Mediocre people occupying senior Leadership positions is one of the chief reasons for the fiasco and humiliation that organizations like Enron and WorldCom faced.  The practice of recruiting average people at the top is omnipresent and often goes unnoticed until the results begin to surface, which is typically too late for any intervention.

Smart people decisions matter a lot in achieving profitability.  Research indicates that a return on average human asset of 5% is typical in many industries.  However, a senior executive selection of 2 standard deviations below the average yields -15% return on asset.  An executive selection with 2 standard deviations above average causes 25+% return, which is 5 times the average.  Increased investment in finding and hiring the best senior executives fetches returns to the magnitude of 1000%.

Attracting and selecting the best people for senior leadership positions isn’t a small feat.  The future of organizations depend on it.  However, not too many organizations succeed in getting the right people at the top.  The reason for this failure is attributed predominantly to 3 critical obstacles that hinder in making the right recruitment decisions at such a crucial level.  Wrong Executive Selection decisions due to these 3 obstacles bring about losses and negative returns:

1. Obstacle of Rarity
2. Obstacle of the Unknown
3. Obstacle of Psychological Traps

Let’s talk about these obstacles in a bit of detail.

Obstacle of Rarity

The first barrier to finding outstanding executives for senior positions is their scarcity, as excellent executives are a rare breed.  Sophisticated skills that make an executive standout aren’t common.  They are distributed in a given sample.

Outstanding people perform at a much higher level than that of their peers, particularly at the top positions.  A blue-collar executive with 1 standard deviation above the mean translates to 20% more productive individual than an average executive.  With increasing complexity of job, the difference between the top performer and an average performer increases considerably.

Appointments at the senior positions do not go without assessment errors, which can prove to be extremely costly.  Even an accuracy level of 90% in executive assessment isn’t satisfactory.  This results in a number of mistakenly categorized top performers and rejection of outstanding candidates.

Obstacle of the Unknown

Another barrier to the Executive Selection process is the predictive assessment of candidates on the skills and attributes required and the actual delivery capabilities of the individuals.  It is difficult to assess the unknown.

Competencies at the junior levels are easier to define, but it gets difficult to pinpoint the skills required at the top level.  The skills required at the top keeps on changing due to the evolving political, technological and economic landscape.  The skills required today get obsolete over time.  In case the exact requirements for a position are fully known, it isn’t certain whether a candidate meets the requirements in their entirety.

Accurate assessment of the candidates’ behavior and competencies is difficult but worth investing efforts and resources.  “Soft” skills—e.g., leading people, coaching and developing teams, teamwork, and managing Business Transformation—are what differentiate the senior leaders, but gauging these skills necessitates thorough evaluation and considerable time, which is difficult at senior levels.

Obstacle of Psychological Traps

A number of psychological traps are associated with cognitive biases in humans that hinder the decision making abilities in people and incapacitate the hiring process.  8 types of psychological traps are most common in individuals:

• Procrastination
• Assuming incorrectly
• Impulsive judgment based on first impressions
• Discounting the warning signs
• Covering mistakes
• Bonding with familiarity
• Emotional anchoring
• Tendency to follow the majority

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A job consists of various critical elements that are essential to achieve enterprise outcomes—i.e., talent and behavioral requirements, role, and responsibilities.  Jobs that are configured inadequately bread disputes, negative perceptions, inequality, and frustration.  On the other hand, structured jobs, appropriate distribution of work, justified authority levels, and correct estimation of value of individual jobs are the signs of effective Human Capital Management function.

The lack of a structured job design—or ill-defined jobs—renders the organizations ineffective and burdened with excessive staffing and payroll costs.  This warrants from the leadership to plan and undertake a Job Leveling initiative.  Job Leveling is a disciplined approach to gauge the value of work for individual positions across the organization.  It entails ascertaining the nature of work done by each position, authority levels, and the effect of each job on business results.  The initiative is critical in administering rewards structures.

However, Job Leveling is a concern at most organizations—not many people are satisfied with the value assigned to their roles.  The absence of proper—or inadequate—job levels yields grave consequences for the entire organization.  Jobs valued higher than their actual value lead to wastage of resources, whereas low valued jobs are perceived as offensive and inculcate demotivation.

Job Design and Job Leveling is essential when organizations consistently encounter these issues:

• Constant employees complaints and demands to reclassify jobs
• Excessive job titles
• Widespread dissatisfaction with remuneration
• Task / processes redundancy
• Financial outflow
• Staffing imbalances and top heavy structure

Workforce planners should use a Job Leveling Framework to methodically benchmark the value of jobs at their organizations.  To accomplish this, they need to first analyze all the activities required under each position, the professional competences and demeanor essential to perform those activities, and gauging the effect each position has on business results.

Implementing a Job Leveling Framework simplifies the allocation of jobs in a harmonized job hierarchy, establishes consistency across the HR Initiatives, develops clear paths for growth, and improves decision making.

Human Resources practitioners need to follow these 5 key phases to implement a Job Leveling Framework and structure job levels at their organizations:

1. Ensure Readiness of Pre-Implementation Groundwork
2. Engage Business Leaders in Implementation
3. Set up Clear Governance Structures
4. Employ User-friendly Job Evaluation Management Tools
5. Establish Clear Communication Mechanisms

Let’s dive deeper into the first 3 phases of the Job Leveling Framework Implementation, for now.

Ensure Readiness of Pre-Implementation Groundwork

Human Resource practitioners should first analyze their existing job architecture, job natures, roles and responsibilities, and Organizational Culture to initiate the Job Leveling process.  Specifically, they have to answer these queries to identify the right Job Levelling method:

• What is the key objective to be achieved by implementing the Job Leveling initiative? Is it to improve compensation, shape career paths, or alleviate pay equity concerns?
• Who will be the users of the Job Leveling system? Will it be managed by Human Resources experts or business leaders?
• The Job Leveling exercise will impact which employees? How many roles, their nature of jobs, locations?
• Define the organizational culture and values. Is it hierarchical, centralized, or cost-focused?

Engage Business Leaders in Implementation

Effective Job Levelling Implementation necessitates involvement of business leaders from the onset of the exercise.  Engaging business managers and employees can hold back the pace of implementation because of conflicting views and ideas, but this is essential for the success of Job Leveling.  The right engagement involves:

• Getting agreement and support from senior business leaders.
• Including business leaders in calibration of key roles for support later during execution phase.
• Coaching key line managers and including them in job evaluation sessions to ensure adequate understanding of the roles and to develop program sponsors during implementation.
• Including key employees during the design phase of Job Leveling to remove any suspicion and win their agreement.

Set up Clear Governance Structures

Establishing effective control mechanisms is essential to avoid any glitches in implementing coherent job levels.  Job Leveling initiatives in large multinational corporations fail because of dearth of appropriate governance mechanisms in place.  A few organizations adopt centralized controls whereas others employ decentralized, locally-driven governance protocols.  To execute clear yet robust governance mechanisms, organizations should follow these key tenets:

• Governance principles should correspond to the organizational culture.
• Stakeholders should be held accountable with clear roles.
• Authorities should be assigned to ensure proper control mechanisms.
• All concerned people should be engaged in the initiative.
• Decision making authorities should be clearly defined.
• Resources should be effectively deployed.
• Promote fairness by applying rules equally, or if not, rationale is clearly explained.

Interested in learning more about the other phases of Job Leveling Implementation and Job Leveling methods? You can download an editable PowerPoint on HR Strategy: Job Leveling Framework Implementation here on the Flevy documents marketplace.

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Inadequately structured jobs create disputes, negative perceptions, inequality, and frustration among employees.  On the other hand, well-articulated jobs, appropriate distribution of work, justified authority levels, and correct estimation of value of individual jobs elevate employee engagement levels, productivity, and job satisfaction.  Organized job levels are a sign of effective Human Resources Management function.

The lack of a structured job design—and ill-defined jobs—renders the organizations ineffective and burdened with excessive staffing and payroll costs.  This warrants from the leadership to plan and undertake a Job Leveling initiative.  Job Leveling is a disciplined approach to gauge the value of work for individual positions across the organization.  It entails ascertaining the nature of work done by each position, authority levels, and the effect of each job on business results.  The initiative is critical in administering rewards structures.

