Category Archives: Strategy

While You’re Celebrating Your Thanksgiving in the U.S.

Think about what you can do to make the rest of the world, including the 870 Million people in the world who are chronically under-nourished, thankful as well.

As Procurement Pros, you have a lot of control over the global food supply whether you realize it or not. Money does talk, and with enough pressure, the supply chain will walk to your marching orders. And if those orders are appropriate, maybe we can prevent half of the food being produced going to waste.

According to The Food and Agriculture Organization (FAO) of the United Nations, roughly 1/3rd of the food produced in the world for human consumption every year, approximately 1.3 Billion Tons, gets lost or wasted — due to losses during harvesting, storage, transport, and processing. This loss is almost four times what would be needed to feed all of the chronically under-nourished people in the world, and part of the reason food reserves are at an all time low.

And to make matters worse, the growth, and partial harvesting, storage, transport and / or processing produces 3.3 Billion tons of CO2 emissions and wastes precious water and energy resources. So, not only are people starving when there should be enough food, but we’re wasting limited fresh water and energy in the production of the food that is being wasted.

In developing countries, 40% of this loss is occurring at post-harvest and processing levels due to financial, managerial, and technical constraints in harvesting techniques as well as storage and cooling facilities. Additional infrastructure investments would solve the financial and technical issues, and getting smart people on the ground would solve the managerial issues. If a large grocery chain decided to invest on the ground, and reduce loss from an average of 35% to 10%, it would effectively increase production by almost 40% and lower the cost per unit by almost 30%. (Production levels go from 65% to 90%. 40% of 90% is 36%. 30% of 90% is 27%.) This is not a hard problem to solve. And it wouldn’t take too long before the grocery chain saw ROI.

In developed countries, more than than 40% of losses happen at retail and consumer levels. Faster transport, better storage, and better inventory planning could have a big impact at the retail level. The only thing a Procurement Pro can’t really control is consumer waste.

So think about what changes you can make in your organization to minimize food waste and encourage investments on the ground in the regions, and on the farms, you depend on. And when costs go down, your organization will have something to be thankful for too!

What Do Bid Optimization and Corporate Strategy Have in Common?

Last month, Pierre penned a very interesting piece over on Spend Matters when he asked What Do Bid Optimization and Corporate Strategy Have in Common and answered Everything. SI doesn’t entirely agree, but definitely agrees that bid optimization and corporate strategy have a significant amount in common.

Pierre is 100% correct when he says that people who say sourcing optimization is too complex and a nice area barely used and needed by most sourcing folks are dead wrong. As Pierre says, ignorant statements like this throw out the philosophy, methodology and techniques that are behind the tool. Optimization is more than a mathematical model embodied in a piece of software — it is an encompassing process designed to make sure you achieve the most value from your efforts. It starts during the problem definition phase where you define your objectives and then figure out the appropriate model, data elements, options, methodology and measurements of success — not after you’ve collected a bunch of semi-random data.

Furthermore the methodology employed is critical and relates to corporate strategy. Pierre says the overarching methodology is corporate strategy, but SI believes that the relationship is a little more subtle — corporate strategy limits the methodologies that can be used. The objective of corporate strategy, which is a fact-based process of developing strategic scenarios and then determining how to best allocate finite resources to support various business objectives and a balanced scorecard, is to define strategies that should be “optimal” in the sense that they minimize trade-offs and are doable by the various stakeholders. The chosen strategy limits the methodologies that can be employed because only so many methodologies will support the strategy, and only a subset of those will be capable of delivering an optimal result. For example, if the corporate strategy is to dominate a foreign market, then the methodology employed must support getting more knowledge and demand for the brand, getting the product on more shelves in the market, and making it affordable for the consumers in that market. The methodologies would have to support developing advertising congruent with the market, logistics efforts that work on the ground, and cost control to insure the product could be priced to maximize sales. If the corporate strategy is to reduce costs to improve the bottom line, the methodologies would have to support better sourcing, more efficient production/distribution, and better supplier relations. With respect to better sourcing, we’re limited to strategic efforts — tactical or catalog buys are out. And with respect to cost minimization, depending on the product being sourced, where it is being sourced from, and the market dynamics, this may dictate an open auction, a multi-round negotiation, or decision optimization based upon final best bids, logistics costs, incurred and usage costs, and/or other value drivers. Optimization doesn’t always mean the most complex model you can imagine, but it does mean insuring everything you do is optimal and that every sourcing event is driven off of a lowest-cost baseline, which is easily calculated by a decision optimization solution built on a proper model. (This is because you only spend more if you get value back — whether it is better quality, marketing power through the supplier’s brand, or joint development efforts — that is at least equal to what you spend.)

