Hello, I'm Shlomo Maital. This is Cracking the Creativity Code, Part Two: Delivering Ideas. And in this session, we're going to talk about the second tool. Tool #2, Strategy & Structure. Strategy is taught in business schools. Full name is competitive strategy. It's a complicated discipline. There are textbooks. Textbooks are, many of them are hundreds of pages. I'm gonna try to simplify strategy for you and boil it down as much as I can into a visual tool. Something that you can use and explain for the road map lying ahead of you. First a bit of history. In 1980, a young Harvard Business School lecturer named Michael Porter published a book called Competitive Strategy, published by Free Press. This book, unlike many books, including one's that I've written, this book created an entire new business discipline called competitive strategy. The book has sold millions of copies. It's in its 60th, 6-0 edition, translated into at least 19 languages over the past 35 years. And in this book, Michael Porter, who is encouraged by his professor, named Ronald Christianson, Michael Porter makes a simple point. Before you go out to battle with your new product idea, before you try to sell your new product or your new service, it's good to check the battlefield. Check out the battlefield and Professor Porter tells us how to do it in a structured and fairly simple way. Oh, before we look at his analysis, two definitions. What is strategy? It's the creation, implementation and sustainment of market leading, product differentiation. Everything about competitive strategy follows directly from this definition, creating value by making something different, different of course, meaning better. Not just a bit better, a lot better. A whole lot better. And the better we understand what creates value in our product, the more our chances to succeed increase. Structure of the organization. Now, everything about strategy has to be implemented, done by somebody. So we need to think about the people who are going to do the strategy, how we explain it to them, how they know exactly, exactly what they're supposed to do, and then how we organize our business. Even before we've hired a single person, really good to think about these things in advance. Think ahead backward. We explained in the introduction to this course. Think about what your business will look like ideally and then work backward to see how you make it happen. So the structure of each organization states what major job function requires and how each job function relates to all the others. Who do I report to and who reports to me? And strategy and structure, of course, are related. This is Michael Porter's famous five forces analysis. This is how you analyze the battlefield before you go out to do battle to sell your product, your wonderful idea. There are five forces at work in any industry. The first force is simply the degree of rivalry within the market and within the industry in which you work. Differences between products, the brand identities, the rivals, the companies, the players, the degree of concentration. Are there few players or a lot? What's the rivalry in the industry? Second force, supplier power. You're going to need to buy stuff from suppliers, components, services. How much power do your suppliers have? [COUGH] How costly are your suppliers? Are there alternative suppliers or is there one supplier that you're stuck with as a monopoly? Second force, the threat of substitutes. So, what product's a substitute or compete with your product? If people don't buy your product, what would they use instead? Buyer power, the power of your buyers. Are there a lot of buyers or are there just a few? Sometimes we have important clients. And they're so important to us, they have great power over us, especially in bargaining over prices. So what's the power of the buyers? And the last force is the barriers to entry. If you have a terrific idea, and you bring it to market, can somebody knock it off, compete with it by copying it, despite patent protection or trademarks or anything else? Are there things that can keep people out of the market and give you some time at least, to capture profits before others come along and do what you're doing, because they've learned what a great idea it is. Those are the five forces. Internal rivalry, suppliers, substitutes, buyer power, and barriers to entry, the famous Five Force Analysis of Michael Porter. Do a pictures of the industry you're gonna compete in, fill in these five boxes, analyze the five forces, even before you go out to battle, especially before you go out to do battle. Another supplementary tool related to this is one developed by Orit Gadiesh. And she's a business consultant who developed a powerful tool that asks a simple question. Value, is what start-up entrepreneurship is about. But the reflection of value, the footprint of value is money and profit because people pay according to the value they perceive they're getting. So it helps sometimes to ask where is the profit, where is the money in the industry I'm going to compete in? Suppose I have an idea related to color printers and I want to do a Porter industry analysis. One thing I can do, is to look at the profit pool, that is the division of profit among different players in the industry. In any industry we have those who manufacture the printers, those who manufacture the cartridges that have the ink and the toner, if it's a laser printer. We have the retailers who sell the printers, and the retailers who sell the cartridges and the toners. And by looking up easily available data for publicly listed companies that publish their profit and loss statement, we can figure out what their gross margins are. That is, the gross margin is the ratio between profit that they make and the revenues that they receive from selling the product. On the x-axis of the profit pool diagram, we have the size of the revenues of the companies in billions of dollars and on the y-axis, we have the profit margin, the company margin, or gross margin, whatever you want to call it. And by one glance at this profit pool, it's pretty hard to do one and it takes some time to gather the data. But looking at this diagram, we can see immediately, the people making the money are not the manufacturers who make the printers. In fact, they seem to sell inkjet printers at a loss, and that makes sense, and you'll see why in a moment. There's some profit in making laser printer, especially the professional laser printers bought by businesses and print shops, and so on. Those who manufacture cartridges and toner, very high profit margins, between 50 and 60%. The retailers who sell the product, minimal profit margins, 15%. Considerable profit in selling cartridges and toners at the retail level. Approximately 30% margin. So, this is a business driven entirely by selling the ink cartridges and the toner rather the actual printer itself. And I know that some of my students at MIT who came from HP once told me HP considered giving away printers, inkjet printers for free just so that people would buy the ink cartridges, and make profit. So, see if you can figure out as part of your strategy analysis, your industry analysis, the competitive strategy. Where's the money? Who is making the money in the industry? It doesn't mean you have to go to the place where the margins are highest. But it does mean that you have to find out where your place is in the value chain and whether you're going to be in a place where the money is and where it will be when you come to market. A word about organizational structure. Which has a lot to do with strategy, because the structure