However, Job Leveling is a concern at most organizations—not many people are satisfied with the value assigned to their roles.  The absence of proper—or inadequate—job levels yields grave consequences for the entire organization.  Jobs valued higher than their actual value lead to wastage of resources, whereas low valued jobs are perceived as offensive and inculcate demotivation.

Job Design and Job Leveling is essential when organizations consistently encounter issues, such as:

• Constant employees complaints and demands to reclassify jobs
• Excessive job titles
• Widespread dissatisfaction with remuneration
• Task / processes redundancy
• Financial outflow
• Staffing imbalances and top heavy structure

Workforce planners should lay out a clearly-defined Job Leveling Framework to tackle these issues and methodically benchmark the value of jobs at their organizations.  To accomplish this, they need to first analyze all the activities required under each position, the professional competences and demeanor essential to perform those activities, and gauging the effect each position has on business results.

The 4 core benefits to developing and executing an efficient Job Leveling Framework include:

1. Establish Consistency across the Human Resource Initiatives
2. Develop Clear Paths for Career Growth
3. Improve Ease of Administration
4. Increase Flexibility for M&A

Let’s delve deeper into 3 of these benefits, for now.

Establish Consistency Across the HR Initiatives

A standardized job evaluation approach enables a consistent job structure terminology.  It makes communication and Job Leveling related decisions easier.  A Job Leveling Framework aids in defining relative placement of various jobs, using elements, such as, knowledge, problem solving, interaction, impact, and accountabilities.  Alignment of jobs through a Job Leveling Framework helps in developing consistency across other HR initiatives and make better talent related decisions.

Develop Clear Paths for Career Growth

Organizations use clear career pathways to enhance employee engagement, meet employee expectations, and provide opportunities for their development.  A Job Leveling Framework provide clear-cut job structure to inspire the employees.  Career pathways developed through Job Leveling Framework helps the leaders as they strive to improve the amount of mobility across teams, units, and divisions.

Improve Ease of Administration

A Job Leveling Framework assists in developing efficient methods to administer HR initiatives.  A Job Leveling Framework enables improved efficiencies and decisions related to key talent and their work.  For instance, it streamlines pay grades and salary structures; standardizes job titles; simplifies short-term incentive criteria and objectives definition; and structures long-term reward eligibility criteria and nominations.

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Organizations typically focus on Customer-centric Design in their Strategic Planning and overlook the critical driver of Performance, Growth and Operational Excellence—their employees.  With cut-throat competition now the norm the realization has become clearer that employees are:

• The face of the business and create lasting—or perishing—brand impression.
• Sources of innovation and organizational knowledge.
• Representation of the company’s service philosophy.
• Expected to live by its Organizational Culture and values.

Employee Engagementhas emerged as one of the significant pillars on which the Competitive Advantage, Productivity, and Growth of an organization rests.  What, exactly, does it mean when an employee is engaged?  Employee Engagement, over the years, has been thought of in terms of:

• Personal engagement with the organization.
• Focus on performance of assigned work.
• Worker burnout.
• Basic needs (meaningful work, safe workplace, abundant resources).
• Attention on Cognitive, Emotional and Behavioral components related to an individual’s performance.

Although Employee Engagement is widely seen as an important concept, there has been little consensus on its definition or its components either in business or in the academic literature.

Kumar and Pansari’s 2015 study define Employee Engagement as:

"a multidimensional construct that comprises all of the different facets of the attitudes and behaviors of employees towards the organization".

The multidimensional construct of Employee Engagement has been synthesized into the following 5 components (or dimensions).

1. Employee Satisfaction
2. Employee Identification
3. Employee Commitment
4. Employee Loyalty
5. Employee Performance

The 5 dimensions of Employee Engagement have been found to have a direct correlation with high profitability, as substantiated by a number of research studies:

For instance, a study of 30 companies in the airline, telecom and hotel industries shows a close relationship between Employee Engagement and growth in profits.  After controlling other relevant factors—i.e., GDP level, marketing costs, nature of business, and type of goods, the study found:

• Highest profitability growth—10% to 15%—in companies with highly engaged employees.
• Lowest level of profitability growth—0% to 1%—in companies with disengaged employees.

Research reveals that Employee Engagement affects 9 performance outcomes; including Customer Ratings, Profitability, Productivity, Safety Incidents, Shrinkage (theft), Absenteeism, Patient Safety Incidents, Quality (Defects), and Turnover.

The differences in performance between engaged and actively disengaged work units revealed:

• Top half Employee Engagement scores nearly doubled the odds of success compared with those in the bottom half.
• Companies with engaged workforces have higher earnings per share (EPS).

These 5 dimensions become the base for measuring Employee Engagement in a meaningful manner that permits managers to identify areas of improvement.  To assess an organization’s current status of Employee Engagement, a measurement system is needed that includes:

• Metrics for each component of Employee Engagement.
• A scale for scoring metrics in each component.
• A comprehensive scorecard that pulls everything together.

Let us delve a little deeper into the first 2 dimensions of Employee Engagement.

Employee Satisfaction

Definition

Employee Satisfaction is the positive reaction employees have to their overall job circumstances, including their supervisors, pay and coworkers.

Details

When employees are satisfied, they tend to be:

• Committed to their work.
• Less absent and more productive in terms of quality of goods and services.
• Connected with the organization’s values and goals.
• Perceptive about being a part of the organization.

Metrics

The 5 metrics that gauge Employee Engagement in terms of Employee Satisfaction include:

1. Receiving recognition for a job.
2. Feeling close to people at work.
3. Feeling good about working at the organization.
4. Feeling secure about the job.
5. Believing that the management is concerned about employees.

We take a look at another dimension central in significance.

Employee Commitment

Definition

Signifies what motivates the employees to do more than what’s in their job descriptions.

Details

Employee Commitment is much higher for the employees who identify with the organization.  This element:

• Develops over time and is an outcome of shared experiences.
• Is often an antecedent of loyalty.
• Induces employees to guard the organization’s secrets.
• Pushes employees to work for organization’s best interests.

Research has found that employees with the highest levels of commitment:

• Perform 20% better.
• Are 87% less likely to leave the organization.

Metrics

The 3 metrics that gauge the Employee Commitment dimension of Employee Engagement include:

1. Commitment to deliver the brand promise along with knowledge of the brand.
2. Very committed to delivering the brand promise.
3. Feels like the organization has a great deal of personal meaning.

Interested in learning more about these foundational pillars to Employee Engagement? You can download an editable PowerPoint on 5 Dimensions of Employee Engagement here on the Flevy documents marketplace.

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Traditional Talent Management practices fail to meet the high-potential talent requirements imperative to compete in the digital world today.  In fact, they disappoint the key talent available in the market.

A 2016 Digital Business research by MIT Sloan Management Review and Deloitte on 3700+ executives reveals attracting and retaining talent as the most pressing concern for organizations large or small.  The study indicates that organizations that are still using traditional approaches to manage Talent face a number of pressing challenges, including:

• Building new competencies within limited resources.
• Alignment of culture, strategic initiatives, human capital, and hierarchies with organizational objectives.
• Attracting, selecting, and retaining key talent.
• Creating robust Performance Management, compensation, and benefits systems.
• Finding and developing talent with critical capabilities—such as forward thinking, transformative vision, and change focus—alongside technical skills.
• Providing opportunities that require digital skills, to attract and keep critical Talent engaged in the organization.

One of the findings of the 2016 digital business study demonstrate that it’s both the younger as well as middle management people who tend to look elsewhere in case they don’t find opportunities to develop digital skills in their existing organizations.  Such results call for senior management to identify, evaluate, and implement more immediate and appropriate digital technologies methods to attract and retain key talent.  Leading organizations are now incorporating these Talent Transformation efforts into their Digital Transformation programs.

Research on 3700 plus Digital-native respondents further reveals leading organizations to be using a combination of 2 distinct models to manage their Talent:

1. Talent Markets for Contractors
2. Digital Tools for Employees

Let's discuss the first approach to Talent Management in detail, for now.

Talent Markets for Contractors

Acquisition of right talent necessitates fostering linkages with on-demand talent markets for the timely availability of required talent.  Many organizations seek help from on-demand Talent Markets to attract and sustain talent in the digital business environment.  These organizations pursue a flexible recruitment model using digital platforms to attract skilled contractors and consultants.  Digital talent markets can be expanded or contracted depending on the quantity of work and skillsets required.

