Corporate Growth Strategies
Corporate Growth Strategies
INTRODUCTION
The ideas and analysis of the prior chapters can be used as the basis for corporate strategies to drive corporate growth and development. The trends and dynamics of economic development and economic growth determine corporate strategies. This chapter will use the ideas of opportunity cost, the role of information systems, and the mix of defensive and innovation strategies to explore corporate strategies.
It is not just a question of corporate growth. It is also a question of corporate survival. Statistical evidence indicates large public companies are disappearing at increasing rates. Companies and their managers have to adapt to changes in the external environment if they are to stay competitive. They must react when there are changes like a shift in consumer tastes, new production technology, new competing products or services, new software to manage the company, new competitors, or changes in the macro economy. Survival in the long run depends on anticipating and reacting to major changes.
INFORMATION AND CORPORATE STRATEGY
The basis of good decisions is good information. Corporations are swimming in information. Yet much of it is not useful for making capital investment or strategic planning decisions. Some of it, including most accounting and financial data, leads to bad decisions. Much of strategic planning and forecasting is based on this data.
A basic information problem is accounting cost compared to opportunity cost. Opportunity cost rather than accounting cost should be used for strategic planning. Accounting cost is based on the past. Opportunity cost forces management to look for alternatives in the future.
Traditional accounting makes it difficult to use internal financial data for financial and strategic planning. Assets are valued at their original purchase cost. Buildings are depreciated even though they may have gone up in market value. Land is valued at its purchase price and is not depreciated or appreciated. Unsold inventory is carried as an asset. Accrual accounting often brings future revenue into the present and pushes current costs into the future.
Accounting costs distort profits and return on investment. Accounting looks at return on assets at accounting value (cost at time of purchase minus depreciation). Heavily depreciated capital equipment may increase return on investment but indicates old, inefficient machinery and large future capital costs if the company wants to remain competitive. The ability to generate profit, and the level of profit, is what determines the value of the assets.
I worked for a large manufacturing company that owned a great deal of land purchased in the early 20thcentury. The land was valued on the balance sheet at the original cost of $1 per acre. It was near an expanding urban center. The land’s market value was greater than the total market capitalization of the company.
Say a company owns a building in Manhattan. The building may be depreciated but the opportunity cost is high. This affects operating cost. A copying machine in a 100 square foot room when the rents in New York are $300 per square foot means a foregone, imputed rent of $30,000 a year. These are expensive copies. Management should ask the question – what are the alternatives?
For decades, Coca-Cola carried the value of its iconic brand name at $1 on its balance sheet. Really? Would Coke sell its brand name for $1 to another company?
The alternative to accounting cost is opportunity cost. Opportunity cost of assets is often the market value of the assets. What would someone else be willing to pay to buy or lease your assets? What would you get if you decided to sell your equipment? A potential buyer would have to figure what the future cash flow from using the assets would be. Old, obsolete assets may only be worth scrap value, regardless of the accounting value on the balance sheet.
Sales forecasting is critical to profitable planning for the future. Two simple ways to forecast are to use trend analysis or apply income elasticity of demand. The future cash flow and thus the rate of return of an investment depends critically on the sales forecast. Investment proposals should be run using different sales forecasts to see how sensitive future profits are to a range of possible future sales.
Any large deviations from trend should be analyzed. Deviations from trend in sales may indicate major shifts in demand. Large differences between the opportunity cost and accounting cost of fixed assets may indicate that major changes in production technology have occurred.
Innovation and change reduce the value of past investments in production and marketing to create customer loyalty. It reduces profits. One reaction is to reduce costs. A company can increase reported profits in the short run by reducing investment, reducing R&D, reducing employee training, and reducing marketing expense. This is a company without a future. Update your resume. Sell the stock.
What is the value of a company? There are basically two measurements. One is the “book value” or equity on the company’s balance sheet. It depends on the accounting value of the assets, intangible assets, past profits, dividends, and financial policies such as stock buybacks. The other method for a public company is the market value of the company – the number of outstanding shares of stock times the price of the stock. It depends mostly on the weighted average estimate of future earnings by investors. There is often a large difference in these two methods.
