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1. Building an Adaptive Enterprise through Customer Focus A New Business Framework and Approach October 27, 1999
2. Contents I. The Sears Story II. Business Imperatives in the Connected Society III. The New Business Paradigm IV. Gap Analysis V. Actions and Implementation Plan VI. Key Success Factors
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6. Consequently, by the Early 90’s, Sears Had Lost Its Historically Dominant Position *S&P Retail Index CAGR from 1990-1992 Source: Dow Jones, Bloomberg ($ Billions) Profit Revenue Indexed Stock Price ($ Billions) CAGR 89-92 23% 43% -1% -2% N/A Sears Wal-mart JC Penney K-mart Dayton- Hudson CAGR 89-92 29% -0.4% 4% 3% 10% Sears Wal-mart JC Penney K-mart Dayton- Hudson CAGR 89-92 42% 16%* 12% 6% 6% 2% Sears Wal-Mart JC Penney K-mart D-H S&P Retail Index In 1992, Sears Hired a New CEO, Arthur Martinez, To Turn Around the Company
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8. The Transformation Began With a New Vision: A Compelling Place to Shop, Work, and Invest C ompelling Place to Shop C ompelling Place to Work C ompelling Place to Invest Satisfied employees influence the shopping experience Loyal customers increase top line growth Employees rewarded for performance P assion for the customer Source: EY Analysis P eople add value P erformance leadership 3 C s and 3 P s Employees Financial Results Customer
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15. This Intense Effort Has Dramatically Improved Results for Employees, Customers, and Investors Sears Wal-mart JC Penney K-mart Dayton Hudson Scores Total Performance Indicators Employee Scores 2 Share Price Market Share S&P Retail Index 1992 = 1
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17. The Sears Story: Redefinition of Core Business Vision Strategy Go-to-Market Strategy Value Propositions Customer Performance Management Performance Management Employee Training & Empowerment Processes Knowledge Management Communication Communication
18. Key Success Factors Leadership Complete Internal Alignment Around Strategy Tireless Execution Measurement System Brand Power Long-Term Perspective Customer Focus SEARS
19. Contents I. The Sears Story II. Business Imperatives in the Connected Society III. The New Business Paradigm IV. Gap Analysis V. Actions and Implementation Plan VI. Key Success Factors
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22. Fundamental Changes Occurring in the Marketplace Are Requiring Samsung to Redefine its Basis for Competition Time ? Birth Renewal Growth Leadership Decline Value New Business Model Globalization Example: GE 80-81 86/87 91/92 99/00 Market Share Leadership Productivity Services and Solutions Digital Inflection Pt Business Model Active Inertia Value Convergence Internet Digital Virtual Community eCommerce Open Standard
23. The Connected Society Marks the Transition To a New Era of Human History Industrial Revolution (Age of Civilization) Transportation Revolution (Age of National Scale Transportation) Information Processing Revolution (Data Processing Age) Connected Society Revolution (Networked Society Age) STEAM ENGINE URBANIZED AND INDUSTRIAL SOCIETY LINEARITY & LIFE CYCLEs TRANSNATIONAL RAILROAD BLURRING INTEGRATED CIRCUIT ACCELERATION AND COMPRESSION INTERNET AND DIGITAL COMMUNICATION GLOBALLY CONNECTED SOCIETY AND ECONOMY SYNCHRONICITY “ We are in for a revolution” Source: E&Y The Leadership Connection TM Interviews REGIONAL SPECIALIZATION AND INTER-REGIONAL TRAVEL KNOWLEDGE WORKER-BASED ECONOMY Evolution of Business Social Implication Defining Application 2000 1950 1860 1750
24. The Connected Economy Is Characterized by Three Key Forces Intangibles Services Products Customer Speed Connection Source: Blur, 1998
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26. . . . Leading to Six Rules for Success in the Connected Society. 1 Source: E&Y Analysis Focus on desired customers 2 Focus on competencies 3 Leverage partnerships 4 Identify differentiators 5 Create hybrid models 6 Be flexible and agile