Digital talent markets can coordinate the work of full-time employees as well as cover live activities of contractors more nimbly and reliably.  Digital platforms offer superior talent markets to assess and manage large talent pool of contractors.  A few organizations are experimenting with developing their own on-demand talent markets while some have cooperated with other organizations to share talent markets.  It’s up to senior management to decide if they want to leverage existing on-demand talent markets or cultivate their own to ensure availability of required skills when needed.  Talent markets can be nurtured using 3 best practices:

1. Manage on-demand talent markets as a community
2. Strike a balance between full-time and part-time talent
3. Create an environment where the best people want to work

Manage on-demand talent markets as a community

To make the availability of required key talent certain:

• On-demand talent markets should be considered strategic resources and cultivated carefully with future talent requirements in mind.
• Companies should devote resources and efforts to develop their own talent pool.

Strike a balance between full-time and part-time talent

Talent markets are meant to manage freelancers.  However, a few organizations have also begun collaborating with them and deploying their full-time employees to project work that is critical to build new competences.  A few considerations in this regard include:

• Companies need to strike an equilibrium between full-time and part-time talent.
• Some people prefer full-time employment while others fancy flexibility or work from home options.
• Some workforce providers even offer services of retired people with expert skills, who have proved to be a valuable asset.
• Firms can choose on-demand workforce providers to have full-time employees to maintain a steady employee base, or pick part-time contractors to handle workload surges.

Create an environment where the best people want to work

Setting up the right environment is central to attracting and retaining the best flexible, on-demand talent.  A majority of companies consider freelancers or independent contractors inferior to their permanent employees.  Organizations that want to attract great talent should think of contractors as valuable resources and treat them as such.  To get top talent, organizations need to:

• Nurture an Organizational Culture conducive to support on-demand workers.
• Devise remuneration and reward systems that value contractors and full-time employees equally.
• Create an atmosphere that offers attractive work experiences for the employees.
• Deploy people on interesting projects and allow them to experience job rotations to improve their skills sets, problem solving abilities, cross-departmental team collaboration, and improve their engagement levels.

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Enterprises worldwide face problems selecting, staffing, developing, compensating, motivating, and sustaining their key talent.  Building a sustainable Talent pipeline is quite strenuous even for large multinationals.

Replicating best practices from somewhere and applying them alone isn’t sufficient for organizations to build a Talent pipeline and achieve Competitive Advantage.  This warrants overcoming arduous challenges associated with this digital age, including:

• Adjusting to varying dynamics in global markets
• Handling the expectations of varied customer segments in different geographies
• Managing the preferences of key Talent
• Acquiring new technologies
• Building novel capabilities
• Achieving Operational Excellence by streamlining operations and improving processes
• Exploring new markets
• Devising strategies to attract, select, develop, assess, and reward top Talent.

Developing Talent Management practices helps the organizations build and retain talented people available in the job market.  The term was first used by McKinsey & Company in 1997, and it pertains to planning and managing strategic Human Capital through activities, i.e. attracting, selecting, developing, evaluating, rewarding, and retaining key people.

Executives use diverse Talent Management strategies and career pathways based on various departments, levels, and roles in their Talent pool.  Multi-year research on Talent Management practices conducted by an international team of researchers from INSEAD, Cornell, Cambridge, and Tillburg universities studied 33 multi-national corporations, headquartered in 11 countries.  The study revealed that successful Human Capital practitioners and workforce planners adopted 6 core principles.  These principles act as the 6 pillars to effective Talent Management implementation:

1. Alignment with Corporate Strategy
2. Consistency of Talent Management Practices
3. Integration with Corporate Culture
4. Involvement of Leadership
5. Global Strategy with Localization
6. Branding and Differentiation

Let’s discuss the first 3 pillars in detail, for now.

Alignment with Corporate Strategy

Integrating Talent Management with Corporate Strategy is imperative as the need for future Talent depends on the company’s long-term strategy.  Corporate Strategy should guide the identification of Talent required to accomplish organizational goals, since it’s the right Talent that drives the key strategic initiatives rather than strategic planning.

For example, GE’s Talent Management practices have been a great assistance in implementing their strategic initiatives.  The organization regards its Talent Management system as their most potent execution tool and has integrated TM processes into their strategic planning process.  To sustain its image as an innovation leader, GE targets technical skills as a priority in its annual Strategic Planning sessions.  Individual business units lay out their business as well as the Human Capital objectives in GE’s annual strategic planning sessions.  Significant time is spent on reviewing its Innovation pipeline, its engineering function’s structure, and Talent requirements.  To achieve its vision, GE promotes more engineers in its senior management than its rivals.

Consistency of Talent Management Practices

Talent Management practices must be consistent and synchronous with each other.  It is critical not only to invest in advancing the careers of key Talent but also to invest in processes to empower, compensate, and retain them.  Human Capital practitioners utilize various tools to ensure consistency of Talent Management practices, including Human Resources satisfaction surveys and qualitative and quantitative data on TM practices implementation.

For example, the success of Siemens is based on consistent monitoring of its systems, processes, and key performance metrics across its subsidiaries.  Every element of Human Capital Management is connected, continuously assessed, and linked to rewards.  This goes from recruitment of graduates each year, to their orientation, to mentoring and development, to performance evaluation and management, and compensation and benefits.

Integration with Corporate Culture

Corporate culture is regarded as important as vision and mission by renowned global organizations. These companies hold their core values and behavioral standards very high and promote them among their employees through coaching and mentoring.  They strive to embed this into their hiring, leadership development, performance management, remuneration, and reward processes / programs.  So much so that they consider cultural adaptability a crucial element of their recruitment process—as personality traits and mindsets are hard to develop than technical skills—and evaluate applicants’ behaviors and values rigorously.

For example, among other leading companies, IBM has a special emphasis on values while selecting and promoting people.  To ensure consistent values across the board, it organizes regular values jam sessions and employee health index surveys.  These sessions encourage open communication and debate on values and organizational culture and their importance among employees.

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VUCA relates to threats that people and enterprises often encounter.  The acronym reflects the constant, dramatically-transforming, and unpredictable world.  The concept originated in 1987, based on the theories of Warren Bennis and Burt Nanus.  The term was first used by U.S. Army War College to describe the volatile, uncertain, complex, and ambiguous general conditions globally.

The acronym found traction after 2002, when it was considered an emerging idea to be discussed among the strategic leadership.  The term VUCA stands for:

1. Volatility
2. Uncertainty
3. Complexity
4. Ambiguity

The 4 VUCA challenges reflect the unpredictable forces of change that affect organizations, necessitating new skills, approaches, and behaviors to mitigate them.  The 4 elements of VUCA relate to how people view the situations where they make decisions, formulate plans, respond to challenges, cultivate change, and solve issues.

VUCA is a practical code for anticipation, understanding, preparedness, and intervention in the wake of uncertainty and confusion.  One of the biggest challenges of managing in a VUCA world involves team members who resist change.  Simply training the leaders on key capabilities isn’t adequate to avoid failures resulting due to not handling the VUCA issues properly.  What differentiates sound Leadership from mediocre management is the leaders’ ability to ascertain key elements that prevent them from adopting resilience and flexibility.

In this age of disruption, Volatility, Uncertainty, Complexity, and Ambiguity are widespread.  These elements will be more prevalent across industries and enterprises in future, and if not managed properly can sap an organization’s and its employees’ strengths.

Let’s discuss these VUCA elements individually.

Volatility

The Volatility element of VUCA talks about the distinct situational categorization of people due to their specific traits or their reactions in particular situations.  People react differently in specific settings due to social cues.  Volatility describes the influence of situations on stereotypes and social categorization, which is the reason why people perceive others differently.

Two factors connect people to their social identities: Normative fit and Comparative Fit.  Normative fit is the degree that a person relates to the stereotypes and norms that others associate with their specific identity.  For example, a Hispanic woman cleaning a house does not get gender stereotypes from others in this situation, but when she eats an enchilada ethnic stereotypes emerge and the gender is forgotten.  Comparative fit relates to specific traits of a person that are prominent in certain states compared to others, which are obvious as others around a person do not have those traits.  For example, a woman in a room full of men stands out, whereas all the men are grouped together.