And when you apply the proper methodology and process to a category, as Pierre explains, it will improve how Procurement will tap supply market power to help the stakeholders meet their objectives. After all, resources are limited, stakeholder requirements are diverse, and trade-offs and constraints are plentiful — which is the precise problem strategic sourcing decision optimization was designed to solve. And when scenarios are developed with stakeholders during the planning processed and then used to improve the robustness of the category strategy, how can you not win?

In short, corporate strategy has a lot to do with bid optimization, as it drives the sourcing strategy and model objectives, and you really can’t succeed in one without the other. They have a lot in common. Not everything, as some aspects of strategy have nothing to do with bid optimization (such as advertising tactics employed or market positioning, although other types of modelling will be used to determine the expected effects of each potential strategy), and some aspects of optimization and based purely in math and logic (which not all strategies are).

And using the two hand-in-hand makes perfect sense. So, just like Pierre, I have to ask why is it when we take this approach to a specific market basket and sourcing project, it somehow becomes an obtuse technology thing rather than just doing good strategy work? It just doesn’t make sense. Without both, you are playing a game of win, lose, or draw with a greater chance of losing or drawing then winning.

Remember, the power of “collaborative sourcing” or “market informed sourcing” is not the tool, but rather the philosophy of cross-functional teams doing scenario planning, defining what they really want as an objective, reducing or eliminating unneeded constraints, and fully tapping supply market power. The optimization tool is just an enabler, albeit a critical one.

Go, Pierre, Go.

The End of Competitive Advantage: A Review, Part III

In Part II of our review, we laid out the four rules for competing in the new landscape of temporary advantages when your organization has reached
The End of Competitive Advantage. In summary, they were:

  1. Compete in arenas, not industries.
  2. Get (out) while the gettin (out)’s good!
  3. Use resource allocation to promote deftness.
  4. Don’t try to tame temporary advantages without the support of a leadership team that believes in temporary advantages (and doing what is necessary to tame them).

Today we want to dive in to what is meant by gettin’ (out) while the gettin (out)’s good, how resources need to be viewed, and what defines a leadership team that will believe in, and support, the continuous pursuit of temporary advantages, according to the book’s author, Rita Gunther McGrath.

A company that gets while the gettin’s good focusses on continuous reconfiguration and healthy disengagement to constantly move from one temporary advantage to another. The reconfiguration process can be thought of as the secret sauce that allows a company to remain relevant in a situation of temporary advantages, because it is through (this) reconfiguration that assets, people, and capabilities make the transition from one advantage to another.

A company that is continuously reconfiguring is constantly morphing. Instead of (extreme) downsizing or restructuring, the plagues of companies that try to hold onto competitive advantages that aren’t sustainable, continually morphing companies shift resources from one wave of temporary advantage to another, as needed. Business units are replaced by opportunities managed by appropriate leaders, execution strategies are adapted to the situation, and the wave rises and falls with the transient nature of the competitive life cycle of the arena. In the beginning, resources are assigned to define and develop the product. When production begins, more resources are assigned. When it’s time to launch, support resources are assigned and added as needed until the product peaks and R&D resources are taken off to being work on the next wave. Once the peak is reached, resources are successively taken off of the wave and assigned to other waves where they can add more value. At some point, the product line, and support, is ended or sold off, the remaining resources are reassigned, and the leadership team is refocussed on other projects.

As the temporary advantage wanes, the leadership begins to look at disengagement strategies in an effort to identify the one(s) that it will pursue. The right strategy for disengagement is typically defined by the value of the capability and the time pressure. If the capability is in decline and there is little time pressure, the leadership team will probably choose to run-off and be well paid to maintain support for customers while decreasing investment. However, if the capability is core to the future of the business and the time pressure is intense, the leadership will have no choice but to pursue a hail mary and divest formerly core capabilities as part of an effort to find a new core to migrate too. For example, if you were in film processing when everyone went digital, you found a new core or you filed for bankruptcy. In between these extremes, the company may pursue an orderly migration, garage sale, fire sale, or last man standing disengagement strategy.