27. The New Organizational Premise is “Sense-and-Respond.” Source: Hackel, Stephen, Adaptive Enterprises , Boston:Havard Business School Press, 1999. MAKE-AND-SELL Assumption: Predictable change Goal: Become an Efficient Enterprise Mission and Policy Strategy - objective - plan Structure functional hierarchy Command and Control management system A Closed System SENSE-AND-RESPOND Assumption: Unpredictable change Goal: Become an Adaptive Enterprise Context - purpose and bounds - adptative structure Coordination of Capabilities - commitment management An Open System Internal Feedback External Signals Adapting
28. Transitioning to a Sense-and-Respond Organization Requires a Fundamental Shift Source: Hackel, Stephen, Adaptive Enterprises , Boston:Havard Business School Press, 1999. Make-and-Sell Sense-and-Respond Continuum Mindset behind Strategic Intent Know-How Process Organizational Priority Profit Focus Operational Concept and Governance Mechanism Information Architecture Information Technology Architecture Market Leader Criteria Articulation of Strategy Business as an efficient mechanism for making and selling offers to defined market segments with predictable needs Embedded in products Mass Production Efficiency and predictability Profit margins on products and economies of scale Functional and sequential activity Functionally managed and optimized Host-centric: hierarachical top-down command and control mgmt system Share of products and services Strategy as plan Business as an adaptive system for responding to unanticipated requests in unpredictable environments Embedded in people and processes Modular customization Invested in capailities and system Return on investmens and economies of scope Networked and paralleled activity and teams Enterprise management of essential information Network-centric: shadowing the dynamic network of people and teams Share of customer spending Strategy as adaptive business design
29. Contents I. The Sears Story II. Business Imperatives in the Connected Society III. The New Business Paradigm IV. Gap Analysis V. Actions and Implementation Plan VI. Key Success Factors
30. The Primary Business Objective for Samsung Is to Increase the Ultimate Value of the Company Market Value Multiple ($) Time Full Potential Typical Financial Performance Non-financial Performance
31. The Challenge is to Determine How to Manage Company Resources to Create Maximum Financial Outcomes = Earnings Revenues Revenues Invested Capital Market Value Earnings x x (Profit Margin) (Capital Efficiency) (Growth / Reliability) Financial Performance Market Value Multiple ($) Time Full Potential Typical Non-Financial
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33. Non-Financial Data Have a Direct Impact on Valuation A one unit improvement in the perception of quality of management could represent a 13.2% price premium on share value Source: Ernst & Young’s Measures That Matter , 1997 Computer Industry Pharmaceuticals Food Industry Oil and Gas Non-Financial Criteria Quality of Management Quality of Products and Services Level of Customer Satisfaction Strength of Corporate Culture Quality of Investor Communications Effectiveness of Executive Compensation Policies Effectiveness of New Product Development Strength of Market Position 1.4% 1.4% 0.0% 0.0% 1.3% 0.3% 1.3% 0.0% 7.6% 13.2% 2.4% 9.6% 0.0% 4.8% 0.0% 2.1% 0.8% 1.8% 0.9% 2.5% 0.0% 3.2% 3.1% 7.1% 2.6% 4.9% 0.9% 3.9% 0.0% 0.0% 3.0% 0.5% 2.8% 0.6% 2.9% 0.3% 4.2% 8.8% 5.8% 7.2% 0.0% 1.3% 0.0% 0.9% 1.1% 2.5% 5.3% 7.3% 3.1% 2.5% 2.7% 1.5% 0.4% 1.2% 0.9% 1.8% 1.2% 6.1% 4.6% 4.4% 1.6% 4.1% 7.3% 9.3% % Increase in P/E Ratio given a one-unit change in…. Influence On Price Short Term Long Term 15% 0% 15% 0% 15% 0% 15% 0%
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37. A Customer Driven Organization Performs Six Key Customer Processes Identify Target Customers Develop Offerings Define go-to-market strategy Fulfill Promises Determine Customer Lifetime Value Manage customer relationship Customer Strategy Customer Behaviors Customer Economics Outcome Measures Delivery Strategy Know Who Are Your Customers Know What Your Customers Do Know What Your Customers Are Worth Know What You Can Get Back Decide What to Give Your Customers Determine How to Deliver Understand Your Relationship with the Customer Exchange Value with Your Customers Capability Specifications Opportunity Design Opportunity Identification