Uncertainty

The Uncertainty element of VUCA pertains to the unpredictability of information in events, which often occurs in the intention to indicate correlation between events.  Uncertainty is often counteracted by using social categorization (stereotypes), as people tend to engage in social categorization when there isn’t much data about an event.

For instance, when there isn’t enough information to clearly appreciate someone's gender—as in case of an author’s name when discussing written information—majority of people presume the author is a male.  Social categorization also occurs in case of a race, when people stereotype a certain race to a particular trait.  For example, basketball players are most of the time assumed as black people while golfers are expected to be white.

Complexity

The Complexity element of VUCA relates to the inter-relatedness of several factors in a system.  Complexities due to interactions and dependencies within groups and categories bring unexpected results even in a controlled environment.  There are certain identities in individuals that are more dominant than others.  Other people distinguish these identities, make their assumptions about them, and create stereotypes.  However, complexity in a person’s personality makes it difficult to socially categorize that individual accurately.

Different categories trigger in the mind of the observer, creating positive and negative perception.  It is that positive perception that the observer is more open-minded despite stereotypes and think past the target’s dominant social trait.  Complexities in social identities cause some identities to lessen the noticeability of other identities, making the targets unnoticeable and overlooked.

Interested in learning more about the elements of a VUCA environment, its mitigation, and Robert Johansen’s leadership framework “VUCA Counterweight” or “VUCA PRIME?”  You can download an editable PowerPoint on VUCA (Volatility, Uncertainty, Complexity, and Ambiguity) here on the Flevy documents marketplace.

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Strategy and execution are the 2 critical elements that drive a business.  However, leaders often struggle even with defining—let alone devising and executing—an effective strategy.  Many of those who are responsible to deal with it fall short of describing how they typically employ it.  This failure takes its roots from the fact that there is no clear path associated with strategy.

Strategy is about making sound decisions about unforeseen problems.  It’s about selecting the right options—about matters that are often quite ambiguous today but have great significance in the future—based on thorough contemplation, detailed analysis, and creative ideas.  Broadly speaking, strategy encompasses these 3 main elements:

• A vision and direction
• A certain position or pattern
• A deliberated Strategic Plan to achieve strategic goals and vision

Great strategists execute their plans, analyze the results, evaluate their actions, and perform course correction based on the outcomes.  They are not afraid of even revamping their approach entirely.  Senior leaders should clarify their understanding of the concept of strategy and draw attention to the importance of differentiating between the 3 distinct types of strategies before formulating their own course of action:

1. General Strategy
2. Corporate Strategy
3. Competitive Strategy

Let’s delve deeper into the 3 types of strategy.

General Strategy

General Strategy indicates how a specific objective will be achieved, with well-thought-out plans.  The focus of this type of Strategy is on ends (objectives and results) and means (the resources we have to achieve the objectives).  Strategy and tactics combined bridge the gap between ends and means; where Strategy deals with deploying the resources at our disposal while tactics govern their utilization.  A pattern of decisions and actions marks progress from the starting point to achievement of objectives in General Strategy.

Senior executives need to deliberate on the following questions before devising their General Strategy:

• What do we do?
• Why are we here?
• What kind of business are we?
• What kind of business do we want to become?
• What is our purpose? What are the results we seek?
• What is our existing Strategy, is it explicit or tacit?
• What Strategy and plans may bring about the results we want?
• What resources we have at our disposal?
• Are there any constraints in terms of resources that limit our actions?

Corporate Strategy

Corporate Strategy describes what a company does, the purpose of its existence, and what it aims to become.  Corporate Strategy focuses on choices and commitments concerning the markets, business, and the organization.  Corporate Strategy classifies the markets and the businesses in which a company will operate.  This type of strategy is typically decided in the context of defining the company’s mission and vision.

A detailed assessment of the existing strategy, market, competition and environment is critical for devising the Corporate Strategy.  Strategists indicate that there are critical elements that should be factored in while formulating Corporate Strategy.  These elements include product or service offerings, resources, marketing and sales approaches, manufacturing capabilities / capacity, customers, distribution channels, technology, type of market and its requirements, and revenue and profit goals.

While formulating Corporate Strategy, senior executives should consider and seek answers to the following questions:

• What is our existing Corporate Strategy?
• Is our Corporate Strategy explicit or tacit?
• What are the critical assumptions that make our existing strategy viable?
• What is going on in the market—in terms of social, political, technical and financial environment?
• What do we seek to accomplish in terms of our growth, size, and profitability targets?
• What markets we are eyeing to compete in?
• What businesses we intend to operate in?
• What locations and geographies will we compete in?

Competitive Strategy

Competitive or Business Strategy specifies for an enterprise the core reason on which it contests its rivals.  It depends on an organization’s competences, advantages, and disadvantages compared to the market and the rivals.

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Manufacturing today entails immediate yet informed decision making.  However, with increasing levels of sophistication and production, senior leadership often has limited time to make optimum decisions pertaining to the number of unanticipated issues surfacing from time to time.  These issues—if not managed properly and timely—can lead to defects and wastes.

Top global enterprises are utilizing innovation and creative ways to enable prompt decision making.  Specifically, they are using Internet of Things (IoT) to effectively handle critical aspects of manufacturing.  Successful implementation of a Manufacturing IoT system facilitates in automating key tasks, decisions and processes; curtailing scrap and rework; and enhancing productivity.

People often object to implementing an IoT system by citing other important projects that they are already undertaking and the resource and time constraints as pressing hurdles.  To work around these limitations, manufacturers can engage 3^rd party consultants having proven expertise in end-to-end successful IoT, Asset Tracking, and manufacturing systems deployment.

Implementing a Manufacturing IoT System leverages immense benefits, including:

• Enhancing the ROI of other programs under way.
• Streamlined and Process Improvement and Robotic Process Automation help prompt informed decisions.
• Managing materials efficiently.
• Adjusting to customer requirements.
• Avoiding costly mistakes and rework.

However, harnessing IoT necessitates careful deliberation and planning.  The core requirements to effectively implement a Manufacturing IoT system can be segregated into 2 broad categories:

1. Functional Requirements
2. System Requirements

Functional Requirements

Functional Requirements (FR) describe the system or its components.  FR provide a description of services that the Manufacturing IoT system must offer.  FR for Manufacturing IoT may include:

• Control Assets and Administer Asset Properties
• Track Assets Movement
• Setup Locations
• Maintain Equipment Duty Cycles for Maintenance
• Record Raw Material Shelf Life
• Maintain Asset Family and Digital Thread
• Extend Material Shelf Life
• Enable Cutting and Kitting
• Asset Search and Filter
• Maintain Assets Events
• Record History of Events
• Generate New Assets
• Record Cured Kits
• Document Assets
• Allow Synchronization with Current Systems
• Generate Real-time Production Maps
• Enable Integration with Cut Planning Optimization Systems
• Allow Production of Passive RFID Tags Internally
• Create Customized Alerts

System Requirements

All systems require availability of certain software resources, functionalities, or other hardware components.  These prerequisites have to be met in the design of a system.  Typical System Requirements for manufacturing IoT may include:

• User Authorization
• Quick installation
• Usability
• Integration to Next-generation IoT Platforms
• Radio-frequency Identification (RFID) Ability

Let’s delve deeper into some of the Functional Requirements for now.

Control Assets and Administer Asset Properties

The system should be able to manage multiple assets and add new assets.  It should be capable of:

• Creating asset properties, e.g., name, ID and shipment date.
• Editing property labels and show / hide asset properties.
• Automatically adding materials’ expiry date, “remaining exposure time,” “tool autoclave cycles left,” and “tool usage time left.”

Trace Assets Movement

The IoT system should be able to:

• Follow assets location from one site to another during the manufacturing process.
• Allow integration of MAT with RFID and other floor sensors to gather real-time assets’ location and condition data.
• Enable asset location reporting manually, through barcode, or hybrid (barcode and RFID).

Setup Locations

The system should maintain:

• Asset data from multiple sites (locations).
• Assets movement to and fro various sites, reported using RFID or other sensors.

Maintain Equipment Duty Cycles for Maintenance

The IoT manufacturing system should record all maintenance needs and maintenance activity performed on an asset.  Specifically it should:

• Keep data on all tools available at various sites with their duty cycles for preventive maintenance.
• Maintain record and generate reports on maintenance activity preformed on a specific tool.

