Return on Strategy

How to Achieve it!

Michael Moesgaard, Morten Froholdt, Flemming Poulfelt

• Publisher: Routledge
• Year: 2009
• ISBN:
  9781135215330
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

Why is it that many companies meticulously following recipes on management and strategy fail? Did Google, Skype, Ryanair, Huawei and a number of other successful companies buy into a well thought out strategy and adhered to that over time? How do companies deliberately opting out of the recipe game and opting into the out-of-the-box-thinking fare? In short, why is it that some companies achieve a higher Return on Strategy than others?

Whereas Return on Investment (RoI) has attracted increased attention over the last couple of decades, little, if any, attention is being paid to whether companies do at all achieve Return on Strategy (RoS) and how.

This book provides an overview of contemporary strategy literature and recipes brushed up with a view to identifying explanations as to how recipes has seldom worked as intended. One out of several reasons rests on the fact that recipes do not take the so-called X-factor into account.

With the X-factor as the starting point the book examines a sample of 50 global companies of which some has achieved a remarkable high Return on Strategy and others failed. The 50 companies covers most continents as some are from the North America, some are from the European continent and others are from different parts of the emerging Asian region – threatening companies from the Western hemisphere.

The book explains the reason behind success and failures and provides practical tools as to how companies may increase their Return on Strategy. In the toolbox, you will find a framework on how to increase the Return on Strategy as well a number of dynamic positioning tools, road maps and bearing points. Invariably, more and more companies - including consultants, business leaders and MBAs - now work diligently in order to increase their Return on Strategy and the best of them are here to stay successfully – are you?

1
THE X-FACTOR UNIVERSE IS OVERLOOKED IN STRATEGY!

Hatched in a Swan's Egg?

Fifteen years have passed since Kim Fournais and Lars Seier Christensen met for a drink to discuss an idea that would lead to a billion-dollar business within the fnancial services industry. As founders of Saxo Bank, a top 25 foreign exchange (FX) provider and the recipient of multiple awards for contributions to the industry, they have managed to successfully navigate the competitive seas of the fnancial services industry. Since 1998 the compounded annual growth rate (CAGR) of the company's profts before tax computes to more than 60%. For the fnancial year 2007 the profts before tax increased by 78% on the previous year leading to Saxo Bank receiving the “Euromoney” award for the fastest growing FX bank of the year.

Aside from their performances and their doings within the fnancial services industry they are one of the sponsors behind the cycle team that won the Tour de France of 2008. Saxo Bank therefore also displays an ability to pick winners outside their business that can increase the brand of their company.

How did Saxo Bank achieve this? Which business book recipe did they follow? And what type of strategy did they pursue?

Saxo Bank is widely recognized among its peers in the industry as an innovative and pioneering company and has received numerous awards for its trading platform, the SaxoTrader. In 2008 they received the award for the best retail platform for the fourth consecutive year at the e-FX awards, sponsored by “FX Week” magazine. Since 2003 the awards presented to Saxo Bank, by “FX Week” magazine, World Finance magazine, “Euromoney” and “Proft & Loss” magazine, have grown at a steady pace cementing their place in the industry as a leading edge player.

Is the successful company hatched in a swan's egg right from the outset? And what does it take – what is the recipe if one exists at all – for eventually turning an ugly duckling into a beautiful swan?

Initially, the bank started off with performing mediocre brokerage activity attracting a somewhat negative publicity. However, the company changed business model and went on the route of leading players of IT and fnancial services with online trading as the foremost tactical weapon. When the company achieved its banking licence in 2001 it changed its name to Saxo Bank.

Banking business is often considered a conventional industry where success is dependent on a long track record, history, strong local presence and a service delivery apparatus comprising friendly front-line offcers.

However, the entrepreneurs behind Saxo Bank did not adhere to any of these industry rules of the game. Neither do they stick to prevailing CEO norms, as Lars Seier Christensen and Kim Fournais jointly share the CEO responsibilities, which is also an unprecedented construction not only in the management literature but also in managerial practice.

Can Entrepreneurs Have Their Cake and Eat It Too?

When asked about the strategy they had followed over 15 years, the founders of Saxo Bank did not just refer to an existing well-known strategy or management book. As Kim Fournais puts it:

We did not follow a specifc strategy described in a business book. We may even be unable to describe or fully explicate what we have done in terms of strategy. What matters to us was the passion to create our platform and that we have been inspired by the execu tion power of others, such as Jack Welch.

Even more importantly, it seems diffcult, if not impossible, to effciently correlate the success elements of Saxo Bank with the strategies and recipes outlined in the current literature.