38. Customer Driven Business Framework Vision Business Strategy Offer Development Communication Service & Support Customer Strategy Competencies Go-to-Market Strategy Pricing Channel Promotion Product Design Brand Strategy SCM NPD Customer Care Salesforce Ad Campaign Field Services Processes Organization Design Customer Knowledge Management Performance Metrics Value Proposition Development CRM Op Model
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41. Measuring Customer Focus in the New Environment Adapted from: The Balanced Scorecard , Kaplan & Norton, 1996 Leading Indicators (Drivers): Customer Value Proposition Customer Acquisition Customer Profitability Customer Retention Customer Satisfaction Market and/or Wallet Share Lagging Indicators (Outcomes): Customer Response Lead To Value to Customer Product/Service Attributes Image Relationship = + + Functionality Price Time Brand Quality (Examples of measures:) (Examples of measures:) (Brand survey rating) (Share points) (% new customers in target segments) (Fully-costed margin in target segments) (# of repeat sales in target segments) (CSI) (Back order rate) (Relative price ratio) (Warranty) claims After-Sales Service Examples of attributes: (External product ratings) (Response time, problem resolution rate)
42. Contents I. The Sears Story II. Business Imperatives in the Connected Society III. The New Business Paradigm IV. Gap Analysis V. Actions and Implementation Plan VI. Key Success Factors
43. Marketing IQ Test 1. Businesses in America were reasonably successful during the 1980s, enjoying real growth in sales of 2 percent or more per year. 2. During the coming decade, marketers will earn more profits from new brands than from existing ones. 3. A high share of market in a product category generally leads to economies of scale that result in a high level of profitability. 4. There is little agreement among marketers about what the hot new concept “brand equity” means. 5, A reasonable way to set the marketing budget is to take last year’s figure and adjust for inflation. 6. Line extensions are a very risky way to introduce new products. 7. Focus group interviews are a serious marketing research tool that a manager can safely use to help make serious marketing decisions. 8. Business today invest more money in finding new customers than in further developing current customers. 9. The most profitable customers of a firm are usually its biggest customers. 10. Big companies generally make their marketing decisions after evaluating many alternatives in terms of profitability. True False Don’t Know
44. Marketing IQ Test (Cont’d) 11. The more appealing a new product concept is to prospective buyers, the more likely it is it will be a success. 12. Every company should strive to hold on to all of its customers. 13. Location is the most important determinant of success for a new retail business. 14. One-hundred percent customer satisfaction is not an intelligent business objectives. 15. Media planners at major advertising agencies know a great deal about the relative effectiveness of print, television, and radio advertising. 16. Because pricing is such an important component in the marketing mix, most big companies have a serious pricing strategy based on pricing research. 17. Nielsen’s television rating service--especially the new “people meter”--provides valid information about the number of people watching a particular television program. 18. Consumer and trade promotional programs tend to be more profitable than advertising. 19. Companies cannot quantify the effects of public relations programs. That's one reason why PR is a less valuable components of the marketing mix than advertising or the sales force. 20. Most marketing and advertising programs usually are measured in terms of their profitability. True False Don’t Know Total:
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46. Contents I. The Sears Story II. Business Imperatives in the Connected Society III. The New Business Paradigm IV. Gap Analysis V. Actions and Implementation Plan VI. Key Success Factors
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50. Operating Model Development: Business System Competencies (Staffing, Training, Development) Performance Management Business Processes Knowledge Management & Information Systems Change Management Business Processes
