Cadbury entered the Chinese chocolate market with confidence and ambition*. With a strong presence already established in Hong Kong and Shanghai, its managers felt they were justified in setting an objective of selling one Cadbury Dairy Milk Chocolate bar to each of the country’s one billion people in a short period of time. Regrettably, something happened along the way; in the form of a supply chain that was unaligned to the specificities of China’s, emerging markets needs.

In the early 1990’s Cadbury Dairy Milk was the leading brand in Hong Kong and throughout the 1980’s it sold products into greater China through a distributor. Assuming it would be successful in meeting its objective of 1 chocolate bar to every person, Cadbury sought to expand its presence with the establishment of a manufacturing facility in Beijing in 1993.

Cadbury reasoned they could best reach the individual consumer through the sale of chocolate bars (as opposed to gift boxes) the kind that is found in most supermarkets throughout the world. The challenge would not be easy; Chinese would need to be converted to the taste of chocolate. The fact that all consumer goods tended to be bought in individual packs, Cadbury felt that that the supply chain side of the equation could be squared away quite readily. Based on Cadbury experience in chocolate sales in Singapore and Hong Kong and some other factors Cadbury determined it would sell its 250g chocolate bars through supermarket outlets in greater China.

With little hard market data to go on, Cadbury recognised it was critical that accurate forecasts were developed as these would be the primary driver in the determination of the size of manufacturing capacity it should build. What happened was devastating for Cadbury. The 250 gram bar turned out to be inappropriate for the consumption habits and disposable incomes of emerging Chinese consumers. Instead, consumers who were mostly trying chocolate for the first time chose Mars Dove brand over Cadbury as Dove could be bought in smaller, 47 gram bars. Similarly, few retail stores and distributers who moved or stocked the Chocolate bars had air conditioned facilities. This resulted in significant problems and accentuated the ‘seasonal’ nature of the product, a problem which in most traditional markets had been resolved some time ago. Cadbury was forced to copy Mars into smaller packs (ultimately as small as bags of 12 gram, bite size bars), an outcome that had a large negative impact on cash flow (lower volumes of product per sale); and an ensuing downsizing of production volumes. As Cadbury had built a plant to accommodate much greater volumes (and bigger sized packs) than it expected, it would take years before it could recover from this problem.

Alignment of markets to an uncertain supply chain has bedevilled the FMCG industry in emerging markets for years. Other examples are single serve shampoos, bought and consumed in the same hour, along with pharmaceuticals and other goods.

What is your experience? Do you have any other lesson that companies contemplating establishment of operations in emerging markets can learn from your experience?

(*Case based on Lawrence, L. Allen, “Chocolate Fortunes; the Battle for the Hearts and Minds, and Wallets of China’s Consumers”, AMACOM, 2010)

As discussed in the June 16 edition of BRW magazine, nothing short of a; revolution in management, and; significantly improved strategic management capabilities are required if the ambitions of modern managers seeking to achieve greatness are to be realised. The following content contributed to Leo D’Angelo Fisher’s article, it provides further insight into:
• the management revolution that is required to deliver sustainable business outcomes – overall,
• issues that inhibit effective strategy (7 Inconvenient Truths of Strategy), and
• problems and solutions that will provide managers with greater control over strategy.

Read ‘The Seven Inconvenient Truths of Strategy’

Read ‘Reinventing Management; Transforming the Way We Manage Communicate Structure Organisations’

Read ‘Skills in Strategy Creation and Execution The first step towards management greatness final’

One of the first things Welch did when he was appointed as CEO was to close the strategy and planning departments, and justifiably so. They had become cumbersome an unwieldley. Such departments are only now being re-established in major corporations. What do you think? We would appreciate your views:
• is a revolution in management required?
• are our current skills in strategy sufficiently strong to support that revolution?

