Strategy is Not Always an Academic Pursuit

And a consideration of market leading companies should put this into perspective. the doctor was reminded of this while reading a recent piece over on the HBR Blogs on “Apple Versus the Strategy Professors” where the author noted that the how of Apple’s fall (or continued rise) will hinge on strategy — because strategy has driven its success.

In the article, the author referenced Michael Porter, famous for his five force analysis, W. Chan Kim and Renee Mauborgne, and their blue oceans, Clayton Christensen, and his disruption model, Michael Raynor, and his successful growth strategies (co-devised with Clayton Christensen), Carl Shapiro and Hal Varian, and their information economy, and Amar Bhide, and his hustle. He then illustrated how Apple has drawn on the teachings of all of these professors (of the Harvard Business School, INSEAD, UC Berkeley, and Tufts) to achieve their transformation and market leadership of the last decade.

It does a great job of demonstrating how strategy is key to success, and, more importantly, how strategy has to be taken beyond the classroom to be effective. Apple didn’t subscribe to any one philosophy or methodology, it borrowed from the teachings of all of the greatest management and strategy thinkers of our time and incorporated those that made sense. But it didn’t do so randomly.

What Apple really did, and what you need to do if you want to ensure consumer success, is figure out what your customers need and give it to them before they have figured out what they need. It took note of what it could do, and then searched for products that would fulfill what people wanted in blue oceans. For example, going back to the iPod, it realized that consumers wanted a portable music device that was easy to use AND easy to manage.

At the time, the mp3 players available were few, used different, proprietary operating systems, and were difficult to use. Furthermore, even if you weren’t a computer geek, getting music on and off was a pain in the backside, and the whole experience — compared to popping a cassette into a Sony Walkman — was unpleasant. Apple realized that people needed an end-to-end solution — a great device, a great software tool for managing the device, and, equally important, an easy way to acquire legally licensed music in the appropriate format. Hence, it developed, and released, in order, iTunes for easy mp3 (and device) management, the iPod, and, finally, the iTunes Store that negated the need to get music from third parties. It was an end-to-end solution that even the most novice of computer users could master — and it was cool. Market dominance was just a matter of time.

While your customer might not be able to tell you what they want when you ask, they know it when the see it and, if you listen, can give you lots of hints. For example, Apple’s future customers were saying things like: “I want my music on the go.”, “This portable music player is cr@p., and How do I manage a library when all I can see is 1 song at a time.” “I can’t figure out how to get the music files I buy from Mperia onto my mp3 player.” All they had to do was listen closely, come up with an entirely new solution that met all the most common wants, and find a way to make it desirable (cool, sexy, fun, etc.). Yes, that’s a tall order — but not that tall when you think about it.

And when you figure out not only what your customers want, but what you are going to give them to make them want your product over the competition, that’s when your supply chain can really give you an edge by getting involved early in the NPD (new product design) effort and finding creative and innovative ways to keep costs down, quality up, and value-add at the right level for maximum reward.

How Do You Identify a Stellar Supplier?

Relating to Wednesday’s post where we asked what is necessary to get a grip on risk before outsourcing to a new supplier, you also want to know how you can identify who is likely to be a stellar performing supplier in the first place. This is also a difficult question, but if you approach the subject from a supplier performance leadership perspective, you have one good starting point, which is mentioned in this recent article over on SIG on “why supplier performance management should be supplier performance leadership” .

Specifically, you look for a supplier that actively self-manages. You want a supplier which measures and reports its own performance against SLAs and KPIs, identifies the corrective actions it needs to take, devises a plan to put those actions in place, and then promptly informs you when it has determined that it is not meeting its targets with an outline of the corrective actions it intends to take, when they will be implemented, when it expects to improve, and when you will get a follow-up report. The supplier should want to not only meet the expectations placed on it, but get to the point where it can exceed those expectations before the contract comes up for renewal. In short, a supplier that talks the talk when it comes to customer service is good, but a supplier that walks the walk is better.

Secondly, you should look for a supplier that wants to collaborate. While it’s great to have a supplier that will bend over backwards to give you anything you want, if what you want is inefficient and costly, it’s better to have a supplier who will work with you to jointly identify opportunities for efficiency improvements and cost reductions. You need to remember that most of the smart people are outside of your organization, no matter how big you are, and if you want to out-innovate the other guy, you have to use all of the know-how available to you up and down your supply chain. There’s a reason the big buys have set up innovation networks to tap external parties — they know they can only do so much. The real winners in today’s economy are not necessarily those that can innovate, but those that can identify the right innovations to incorporate into their products and services at the right times to maximize profit.

And while this may not be everything you should look for in a perspective supplier, if you want a supplier that will lead the pack, this is where you start.

There is a Spend Rule of Three

But the Third Spend Savings may not be for thee.

Backing up, I’m referencing a very interesting article published in SIG’s recent newsletter on “Spend Management’s New Norm: Uncovering Big Third Spend Savings” by Mark Walsh, CEO of FedBid. According to Mark, the best way to slice, dice, and categorize spend is not to get bogged down in category taxonomies, spend thresholds, savings potential, transactional analysis, supply risk, etc. — but to simply categorize spend by the Spend Rule of Three.

Mark defines the “Spend Three” as:

  • Strategic Spend
    the largest category of spend that typically accounts for 80% of organizational spend across 20% of vendors and service providers
  • Catalog Spend
    the smallest category of spend that typically accounts for less than 10% of fixed-price transactions on credit lines, p-cards, and employee expense reports
  • Third Spend
    the middle category of spend that accounts for 10% to 20% of spend that accounts for the bulk of indirect, or tail, spending (in a non-service oriented organization, as indirect and service spend will be much higher in finance and other verticals that don’t produce physical goods)

According to Mark, the greatest savings opportunity will generally be in the Third Spend category as most organizations will have a good grip on strategic spend, where they focus all of their efforts, and catalog spend, where they will have fixed price contracts and where savings opportunities, due to such low volumes, are inconsequential. Specifically, he believes that this category represents an average savings opportunity of 11%, which is not unexpected as it is consistent with recent findings by Aberdeen, AT Kearney, CombineNet, and others over the last few years. But the savings are only there if the spend is not under management, you haven’t spent time strategically negotiating the contract, and the purchase volume is high enough to be attractive to at least one supplier.

The reality is that savings opportunities will not neatly fit into any one category, and will depend on a number of factors. How much you’re paying, the current market price, supply vs. demand, energy prices, requirement flexibility, innovation and creativity, just to name a few factors. For example, that category you’ve strategically sourced five times in the last two years might still be a huge savings opportunity if a new production technology just hit the market that allows a supplier to cut production costs by 20%. You need to do a high level analysis across all categories to identify where the greatest opportunities likely lie, not just focus on the third spend. While there are probably some big savings to be had, the biggest savings lie where you’re spending the most in a manner that’s the most off of optimal. Don’t forget that … and if by some chance you’re not one of the thousands of readers who have already downloaded Spend Visibility: An Implementation Guide a free e-book by Sourcing Innovation and Lexington Analytics that is the definitive book on next level performance, do so today. It’s worth your time.