51. Operating Model Development Competencies (Staffing, Training, Development) Performance Management Business Processes Knowledge Management & Information Systems Change Management Business Processes
52. Competency Modeling and Assessment Methodology Universal Competency Modeling Process Job/Role Assessment Gap Analysis HR Link Tactical Organizational Design Stage 1 Stage 2 Stage 3 Stage 4 Documentation Review/ Current State Understanding LINKAGE Succession/ Career Planning Selection Training and Development Performance Appraisal Compensation Recruitment Validation
53. Operating Model Development Competencies (Staffing, Training, Development) Performance Management Business Processes Knowledge Management & Information Systems Change Management Business Processes
54. Operating Model Development Competencies (Staffing, Training, Development) Performance Management Business Processes Knowledge Management & Information Systems Change Management Business Processes
55. Performance Management is the Vital Link Between a Company’s Ability to Define its Strategy and Implement It. Strategy Vision Performance Management Execution Concrete initiatives to operationalize a firm’s strategy Execution at all levels consistent with strategy Measurement Motives What you measure is what you get. It’s not what you expect … it’s what you inspect. If you can measure it, you can manage it.
56. Effective Performance Measurement Systems Capture Both Financial and Non-Financial Value Creation Strategic Decisions Financial Markets Investor Estimates of Future Cash Flows Strategy Execution Capital Allocations Share Price Financial Performance Measurement Non-Financial Performance Measurement Company Market Feedback Loop: Measuring Value Value Creation
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60. At a Personal Level, Understand How Their Actions Impact Economic Value ILLUSTRATIVE Capital Expense Production Expense Raw Materials Ordering Costs Errors Clerical Errors Revenue Ability Administration Expense Facilities Rents/Occupancy Expense Expensed Capital Transportation People Expense Confidence NOPAT Sales Marketing New Product Development Inputs EDI Inventory Spoilage Bad Data Errors Staffing Constraints Equipment Technical Errors Education Intellectual Aptitude Reporting Warehousing Cost Of Capital EVA
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62. The BSC Links Strategic Objectives to Measurements Across Four Perspectives Business Process To satisfy our customers, in which internal business processes must we excel? Customer To satisfy our shareholders, what financial objectives must we accomplish? The Strategy Financial To achieve our strategy, which customer needs must we satisfy? People To achieve our strategy, how must the people learn and innovate? The Balanced Scorecard translates the strategy of a firm into statements of “things the firm needs to do well to be successful.” In its standard form, the Balanced Scorecard defines success across at least four perspectives: Financial, Customer, Business Process, and People. Most Scorecards also seek a balance between indicators of current growth (often financial and business measures) and indicators of future growth (typically in the “customer” and “people” perspectives) *Based on the original concepts proposed by David Norton and Robert Kaplan in their 1992 Harvard Business Review article
63. The Balanced Scorecard Defines Strategy As a Set of Hypotheses About Cause and Effect Increase Customer Confidence in Our Financial Advice Broaden Revenue Mix Improve Returns Understand Customer Segments Cross-Sell the Product Line Develop the Offering Achieve Employee Satisfaction Improve Customer Information Broaden Skills (Financial Planner) Align Reward System Partial Revenue Strategy Illustrative