Approximately 85% of organisations (globally) undertake some form of formal strategic planning; results of an Economist Intelligence Unit Survey show however; “only 11% of executives are highly satisfied that (strategic planning) is worth the effort”. So, what’s wrong with strategy? HCP has identified 7 Inconvenient Truths that contribute to underwhelming results from strategy…

Download pdf Here

In this blog we propose to follow a live case study as it unfolds. We have selected the apparent war that is emerging between Qantas and the (very) recently rebranded Virgin Australia for this, and we appear to be at the beginning of something big. Recently, Virgin has sought to reposition its market focus and expressed an ambition to become a direct competitor to Qantas in the Australian (and International) the full service airline space. The prize for Virgin is an incursion into the business travel market which is currently dominated by Qantas. The other benefit to Virgin from the change in focus is the opportunity to vacate the increasingly crowded and competitive low cost, minimal service market. An illustration of the move was articulated in the press by Elizabeth Knight of the Sydney Morning Herald who on the 5th of May 2011 noted the battle lines were being drawn by Richard Branson, who announced the change of name from Virgin Blue to Virgin Australia. In her article: Virgin v Qantas it’s Flights and Fights, Elizabeth observed that:

“The product the new Virgin Australia unveiled yesterday is impressive. Virgin’s (new) aircraft looks fresh and comfortable on the inside, both in business and economy, and is spacious enough to satisfy the corporate traveler. For the Virgin shareholders, the numbers should stack up. Virgin Australia’s boss, John Borghetti, has spent the $35 million capital expenditure wisely to pull his product out of the middle-ground dead zone – with a cost base that could not compete with the no-frills market and a product that could not capture the more discerning business traveler – and into the full service market”

Knight goes on to observe:

“Once the fleet is introduced, the business traveler will have an alternative in quality – but perhaps not in frequency. Over time all new Virgin aircraft will be equipped with the same quality interiors seen on display yesterday. The airline will also beef up its frequent flyer program and overhaul its business class lounges. If Qantas and Virgin were starting out fresh tomorrow as competitors on an equal footing in the Australian domestic market, they would probably split the market 50/50. But Qantas, as the airline with a near monopoly on the business market, has the advantage of inertia and, more importantly, a well-established frequent flyer customer base. It also has the huge advantage of more flights.
Virgin does not aspire for a moment to catch half of the business share – it just wants to take an additional 10 per cent, which on its numbers is $150 million in revenue. And it doesn’t expect to get this overnight. It will take a few years”.

We invite comments on your perspectives of the Virgin move. Will it succeed and if so, how fast and how big? Critical to this will be the establishment of performance measures that we should follow to measure success. When available we will be on the lookout for data providing us with information on: occupancy (seating utilisation), market share, profitability. Any other information we can glean; e.g. route expansion, number of new planes, capital expenditure announcements, number of employees, comparative fares, and perceptions of quality.

Under current conditions we would envisage Virgin getting a strong foot holding, but as suggested by Elizabeth Knight, they have a tough challenge ahead. Is anyone brave enough to take a guess at a market share position by the end of the year?

We will post a survey through our LinkedIn discussion group and post results in this blog. If you would like to participate in the group, email us at hcandp@hcandp.com. We look forward to your email and participation in our discussions.

For further insight into airline competitiveness and associated performance measures, check out this case study: Whitestone, D., Schlesinger, L., People Express: Harvard Business School Case #483-103, Oct 2000.

The 7 Inconvenient Truths of Strategy is a useful illustration of some of the things that are wrong with strategy. We developed this descriptor of strategy to prompt discussion around ways in which strategy can be improved; to deliver excellence in both strategy content and strategic outcomes. Following is an illustration of ways in which a better understanding of the workings of strategy can be used to make better strategic decisions and therefore, derive better outcomes. We use Toyota and Porsche as the basis for our discussion.

Case discussion

Toyota Corolla, Porsche 911
In addressing various aspects of the 7 Inconvenient Truths, it is useful to compare and contrast the differing strategies adopted by Toyota and Porsche in their quest to build a global presence through the success of their iconic products; the Toyota Corolla and Porsche 911. Both models have achieved iconic levels of success based on strategies that on the surface appear to be very similar, but underneath, are worlds apart.

Toyota Corolla: The Toyota Corporation was built out of Toyota’s founding father’s (Sakichi Toyoda) passion for excellence and an associated culture that prescribed the relentless pursuit of continual improvement in operational efficiency and effectiveness, combined with a strong focus on customer satisfaction. Corolla is recognised as the forbear of Toyota’s global branding strategy. Released in Japan in November 1966, Corollas global sales figures now exceeded 30 million a year.
The secrets of the success of the Corolla can be attributed to its high appeal to consumers who were (and still are) attracted to the appeal of its simplicity, quality, durability and competitive pricing. With Corolla and many of its subsequent products, Toyota succeeded through its ability to leverage its unique competences in manufacturing, to the extent that it became the global market leader (by volume) across the board.
The name Corolla has its origins in a Latin term; “crown of flowers”. It is interesting to note however that rather than marketing or sales, the group charged with the decision of the choice of name was Toyota’s Product Planning Division. We should not be surprised by this though. The responsibility afforded this group is representative of the fundamental strategy followed by Toyota, i.e. the building and leveraging of inimitable competences in the combined design, development and delivery of a product offering that offers the same standard of quality and value to consumers located anywhere in the world; supported and enabled by Toyota’s relentless pursuit of ‘evolutionary’ year on year improvements in efficiency and effectiveness.