A company that competes in arenas can only win if it is innovative and deft. A company deft at resource allocation follows the new strategy playbook for resource allocation. This means the following:

  • It manages resources centrally, not in business unit silos.
  • It organizes around opportunities, not an organizational structure.
  • It aggressively and proactively retires competitively obsolete assets, and moves the talent that was supporting them to new opportunities.
  • It has a real options mind-set structured around variable costs and flexible investments.
  • It’s all about parsimony, parsimony, parsimony. It invests only when the time is right.
  • It knows that access trumps ownership.
  • It leverages what is available, wherever it is. Inside or outside, it doesn’t matter.

When it comes to innovation, it has more or less mastered the process. It has obtained a level of proficiency where innovation is ongoing, fueled by an ideation pipeline, and supported by the leadership team that spins up new operating groups as needed to explore potentially viable ideas, and that then spins them down, without negative repercussions to the team, if it is later determined that they are not sufficient to conquer the target arena(s). There are no failures, just learning experiences that guide, and increase the chances of success of, the next idea.

The book also summarizes a process for managing the ideation and innovation process, which was outlined in more detail in the author’s previous co-authored book on Discovery-Driven Growth, the core competencies required by the leadership team, and what transient advantage means for your, personally, but we’ll leave that to your review of the book.

This three-part review concludes with the statement that this book, packed with relevant examples and case studies, not only makes a great case for transitioning away from sustainable advantage strategies when the industry your organization was operating in no longer supports them, but also does a great job in laying out the rules and framework your organization will have to adopt if it wants to ride the waves of temporary advantage that will otherwise wash it out to sea if it’s not prepared. It is well thought out, well written, and a must read for anyone that wants to adapt to the constant change many business have to, and will soon have to, cope with. I recommend this for any business leader that wants to stay on top of her game (because even if she has a sustainable advantage today, it may wither tomorrow) and strongly recommend this for every Supply Management professional because history has shown that supply chain advantages (which depend on labour costs, the price of oil, global market dynamics, etc.) are always temporary.

The End of Competitive Advantage: A Review, Part II

In The End of Competitive Advantage, the first rule Rita Gunther McGrath lays down is to compete in arenas, not industries. Using a typical strategy playbook, a company will define its most important competitors as other companies within the same industry. This doesn’t make sense when industries compete, business models compete, and new categories appear. For example, FujiFilm’s biggest competitor was not Kodak and its stranglehold on film distribution channels in many markets, but Sony and other future manufacturers of digital cameras that negated the need for its products! Industry level analysis needs to be replaced with a level of analysis that reflects the connection between (target) market segment, (product/service) offer, and (target) geographic location(s). This intersection is an arena. The middle-class end consumer (market) in North America (geography) who uses a mobile phone (product offer) is one arena. Small Businesses (market) in Asia (geography) who need cellular high-speed internet (service offer) is another. For those of you with military or defense experience, battles are fought in particular geographic locations, with particular equipment, to beat particular rivals. Today’s business needs the same level of precision in its strategy to compete. To use the author’s metaphor, the game of chess has been replaced with the Japanese game of Go.

The next rule that Gunther McGrath lays down is to focus on temporary, not sustainable, competitive advantages. To coin a popular phrase, you need to get while the gettin’s good, because it won’t be good for ever. (This also means you need to plan to get out while the gettin’ out’s good.) Your organization needs to rive the waves of temporary advantage. In each wave it needs to design a new product or service that will define the next arena it will successfully compete it, launch that product, ramp up, exploit the temporary advantage the product or service gives it, begin to exit (and re-allocate resources to the next wave), and then disengage (by discontinuing the product, upgrading the customer to a new product, or selling the product line off). Business that focus on temporary sustainable advantages are in a state of continuous reconfiguration and masters of healthy disengagement.

The third rule that comes across loud and clear in Gunther McGrath’s book on The End of Competitive Advantage is to use resource allocation to promote deftness and build an innovation proficiency. In order to ride the waves of temporary advantage successfully, an organization has to constantly innovate the next product and/or service that will take it into the next arena and it has to do so with agility and grace — which requires a deftness in resource allocation not present in an average organization. In an organization that has mastered resource allocation for temporary advantages, resources are under central control, and not business units, and can be reallocated as needed. They are organized around opportunities, accessible when needed, and may even be external to the organization as access, and not ownership, is key.

