needs to satisfy

Needs to ignore

. . . . . . . . . I

7¸111¸ B u i l d iiiiii:;

capabilities iiiiii!

Rejected Desired customers customers

Figure 4 Capabi l i ty Gains



Is the Customer Always Right? A commonly used slogan is 'The customer is always right. ' This jingle is often brought out in business discussions whenever managers, arguing whether or not to make major concessions to a customer, run out of arguments. Blind application of this 'formula' is dangerous.

Let us first ask: is it one of our customers in the first place? Thinkouts are about strategic choices, and customer choice means yes to certain customers and no to others. If the person does not belong to our chosen market segment, he/she is wrong and not right! Serving these customers may lead us along a wrong strategic path, i.e. we invest in wrong future capabilities whilst weakening desired ones. A banking IT-solutions service company, for instance, would build the wrong capabilities if it decided to serve the automation demands of a chemical manufacturing plant.

Assuming that the person does belong to our customer set, we still have to ask ourselves: is it a real need or an abuse of purchasing power? Abusive customers (see Figure 5) may not be the ones we would like to see in our market segment. Reconsider our customer set! Who needs customers with whom our company's value creation capability is being destroyed? Why serve a customer that hurts our business? Do we have a unique selling proposition? A customer taking advantage of a temporary weakness is not a 'good' long term customer -- he behaves opportunistically.

Now, assume this customer is not only in our chosen segment but is in fact a very nice customer asking for products/services that we cannot deliver. Is this customer right? The question is whether or not we are going to develop new capabilities to serve such customers. To answer this, we would have to have a clear idea of the strategic direction of our company and then check whether or not these new capabilities will be needed in our chosen future. If the development of these capabilities is needed for our future plans, then we may have to build them anyway, even if we don ' t need them for today's demands. But if the answer is no, we won ' t need these capabilities in the future, then we must either change our strategy or say 'on this one,

Segment's demands

Abusive

Needs

Customer Customer Customer may be is wrong is wrong right

Customer Customer Customer is right is right is wrong

Use old Build new Ignored capabilities capabilities capabilities

Capabilities

F igure 5 C u s t o m e r Legi t imacy

these customers are always wrong! ' We don ' t build capabilities unnecessary in our chosen future. Clearly, we may decide to satisfy these orders in view of the total business generated by a customer.

The most dangerous situation results from investing only in old capabilities -- those needed to serve the chosen market segment today -- just to discover that our customer set ceases to demand these capabilities in the future. Why should we protect a capability set that will not be used in future products? Industry and market dynamics help clarify future capability needs. Main- frame computers, for instance, feed on capabilities useless in the multimedia future.

In the discussion above at least three elements have been identified that helped clarify our perception of a customer's legitimacy: The market segment choice, the product/services demanded, and the capabilities needed to serve these demands. Below is a list of questions that provide insights in to the legitimacy of a customer's demand.

Strategic Questions for the Future Preempting Market segment questions 1. Does the customer belong to today's chosen

segments? Concentrate on serving only customers in your chosen market segment. Don't serve other segments -- say no! no matter how difficult it is.

2. Does the customer belong to your chosen future segments? Regularly review whether or not you still want to serve your chosen market segment. Have you found a more attractive segment to serve in the future? How do you plan to disengage from your present customer set?

Demand questions 1. Are your customers demanding today's product/

services? 2. Are your customers demanding your future

product/services? Regularly review if the needs in your chosen market segment remain the same or are changing over time. Check what has changed and why this is so.

3. Are your customers behaving opportunistically? Seek peace of mind by increasing the quality of your business life. Do not serve abusive, oppor- tunistic and nasty customers in your market segment -- leave them to your competitors. They are there just to destroy your capabilities and future profitability.

4. Are your 'nice' customers demanding something outside your present and future product lines? Companies can be led, by well meaning customers, on a golden path to bankruptcy. The future of the supplying company is decided by the orders it decides to satisfy. You must see that this future coincides with your strategic intent.

Capability questions 1. Does the order require that you build capabilities



needed anyway to satisfy today's demand? Serving only the segments that 'fit' our present capability set is a recipe for stagnation -- we must also build capabilities for satisfying future market needs.