Record Raw Material Shelf Life

The IoT manufacturing system should:

• Automatically calculate raw material and work in process exposure time and date of expiration.
• Maintain assets’ shelf life and generate automated screen notifications, alerts, emails, or SMS.

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In the wake of global pandemics when meeting face to face is not possible, it’s about facilitating workshops digitally, designing a formal agenda, and utilizing digital tools to ensure a productive virtual meeting.  Digital Collaboration Platforms have been pivotal in the current scenario.

As a matter of fact, Digital Collaboration platforms have become a new norm and have forever transformed business work environment.  Digital Facilitation tools are extensively used by facilitators, Change Management consultants, Organizational Development  practitioners, and learning professionals as a way to collaborate on workshops, events, change initiatives, and learning programs.

Digital Workshop Facilitation can be categorized into the following 3 major types:

1. Virtual Facilitation

In this type of Digital Facilitation, a group collaborates remotely in real time but from different locations.  Common tools used are Zoom, GoToMeeting etc.

2. Asynchronous Facilitation

In this facilitation method, a facilitator leads participants remotely at a different time and place. Common tools include Email, Slack etc.

3. Face-to-Face Facilitation

In Face-to-Face facilitation, a facilitator interacts with a group of people in the same workshop space, in person.  Digital tools can be used in such a setup instead of flip charts and sticky notes.

The new scenario brings forth new challenges in workshop facilitation that necessitate robust principles, methods, and tools for the future work environment to run smoothly.  Understanding and adhering to the following best practices and principles in Digital Workshop Facilitation helps in attaining effective results just like face-to-face workshops:

1. Specify well-defined guidelines and expectations.
2. Form an assured environment to enable discourse.
3. Ensure effective interaction before, during, and after a workshop.
4. Ensure all voices are heard.
5. Document the conversations.
6. Alter the moderation approach based on the participants’ level of understanding.
7. Seek comments and iterate.

Let us delve a little deeper into some of the principles:

1. Specify well-defined guidelines and expectations.

The remote nature of digital workshops limits the element of reacting to audience’s lack of attention.  This warrants clear instructions regarding ground rules, both in writing and orally to compensate for this disadvantage.  Participants need to use precise language in asking questions and answering them.

Instructions on technology and tools usage should be reiterated from time to time.

2. Form an assured environment to enable discourse.

Trusting participants in a virtual setting is difficult if you do not know them.  It is the digital facilitator’s job to create conversation security in different ways.  Spending time on icebreakers or other pre-engagement activities may ease the discomfort.  Providing quick and positive feedback to those who actively contribute encourages shy participants and creates a positive environment.  Informing the participants on how meetings are being documented and information on who has access to this documentation can reassure participants.

3. Ensure effective interaction before, during, and after a workshop.

Digital Facilitation platform can be used ahead of a meeting to help participants familiarize with each other, disseminate the agenda, initiate discussions, or obtain helpful information from the participants, such as questions, skill levels, ideas, etc.  Digital Collaboration Platform should be the center of post-workshop activities, e.g., sharing documents, closing agendas, answering additional queries, and extended discussions.

4. Ensure all voices are heard.

Digital Workshop tools can facilitate participation of people who in a traditional workshop setup will not be able to participate due to dominance by a few individuals.

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Changing industry ecosystems and competition today demand from the organizations to undergo strategic shifts.  The purpose of a company is undergoing Business Transformation from serving the interest of shareholders to serving all stakeholders that influence the organization.

Shareholders are often considered the only stakeholders that invest in a business.  Senior management needs to be cognizant of the importance of shareholders as well other stakeholders who create value for the organization.  They should work on building a collaborative Organizational Culture and paying heed to the welfare of all those groups that play a role in organizational growth.

This warrants a thorough evaluation of all stakeholders, their long-term interests, and Value Creation—or Value Destruction—potential for the organization.  But first, this calls for finding answers to the following key questions:

• Who creates the most value for the organization?
• Who among the stakeholders typically secure the best deals from the organization?
• Who is the victim of having the worst deals from the organization?
• Who among the stakeholders is potentially untrustworthy?
• Are there any intermediaries or stakeholders fulfilling their personal agendas?

Answering these questions is critical for the executives, otherwise they may risk falling into Shareholder Value Traps.  Recognizing and understanding stakeholder value traps while managing stakeholders' various interests helps executives achieve shared and individual long-term goals.  These 5 common traps prevent stakeholders’ interests to get integrated with the interests of the organization and destroy the value of a company if overlooked:

1. Ignoring cash-flow driving stakeholders while distributing cash
2. Miscalculating reaction from stakeholders
3. Supporting under-performing units
4. Conceding to willful vulture capitalists
5. Misjudging intermediaries role in transactions

Let’s discuss 3 of these stakeholder traps individually.

TRAP 1 – Ignoring cash-flow driving stakeholders while distributing cash

Shareholders are often treated as the critical drivers of long-term cash flows.  However, they are often short-term cash flow generators, whereas other stakeholders who provide their input for the organization in the form of their competencies and experience deliver long-term value.  These real contributors should be given top priority when distributing cash on earnings.  Underestimating or failure to identify the real long-term cash-flow generators can be a fatal value trap for an organization.

TRAP 2 – Miscalculating reaction from stakeholders

Another trap that most executives fall victim to is discounting potential backlash from weak stakeholders upon unfair distribution of cash / incentives.  Mining value from these victims to support shareholder disbursements can be equally detrimental, as annoyed stakeholders—with the help of social media and NGOs—, legal battles, and financial penalties can devastate a firm’s reputation and financial health.

TRAP 3 – Supporting under-performing units

Senior executives and boards at some organizations foster free riders—stakeholders that sap more benefits from the enterprise than the business they generate—at the expense of long-term value shareholders.  Free riders include an under-performing department close to the board, or a dwindling business unit that is part of a profitable section and whose financials are not categorized separately.

Continued support to these free riders is often at the cost of allocating resources to other potentially more profitable ventures, and this practice has led many companies to losses and even bankruptcies.

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Large manufacturers are often reluctant to share knowledge with suppliers.  However, supplier networks are considered a great source of gaining competitive edge by Learning Organizations.

A Learning Organization is founded on innovation, free flow of ideas, and a consistent focus on transforming the ways of doing business in order to achieve the desired results.  For instance, Toyota out-performed its competitors in the 2000s era by incorporating the principles of Learning Organization in its culture and sharing technology and knowledge with its suppliers.  This resulted in less defects, lower inventory levels, and improved labor productivity for its suppliers and higher profits for Toyota.

Specifically, Toyota became a Learning Organization by developing the infrastructure and inter-organizational processes that enabled quick and free flow of explicit and tacit knowledge to its supplier network.  The Learning Organization at Toyota features 3 inter-organizational processes, which became foundational to its approach to Supply Chain Management::

• Supplier Associations
• Consulting Groups
• Learning Teams

Let’s dive deeper into these processes.

Supplier Associations

Supplier Associations were setup by Toyota, initially, to share information, valuable experience, and to extract feedback.  The knowledge-sharing mechanisms that Toyota’s Supplier Associations employ include high-level sharing of explicit knowledge within the supply network regarding production plans, policies, and market trends.  The Supplier Associations hold bimonthly/monthly meetings to discuss key topics that include cost, quality, safety, best practices, and social activities.

These Supplier Associations enable suppliers to build relationships in Toyota at higher levels which was not a common practice in the industry.  This resulted in tremendous improvements in supplier performance due to explicit information and experience-sharing, which ultimately benefited Toyota to achieve excellence.

Consulting Groups

By establishing Consulting Groups in the 1960s, Toyota started the practice of providing free consultation regarding valuable production knowledge to its suppliers through experts.  This was accomplished through the creation of Operations Management Consulting Department (OMCD) in Japan in the 1960s and Toyota Supplier Support Center (TSSC) in the U.S. in 1992.

By developing the Consulting Groups infrastructure, Toyota’ consultants spent significant time at their supplier sites free of charge, helping them resolve problems in the Toyota Production System (TPS) implementation.  Suppliers, in turn, were encouraged to share their project results and open their operations to one another.  This explicit sharing of results and knowledge enabled other suppliers to replicate best practices and benefited Toyota by negotiating Target Pricing with its suppliers.