Porsche 911: This story is grounded in a similar passion for excellence demonstrated by Sakichi Toyoda. Ferrie Porsche, son of Porsche founder, Ferdinand Porsche reflected this passion in a bold statement; “in the beginning I looked around and could not find the car I dreamed of, so I decided to build it myself”. Based on the principle of achieving maximum output from minimum input, Ferrie Porsche’s race-inspired philosophy became integral to the design and production of each and every Porsche car. Porsche state that as a matter of policy they don’t simply build (premium) sports cars, but rather: “We work with a range of companies that share our values, creating successful partnerships by integrating our suppliers”.
Illustrative of a successful formula for over forty years, the Porsche 911 benefits from continual renewal and regeneration of its design that literally ‘evolves’ over time in concert with the demands of a long list of satisfied, but highly discerning buyers. Whereas most cars (Toyota included) are ‘updated’ through annual facelifts and periodic renewal of their overall design, every new generation 911 according to Porsche “brings innovation (that) allows our cars to be timeless and unique”. In maintaining a balanced approach to its car designs, Porsche suggest that the 911 styling evolves with sensitivity and restraint, but in a way that remains committed to its overall character.

Strategies compared

Although subject to occasional ups and downs, Toyota and Porsche have essentially enjoyed a long period of success. Although corporate strategy for both appears to be the same, there is a significant difference in their makeup, content and philosophy. Grounded in a passion to build, maintain and leverage operational standards of the highest degree, Toyota’s approach to market positioning is one of; build it and they will come. Although potentially risky in nature, Toyota has excelled as a manufacturer and seller of family oriented cars; commercial vehicles, and; four wheel drives.

Porsche exhibit a similar passion for excellence, but their approach has been the opposite of Toyota, preferring instead to identify a unique market position as the basis for competitiveness, coupled with the manufacture of low volumes of high performance sports cars and all wheel drives in niche markets where others find it difficult – if not impossible – to compete. In stark contrast to Toyota, Porsche did not initially own its own manufacturing facility. They were forced to acquire it when the plant owners of the day decided to sell. Porsche were the only buyers. While Toyota’s story of competence leveraging can be described as being one of an ‘Inside Out’ strategy, Porsche’s market positioning strategy can be described as one of an ‘Outside In’ strategy.

Discussion
excellence in strategy content and strategic outcomes

Is the foregoing important? An understanding of causality in strategy structure and strategic influences in general, contributes not only to better strategy and strategic outcomes, but also to an avoidance of poor strategy and potentially sub-optimal strategic outcomes. As an example, Fosters shareholders are lamenting its unsuccessful bid to integrate its wine and beverage business following the bold Southcorp Wines acquisition that was undertaken only a few years ago. The subtlety of the differences between an Inside Out and Outside In strategy immediately comes to the fore. Whereas Foster’s are undisputed specialists in brand management and market positioning (Outside In strategy), businesses competing in the wine industry by definition, compete through an inherent Inside Out strategy, one that requires skills in the production of a technically oriented and delicate product that is matured over time and made from a range of raw materials that are subject to varying degrees of texture, taste and quality – qualities that are difficult to replicate (as demonstrated by Penfolds ; a bottle of Grange is quoted at $12,500 for a 1952 Shiraz). To this day, the spun off Treasury Wine Estate is still being valued for its portfolio of brands over its skills in wine production capabilities, global reach and quality of product. There is of course nothing wrong with acknowledging the value of a portfolio of brands; it is important to understand this is not the only way to value the business.
Ultimately a balance between an Inside Out and Outside In strategy is the most desirable position. Both Toyota and Porsche have reached the stage where competence leveraging is just as important as market positioning. We suspect however that Toyota could benefit by moving further towards market positioning capabilities whilst maintaining its roots in operational excellence, enough to understand and pre-empt the still emerging needs of the markets in which they operate. Porsche started life with a clear market positioning strategy and through alliances and partnerships is now diversifying into broader market segments, but not diversified industries.
Honda is an example of a company that has managed both, and in doing so, has realised a high level of diversification. With its roots grounded in competences in engine and drive train manufacture, Honda operates in well defined market segments in the automotive industry, as well as in other industries including motor bikes, powered garden tools, marine engines and personal water craft. The benefit from their strategy is an ability to competently operate a diversified portfolio of businesses, allowing it to spread its exposure to risk; a feat not readily available to many of the world’s corporations.

