A thinkers blog

Open Innovation

For the first time I have come across the concept of Open Innovation while reading the interview of Henry Chesbrough. I must say the concept is quite intuitive as instead of supporting manufacturing over services or visa versa Henry is propagating adoption of services by the manufacturing sector to come out of the commodity trap. The increased flow of knowledge has reduced the product life cycles thereby increased threat of commoditization of the products. He advocates that companies should tear down the wall of it's R&D and ask the question, 'How can I make my product a platform?'. Platform is a place where others can build along or on top i.e. to continuously think how my product can help others to provide their product or services on top of my product or along with my product. He quotes an example of iStore which created the platform for thousands of app developers.
I am quite sure that this concept will catch on sooner than expected. Here is the link - http://www.strategy-business.com/article/11210?pg=all

Strategy and Execution

Summer of 2009 is behind us and now it is time for businesses to plan for the next year. This is the time when most of the management time is invested in formulating strategies, both short-term and long-term. All levels of the management are active during these sessions to contribute in the process. I have found that many times people get lost when some words such as 'vision', 'strategy', 'execution' and the likes are used in such brainstorming sessions, due to which the businesses may be devoid of some good ideas that may come from unexpected lower level source.

Simply put, one starts with 'target/s' (aka vision / goal / objectives). Decides what to do (aka strategy) to achieve the target. And then during the given time frame gets it done (aka execution).

My friend 'targeted' to spend his summer vacations in Spain. He (along with his wife) decided the airline, hotel, daily care for their pet dog during their absence, and back up arrangement in their respective offices - thus, formulated the 'strategies'. They did as they planned and also adjusted in between the vacation due to an unexpected call from one of the dear ones - thus, they executed the strategy and also adjusted mid-course based on the situational demand. 

In my experience such simple examples strikes a cord with most of the people, which increases their participation which in turn increases the inputs (badly needed by any business).

Learning from recession

There are two ways to study the current recession - either to cast it as an accident, mishap, or misfortune and try to recover from the shock by using all possible therapies available and forget about it following recuperation. Or it can be likened to any natural cataclysmic event, such as storm, earthquake, tsunami, or forest wildfire, which are nature's way of cleansing the system and creating stronger subjects. Werber, global CEO of Saatchi & Saatchi, believes that recessions are like forest wildfires - a rush of destruction that affects everything in their path.

In a forest fire, destruction leads trees to adapt better for future fires by developing characteristics like self-pruning, thicker barks, and deeper roots. Similarly, companies need to look at a recession as an opportunity to lose all the flab, find its true purpose, and develop staff to engage them in the purpose of the company. Companies also need to understand that the playing ground post-destruction will be different. Consumers demand will not be the same. The companies which can foresee the changed scenario will be better placed than their rivals. Pepsico, the world's leading soda-producer, shifted its focus to healthy products - Quaker Oatmeal, Tropicana juice - from its soda based products, sensing the changing consumer preferences.

Thus, recession makes companies aware of their inefficiencies, teaches them to be better prepared and makes them change proactively. And the result of this recession will not only be destruction, but a leaner and more efficient group of survivors.

(Ir)rational Pricing Strategies

Behavioral economics has always been influential in shaping managers' decisions. Findings by the behavioral economist, Dan Ariely, in his book Predictably Irrational gives three different pricing tools to managers.

1) CONTEXT:

“most people don’t know what they want unless they see it in context.”
- Dan Ariely – Predictably Irrational

Offer customers three options at different price levels - the middle one being the one you want them to  buy. This helps the customer to compare and decide within the context.

2) DECOY:

Decoy pricing is giving customers three choices; 1) The product you want them to buy at the price you want them to buy, 2) A slightly inferior product at a slightly lower price (the decoy), and 3) a similar product but not quite the same as what the customer wants.

You know the customer won’t choose option (3) and you don’t want them to choose it anyway. You include this choice in the mix for two reasons, to give the customer a third choice and to focus the customer on the choice you want them to make between option (1) and (2).

Why do this? Ariely found that people...

“tend to focus on comparing things that are easily comparable, and avoid things that cannot be compared easily.” And remember, “people don’t know what they want unless they see it in context.”

Offering customers three choices allows them to put things in context. Ariely also surmised that decoys help people make decisions, and his experiments showed that when faced with a decision between two similar products people will most often choose the slightly better product, even if it costs slightly more.

3) ANCHOR:

Ariely found that “once we buy a new product at a particular price, we become anchored to that price. But price tags by themselves are not necessarily anchors. They become anchors when we contemplate buying a product or service at that particular price. That’s when the imprint is set. From then on, we are willing to accept a range of prices but as with the pull of a bungee cord, we always refer back tot he original anchor. Then the first anchor influences not only the immediate buying decision but many others that follow.”

So the strategy should be to set the anchor at higher levels.

What is striking in all of the above three findings is that they contradict the conventional wisdom of value pricing, where the customer is assumed to be a better judge of value of a product or service.

Organizational Alignment

When the resources of an organization are not applied effectively with its vision / mission, the organization is not aligned and as per research more than 50% of the organizations are not aligned. I have heard many middle managers complain (senior mangers confide) about the non-clarity around vision / mission / goals and most of them are aware of the disconnect between their daily actions and the vision of the organization. I have observed that several definitions of vision, mission, and goals blur the distinction instead of creating clarity, also being one of the causes of disconnect. One effective way to communicate the difference, that I have found useful, is the following triangle (I am not sure of the source, probably Gary Harpst book).   

Thus, the first step to bring the alignment in the company is to ensure that the vision / mission / goals and plans are well communicated and understood within the organization. Subsequently to the basic step of vision, mission clarification, a six-step plan by Marshall Goldsmith is quite useful in aligning, where he suggests having meetings with direct reports every quarter and to ask them following questions -

1. Where are we going?
2. Where are you going?
3. What are you doing well?
4. What changes can lead to improvement?
5. How can I help?
6. What suggestions do you have for me

This method allows the leader to inspect and re-set the priorities if required by the changes in the business environment. Thus, keeping the organization aligned.

Circular Growth

The principles of Economics are ever evolving and the current crisis we are going through is bound to bring forth some fundamental changes in the way we think about the 'economics of growth'. It is clear that the current principle of ever lasting growth quarter on quarter is one of the root causes of greed infested reckless behavior that led us to this crisis. Probably we are in the evolutionary stage where new principles will be tested. One of such interesting principle is proposed by Stan Stalnaker where he suggests adopting the principle of growth followed by human cells i.e. 'circular growth', a patter of development, replacement and renewal that can be maintained indefinitely. It makes immense sense as in the human body the only cells that grows constantly are cancerous cells. Stan has also referred couple of companies - one brewery in India and a wood furniture maker in Switzerland - which are following 'circular growth' economics. Time will tell if we make this evolutionary shift on the back of current crisis or resort to same old methods post-crisis (awaiting another crisis!).