Various equations using enterprise value. Based on outsiders' weighted forecast of the company's future earnings (EPS) and P/E ratio.
Determining value of intellectual property. Using metrics developed for manufacturing companies.
Accounting looks to the past; good information systems should assist in planning for the future. Opportunity cost forces management to think in terms of alternatives. Accounting cost information does not.
Information can be used as a competitive or strategic weapon. Asymmetric information, including detailed knowledge about competitors and customers, can be used in negotiating prices or devising price discrimination schemes.
WE HAVE BEEN HERE BEFORE: INFORMATION BOTTLENECKS IN THE SECOND INDUSTRIAL REVOLUTION (1870-1929)
The problem of how to use information and new information processing technology has been a problem since the beginning of the Industrial Revolution. In the 19thand early 20thcenturies, companies were overwhelmed by the explosion of information and the antiquated ways of processing it. Especially railroads. Trains on one-track railroads kept crashing into each other. Killing your customers was not a viable long-range plan. Trains had to be sidetracked for long periods of time since the engineer did not know when a train was coming in the opposite direction. As railroads became longer and handled more traffic, day-to-day operations and local decisions were delayed. Writing letters to top management back in Boston, New York or Philadelphia for guidance further delayed crucial coordinating decisions.
The answer was the telegraph. Railroads allowed telegraph companies to put up poles along their tracks in exchange for free or priority usage. More information about operating conditions could be transmitted much faster between stations and between local managers and corporate. But this created a new problem. Corporate managers and their growing staffs were overwhelmed by the increasing amount of data. The solution was a new organizational structure – intermediate operating managers. The line was divided into “divisions,” each with a divisional manager and staff. Coordination of operations and immediate decisions such as clearing a train wreck or damaged track were now handled by divisional management without prior approval from corporate management. Bottlenecks to corporate growth were relieved by new information technology and a new organizational structure. The modern corporate structure was born.
The explosion of information created decision and efficiency bottlenecks that slowed corporate growth. In late 19thcentury and early 20thcentury, during the so-called Second Industrial Revolution, growing and large corporations had to adopt and develop new, more efficient information systems. The keys were the telegraph and then the telephone, the beginning of “instant” electronic communication. New office equipment, especially the typewriter, increased the speed of generating actionable information and communicating with suppliers and customers. New filing systems for faster information storage and retrieval were started. The new information tehnology led to new ways to organize work, including the modern office building with its innovations in steel structure, large glass windows, electricity, and elevators. This was also the beginning of financial control systems as companies became much larger and more diversified.
For example, Sears, Roebuck revolutionized retailing by combining a number of innovations – rural free delivery of the postal system (taking advantage of an “enabling” information network), a national railroad network, reduced cost of high speed, high volume printing, mass literacy, more capital intensive distribution warehouses with advanced inventory systems, postal money orders (variation of an old financial instrument), a large office staff processing orders. and new office systems (including pneumatic tubes, an industrial forerunner of electronic circuits in computers). The second generation of managers instituted tighter management and financial controls (same thing happened at GM).
ORDER AND CHAOS: TWO ECONOMIC ENVIRONMENTS
Corporations need two frameworks for long term planning. One assumes a stable, orderly world where the future is a continuation of the present and cash flows are fairly predictable. The other assumes an uncertain, chaotic future environment. A company has to plan for both.
If a situation is totally uncertain, it is equivalent to random. It is impossible to plan in this environment. But the future is more likely to be chaotic than random. One idea of chaos theory is that seemingly random systems resolve themselves into some type of order. This is a useful idea for corporations because disruptive innovation, creating chaos, is often gradual. There is first the basic research and prototypes to be tested. For new drugs, the time period from first formulation to FDA approval could be 10 years. Commerical versions have to be engineered and production systems set up. Then there is consumer acceptance, usually at low levels for some time before mass acceptance. This process and timing for individual products is shown by an S-curve in marketing textbooks. During this period, demand is increased by improvements in the product along with reductions in unit cost and price.
For many new products in the past, the time period from early development to mass consumer acceptance has been in the 10-30 years time range. The cell phone was developed by the U.S. military in the 1980s. The first commercial cell phone was introduced in 1991 (13 were sold in New York City); Apple’s iPhone appeared in 2007.
