The CFO also has access to channels for communicating the value of strategic initiatives that don’t pay back in the next financial year - which our finance friends keep telling us investors value.

He recommends an interesting alternative - introducing many more products, and giving them plenty of time to succeed or fail in the market.

Just one thing to beware of - the cost and effort of getting just a single product to fulfill its potential in this sector is enormous, for rather simple reasons [see chapter 6 of my book]. Consumers can’t just be ’switched on’ to a product from a standing start. They have to be taken from ignorance of the product, through awareness, understanding and appreciation, which takes time and money, and all of which has to happen against a cacophony of noise from hundreds of other products. Yes, there are tricks to short-circuit these stages, but they are hard to find.

… all of which has a very unfortunate consequence - many, many perfectly decent products get launched with only a tiny fraction of the investment needed to realise their potential. Surely, there’s a 2+2=5 here .. use the many-and-varied evolutionary approach Alexander proposes to raise the number of promising new products, then really throw in sufficient resources to each in turn to extract their potential quickly.  

.. which would bring me onto another topic if I had time - the need for much more ‘controlled experimentation’ in strategy.

Just come across another couple of extreme cases.

• The ‘market’ for mortgages in middle-east countries is apparently near-zero - but the rate at which ‘demand’ will grow will reflect the rate at which banks develop and provide Shariah-compliant products. For such a bank, ‘forecasting’ growth of this market is pointless, as its growth will depend totally on what suppliers will do.   
• Same applies to some alternative-energy markets - roof-top solar heating, domestic combined-heat-and-power, ground-source heat pumps etc. The current ‘market size’ for many of these is currently tiny, because the technology is immature and costly, and ‘growth in demand’ is a meaningless concept - demand will develop in response to the rate at which each technology’s performance and price improves … which in turn depends on the sales rate. [All explained in chapter 6 of the book] 

The exceptions to this general point relate to highly mature markets, where interactions between competitive suppliers and potential customers long ago played out, leaving demand to be most strongly influenced by economic, social and other mechanisms. Even then, there is often much that strategy can do to improve performance way out of line with market ‘trends’.

Kim

lack of the required number and skill of people - not customers, not products, not the challenges of competitors.

I’ve mentioned in earlier posts some examples of the problems that come up in HR, but these are just a handful of the issues that come up.  I don’t think we can blame the HR community, though, if the strategy professionals have never helped them develop professional tools for the job. HR has an unfortunate habit of attracting folk who think people issues are all ’soft’ issues of motivation, leadership, relationships, ‘EQ’ and so on - all doubtless very important, but there are some critical quantitative issues that you just can’t deal with via chit-chat and arm-waving.

There are plenty of examples in the textbook but McKinsey themselves already published an article on the key solution - unfortunately as i write their website is down, but if you go to mckinseyquarterly.com and search for Doman et al, 2000, ‘The Talent Growth Dynamic’ you’ll find it.

think I might have to put on a webinar on this.

Back then, my friend and colleague in SDS Suresh Mistry saw this bold claim and thought it looked odd, in spite of the fact that all but one of the market analysts following Sky bought the story hook line and sinker. Further examination showed it was simply impossible, as we wrote to the Financial Times at the time [see attachment on the strategy dynamics Forum post].  Here’s how he worked it out …

There are about 25 million households in the UK of which at end-04 10.2m were still using analogue TV only. Amongst digital services, Sky had 7.4m, cable 3.7m and the new ‘Freeview’ terrestrial-digital service had 3.6m. Seems Sky had plenty to go for - at least that’s what CEO James Murdoch [son of the nice Mr Rupert] thought .. except when you ask the always important question about the flow-rates.

Sky was winning 270,000 each quarter - great - but losing 220,000 [annual churn well over 10%]. With 5 years to go, +50,000 net doesn’t get you from 7.4m to 10m. Never mind, perhaps Sky could have got its win-rate up a bit and pulled churn back to say 8% or 150,000 a quarter.  Sure enough, they upped the marketing spend - and how! - launched great-value pricing deals [i.e. cheap], and got the win-rate up … for a while.