2. Does the order require that you build capabilities not needed to satisfy today's demand?

3. Does the order require that you build capabilities needed anyway to satisfy tomorrow's demand? Be consistent, stick to product/services that 'fit' your chosen future capabilities. Avoid building capabilities that do not belong in your chosen future.

4. Does the order require that you build capabilities not needed to satisfy tomorrow's demand?

The future of our company is determined by the 'future needs' of the market segments chosen for our future. This depends on whom we want to serve (our choice); what needs do we want to satisfy (among their many needs), and what capabilities we already have in place. Is the customer always right? No, not everyone knock- ing at our door is always right! Forget jingle and think situations through!

Conclusions The thinkout approach to strategic management has proven to be a very effective way of creating an empowered management team. Such a team is com- mitted to exploit the opportunities found in the market place, either through development of new capabilities or from unleashing already existing internal competen- cies. Thinkouts produce task alignment because they are set up to solve specific challenges in the first place. Task alignment can only occur if motivations are aligned, and thinkout processes align the motivations of the managers, in charge of execution, with the solutions they find to their challenges.

By the end of 1995, Norsk Hydro, the Norwegian energy giant, will have performed thinkouts with 25 different management teams; since 1991, Uponor Oy, the Finnish pipe systems corporation, has performed 36 different thinkouts with management teams; and Caterpillar Overseas, performed seven market segmentation thinkouts in late March 1995. What these corporations, and many others in Brazil and Latin America, are seeking, is to align the knowledge embedded in their management teams with the challenges faced by the corporation -- to develop learning processes which coordinate strategic thinking with management execution.

Appendix A

W h a t are O u r R o l e s in the Process? There are three basic groups that should be involved in the participative consulting process of a strategic workshop: the client, the participants, and the facilitator.

The client, is represented by top management and the

sponsors, who 'own' the challenges and determine which should be solved. The client must be receptive; he must permit himself to listen to ideas and have others work on the problem. The client evaluates the ideas and alternatives and examines them as they are presented.

The participants are the members of the five different task forces, working for the client on a particular problem. They allow the facilitator to direct the problem-solving process; let responsibility for the problem stay with the client; provide useful facts for problem-solving; offer possible solutions for consideration; recommend actions; and maintain a high level of energy and creativity.

The facilitator is the outsider of the organization -- who manages the process. He is concerned with maximizing the organization's ability to conduct this type of self- diagnosis and solution identification.

The facilitator decides when to do what. He decides on the sequence of steps in the process, and makes sure that the problem-solving process flows smoothly; often this is done through directive questions which all participants are invited to discuss and provide answers. Also, the facilitator creates co-operative climates by:

preventing discounting: negative comments about a person, his ideas or his department; avoiding offensive/defensive behavior among the participants; protecting people from critical interventions; evaluating interactions; encouraging positive interventions; keeping energy levels high.

Appendix B

O n B u s i n e s s S y s t e m s , V a l u e C h a i n s a n d S u c h Two years ago I read a fascinating book entitled Powers of Ten. In this book I took an imaginary journey through the Universe, based on a series of fictitious photographs of the hand of a man sleeping on the grass of a Chicago park. The trip starts 10 metres above the man and proceeds to take a series of successive pictures, each incrementally away by a power of ten. So, I saw a view 100, 1000, 10,000, metres away, and so on, until I reached I billion light years away from the hand, where most of the space looks empty, and I only saw a few faint clusters of galaxies far away. Similarly, I took the trip in reverse, zooming in on the hand, from the original 10 metres away, again in ever closer powers of ten, i.e. one metre away, one decimetre, one centimetre, one millimetre, and so on, until I saw the quarks in one proton of one carbon atom in the man's hand.

It occurred to me that this was a fascinating way of showing what systems analysis is all about. Depending on what the unit of analysis is, and the kind of insights one is seeking, there is an appropriate systemic view. For instance, if the unit of analysis is a cell, there are



just a few systemic views that are helpful to gain insights about the cell. Instead, if the unit of analysis is the solar system, again, there are just a few helpful systemic views, and alas, they are different from the systemic views useful for studying the cell in the man's hand. This analogy shows that, for each unit of analysis, there are different useful systemic views.