Learning Teams

Learning Teams—the 3^rd pillar of a Learning Organization—were pioneered by Toyota in 1977 by organizing its suppliers into Voluntary Study Groups in Japan or Plant Development Activity (PDA) groups in the U.S.  The Learning Team collaborated voluntarily on production and quality management.

 The Learning Teams were—and still are—responsible for determining a theme and spending time addressing each member’s problems related to that theme, making the members learn significantly by having outside pair of eyes look at their problems.  This helped Toyota’s suppliers’ network achieve effective tacit knowledge transfer, explore new ideas and applications of Toyota Production System (TPS), transfer valuable lessons learnt to all stakeholders, and enhance production quality.

Toyota follows a deliberate step-wise path to create Knowledge-Sharing Networks.  These Knowledge-Sharing Networks are an invaluable resource for enhancing both overt and implicit information and experiences for the organization.

Key dynamics of Toyota’s Knowledge-Sharing Networks involve creating a non-threatening one-on-one relationship with suppliers through the Suppliers Association in the form of financial as well as valuable knowledge-sharing assistance.

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Financial crisis, adverse supply shock, technological disruption, or natural hazards and disasters significantly affect global businesses.  Recessions caused by these global incidents and problems have serious outcomes on commodity prices, stock markets, economies, and even countries.

A Downturn can be described as a contracted business cycle with a significant decline in economic activity across markets with subsequent drop in spending, GDP, real income, employment, and manufacturing.  Downturns cause inflation, decline in sales revenues and profits, and cutbacks on R&D and other crucial expenditures.  The scenario challenges businesses because of tightening credit conditions, slower demand, layoffs, and general insecurity.

The organizational readiness to manage and curtail the adverse effects of downturns is the top agenda for the senior executives.  However, the uncertain nature of an economic crisis often triggers rash responses or even inaction.

Any haphazard responses or inaction can make recovery of an organization from a downturn costly later on.  Downturn management necessitate a calculated approach to confront the uncertainties, anxiety among the employees, and to unlock opportunities out of such crisis.  An effective approach to deal with the downturn crisis encompasses 2 key phases:

1. Stabilize

• Determine Exposure
• Minimize Exposure

2. Capitalize

• Invest for the Future
• Pursue M&A Opportunities
• Redesign Business Models

Let's dive deeper into the 2 phases.

Stabilize

This phase entails a series of actions to safeguard the organization from downturns and maintain the liquidity required to sustain the period of uncertainty.  Leading organizations take downturns as an opportunity to deploy planned yet urgent, high-priority interventions to maintain standard functioning of the enterprise.  They carry out careful analysis to appraise and curtail the risks of exposure.  Key steps required to stabilize the organization during a downturn include:

1. Determine Exposure
2. Minimize Exposure

Determine Exposure

This step demands a methodical assessment of risks associated with exposure.  This necessitates evaluating various scenarios and their impact on the organization as well as on the industry.  The step helps in ascertaining the units that are more susceptible to downturn risks and warrants prompt action.   The analysis of various scenario assists in highlighting and communicating the rationale—for interventions required to manage the downturn—to the people across the organization.

Specifically, the step involves initiating 3 fundamental actions:

• Conduct Scenario Analysis
• Quantify Impact
• Analyze Competition

Minimize Exposure

Once the executives have determined the impact of downturn exposure on their business, it’s time to work on reducing the exposure from crisis risks.  An understanding of the effects of a downturn exposure on the business helps the senior executives discern the most appropriate method to subsist and make the most of their organizational performance during the downturn.

In order to subsist and minimize downturn exposure risks senior leadership needs to maintain enough liquidity and access to capital to make sound investments in future, keeping a check on cash flows by generating weekly / monthly cash reports, cutting down or delaying discretionary spending, carrying out interventions to improve fundamental business, improve business processes, and maintain the organization’s market value and positive outlook for the investors.

Specifically, the executives have to work on achieving these 3 objectives:

1. Protect Financials
2. Protect Existing Business
3. Maximize Valuation.

Capitalize

The Capitalize phase focuses on growing the business and making the most of the economic situation.  Leading organizations prudently manage downturns with greater diligence and immediate, well-thought-out response.  Downturns do not preclude executives from investing in critical interventions.  Most investments take time to fruition and postponing crucial investments may put an organization on the back foot when economic conditions normalize.

To capitalize on these hard times, senior executives need to carefully think about and prioritize the various investment options and endeavors critical for improving productivity and revenue, consolidate the business through mergers or acquisitions, hold back spending on projects with unclear results, shelve the endeavors that do not have a key role in future success, and invest in developing their people.

Specifically, they should chart out 3 key actions to take advantage of the crises and emerge rejuvenated after these tough times:

1. Invest for the Future
2. Pursue M&A Opportunities
3. Redesign Business Models

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Cost-based Pricing is fast becoming a relic of the past and being substituted by the concept of Target Costing.  Target Costing is referred to as an organized process to determine the cost at which a proposed product must be developed so as to generate profits at the product’s anticipated selling price in future.

In highly competitive markets such as FMCG, construction, healthcare, and energy, prices are determined by market forces.  Producers cannot effectively control selling prices.  The only control, to some extent, is over costs, so management’s focus has to be on influencing every component of product, service, or operational costs.

Target Costing is a proactive Cost Planning, Cost Management, and Cost Reduction practice.  Costs are planned and managed out of a product and business early in product life-cycle, rather than during the later stages.  The fundamental objective of Target Costing is to make the business profitable in any competitive marketplace.  Target Costing is widely used in several industries e.g. manufacturing, energy, healthcare, construction, and a host of others.

Some key features of Target Costing are:

• Seller is a price taker rather than a price maker.
• The target selling price incorporates desired profit margin.
• Product design, specifications, and customer expectations are built-in while formulating the total selling price.
• Cost reduction and effective cost management is the corner stone of management strategy.
• Target Cost has to be achieved through team collaboration during activities such as designing, purchasing, manufacturing, marketing, and other activities.

Target Costing presents the following advantages over other product pricing techniques:

• More value delivered to customer since the product is created keeping in mind the expectation of the customer.
• Approach to designing and manufacturing products is market driven.
• Competitive Advantage gained through process improvement and product innovation.
• Drastic Process Improvement, which creates economies of scale.
• New market opportunities converted into real savings to achieve the best value for money rather than to simply realize the lowest cost.

The Target Costing process comprises 3 main phases.

1. Market-Driven Target Costing
2. Product-Level Target Costing
3. Component-Level Target Costing

Let’s discuss the 3 phases briefly.

1. Market-Driven Target Costing

In this phase, Selling Price is determined by analyzing the entire industry value chain and all functions of the firm.  The focus of this costing phase is on analyzing market conditions and determining the company's Profit Margin in order to identify the "Allowable Cost" of a product.

In this phase, the desired profit level is set on the basis of firm’s strategy and financial goals, and is deducted from Selling Price to obtain Allowable costs.  Intensity of competition, nature of customers, similar product introduction by competitors, and level of customer sophistication are the key factors influencing Market-driven Target Costing.

2. Product-Level Target Costing

In this phase, Allowable Cost only gives a ball-park figure of cost saving to be achieved.  It has to be translated into Achievable Target Cost.  This type of costing concentrates on designing products that satisfy the company's customers at the Allowable Cost.  The cardinal rule of Product-level Target Costing is to never exceed the Target Cost.

The objective of this Target Costing phase is to create intense but realistic pressure on the product designers to reduce costs.  Product Strategy (number of products in the line, frequency of redesign, degree of innovation) and product characteristics (complexity, magnitude of up-front investments, and duration of product development) are the key factors affecting Product-level Target Costing.

3. Component- Level Target Costing

The Component-level Target Costing settles the price at which a firm is willing to purchase the externally-acquired components being used in its product.  This phase involves a cross-functional team that is tasked to reduce costs across all functions such as designing, purchasing, manufacturing, marketing, and other activities.

The components cost history serves as the starting point for estimating the new component-level target costs alongside optimal selection of suppliers.  A supplier-focused strategy is the key factor that influences Component-level Target Costing.

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Transformation from a product-based model to a platform model is a dream for many executives.  More and more product companies are now shifting into a platform model.  The drive behind such a shift is the huge success of platform companies—e.g., Amazon, Google, and Apple.  These organizations started out as a retailer, search engine, and iPod manufacturer respectively, but later transformed into platform models.