This is where physics killed them. The natty Freeview service gives >30 channels, some of which are quite good. Not surprisingly - being free - their growth rate, even at this early stage of their development, was fantastic at around 400,000 per quarter. Cable was growing a bit, but we can ignore them for the key insight. You don’t need many quarters of this win-rate to Freeview before the number of households in the analogue ‘tank’ drops fast from the level of 10.2m. And since Sky’s only real USP was for some sports and movie channels,  the fraction of those remaining homes likely to be won was dropping sharply [my aged auntie can barely find her way round 5 channels, and isn't a great Manchester United fan!].

End-result - no chance of Sky hitting 10 million by 2010 without literally giving their service away. Did this matter? - well there’s no problem having ’stretching goals’, provided that they don’t push you into doing dumb things to hit them, like spending hugely more money on marketing than the customers won are likely to be worth, or giving away huge amounts of margin. Maybe one of the analysts who bought Mr Murdoch’s tall tale back in 2004 would like to work out how much shareholder value Sky threw away in its pursuit of James Murdoch’s impossible dream.

There’s a simple model of this situation attached to the strategy dynamics Forum post.

PS - ironically, there just may be one way Sky will hit that number … by 2010, the UK Government will be switching off analogue TV completely, so households will have to go digital, even my Auntie. Not all can be reached by terrestrial-digital, so may have to be given access to satellite services.

This is outrageously inaccurate. Try telling Jeff Bezos of Amazon or the Toyota execs who decided to add the Lexus brand and models that it was just ‘lucky’ their ideas worked and you’ll likely get a short and impolite answer. I spent a key part of my professional career with colleagues deliberately designing business models against market changes that were either confidently anticipated or intentionally engineered by ourselves.  Sure, not every one of these succeeded, but a lot more worked than those of our rivals’, as we knew for sure they would.

Darwinism is a very bad metaphor for business competition, for the simple reason that there is deliberate intent on the part of the ‘designers’. It’s as if a gazelle could intentionally give itself a long neck and both out-compete giraffes and still run away from lions - oh yes, and create more tall trees for itself to browse on while it is at it! Furthermore, business model designers have the capacity to carry capability forward to new situations, as serial entrepreneurs and serially successful innovating firms show repeatedly, in an analogy much closer to Lamarckism.

The contribution to Dawkins program was not even helpful - Dawkins was trying to make the case that humanity with its conscious intelligence can mitigate the ‘cruel’ aspects of what would otherwise be social Darwinism [the obscene view that the weak will just go under, and it's pointless and ultimately bad to try and stop it]. Eric’s description of what looked like social Darwinism amongst businesses actually undermined the point Dawkins was trying to make.

Strategy as coin-flipping might make good TV - shame it’s just rubbish.

To understand the origins of this challenge, see the chart below on US graduation rates for petroleum engineers to appreciate the scale and timing of the issue! [thanks to Prof Mukul M. Sharma at University of Texas for this].

Regulators, of course, have helped consumers enormously here, pressing down on water-compay prices and ROI, and grudgingly allowing them to invest in maintaining that equipment. One UK firm estimated that the capex they were allowed would enable them to replace their equiment once every 250 years. Thanks, regulators! I hope consumers in other countries are not so badly served.

BTW - if you want to read more about this issue, and see a way of understanding how to manage it, see chapter 6 of Strategic Management Dynamics and registered instructors and students can work with the model of this issue in the chapter’s online resources.

This, of course, is the inevitable result of bad HR and corporate strategy going back 10-20 years - if you don’t have people with 10 years’ experience today, it’s because you didn’t hire 10 years ago [+couldn't steal them from rivals]. Simple - yes, obvious - yes … so why do multi-billion-dollar firms make such huge screw-ups? Couldn’t be that old culprit ‘investor expectations’ again, could it? It’s hard to tough it out and insist on sustained trainee hiring when all around you are ‘downsizing’ and delivering what the Street or the City ‘want’.