Addressing the 7 Inconvenient Truths, Where to Start?
A Look at A look at 3 Inconvenient Truths

• Relevance: Both Porsche and Toyota strategy originated in the mid 1960’s, a time of high certainty and predictability; do we know if they are using the right tools in what is now a highly uncertain and unpredictable environment? Could they be using more sophisticated tools and if so, which ones? Will their reliance on agile and lean manufacturing be sufficient to maintain a sustainable competitive advantage in the future?
• Strategy structure: given the extent of diversity in a global automotive strategy, do Toyota and Porsche exhibit a balance between deliberate vs. emerging strategy, evolutionary (continuous improvement) vs. revolutionary change and differences between business unit and corporate level strategy?
• Strategy Process: Are Toyota and Porsche sufficiently responsive to changes in their markets and industries? Should they be more aggressive in their approach to change? Have they achieved balance between Inside Out and Outside In strategy?

When the term strategic plan is used in business, thoughts immediately turn to an image of a board presentation that consists of a list of ‘priorities for action’ for the next 3 to 5 years. Research has shown that over 85% of corporations globally develop strategic plans, but McKinsey & Co Research surveys have found that:

• Only 45% expressed satisfaction with their strategic planning process, and
• Only 23% indicated that the process is key to making their most important decisions.

In particular, they noted that:

“…executives harbor significant concerns about the way their company executes, communicates, aligns the organisation with, and measures performance against its strategy”

Similarly, the Economist Intelligence Unit (EIU) Research into Strategy Outcomes found that:

“Only 11% of executives surveyed are highly satisfied that strategic planning is worth the effort”.

What is strategy and does it matter? Text books are awash with definitions of strategy, few are consistent. Members of the Strategic Management Institute (SMI) address the issue, suggesting it really doesn’t matter. What does matter are the benefits of strategy which, apart from being the development of the management control device in the form of the strategic plan, have been identified as starting with problem solving. In the context of strategy however, strategic problems are ‘wicked’ problems that are characterised as; having innumerable causes; are tough to describe, and; often don’t have a right answer. ‘Wicked’ strategic problems are:

“like the head of a hydra, an ensnarled web of tentacles; the more you attempt to tame them, the more complicated they become” (Camillus, J. C., “Strategy as a Wicked Problem”, Harvard Business Review May, 2008).

So, what are the benefits of strategy?
Learning: Time to focus on; the future, competitors, positioning, core competancies, transformation
Leadership:getting everyone ALIGNED around a common sense of purpose and direction
Structure:“structure follows strategy, systems and processes follow structure”
Transformation and Renewal: Pre-empting the future, making the existing business OBSOLETE

Examples of effectiveness observations: members of the HCP management consulting team have reviewed the content of numerous business strategies. In many cases we find gaps in strategy (and as a result, organisation structure) more so than errors. As an example, a market oriented (Outside In) business that relies on its brand portfolio as a foundation for its sustainable competitive advantage was observed to have not only omitted an articulation of its market positioning strategy (the fundamental component of its ‘being’), it had also eliminated its entire marketing function (key strategic driver), following a recent downsizing activity.

In other instances we have observed that when long term Strategy is confused with a short term Annual Strategic Plan, Strategy content tends to over focus on the here and now and under focus on the future. In more than one business, this has meant that a restructuring exercise for example, becomes the strategy for the business. With a vision on ‘being the most efficient’ as opposed to ‘being the best’, we have witnessed clients embark upon a prolonged and arduous restructuring exercise, rather than a short term program that acts as a stepping stone to future greatness. General Motors in the US for example recently undertook aggressive restructuring. The objective was to regain market share through the offer of fresh, reliable, clean, efficient cars, not to simply cut costs and continue as before.

Poor articulation of long term strategy is another problem that can result in missed opportunities to strengthen leadership. In the face of a poorly articulated strategy, leaders risk projecting an appearance of uncertainty and doubt. Conversely, the opportunity to inspire, motivate and grow may also be lost.