However, bringing this transformative vision into reality is anything but straightforward.  Research into successful platform businesses reveals that this necessitates a robust approach comprising the following 4 critical phases:

1. Attractive Product and Customer Base
2. Hybrid Business Model
3. Rapid Conversion
4. Identify and Seize Opportunities

Let’s dive deeper into the first two phases of the approach, for now.

Attractive Product and Customer Base

A platform model is not a remedy to resuscitate products that are on a downward slide.  It necessitates an attractive product that offers a significant customer base and value to help improve customer loyalty and resist rival offerings.  The critical mass of customers also allows the platform company to create value for—and attract—third parties that are crucial for the platform to flourish.

Qihoo 360 Technology, a large internet firm in China, commenced its operations in 2006 by selling an antivirus software, 360 Safe Guard.  To build a broad user base and to gather customers’ feedback on improving the product, the company started giving away the product free.  The company maintained a list of malware as well as a “whitelist” of programs that were safe for the users.  The critical mass of customers allowed Qihoo to:

• Quickly identify viruses on scanning computers
• Improve the antivirus
• Introduce new products
• Attract new customers
• Create new platforms
• Attract 3rd-party software companies to make Qihoo a channel for reaching customers.

Hybrid Business Model

The notion that an organization has to embrace either a product-based or a platform-based business model is far from reality.  Although, both the product-based and platform-based business models need a framework to assign dedicated resources and manage operations, however, Business Transformation from a product-based model to a platform-based model gets simplified utilizing a hybrid approach.  A product-based business model calls for organizations to have differentiated products catering to customers’ needs, to create value.  Whereas, a platform-based business model creates value by linking users to 3rd parties and charging fees for using the platform.  The focus of Platform models is on:

• Inspiring mass-market acceptance
• Increasing the number of interactions rather than meeting specific customer needs
• Connecting users and 3^rd parties to create competitive edge instead of relying solely on product differentiation (product model).

For example, Apple converted itself from a product model to a platform model within a year after the launch of the first iPhone.  Initially, Apple reacted defensively to any hacking attempts and precluded 3^rd party apps on the iPhone, but then decided to create an open platform, and launched the App Store.  The hybrid model and platform mindset created additional income streams and significant revenue for Apple.

Rapid Conversion

To make a product and business model profitable, the conversion of product users into platform users is of utmost importance.  To enable this, an organization needs to develop its platform in such a way that it should present enough additional value for the customers to adopt it and become its users.  Three key elements are critical to accomplish this:

• Deliver adequate value
• Launch connected products consistent with the brand
• Allow 3^rd parties to perform upgrades

If the platform does not offer adequate value for the customers they are not going to embrace it the way they do to a great product.  Similarly, addition of new offerings that are coherent with the brand has a strong correlation with new platform adoption.  New offerings gain traction from a firm’s image and strengthen the brand further.  Likewise, allowing 3^rd parties to make upgrades, improve product offerings, and develop the platform further helps in rapid conversion, additional revenue, and growth.

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Scalability is defined as possible meaningful changes in magnitude or capacity.  In business terms, it’s the capability of a system to enhance productivity upon resource augmentation.  Scalability provides an organization the capabilities to develop compelling value propositions—that are hard to imitate by the rivals—and achieve profitable growth even in the wake of external threats, cut-throat competition, stringent laws, or financial downturns.

Today’s challenging business ecosystems and economic outlook demand from the enterprises to develop novel and Scalable Business Models that are able to leverage positive returns on investments.  To accomplish this, leaders need to identify and eradicate any capacity issues, enhance collaboration with existing partners, build new partnerships, or develop platforms to work with their opponents.

Executives should invest in scaling options only when they are sure to boost returns.  They have to be quick to exit a business when returns on investment to scale backfire.

5 Patterns of Business Model Scalability

Benchmarking a number of successful organizations reveals that their Business Models were flexible enough to sustain internal and external pressures.  Business Model Scalability hinges on aligning the strategic partners and Value Propositions to serve the customers.

To drive Business Model Innovation (BMI), leading organizations consistently display 5 critical patterns of Business Model Scalability:

1. Operate with multiple distribution channels
2. Eliminate typical capacity limitations
3. Outsource capital investments to partners
4. Allow customers and partners assume multiple roles in the business
5. Create platform models

Operate with multiple distribution channels

Successful businesses achieve scalability by selling through multiple distribution channels.  Well-known businesses—e.g., Google and Apple—have extensively studied and implemented adding additional distribution channels.  By avoiding cannibalization of sales through existing channels, this has allowed them to spread overhead costs and profit from increased sales.  Additional channels help businesses expand clientele and uncover new opportunities.

Eliminate typical capacity limitations

Scalability necessitates finding ways to overcome capacity limitations that hamper various industries.  Well-known companies achieve scalability by overpowering any limitations that constrain various businesses.  Successful companies are not inhibited in any way by physical or material constraints—including deficiencies related to manpower, capital, warehousing, systems, technology, or capacity.  For example, managing costs related to creating R&D facilities and innovating new products that often impede the entire pharmaceutical industry.

Outsource capital investments to partners

Top businesses achieve scalability by transferring or sharing cash flow and working capital requirements with the partners.  They optimize their capital and cash flow limitations and prioritize their crucial investments.  They adopt Business Models geared toward creating open platforms that allow them to shift these expenditures to their strategic partners.

Allow customers and partners assume multiple roles in the business

Scalable businesses work in conjunction with their strategic partners and customers.  They offer multiple roles to them and leverage mutual resources for growth of their businesses.  They collaborate with each other through joint ventures or through informal mechanisms—e.g., core platforms—which they utilize to share distribution methods, loyalty programs, and resources.  They have a “laser” focus on the factors that are of value to their customers, and develop (and enrich) their value propositions based on that.

Create platform models

Top businesses build platform-based Business Models that work on the principles of partnership and scalability.  They use their platform-based Business Models to foster relationships with and convert their rivals into partners—by letting them share their platform and generate incremental revenues, for instance, through benchmarking data and “ease of use” sales.  Visa Inc. is an example of how businesses connect with shoppers using Visa’s credit card platform.

Scalable Business Models are more likely to generate rapid returns.  However, these Business Models demand utilization and alignment of capabilities that the organization, its strategic partners, and customers possess.  Execution of the patterns of Business Model Scalability involves categorizing key resources and initiatives required to enable synergistic collaboration and superior product / service offerings.

Executives can make use of these 3 potential levers to achieve Business Model Scalability that provide an implementation roadmap for both novel or revamped Business Models:

1. Determine potential strategic partners
2. Brainstorm a scalability plan
3. Select viable and scalable Business Model options

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Survival of a business in this digital age largely depends on its ability to timely embrace Digital Transformation. Digital Transformation entails using Digital Technologies to streamline business processes, culture, and customer experiences.

In order to compete today—and in future—and to enable Digital Transformation, organizations should work towards fostering a culture of continuous learning, since Digital Transformation depends on learning and innovation.  The organizations that holistically embrace this culture are called “Next-Generation Learning Organizations.”

The next generation of Learning Organizations capitalize on the following key variables; Humans, Machines, Timescales, and Scope.  These organizations incorporate technology in enabling dynamic learning.  Creating Next-Generation Learning Organizations demands reorganizing the entire enterprise to accomplish the following key functions to win in future:

1. Learning on Multiple Timescales
2. Man and Machine Integration
3. Expanding the Ecosystem
4. Continuous Learning

Learning on Multiple Timescales

Next-Generation Learning Organizations make the best use of their time.  They appreciate the objectives that can be realized in the short term and those that take long term to accomplish.  Learning quickly and in the short term is what many organizations are already doing, e.g., by using Artificial Intelligence, algorithms, or dynamic pricing.  Other learning variables that effect an organization gradually are also critical, e.g., changing social attitudes.

Man and Machine Integration

Rather than having people to design and control processes, Next-generation Learning Organizations employ intelligent machines that learn and adjust accordingly.  The role of people in such organizations keeps evolving to supplement intelligent machines.

Expanding the Ecosystem

The Next-generation Learning Organizations incorporate economic activities beyond their boundaries.  These organizations act like platform businesses that facilitate exchanges between consumers and producers by harnessing and creating large networks of users and resources available on demand.  These ecosystems are a valuable source for enhanced learning opportunities, rapid experimentation, access to larger data pools, and a wide network of suppliers.