PASSIVE VS. ACTIVE GROWTH
Much of corporate growth is passive growth. Mature companies grow because the economy and total income grow. The demand for most goods and services goes up, so the sales of most companies go up. (Shifting up of demand curves are discussed in ET1 – Demand.) Consumers spend more when they have more real income and they can borrow more. As higher production and sales work their way through the supply chain, this increases orders and sales for most large input companies.
Doing the same thing can be successful for a long period of time for a company with large market shares in many market niches. A large, mature company in markets without major disruption can coast for a long time and still make an acceptable profit. (Discuss branded consumer products with brand "loyalty."
A more flexible strategy is to make small changes, often with new inputs bought from outside the company. New production and information processing technology from capital goods providers can be absorbed to support the existing businesses.
There are internal and external barriers to major change in a large, mature company. If the threat is new technology or new products that replace existing technology or products, managers often make the cannibalism argument against adopting it. They point to the large investment in fixed assets. They recite the company’s strengths – brand names, consumer loyalty, strong distribution channels, large investment in specialized production, proprietary knowledge, the experience of management and employees. All of this is the result of past investment and experience. All of this may generate cash flow to fund initiatives. But they should be ignored in making decisions about the future.
Proposed change in corporate actions and structure often result in the internal loss of power, prestige, and even position for some managers. They lobby corporate management committees. They kill or stonewall change proposals.
Corporate managers in this common situation often attribute increased sales and profits to their own management skills, superior existing strategies, and vision. This is plausible as long as the economy and their markets are expanding.
The problem is that they may not know how to react to major changes or their reaction time may be too slow. New products, new IT, shifts in consumer preferences, new competitors, new distribution channels (ecommerce) may devalue their experience and appear threatening. Common reactions are to minimize threats from new competition, see them as limited or unimportant, or see them as temporary. GM and Toyoda. Intel, IBM. Dominant tech companies are especially vulnerable.
Routine management reactions to change that seemed to work in the past (increase advertising, extend product line) no longer work. Demand is shifting to new products and services. Mangers miss major opportunities or believe that the risk of change is too high. They adopt short run strategies of cutting costs, cutting spending on capital investment and R&D. Instead of fixing the core business, they diversify through acquisition, a high risk strategy (see Mergers and Acquisitions).
Companies that do not adapt to changes in their competitive environment tend to lose market share. But not always; companies with dominance in a market niche or some other competitive advantage can last a long time. But in the long run, they lose their dominant positions and increase their chances of being acquired or going bankrupt.
The large packaged goods food companies, very innovative in the past, missed the shift in consumer demand towards organic foods, healthy snacks, bottled water, and Greek yogurt. They gave new, small companies time to develop the markets before they reacted, thus competing against companies that had developed consumer loyalty, distribution channels, and brand recognition through marketing and advertising.
If an established company does not respond to the changing external environment, another company will.
PROCTER AND GAMBLE
Procter and Gamble is an example of a large, mature company that opted for order, routine, and control without much internal innovation. P&G has had only one new successful new product line in the last 20 years. Management has been inbred.
P&G has expanded to become a global company, a mutinational corporation (MNC). But their internal management and control systems have not worked well. Their systems and structure has been cumbersome with too much centralized control. They have been trying to sell high price products in markets with lower incomes. Because of centralized control, there has been little customizing products to local preferences.
Proctor and Gamble made a large acquisition of Gillette. Since then, Gillette has been the victim of Internet marketing of cheaper razor products. P&G has ignored new marketing channels and strategies.
Despite large investment in R&D, advertising and promotion, and capital expenditures, operating income has stagnated. The company makes a very low return on capital and assets
For an extraordinary critique of Procter and Gamble, see
MANAGING THE MATURE COMPANY: THE SEARCH FOR STABILITY AND CONTROLLING CHANGE
An economic structure dominated or controlled by new large corporations is often in a “search for order” and market control. This happened in the late 19thand early 20thcentury as “merger mania” was an attempt to control the economic disruption and “ruinous competition” of new technologies. Led by J.P. Morgan, dominant oligopolies and cartels were formed in many of America’s industries. John D. Rockefeller formed a virtual monopoly in oil refining before Standard Oil was challenged by large, new oil discoveries it did not control. Many of the companies were still large if not dominant companies over 100 years later. Many of them have merged with each other in the recent merger wave.
