How to analyse competitiveness
BY MICHEL PIREU, 02 AUGUST 2016
MARTIN Reeves, MD of the BCG Henderson Institute, gave a public lecture on business strategy at Wits Business School and I asked him how investors might go about analysing the competitiveness of companies in a complex business environment.
“Just as there is not one approach to strategy,” he says, “there is not one approach to examining the competitiveness of companies. Step number one is to look at the fundamental characteristics of each market that each part of the company is facing, to break it down into its two, three or four constituent pieces and to ask for each what sort of environment it is facing in terms of predictability (can we plan it?), malleability (can we shape it?) and harshness (negative cash flow, zero growth, or whatever).
“The second step is to ask: what is the basis for competitiveness for each of those segments? Typically, for a classical business it’s all about scale and efficiency. For an adaptive business, it’s all about speed, agility and experimentation, while for a visionary business it’s all about imagination and converting ideas into first to market. For a shaping strategy, it’s all about owning the platform and orchestrating the activities of other companies; in a renewal situation where a company has gone off-track either because of an internal or external shock — you’re looking for a rapid financial turnaround followed by a pivot to growth and innovation.
“If you can see which companies are doing that, you’re able to prospectively see which are likely to do well, rather than just looking at last week’s financial results or volatility, which may have more to do with exogenous factors and may not say very much about the fundamental competitiveness of the company.”
For a better understanding of the basic environments, Reeves is referring to and that investors need to be able to recognise to correctly assess a firm’s strategy, we turn to his book, Your Strategy Needs a Strategy:
• Classical — be big. Mars is a good example of a conglomerate operating in a predictable classical environment. Milky Way was introduced in 1923, Snickers in 1930, the Mars Bar in 1932, M&Ms in 1941 and Twix in 1979. Snickers and M&Ms were still the biggest selling sweets in 2014 and, together with the other brands, continue to underpin the success of the company founded by Frank Mars a 100 years ago. What investors need to know is that in such classical markets, advantage comes from one of three sources: size, differentiation or superior capabilities. One of the traps to look out for, however, is “letting the way it’s always been” beat “the way it should be”. Large jumps may occasionally be necessary.
• Adaptive — be fast. This is the strategy that enabled Tata Consultancy Services (TCS) to grow from a small player to the largest Indian company by market cap in 2014. Despite its size, TCS has retained an external orientation that enables it to capture and harness change. To quote “Chandra” who became CEO in 2009 : “Every business process will get reimagined. Every business model will get reimagined. How the company works internally will get reimagined. It is our job to engage with customers on how they think about digital … and we will shape our delivery model accordingly.”
Google has taken the adaptive approach further by experimenting on options far from its core business. What investors need to know is that such an approach is appropriate when, and only when, a company is operating in an environment that is hard to predict and hard to shape. An adaptive approach is more often called for in an unpredictable business environment, but following the crowd is poor logic for selecting it. Among the traps: “betting the farm” — large experiments that fail can drag down the firm.
• Visionary — be first. In some environments, a single firm can create or recreate an industry and fashion the future with a degree of predictability. In those rare instances, it is in a position to employ a visionary approach. Your brand name may even come to define the product category for years. What investors need to know is that although visionary approaches are most frequently associated with entrepreneurial start-ups and might appear to have more to do with venture capitalists than stock market participants, it’s worth remembering that in some garage is an entrepreneur who is forging a bullet with your company’s name on it.
• Shaping — be the orchestrator. When August Krogh cofounded Novo Nordsik in 1923, he couldn’t have foreseen his firm would play a role in the development of China’s booming insulin market. The firm now controls 60% of that market, having taken advantage of an opportunity to shape an industry by orchestrating stakeholders. The Alibaba Group achieved phenomenal growth by engaging a broad set of stakeholders and evolving its ecosystems. What investors need to know is that a shaping firm operates under a high degree of unpredictability, given the nascent stage of industry evolution it faces and participation of stakeholders that it must influence but cannot control.
• Renewal — be viable. When external circumstances are so difficult that the way of doing business cannot be sustained, changing course to preserve resources, and later redirecting towards growth is the only way for a firm to thrive again. What investors need to know is that while painful cost-cutting and other defensive measures are familiar approaches to staying afloat and deliver quick results, they are not by themselves a recipe for long-term success. For a renewable strategy to be successful, a firm must initiate the first phase of economising and the second phase of growth. It must pivot to one of the other four approaches to strategy.
This brings us to the overarching message in Reeve’s book, that there is a need, particularly among bigger organisations, to combine different strategic approaches into what he calls a “strategy collage”. Peter Hannock of AIG lays the concept bare when he says the role of management is to grow and shrink. “We’re in a complex world where we have to be growing in some places and shrinking in others, and that’s what we need to pay managers to do — to think!” Which sounds very much like what investors need to be doing too.