Continuous Learning

Next-generation Learning Organizations make learning part and parcel of every function and process in their enterprise.  They adapt their vision and strategies based on the changing external environments, competition, and market; and extend learning to everything they do.

With the constantly-evolving technology landscape, organizations will require different capabilities and structures to sustain in future.  A majority of the organizations today are able to operate only in steady business settings.  Transforming these organizations into the Next-Generation Learning Organizations—that are able to effectively traverse the volatile economic environment, competitive landscapes, and unpredictable future—necessitates them to implement these 5 pillars of learning:

1. Digital Transformation
2. Human Cognition Improvement
3. Man and Machine Relationship
4. Expanded Ecosystems
5. Management Innovation

1. Digital Transformation

Traditional organizations—that are dependent on structures and human involvement in decision making—use technology to simply execute a predesigned process repeatedly or to gain incremental improvements in their existing processes.  The Next-generation Learning Organizations (NLOs), in contrast, are governed by their aspiration to continuously seek knowledge by leveraging technology.   NLOs implement automation and autonomous decision-making across their businesses to learn at faster timescales.  They design autonomous systems by integrating multiple technologies and learning loops.

2. Human Cognition Improvement

NLOs understand AI’s edge at quickly analyzing correlations in complex data sets and are aware of the inadequacies that AI and machines have in terms of reasoning abilities.  They focus on the unique strengths of human cognition and assign people roles that add value—e.g., understanding causal relationships, drawing causal inference, counterfactual thinking, and creativity.  Design is the center of attention of these organizations and they utilize human imagination and creativity to generate new ideas and produce novel products.

3. Man and Machine Relationship

Next-generation Learning Organizations (NLOs) make the best use of humans and machines combined.  They utilize machines to recognize patterns in complex data and deploy people to decipher causal relationships and spark innovative thinking.  NLOs make humans and machines cooperate in innovative ways, and constantly revisit the deployment of resources, people, and technology on tasks based on their viability.

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Identifying what the market wants is a critical issue for most executives.  Likewise, the decision on how much to charge for a product is also crucial for planners.  This is where Market Research comes to rescue.

One of the Marketing Research methods that researchers most commonly employ is the Conjoint (Trade-off) Analysis.  Conjoint Analysis helps in identifying product features that consumers prefer, discerning the impact of price changes on demand, and estimating the probability of product acceptance in the market.

In contrast to directly inquiring from the respondents about the most important feature in a product, Conjoint Analysis makes the survey participants assess product profiles.  These product profiles comprise various linked—or conjoined—product features, therefore the analysis is termed “Conjoint Analysis.”  Conjoint Analysis simulates real-world buying situations where the researchers statistically determine the product attributes—that carry the most impact and are attractive to the participants—by substituting the features and recording the participants’ responses.

The Conjoint Analysis Approach

The Conjoint Analysis is useful in creating market models to estimate market share, revenue, or profitability.  The Conjoint Analysis is widely used in marketing, product management, and operations research.  The Conjoint Analysis approach entails the following key steps:

1. Determine the Study Type
2. Identify Relevant Features
3. Establish Values for Each Feature
4. Design Questionnaire
5. Collect Data
6. Analyze Data

1. Determine the Study Type

The first step of the Conjoint Analysis involves ascertaining and selecting from a number of different types of Conjoint Analysis methods available.  This should be determined based on the individual requirements of the organization.

2. Identify Relevant Features

The next step of the Conjoint Analysis entails categorizing the key features or relevant attributes of a product.  For instance, setting the main product attributes in terms of size, appearance, price.

3. Establish Values for Each Feature

After selecting the key features of the product, the next step in Conjoint Analysis is to choose some values for each of the itemized features that have to be enumerated.  A combination of features in different forms should be chosen to present to the participants.  The presentation could be written notes describing the products or in the form of pictorial descriptions.

4. Design Questionnaire

The basic forms of Conjoint Analysis—practiced in the past—encompassed a set of product features (4 to 5) used to create profiles, displayed to the respondents on individual cards for ranking.  These days, different design techniques and automated tools are used to reduce the number of profiles while maintaining enough data availability for analysis.  The questionnaire length depends on the number of features to be evaluated and the Conjoint Analysis type employed.

5. Collect Data

A statistically viable sample size and accuracy should be considered while planning a Conjoint Analysis survey.  It is up to the senior management to decide how they want to gather the responses—by taking the responses from each individual and analyzing them individually, collecting all the responses into a single utility function, or dividing the respondents into segments and recording their preferences.

6. Analyze Data

Various econometric and statistical methods are utilized to analyze the data gathered through the Conjoint exercise.  This includes linear programming techniques for earlier Conjoint types, linear regression to rate Full-Profile Tasks, and Maximum Likelihood Estimation (MLE) for Choice-based Conjoint.

Types of Conjoint Analysis

There are a number of Conjoint Analysis types available for the marketing researchers to choose from, including:

1. Two-Attribute Tradeoff Analysis
2. Full-Profile Conjoint Analysis
3. Adaptive Conjoint Analysis
4. Choice-Based Conjoint Analysis
5. Self-Explicated Conjoint Analysis
6. Max-Diff Conjoint Analysis
7. Hierarchical Bayes Analysis (HB)

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The decision for pricing a product or service isn’t as simple as it seems. It is a key consideration for executives. Pricing way above the rival products risks not attracting the required customers while charging way below the competitor products could be equally detrimental.

Manufacturers can utilize research to have a better understanding on what consumers are willing to pay for a product. There are a host of research-based pricing approaches available — e.g., Monadic, Sequential Monadic, Conjoint Analysis, Van Westendorp Price Sensitivity Meter etc. — however, researchers often get confused on which one to use in a given product development phase. Let’s discuss the Van Westendorp Price Sensitivity Meter approach for now.

The Price Sensitivity Meter (PSM) is an easy-to-use method of evaluating price of a new product. The method was developed by Peter Van Westendorp in 1976. Through the PSM approach, consumers undergo a short survey where they answer 4 questions about their price expectations. These answers are used to determine the maximum amount a consumer is willing to pay for a particular product and how higher the price be set for the customer to still buy the product.

The approach offers a ball-park figure for the price of a product, is easy to administer, requires less effort from the consumers, and the PSM results are communicated in the form of simple diagrams. The approach, however, surveys only the “willingness to pay” attribute of a product, and is more appropriate for innovative products — as it is not easy to determine prices with competing products using this approach. PSM analysis should be a part of your Pricing Strategy process.

The PSM approach encompasses the following key phases:

1. Plan and Execute Market Research Survey
2. Analyze Data
3. Evaluate Intersections to Determine Price

Let’s discuss the first 2 phases of the approach.

Plan and Execute Market Research Survey

The initial phase of the PSM research entails deciding on the medium of the study and planning the logistics, design, resources, guidelines, and governance protocols for the survey. More specifically, the phase involves:

• Preparing the field research plans.
• Determining whether the survey should be conducted online, telephonically, or face-to-face.
• Identifying the consumers (respondents).
• Assigning the required resources to the survey.
• Getting the data collection tools and research instrument (questionnaire) ready. 

The study questionnaire should include the following questions:

• At what price the product would become so expensive for you to even consider buying it?
• Indicate the price that is expensive for you but you would still buy the product?
• What would be the price that is too cheap for the product where you would start doubting its quality and not buy it?
• Indicate the price of the product where you would consider it a great value for money (a bargain)?
• Gathering data from the survey participants.

Analyze Data

The second phase pertains to analyzing the respondents’ data from the field survey. This is done once the field data has been validated and cleansed of any inconsistent errors. The steps taken in this phase include:

• Ordering the 4 questions in a manner that it ranks prices as “Too Cheap,” “Bargain,” “Getting Expensive,” and “Too Expensive.” The values of these ranks should be kept in numeric dollar values.
• Plotting the responses of the survey participants on a graph.
• Depicting the prices on the X-axis.
• Representing the percentage of consumers who quoted the respective price (i.e. the cumulative frequency) on the Y-axis.
• Reversing the values of the two curves.
• The curves with the values “Too Cheap” and “Too Expensive” are drawn with inverse values. This creates two other curves. These curves show the percentage of consumers who regard prices as “Getting Expensive” and “Bargain.”

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