Imagine that Saxo Bank adheres to both a differentiator and a cost leader strategy. Imagine that they run the company with two CEOs with equal responsibility. Imagine that they deliver their core IT platform on a wholesale basis to some of their competitors, whilst at the same time generating channel confict by addressing banking customers directly.

How come that Saxo Bank can have its cake and eat it too? How come that Saxo Bank can combine various generic strategies, such as differentiation, cost leadership and niche excellence? Why do they pursue blue and red ocean strategies simultaneously? How come that you can be successful when breaking many of the rules from strategy theories as they do?

The path to success has not been an entirely rosy one, but the thorns encountered along the way have, to a large degree, been instrumental in the strategic direction of Saxo Bank and thus its remarkable top line growth. The top line has grown by more than 50% annually each year and with a continued strong underlying trend. Saxo Bank has not been focused on identifying the holy grail of strategy by devising the one and only generic recipe for success. In fact, they did not use any recipe at all. As true entrepreneurs they did it their own way.

Building Unprecedented Bridges, Breaking Conventions?

Invariably, part of the Saxo Bank road map resembles well-known aspects, although often mixed in a creative way. Saxo Bank succeeds because the company is keen to execute either something which is not described in the standard recipes or something which is the complete opposite of the prescribed behaviour.

In order to fully understand the achievements of Saxo Bank it is necessary to look into two widely different universes. One universe is characterized by companies adopting textbook strategies or companies, which incidentally ft an easy-to-understand recipe. As foremost examples of recognized typical cost leaders, IKEA, Dell, Wal-Mart, Anheuser-Busch, Samsung Electronics and Hyundai Electronics are often mentioned and admired cases. Virgin, Harley Davidson, JetBlue, Toyota, Glaxo Wellcome and IBM are often quoted as examples of successful differentiators. Ferrari, Gucci and Louis Vuitton are all examples of a focus strategy, while Costco and Lidl go for discount strategies. Finally, we have Cirque du Soleil and Starbucks as prime examples of blue ocean strategy. As these examples are primarily based on conventional strategy frameworks. This space is labelled the recipe universe.

Another universe is defned by companies which do not ft the conventional recipes and are tainted very much by out-of-the-box-thinking. Many of these companies display highly profitable growth which is often correlated with unconventional thinking, as is the case with Saxo Bank. Other examples to be addressed later include Google, Skype, Facebook, Huawei, Yahoo, Hotmail, eBay, Ryanair, PayPal, Naturhouse and Wahaha. This universe is characterized by companies that do not ft the recipes but rather deliberately work in contrast to the recipes and make use of what is called the X-factor. Therefore, this space is labelled the X-factor universe.

How come that we are so keen on recipes in the management literat ure? How come that case stories like Saxo Bank moving out of the recipe universe and successfully into the X-factor universe are untold? How come that no alarm bells ring at conventional companies, when new comers are building strategic bridges that they should not be able to build according to traditional theory? And how come that some companies are deliberately and successfully breaking industry conventions?

It is somewhat unfortunate that the dominant strategy literature has expended so much energy on establishing rules and recipes, leaving top-level management and boards almost on autopilot once a business book on strategy was adopted. The out-of-the-box initiatives are therefore largely uncharted today and no room is left for what could be labelled the X-factor in strategy.

At the same time there has been a competition in the theoretical landscape between different approaches to strategy. Various perspectives and schools have been introduced, often leaving executives uncertain on which approach to apply as the theoretical prescriptions often emphasize the importance of not mixing perspectives.

Inevitably, easy procrastination of companies’ tendencies to adopt certain strategies has been the consequence of conventional thinking. However, more and more companies are making their stewardship in the out-of-the-box strategic landscape moving into the X-factor universe. As this trend evolves, there is a growing need to effectively manage the risk of business books on strategy being successfully conquered by disruptive strategies from the X-factor universe.

Optimizing the Exploitation of Trigger Events

How did Saxo Bank manage to transform itself from a brokerage com pany deploying a full service model to a global online success, and what are the reasons behind their innovative strength and ability to continu ously develop their award winning trading platform?

Back in the 1990s, the company was in a crisis as negative press coverage for the industry as a whole emerged, leading to some major clients leaving the company and potential clients hard to convince. True entrepreneurs do not give up just because of temporary head wind. In this case, the SaxoTrader platform was developed during the subsequent years. Saxo Bank relied heavily on this IT platform in conjunction with their increased focus on the Internet. Maybe this platform would never have been built if the entrepreneurs had not met with temporary opposition in the market?

A parallel example is the case of Hotmail. When trying to develop a web-based personal database company, the entrepreneurs were frustrated because their employer's frewall prevented them from accessing their personal email accounts. Subsequently, they developed the idea of email accounts that could be accessed anonymously through a web browser leading to Hotmail as we know it.