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65. For example, a Large Beverage Company People Continue to Attract and Retain Highly-Effective Workforce Continue to Attract and Retain Highly-Effective Workforce Foster Culture of Innovation and Risk Taking Foster Culture of Innovation and Risk Taking Eliminate Silos and Ceilings Eliminate Silos and Ceilings Provide Challenging and Rewarding Work Provide Challenging and Rewarding Work Create a Work Environment of Trust, Teamwork, and Integrity Create a Work Environment of Trust, Teamwork, and Integrity Financial Customer Business Process Retailer Push Consumer Pull “ Profitable Share Growth” “ Be Consumer Brand-of-Choice and Retailer Preferred Supplier” “ Provide High Quality, Enhanced Margin” “ New Ideas, Good Team Work” Maximize Total Return to Shareholders Strategically Manage Market Share Strategically Manage Market Share Meet or Exceed Long-Term Corporate Earnings Goals Meet or Exceed Long-Term Corporate Earnings Goals Achieve Productivity and Cost Advantage Achieve Productivity and Cost Advantage Enhance Profitability of Business Partners (Wholesaler, Retailer) Enhance Profitability of Business Partners (Wholesaler, Retailer) Be Perceived by Consumers as Having the Best Value Be Perceived by Consumers as Having the Best Value Enhance Brand Equity, esp. Budweiser Trademark Enhance Brand Equity, esp. XXX Trademark Ensure and Promote High Product Quality and Freshness as a Competitive Advantage Ensure and Promote High Product Quality and Freshness as a Competitive Advantage Help Partners Manage Product Mix and Availability Help Partners Manage Product Mix and Availability Partner with Retailers to Execute Win/Win/Win Activities Partner with Retailers to Execute Win/Win/Win Activities Strengthen use of information across the extended supply chain, including 2nd and 3rd tier Strengthen use of information across the extended supply chain, including 2nd and 3rd tier Understand Customer Trends to Design Targeted Pricing, Packaging, and Advertising/Merchandising Understand Customer Trends to Design Targeted Pricing, Packaging, and Advertising/Merchandising Maintain Best-in-Class Master Scheduling and Distribution Capability Maintain Best-in-Class Master Scheduling and Distribution Capability Maintain Consistency in Production and Procurement Processes Maintain Consistency in Production and Procurement Processes Develop Creative Production Innovations Develop Creative Production Innovations Maintain Best-in-Class Innovative Marketing Capability Maintain Best-in-Class Innovative Marketing Capability “ Manage and Measure Across Value Chain” Incorporate Leading Edge Decision Support Systems into Effective Decision Making Incorporate Leading Edge Decision Support Systems into Effective Decision Making Provide Right Product/ Package at Right Place, at Right Time, at Right Price and Margin
66. A XXX Cause-and-Effect Model Should Show How its Strategic Objectives in All Four Perspectives Business Processes People Growth Customer/ Consumer Understand & respond to customer needs Create a knowledge- sharing culture Reduce inventory & current assets Increase unit volume Maximize shareholder value Hire & develop customer-focused employees Make what you sell, don’t sell what you make Empower employees to make decisions closer to the customer Increase EVA Increase price relative to market leader Increase customer acquisition & share of wallet Increase customer retention & lifetime value Build brand equity Target key customer segments Develop customer knowledge management infrastructure Increase sales-to-asset ratio Illustrative XXX Cause-&-Effect Model Increase customer profitability Measure & reward customer-focused behavior Organize around the customer Leverage R&D to develop innovative digital products that ad- dress customer needs
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70. The Balanced Scorecard’s Metrics and Supporting Processes Are Cascaded Down Through The Organization As Far As Needed, Often to the Individual Hourly Worker Design Scorecard Implement Scorecard Cascade Level n: Dept. or Team Design Scorecard Implement Scorecard Cascade Level I: Corporate Design Scorecard Implement Scorecard Cascade Level II: Business Unit Design Scorecard Implement Scorecard Cascade Level n+1: Individual
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74. Operating Model Development Competencies (Staffing, Training, Development) Performance Management Business Processes Knowledge Management & Information Systems Change Management Business Processes
75. Contents I. The Sears Story II. Business Imperatives in the Connected Society III. The New Business Paradigm IV. Gap Analysis V. Actions and Implementation Plan VI. Key Success Factors