The Silicon Valley version of this strategy is for large companies like Google and Microsoft to buy small technology companies. Some of the acquisitions are potential competitors; some bring new technology that the larger company believes it can develop into a new growth business. Often, small tech companies are the R&D divisions of large companies.
The size (scale) of a company is a function of exploiting the growth, application and ongoing development of new technology and new organizational management techniques and systems. New technology offers opportunities for new sources of economies of scale.
A major corporate mistake is not investing in new input technology or not customizing the new technology to improve the traditional business.
In a rapidly changing environment, the weaknesses of a top-down corporate structure and hierarchy with power and strategic decision-making at the top becomes critical. Top management and their staffs rely on financial reporting and summarized data. They may miss or not have access to crucial variables or key knowledge necessary for making good decisions. It exposes top corporate managers’ lack of detailed knowledge about the company. Decisions based on experience gained a generation or two before may be irrelevant or misleading.
EARNINGS STABILITY: HEDGING AGAINST UNCERTAINTY
Many external forces that are difficult to forecast affect corporate earnings, including raw material and energy prices, interest rates, and foreign exchange rates. Companies have to decide (cost/benefit analysis again) if they want to incur the cost of hedging against possible price increases in key inputs.
Many large companies have hedging programs in one or more of the three areas. Energy and raw material producers often use futures contracts to lock in the sales prices of some of their future output. Global corporations hedge against foreign exchange risk. In general, corporations are more concerned about how higher input prices would decrease profits than how lower input prices would increase profits.
MANAGING THE MATURE COMPANY IN A CHAOTIC ENVIRONMENT: THE CHALLENGES AND OPPORTUNITIES OF INNOVATION
A mature company should have a combination of two strategies. One strategy is short run, operational, and low-risk strategies for existing business; the other is long-range, high-risk (lower probability of success) strategies that fundamentally change the business.
Large pharmaceutical and biotech companies bet on the future by making many investments in small biotech startups at the development stage. One example is Celgene, which uses its large cash flow from one highly profitable drug to fund not only internal R&D but to finance joint ventures with dozens of smaller biotech companies. The largest information technology companies like Google and Amazon have bought out dozens of smaller companies.
A more radical strategy is to think about a change in organizational structure. The goal is to accelerate innovation, encourage new ideas, change small parts of the organization quickly and then have the change spread rapidly through the rest of the company. As in the past, radical changes in information technology will change many internal procedures and possibly the corporate structure.
Three ways to deal with disruptive or uncertain change:
Resist or deny, react and adapt, or probe with R&D, prototypes, acquisitions.
SHORT RUN OPERATIONAL PLANNING (EXECUTION) VERSUS LONG RUN STRATEGIC THINKING
Much of what companies call strategic planning is really short-run operations planning to support existing businesses. Detailed one year budgeting. Investment in new capital goods such as machinery and computer systems is mostly to replace existing capital.
There are basically three types of strategies:
· Expansion. Companies expand capacity to fill rising demand and to lower unit cost (avoid rising marginal cost of increased output). These can be analyzed because the costs and expected sales increase can be estimated from internal data generated by the existing business.
Go after new group of customers. Specialized products. Market niche products. Expand geographical market. Go regional (Europe) or global.
· Cost savings. Companies buy new equipment or systems to reduce the cost of output, either through increased productivity or fewer employees. Again, managers are usually fairly certain what the costs and benefits of this kind of investment will be. Alternative strategies might be to move some operations to lower labor cost areas or countries, or to outsource some operations to other companies.
Labor-saving machinery and information processing systems.
Integrated business planning and control systems.
· Innovation. This is the toughest to analyze, either because the future sales and profits are unknown or uncertain. One approach is to break the project up into stages and make a decision to fund the next stage only after analyzing the results from the prior stage. Drug companies do this when creating and testing new drugs. Market testing of new consumer products. In Finance, this strategy is called real options.
