Value Acceleration

About two years back I noticed in a LinkedIn Update that Bob Walton, who was a Sr. Vice President at Kaiser Permanente, had joined Qualcomm. Bob Walton is now Sr. Vice President of Enterprise Services. When I looked at Bob's profile, I noticed that he was following a modified "Private Equity Value Acceleration" model developed by Bain & Company. Bob's profile on LinkedIn contained a link to Bain & Company website. I was intrigued. I followed the link to Bain & Company website and reviewed the presentation. By the way, I checked Bain & Company website recently and I was unable to find that multimedia presentation. I loved the presentation for its sheer simplicity. The presentation outlined in as few words as possible that the only way to create value was to follow a disciplined approach to management. Since then Paul Rogers, who had worked on developing the Value Acceleration model, has written an article in Harvard Business Review as well as a book on "Value Acceleration: Lessons from Private-Equity Masters" in cooperation with Tom Holland, and Dan Haas. Bain and Compnay have an excellent summary of this article available on their website.

I'm going to briefly mention some of the key points of Value Acceleration approach. First of all value acceleration requires defining a simple and short investment thesis to increase the value of the firm in three to five years. Investment thesis emphasizes a limited number of key success factors. After this private equity investors define their blueprint for action. It is said that what you can't measure, you can't manage. This has resulted in creation of too many metrics at the cost of focus. Private equity firms are not distracted by a large number of metrics. They focus on a few limited measurements. They hire managers for their attitude. The managers who behave as owners-investors and not as administrators or employers. Private equity firms make their balance sheet work for them by identification of firm's assets and redeployment of those assets in such a way that overall return is maximized. They eliminate unproductive capital without being sentimental about it.

I think one of the hardest equations to learn is Profit = Revenue - Cost. There are just three ways to increase profit. Either you reduce the cost, or you increase the revenue, or achieve a combination of reduction in cost and increase in profit. That's it. There is no other way to make a profit. Cost reduction is generally easier to achieve than revenue enhancement. I have noticed that a large number of firms regularly focus on cost reduction. But cost reduction does not increase value of the firm. While cost control and reduction are necessary conditions for creation of value, it is growth that creates real value for the investors. Therefore, General Partners of private-equity focus on creation of growth. However, private-equity firms are not stickler for a particular kind of management dogma. They do whatever is necessary to create value. In case of certain distressed firms, drastic and unsentimental cost reduction may be the only remedy. Private-equity firms do not hesitate to take the necessary steps quickly.

Eventually hardcore management discipline, intense focus, effective deployment of capital and effective cultivation of growth opportunities allow private-equity firms to create high rates of return. Thank you, Bob!

Achieving Strategic Fit Between Business Strategy and Technology Policy

One key issue that concerns many Chief Information Officers is validation of a fit between their technology strategy and firm's business strategy. CIOs follow a number of different approaches for validation of this fit. They hire management consultants to review technology policies and business strategy from a conceptual-logical perspective and highlight inconsistencies, if any. They spend days going through joint internal reviews of the fit between their technology policy and business strategy. If no inconsistencies are discovered, then the fit between technology policy and business strategy stands validated. This is often a difficult consensus building exercise, since there could be major differences between firm's articulated business strategy, executive intent and business strategy that is implemented. As a result conflicts and inconsistencies in fit are more of a rule than exception. Finally, a general agreement does not mean validation of a fit. Obviously, there has been some disappointment with these approaches and CIOs continue to search for a more objective analysis of fit between technology policies and business strategy. Some of the CIOs work closely with their financial experts to build financial models of technology spend and performance of the firm. But this approach is also far from complete.

 

This is certainly an interesting topic to dig into. But before we go deeper, let us briefly examine the concept of fit. Michael Porter, one of my favorite authors, mentions that fit has three different components: consistency, reinforcement and optimization of effort. Consistency among policies is certainly one of the oldest concepts of strategy since the days of Alexander, son of Philip of Macedonia. Inconsistency among policies whether at the conceptual level or implementation level results in incoherent communication of strategy and wasted resources. Secondly, a strong fit means that activities in one area of the strategy will reinforce and strengthen activities in another area of strategy. Here it is important to remember that presence or absence of economies of scale, while preferable, is not necessary for fit. Strategic fit can exist with or without economies of scale. I think it is the positive feedback effect among activities that leads to a strategic fit. Positive feedback effect means that learning and doing of one activity facilitates learning and doing of another activity and this positive feedback effect would also apply to groups of tightly interlinked system of activities. Complementarity among activities, which means that doing of one thing increases returns from doing of another, without the assumption of returns to scale, is an important source of strategic fit. Finally, certain strategic choices could lead to optimization of efforts. For instance, a good product design can eliminate the need for customer service and product choices could lead to optimization of inventory turnover and achievement of a strategic fit.