I do not use a unique and all encompassing model to explain all industries. Every person walks around with colored glasses which filter perceptions of surrounding phenomena. There is nothing strange in this, most people see best what they know best -- their perception field is dominated by their short and long term needs and worries. I believe that basic assumptions about the most useful system should be reviewed each time we change the unit of analysis and the kind of insights sought.

So, in business, we may want to see one systemic view to analyze an industry and another systemic view to analyze a company; and yet a third systemic view to analyze clusters of industries. But more interestingly, we must choose an appropriate systemic view each time we change the industry under study i.e.: the systemic view used in one industry may not provide useful insights in another industry.

A very broad view is one that encompasses several industries in a country, depicted by what I call a business web (Ketelh6hn, 1993). Each node in this web represents a group of competitors selling directly substitutable products/services to the businesses contained in the nodes downstream from them. This systemic view helps us understand the different clusters of industries and how they are linked by flows of information, goods and money. This systemic view, the business web helps picture what Michael Porter calls related industry clusters.

Focusing in one step further, we proceed to examine one of these industries in detail. Here we define the object industry in terms of the businesses involved in the flows of information, goods and money standing between the r aw material producer and the final con- sumer. This enterprise system (Ketelh6hn, 1993), defines the industry in terms of products (function and form), geography, markets and all businesses involved in the flows (see Figure A). An industry definition draws boundaries around a set of competitors whose actions have direct impact on our business performance. So, the enterprise system of an industry defines the boundaries of that industry. It is also known as supply chain, business constellation or business ecosystem, depending on the analogy used to describe the industry.

Focusing even further, we proceed to examine one of these companies in terms of the activities it is performing in the flows linking raw material producers with final consumers. These activities form the company's business system, as McKinsey calls it, and can be used to define the business in which this particular company is in. A business definition draws boundaries around a unit for which

Products/Services Function & F o r m

Countries Markets

Suppliers Assemblers Retailers I ~ A

Enterprise System ~ ' - - =

Figure A industry Definition

we can develop strategies to succeed in specific markets. So, it should also be presented in terms of product func- tionality and form, geography, markets and the business system's processes and activities.

We learned to make a distinction between the business system 2 and the functions of a company. The business system is not a horizontal arrangement of the functions in a company. The business system should be con- ceived, as in Benetton, with a Gannt chart or Pert diagram of the activities involved in the three above mentioned flows. Since not all functional activities are involved in the information, goods and cash flows, a simple horizontal alignment of functions does not describe a business system.

Furthermore, different business systems correspond to each one of the following three strategic objectives: anticipating market needs; quick response to a customer's order; and new product development (Ketelh6hn, 1995).

In my time at IMD I have found that the views above provided our partners and clients with a robust business ideology. Robust in the sense that it can be used to explain how to make money in any type of industry, from consulting or financial services to assembly or flow industries. Furthermore, this ideology is useful for identifying business issues and what to do about them.

Notes 1 A 'Thinkout' is a one week workshop during which entire

management teams break away from every day operations to think through their strategic business challenges under the leadership of an outside facilitator. The thinking process is outside the premises of the company -- hence the name 'Thinkout'.

2 Defined by the sequence of activities involved in reading



market needs, delivering products/services, and collecting receivables.

References Ketelh6hn, W. (1993). International Business Strategy.

Butterworth Heinemann. Ketelh6hn, W. (1985) Reengineering Strategic Management,

Long Range Planning, June.

WERNER KETELHOHN, IMD, International Institute for Management Development, P.O. Box 415, Chemin de Bellerive 23, CH-1001, Lausanne, Switzerland

Werner Ketelh6hn is Professor of Strategy at IMD, Lausanne. His areas of special interest are business unit strategy, corporate strategy and network companies. He has German- Nicaraguan dual nationality and spent many years as entrepreneur and consultant in Central America before joining IMD. Currently, he is a consultant in the area of strategic problem identification through participative processes and in the design of management development programmes, and has a number of multinational companies as clients. Professor Ketelh6hn has written many case studies and technical teaching notes as well as five books including Cases in International Business Strategy (1995).


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Take time to think out your business challenges