The first two are operational or tactical planning. The third can be used for both operational and strategic planning.
PLANNING TOOLS
You need to know three things about management and finance:
Opportunity Cost
80/20 Rule
Compound Growth
Opportunity Cost
After you’ve identified the critical opportunities and problems, opportunity cost is a good guide to deciding what to do about them. It reminds you that time and assets are limited and valuable. Time and assets you spend on one problem or function might be more profitably spent managing something else. For example, if you have a small customer who takes up a lot of your time, either raise prices, reduce service or get rid of her. The opportunity cost is too high.
Opportunity cost is a guide for better decision-making.
What are the realistic options and alternatives (not a list from a management textbook)? Is there a less expensive (more profitable) way to do something? Lease or rent rather than own? Outsource some of your production?
What is the net benefit (profit) over time of each alternative?
Include risk as part of cost.
A word about accounting systems. Accounting systems are not set up to tell you which products or services are profitable. They are also poor indicators of return on capital or assets. Asset values should be adjusted from depreciated historical cost to present opportunity cost (often market value if sold or leased). The classic example is that Coca-Cola for decades carried the value of their brand name at $1 on their balance sheet. Really?
For a tutorial on opportunity cost, see my Economics Tutorial 1.
80/20 Rule (Also called Pareto’s Law)
Applying Pareto’s Law. A relatively small percent of your customers account for a relatively large amount of sales and hopefully profit. Restaurant owners know that their business success depends on repeat customers.
This idea says that a relatively small percent of actions account for a relatively large percent of outcomes. Isolate the few most important influences on your business and ignore the rest.
20% of your SKUs account for 80% of your stockouts (and lost sales).
20% of your programmers account for 80% of the bugs in new programs.
10% of the population account for 80% of total medical costs.
10% the cars on the road account for 60% of the emissions.
The possibilities are almost endless.
Some other examples:
20% of your customers account for 80% of your sales.
McDonald’s accidentally learned that 10% of its customers accounted for 60% of its lunch sales. And it was an identifiable group that they had never aimed its advertised at.
20% of your product line accounts for 80% of your sales and profits.
Often, companies with a large product line with many variations find that 50% of their products account for over 90% of sales. An even smaller percent usually account for most of the profits. Automobile companies have drastically cut back on options and colors without hurting overall sales.
Companies should constantly monitoring profitable vs. unprofitable customers. I worked for a company whose largest corporate customer was never profitable for the company (see ET12 – Bilateral Oligopoly). Why sell to them? Our divisional management argued that they needed the customer’s volume to run our plants near capacity. This suggested that something was probably wrong with how the division was managed. Management should have looked to change its product mix, its customer mix and how it marketed. The company stagnated and was eventually sold to another company.
The 80/20 rule implies:
“Less is more” … reminds us that much of what we do, when closely analyzed, has negative value. Many activities, customers, products and suppliers actually subtract value, which helps to explain why their very positive counterparts produce such a high proportion of net value.
Richard Koch, The Natural Laws of Business(182-3)
Eliminate losing products, customers and functions.
Look at divisions, regions or product lines that consistently have low sales growth rates and make below the minimum cost of capital. Reduce or eliminate these businesses. This frees up capital and resources to find and fund growth opportunities Loser operations have a potentially high opportunity cost (see below).
Look at positions or functions in the corporate structure that don’t add value to the company. Eliminate or outsource. This is a major strategy many companies are now pursuing, which is why a high percent of job losses over the last three decades occurred because the position or function was eliminated.
Better yet, avoid complexity in the first place. Growth through mergers and acquisitions is a high-risk strategy with a high failure rate.
If you and your company are successful in applying this idea, you might be rewarded as seen by the original Pareto’s Law - 10% of the households in America own 80% of the financial wealth.
Compound Growth (also known as exponential growth).
After you’ve freed up people and resources by applying the ideas of the 80/20 rule and opportunity cost, start looking for growth opportunities. By this time you will have a good idea what are the critical factors for your company’s success, the knowledge and resources that give you a competitive advantage. Develop opportunities that have a good chance for sustained exponential growth. Know the difference between sales growth rates and the dollar amount of sales growth.