The fourth, and final rule that can not be broken is that you must have the support of the leadership team that must believe in the rules and processes required. Gunther McGrath’s playbook will not work without the support of a leadership team that believes in it. An organization cannot be reconfigured to ride the waves of temporary advantage as a skunkworks project or a one-off. Without full leadership support, it will be impossible to dynamically reallocate resources from one arena to another, to engage with (and disengage from) new (and old) opportunities as the markets shift, to get support to leverage external resources when time is of the essence, etc. If people are still stuck in business units, if opportunities are force-fit into age-old structures, and the CFO is still capital-budgeting against sustainable advantages, there is no way your organization will be able to move from one temporary advantage to another (and if your organization is competing in an industry where there are no more sustainable advantages or an industry that is shrinking by the day due to cannibalization from other industries and external business models, it’s time is running out). Not only is this a playbook only for those companies that no longer have sustainable advantages to exploit, but it is also only a playbook for those willing to adapt to a new operating reality.

In Part III, we’ll dive into continuous reconfiguration, disengagement options, and building an innovation proficiency.

The End of Competitive Advantage: A Review, Part I


Strategy is stuck. If you dropped into a boardroom discussion or an executive team meeting, chances are you’d hear a lot of strategic thinking based on ideas and frameworks designed in, and for, a different era. The biggies — such as Michael Porter’s five forces analysis, BCG’s growth-share matrix for analyzing corporate portfolios, and Hamel and Prahalad’s core competence of the firm — are all tremendously important ideas. Many strategies today are still informed by them. But virtually all strategy frameworks and tools in use today are based on a single dominant idea: that the purpose of strategy is to achieve a sustainable competitive advantage. This idea is strategy’s most fundamental concept. It’s every company’s holy grail. And it’s no longer relevant for more and more companies.

     Rita Gunther McGrath, The End of Competitive Advantage

Consider the following case study of Fuji Photo Film Company and its inauspicious beginning in the 1930s when it was divested from Japan’s first cinematic film manufacturer because it was a chronic under-performer. Over the years, it improved its reputation and eventually began to take on giants such as Eastman Kodak in film and film processing. However, as the market for chemical-based photography changed little during the past hundred years, Fuji struggled to break into markets where Kodak was entrenched.

In the 1970s, Nelson Bunker Hunt and William Herbert Hunt made a play to corner the silver market as a hedge against inflation. They started to make investments in 1973, when silver was only $2 an ounce. By early 1979, the price had risen to $5 an ounce. By the time their plans were announced in 1979, they had amassed roughly half of the world’s supply. Their announcement caused the price of silver jumped to $50 per ounce! When the price collapsed in March of 1980, the Dow Jones Industrial average saw one of the sharpest declines in history.

The experience deeply troubled Minoru Ohnishi, the CEO of Fuji Photo Film, as silver was a key ingredient in film processing and another similar action could seriously damage any film processing business. Furthermore, he sensed a fundamental change might be coming. Four years later, Sony introduced the Mavica, one of the the first consumer digital cameras, and Mr. Ohnishi knew that film-less technology was possible. He immediately moved on the insight and invested heavily in building up expertise in digital technologies to prepare for the next round of competition in the photography business. By the end of 1999, the company had invested over 2 Billion in R&D and by 2003, it had nearly five thousand digital processing labs in chain stores in the US whereas Kodak had less than 100.

In addition, the company branched out and started to supply magnetic tape optics, hybrid electronic systems, and videotape (as the first non-US company to do so). Later still, the company branched into office automation and even biotechnology. Thirty years later, Kodak went bankrupt and Fujifilm, which obtains 45% of its revenue from document solutions and office printers, has significant electronics and healthcare operations.

The lesson is that simply managing well, developing quality products, and building up well-recognized brands is insufficient to remain on top in increasingly heated global competition. The stakes for Fujifilm, which risked undermining its existing advantages while betting on a highly uncertain future, were huge. But it was this approach, investing in new advantages and pulling resources from declining ones, that was more robust in the face of change. When competitive advantages don’t last, or last for a much shorter time, the strategy playbook needs to change.

And that’s what this book is really about, adapting to a changing competitive landscape in our modern, globally connected, world. In some industries, like logistics, products and services change slowly and competitive advantages can last for a long time. But in other industries, such as fashion and consumer electronics, products change quickly and competitive advantages last only until your competitor releases a new model with a feature your last product didn’t have. In these industries, where advantages are transient, a firm needs new rules and new models to determine where to compete, how to compete, and how to win. The old models don’t work, or at least don’t work on their own. In Part II, we’ll begin to discuss how an agile organization deals with the transient landscape.