of the company will have a lot to do whether you can implement your strategy. And the key here is implementing the strategy, not the paper strategy that you develop, not the road map for your strategy, but also who will do it and how well do they understand what they need to do? I think that Michael Porter's book originally didn't achieve a lot of practical success because many companies felt that it was sufficient to develop a complicated strategic plan as a kind of a book. And then they realize what they really needed was not a vice president for devising for a planning strategy. They needed a vice president for strategy implementation and the implementation was 90% of the success, the formulation, perhaps only 10%. So, there are two different kinds of structures, organizational structures companies can follow. One is called hierarchy. A pyramid. A multi-level system with many levels. IBM it is said in the 1990s, the early 1990s, when IBM got into a great deal of trouble, had something like 18 different levels in its hierarchy. A hierarchical organization with such a tall pyramid, if there's a great idea at the bottom and the idea has to make its way all the way up to the top of the pyramid. And then all the way, all the way, all the way down to the bottom of the pyramid to implement it. Pretty unlikely ideas are going to survive that. Pretty unlikely anyone's even gonna try if they're way down here at the bottom of the pyramid. So these pyramids, hierarchies are pretty old fashioned. Many companies, including start-up entrepreneurship organizations, prefer flat organizational structure. Somebody is in charge, there are a few senior managers, maybe you know vice presidents and then others report to them. And the reason for this flat structure is that it's much simpler, much quicker, much more flexible, much more agile. And it's much more likely that ideas will come from the field and move up to the place where people can make a decision on those ideas and actually implement them. Much more likely that with a flat organizational structure, you're going to be able to implement your strategy quickly and well, and most important, you're gonna be able to change your strategy. Because strategy can't be set in stone, it has to be flexible and adapt quickly to changes in the marketplace. One more word about strategy and the start-up life cycle. There's a basic problem with strategy in a start-up and structure in a start-up. You start day one with a founder or a team of founders, usually a team of three. A manager, a technology person and a salesperson. And then you start to hire and you find good people. Today we have a talent shortage in many areas, so it takes quite a lot of time to find the right people and hiring is one of the key decisions that you're going to make as a start-up entrepreneur. So you need to do it well and take your time. Spend time, I know companies where the CEO will spend an entire day with a potential hire getting to know them, having lunch, playing squash, or tennis with him. And really learning who the person is and what their goals are, their abilities, their skills, their motivation. So, this takes a lot of time. The problem is you don't have time as a start-up. In some ways, a start-up is like a baby antelope born in Africa in the Serengeti. And the antelope is born, baby antelope with it's long legs. And in a very short time it's standing on it's legs and in an hour or two, it's able to run with it's mother. And it has to do that because there are lions out there. And the lions are coming after you. So a start-up is a baby antelope. And you'd have to run from the time you are born, or else the lions will catch you. How do you do that? Well, here's a model that I learned from a highly successful entrepreneur, named Yehuda Zisapel, who started a company called RAD, R-A-D, 34 years ago in 1981. And he's used this model to create a 120 spin off start-ups. Some of them in which he invested, some not. Half of them in the area of the mother ship, the RAD original company. And the idea is that you encourage your employees to go off and start their own companies with their idea. And, you provide them help from day zero, with R&D, managing, financing, human resources, engineering, production. So, like the baby antelope, they're running right from day zero. And then gradually, they hire their own people, and need less and less help and mentoring from the mother ship. But, they're more likely to succeed because they have help from the mother ship, and they can run right from day zero. And the success rate of start-ups in this cloud of 128 companies that sprang from RAD is 70%, well above the usual 10% success rate that we associate with start-ups. Think about this model, build your start-up under the umbrella of a strategic partner, a large company, willing to help you, willing to mentor your because they have an interest in your success. And a story before we conclude this segment, Tool number 2, Strategy and Structure. This is Sir James Dyson, he's a commander of the British Empire, he's British inventor, industrial designer, founder of the company named after him. And he invented the dual cyclone bagless vacuum cleaner. And it works on a principle called cyclonic separation. It's a wow, it's a vacuum cleaner that's a lot better than the standard vacuum cleaner. It has many really good features. Dyson understood, using our principle of strategy, that strategy is creating a key differentiating feature. What does my vacuum cleaner have that the other vacuum cleaners don't have? He decided he was gonna focus on one feature, bagless. Our vacuum cleaner, the Dyson vacuum cleaner, doesn't need these inconvenient bags that you have you to change and try to find bags in the supermarket and replace the bags and so on. Bagless vacuum cleaner. The other features, a powerful suction and many other features. Light, easy to carry vacuum cleaners. They're all there, but he thought that this is the one feature people would really like. So strategy, simplifying down to one principle. Strategy is find one key major value creating, differentiator, differentiating feature, or characteristic of your product. And hammer that differentiator home, but first, verify it. Make sure that that's the thing that people really love, and that creates high value. Test your understanding. Please go to the Assignments page and answer these multiple choice questions. What's the simplest definition of strategy? How are strategy and structure related? Why are more companies trying to become flat in their structure? What are the five forces of Michael Porter? How do you answer the question, where's the money in an industry's value chain? And why should you focus on a key value-creating feature rather than market and sell all of them. For your action learning, take your innovative idea. Do a quick and dirty five forces analysis for your industry. Analyze Porter's five forces. Do the battlefield intelligence check before you go out to battle. Answer the question where is the money by looking at profit and loss statements for companies. State your differentiator. What's the evidence that your differentiator is something clients truly need and want? How will you sustain this advantage when your competitors perhaps copy your key differentiating feature? That concludes Tool number 2. So we've talked about price value cost and then strategy. And our Tool number 3 also would be visual, and we call it Value Profiles. How do you create a picture of your key differentiator in a way that communicates your value proposition to your employees, to your investors and possibly to your clients as well?