In the beginning, new ventures often have low sales compared to the size of the company but high compound growth rates. If there are high growth rates, these ventures can become large contributors to sales and profits in the future. Also factor in that there will be learning curves as new systems are installed and employees acquire new knowledge and experience.
Compound growth rates are the first thing you need to know about finance, particularly investing. Start early, save steadily over a long period of time, invest in high-quality bonds and dividend-paying stocks, and let compound interest do its thing. Spend all the time you save not analyzing or worrying about investments doing more pleasant and productive things (see opportunity cost).
All three work together.
These ideas applied to starting a new business:
Opportunity cost as part of start-up costs.
Loss of income from the job you quit.
Loss of income from the money you invest.
What are the critical factors for success?
Exponential growth and learning curves.
STRATEGY AND STRUCTURE
A few companies have formal procedures that allow any employee to pursue a new idea. The employee who proposing a new product, not the R&D personnel, manages the development of the proposed product, including picking the personnel on the ad hoc team. 3M is famous for this approach to innovation.
A few companies attempting to develop artificial intelligence applications have set up a separate innovation group outside of the corporate structure, reporting directly to the CEO.
DISRUPTIVE INNOVATION
Many store retailers were slow in realizing the potential of online sales. Many went bankrupt. Manufacturering companies did not believe similar products could be sold on the Internet and delivered directly to consumers. In the early years of online retailing, most observers did not believe American consumers would buy clothes online. Gillette, for example, lost market share to new companies selling less expensive razor blades online. Another is new mattress companies that sell online, although they are beginning to lease stores. The largest mattress retail chain went bankrupt.
INNOVATION TSUNAMIS AND EXIT STRATEGIES
In the service economy, the most important thing that management does is to know who and what contributes value and thus profit. In any organization there is a core group of employees that contribute most of the value (see 80/20 rule). It is not obvious from an organization chart who they are. It is not obvious from the balance sheet. Unless rewarded, these employees are likely to go elsewhere. Maybe to competitors. Maybe to start new companies to compete with their former employer.
Knowing the opportunity cost of assets may suggest that some products or even whole divisions make a low rate of return or are unprofitable. Large companies stay with core businesses long after they are stagnant of declining. They do not look for other possible businesses.
In the extreme, a company’s management may realize it is in the wrong business.
There may be an an alternative use of undervalued resources, especially if they are land or fixed assets. A discount retail chain called Two Guys had to go through a bankruptcy before it realized it owned some very valuable real estate. It became Vornado, one of the largest real estate development companies in America. A company might have developed a valuable expertise in some function in support of the main business, such as Amazon with cloud computing. A company may be losing money as a manufacturer but might have created valuable brands that can be leased to other companies. This is common in consumer companies, especially clothing and fashion accessories.
Then there are companies that are truly innovative but either do not develop their technology into profitable businesses or do not keep up with future innovation. GE and RCA in computers, IBM in personal computers, Kodak in digital photography, Nokia in cell phones. A Xerox R&D operation called PARC invented much of the technology of the modern office; corporate managers decided not to invest in commercializing the technology. A small company down the road from PARC, called Apple, realized the potential and hired many of PARC’s scientists and engineers.
STRATEGIES FOR SMALL INNOVATIVE COMPANIES
The owners of successful small businesses I've consulted with had one thing in common – they were always on the lookout for new opportunities and new ways to cut costs and improve efficiency. The good ones never felt complacent.
I believe from experience that cheap or free social media such as Yelp, websites, and mobile phone-based business software help small businesses to develop market niches, compete against larger companies and grow faster.
Best advice for a small, disruptive company competing with larger companies:
“Hit ‘em where they ain’t.”
“Wee Willie” Keeler
One of the greatest hitters in baseball. Only one of 22 men ever to hit over .400 in a season. Also one of the smallest ever to play in the major leagues. Innovative. See biography in Wikipedia.
“Get there the firstest with the mostest.”
Nathan Bedford Forrest
Surprisingly successful Confederate general in the Civil War. Consistently defeated larger Union armies. Not size but speed, surprise and force at the point of attack leads to victory. Same strategy used by Stonewall Jackson and Erwin Rommel against larger forces. One reason for the success of guerilla warfare.