A crisis, head wind or temporary opposition may be an important stepping stone to bankruptcy for some companies and a golden opportunity for others.

In addition to a crisis, important events that lead to golden opportunities may be largely down to luck or initial failures. While developing an online facebook for his local university in response to the traditional paper-based versions, Mark Zucker-berg stumbled upon a worldwide demand for a social networking web site that has since led to the growth of Facebook. When the Spanish dietary company Naturhouse opened their frst retail shop in the early 1990s it failed miserably, calling for a revised strategy that has since proven highly successful.

The X-factor Narrowed Down

Performing a Google search on the term “X-factor” will yield just over 70 million hits within 0.25 seconds. Many of these hits will lead to information about the talent show of the same name broadcast in more than 20 countries across the world. However, this is not the X-factor of interest in this publication. The X-factor of interest is what the Shorter Oxford English Dictionary defnes as:

A critical but indefnable element. Also a noteworthy special talent or quality.

In other words, the X-factor comprises an element of surprise or something which goes far beyond what could be found in a standard business book recipe. It comprises features that make a company superior in a special way while not necessarily following the typical management recipes.

To avoid paging through the many hits that the “X-factor” search returns, the above defnition can also be found by performing a search on the word combination of X-factor and dictionary. What such a search, however, does not return is the X-factor of the company Google itself – a company which has been very successful by not following business book strategies. Neither will a search performed on the X-factor of Saxo Bank, Huawei, Facebook or some of the numerous companies that have had success without relying on business book recipes yield any results.

This book sets out to explore the X-factor universe and what companies belonging to this universe have done in order to break the rules of the conventional game or otherwise thought “out-of-the-box” whereby they outperform, i.e. achieve a disproportionately high Return on Strategy.

This book also sets out to illuminate: how major parts of the existing literature have derailed or even extinguished the X-factor, being part of the recipe universe. How Saxo Bank and other companies have found inroads to diligent exploitation of the X-factor. How Google and similar business cases have worked with, for example, reverse pricing mechanisms and other unprecedented strategic elements in the X-factor universe. How the X-factor needs to be rethought and redefned over time. How diffcult, yet very relevant, the X-factor as an “indefnable element” is to catch, describe and evaluate thereby making it irrelevant to create a new recipe. How the use of the X-factor often disrupts the establishment and conventional thinking.

The book will depart in Chapter 2 with an analysis of existing managerial recipes on how to achieve success. The survey is based on some of the most successful business books during the last 25 years. It shows that the recipes for success seem quite short termed as well as ambiguous when it comes to the specifc conclusions which can be made. As such the recipe game for business success formulated in some bullet points seems to be a mirage for several reasons.

One main reason is that a considerable number of the companies on which basis the recipe for success was crafted in the frst place, turned out to be unsuccessful. Another main reason is that the recipes are crafted, formulated and marketed under an assumption of full validity without any room for other or additional explanations. The mirage is then already evident when just these two reasons are combined, because how can you trust a recipe, if a recipe pretends to be exhaustive, but ends up with companies that are not successful because they go bankrupt or otherwise cease to exist?

This recipe game is taken over in Chapter 3 by a guided tour in the strategy landscape with the purpose of demonstrating the scope and variety of strategy perspectives. The strategy “jungle” is narrowed down to four different perspectives, namely strategy as positioning, resource-based strategy, blue ocean strategy and disruptive strategy.

These four perspectives lead directly forward to a combination of the four different perspectives in what is labelled “The Strategy System” and a focus on how to achieve Return on Strategy (RoS), which are presented in Chapter 4. Arguably, companies in the X-factor universe diligently achieve a high Return on Strategy, in fact they outperform not only their peers, if such exist, they outperform their own strategic goals ...

Table of contents

• Cover
• Half Title
• Full Title
• Copyright
• Contents
• Foreword
• Are We Able to Produce Gold?
• 1 The X-factor Universe Is Overlooked in Strategy!
• 2 The Recipe Game
• 3 The Strategy Landscape
• 4 The Strategy System or How to Combine Perspectives
• 5 What Triggers Strategy?
• 6 Exploiting Customer Attitudes
• 7 Revising the Product Portfolio
• 8 Leveraging the Financial Circuit
• 9 Optimizing the Organizational Design
• 10 Spinning the Technological Chain
• 11 Driving the Leadership Genes
• 12 Inroads to the Achievement of a Higher Return
• Appendix I – Zero-SAC
• Appendix II – Foremost Case Companies
• Notes
• Bibliography
• Credits And Permissions
• Index