 

There is certainly a dearth of empirical studies on fit between generic business strategies and generic technology strategies. If you come across such a study, I'd certainly appreciate if you could please e-mail the reference to me. The three pure generic business strategies are differentiation, cost leadership and focus. There are firms that are focused differentiators and focused cost leaders. I haven't heard about focused focusers. That must be a real tiny niche! Generic technology policies try to create value for the firm through development/innovation of new products and services, for instance 24x7 web-based banking or reduce the cost of operations through process automation. A firm could choose to be technologically aggressive or not while following these two generic technology policies. Recently, I came across an excellent paper written by Zahra and Covin in 1993 in Strategic Management Journal. This paper is one of the few papers that empirically examine multivariate relationship between business strategy, technology policy and the performance of the firm.

Zahra and Covin examined four business strategy dimensions, viz., commodity-specialty, marketing intensity, cost leadership, breadth of product line and three technology strategy dimensions, viz., new product innovation, automation or process innovation and aggressive technology posture. Their results provided clear evidence that business strategy and technology strategy were distinct constructs with wide variation across firms. They also found that high-performance firms had made a coherent set of technological choices consistent with the strategy of the firm. Their results provided empirical support for the intuitively positive correlation between cost leadership and process automation. They also found that it was better for undifferentiated firms to focus their technology spend on process innovation rather than product innovation. On the other hand specialty firms' investments in new product innovation combined with an aggressive technology posture and high-intensity marketing paid off handsomely in terms of high returns on sales.

 

In order to test how business strategy moderated the impact of technology policy on the performance of the firm in terms of return on sales, Zahra and Covin created five distinct business strategy clusters. I'm describing these business strategy clusters in the table 1 below. Table 2 shows correlation between business strategy clusters and different technology strategy choices.

Table 1: Clusters of firms based on business strategy and their characteristics

Firm Cluster based on business strategy	Description of the cluster
High profile, specialty product firms	Specialty products	High intensity marketing	Cost leadership a strategic thrust	Broad product line
Prudently aggressive, medium product line breadth firms	Products typically more specialty-like than commodity-like	High intensity marketing	Cost leadership a strategic thrust	Moderately broad product line
Low profile, narrowly focused firms	Commodity-like products	Low intensity marketing	Modest emphasis on cost leadership	Narrow product line
Middle-of-the-road firms	Moderately more specialty-like than commodity-like products	Moderate marketing & advertising	Average emphasis on cost leadership	Moderately broad product line
Undifferentiated, low marketing intensity firms	Commodity-like products	Low intensity marketing	Not concerned with cost leadership	Moderately broad product line

 

Table 2: Shows correlation between business strategy cluster, technology strategy and its impact on firm's performance in terms of return on sales

		Technology strategy
	Business strategy clusters ordered from highest performing in terms of returns on sale (ROS) at the top to lowest performing at the bottom	Aggressive technology posture	Automation and process innovation	New product development
Business strategy cluster	High profile, specialty product firm	+	+	+
	Prudently aggressive, medium product line breadth firm	+	-	+
	Low profile, narrowly focused firm	+	+	+
	Middle-of-the-road firm	0	+	0
	Undifferentiated, low marketing intensity firm	-	+	0

Note: + indicates a positive correlation, - indicates a negative correlation and 0 indicates no correlation.

 

Table 3: Technology choices that created high-performance for firms in five distinct business strategy clusters

Business Strategy clusters	Technology strategy
High profile, specialty product firm	Aggressive technology posture Automation and process innovation New product development
Low profile, narrowly focused firm
Prudently aggressive, medium product line breadth firm	Aggressive technology posture New product development Deemphasize automation and process innovation
Middle-of-the-road firm	Automation and process innovation
Undifferentiated, low marketing intensity firm

 

These results indicate that high profile, specialty firms and low profile, narrowly focused firms benefited from following aggressive technology posture, automation/process innovation and new product innovation. Prudently aggressive, medium product line bread firms benefited from deemphasizing automation and process innovation. Clearly, automation of processes across a wide range of products did not pay off for such firms. Such automation is hard to achieve and tends to be expensive. It is likely that return on sales declined for such firms due to overinvestment in technology.