Good general advice but especially relevant if you are going up against a larger, established competitor with more resources. No large company is good at everything they do. Find niches where they are “under-serving” their customers – high prices, poor service, low quality, selling mass market products to specialized segments.
The classic example is how Toyota destroyed General Motors in the American car market. GM had a 50% market share and was very profitable. But it had become fat and sloppy – terrible quality, high prices, high repair costs, and poor service. The worse cars were at the low end, compact car, segment of the market – remember the Vega and the infamous Corvair? GM did not want to be in this part of the market; they contended they lost money. This was the segment Toyota attacked. After establishing a foothold here with low-priced cars with a reputation for quality, Toyota moved upmarket. Eventually, Toyota and German car companies attacked GM’s most profitable division, Cadillac.
GM reacted by cutting costs. They closed plants. They replaced workers with industrial robots, which was an expensive failure until the quality of the robots improved. They started the new Saturn division to compete with Japanese imports. It could not overcome the GM culture and eventually closed. Quality improved but did not catch up to Toyota for decades. GM’s market share fell from 50% to 30%. Ironically, as Toyota became a global car company, they were also plagued with quality problems. Toyota was slow in getting into the SUV and small truck segments of the market. They also lost market share at the lower ends of the American market to South Korean car companies.
Technology is not just for new companies or large companies. It is also for small service companies. My dentist uses digital imaging and 3D printing. My tax accountant uses QuickBooks; I use Turbotax instead of my tax accountant. Legal reference books have disappeared from law offices. Doctors routinely look up information online during examinations. Almost all my local restaurants have online ordering and reservations.
The best management book every written is Andy Grove, Only the Paranoid Survive. Andy Grove was raised in Communist Hungary, escaped during the Hungarian Revolution, and was CEO when the company decided to “bet the ranch” on “integrated circuits” (aka microchips or CPUs).
CONCLUSIONS
Improve financial and data systems to generate strategic data. Adjust accounting data to reflect opportunity cost. Create data systems, based on opportunity cost, to support operational and strategic decision-making.
The future success of company investment depends on how close actual sales comes to forecasted sales. Analyze deviations, review assumptions, and audit investments.
Know which products and which customers are profitable. Corporate planning should include the knowledge and experience of sales and marketing managers. Discover the small percent of high value-added employees. Apply Pareto’s Law.
In the short run, concentrate on factors that add value and drive growth and profit. This is often not obvious to top management; answers are not found in financial reports and planning meetings.
Look for threats to the existing business.
Look at alternatives, however unlikely – contingency planning to change business, change location or change structure.
Internal processes to adopt and adapt new technology. New ideas. New models. New decision-making processes based on new information technology.
The impact of new technology usually takes time. Disruption is often a gradual process. Established companies have time to adjust or adapt. Recognize how evolving technology and fundamental changes today will affect business in the future.
In the long run, current organizational (multidivisional operating with centralized financial and strategic control) structure may be a function of technology – long production runs, similar products, underlying technology and proprietary information, information systems. But new technology might lead to new structures – an organization with AI, robotics, 3D printing, decision-making algorithms based on probabilities and contingencies, marketing based on knowledge of individual customers, simulations, neural networks learning,
EXTRA CREDIT FOR ECONOMICS MAJORS
Many of the basic ideas and analytical tools of strategic planning and financial planning are derived from economic theory. Finance theory is a direct application of microeconomic assumptions and theory; so is market research. The best analysis of the opportunities opened up by the Internet uses economic concepts.
Cost/benefit thinking is a crucial part of good management decision-making and a reminder that any proposed change has both benefits (increased sales for example) and costs (the costs of increased production and marketing). Comparing the impact of a new strategy on both sales (marginal revenue) and cost (marginal cost) is not always done.
Economic theory also indicates to managers what the overall change will be after something important changes in the company’s external environment. Thinking in terms of short run changes vs. long run changes, which includes feedback effects, leads to better strategic planning.
In a mature company, economic concepts often apply in the short run.
In an innovative company, basic short run economic concepts often do not apply.
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