<br><h3> Chapter One </h3> <b>Escape Velocity and the Hierarchy of Powers</b><br> To free your company’s future from the pull of the past, <br> to escape the gravitational field of your prior year’s operating<br> plan, and to complete the round trip by returning <br> with next year’s operating plan, you need to apply a force <br> that is greater than the inertial momentum of current <br> operations. No experienced executive is likely to underestimate <br> the amount of force required. It is, as we like to say in Silicon <br> Valley, ginormous.<br> Newton taught us several centuries ago in his first law of <br> motion, the one that covers inertia, that an object at rest tends <br> to stay at rest and an object in motion tends to continue in the <br> direction in which it is currently moving. The same goes for <br> resource allocation.<br> When organizations begin their strategic planning effort <br> by circulating last year’s operating plan, they reinforce the <br> inertial properties of the resources as currently allocated. <br> This is not a good outcome, but to be frank, there is no help <br> for it. You cannot really zero-base the budget every year, <br> not in an enterprise of any size. So you have to assume this <br> inertial force will be introduced into the process at some <br> point.<br> What you can do, however, is get yourself and your <br> colleagues out in front of it. Specifically, you can take the time <br> to develop and bring to the table an outside-in, market-centric<br> perspective that is so compelling and so well informed that it <br> can counterbalance the inside-out company-centric orientation<br> of last year’s operating plan. This will help correct for <br> the one huge, glaring flaw in that plan—the fact that it’s all <br> about you!<br> It is not about the world or the market or your customers <br> or your partners or even your competitors. It is exclusively <br> and solely about you and your revenue and earnings targets <br> and your desired return on equity and your management <br> objectives, and your operating metrics and your internal <br> disposition of resources, and perhaps most influentially, about <br> your comp plan. But step back and take stock. The world is <br> more powerful than you. The market is more powerful than <br> you. Your customers are more powerful than you. And the <br> sum of all your partners and competitors—the ecosystem—is <br> more powerful than you. And just to put the cap on it, nobody <br> really cares about you except you. So given the enormous <br> challenge of counterbalancing the inertial momentum of last <br> year’s plan, what do you say we tap into some of these external<br> sources of power to give your company a boost?<br> To do this you must conduct a series of dialogues before <br> opening resource-allocation discussions. In them you <br> profile trends and opportunities that can create new sources of <br> wealth for your customers and your company and can stake <br> out the positions of power you want to occupy. This is not a <br> new idea. What is new is the mechanism by which we <br> propose to do it.<br> Most strategy dialogues end up with executives talking at <br> cross-purposes because—and this is one of the dirty secrets <br> of enterprise management—nobody knows exactly what is <br> meant by vision and strategy, and no two people ever quite <br> agree on which topics belong where. That is why, when you <br> ask members of an executive team to describe and explain <br> the corporate strategy, you so frequently get wildly different <br> answers. We just don’t have a good business discipline for <br> converging on issues this abstract. And that does not bode <br> well for setting a clear trajectory to achieve escape velocity.<br> This book intends to change that. Leveraging a model we <br> call the Hierarchy of Powers, it will provide a map that will <br> engage you and your colleagues in the various domains of <br> power in a systematic and structured way, ensuring that the <br> right questions get the right kind of answers at the right time <br> and in the right sequence. <br> THE HIERARCHY OF POWERS<br> The Hierarchy of Powers is a framework of frameworks. It <br> sizes up all economic competitions in relation to five types of <br> economic power, organized in descending order from most <br> general to most specific, as follows:<br> 1. Category power<br> 2. Company power<br> 3. Market power<br> 4. Offer power<br> 5. Execution power<br> This hierarchy derives from taking an investor view of <br> your company. The first decision investors make is what <br> categories to invest in. Once they have determined that, then <br> they choose specific companies. Once they hold stock in a <br> company, they dig into the dynamics of the markets it serves, <br> the competitiveness of its offers, and its track record for <br> executing to the forecasts it provides. That covers the hierarchy <br> top to bottom and explains why it is in the order it is.<br> Within this framework, think of each type of power as <br> being made up of a set of vectors, arrows of force, each arrow <br> headed in its own direction. Taken together, combining both <br> within and across the various levels in the model, these <br> vectors can align with one another to reinforce the sum total <br> of power, or they can cancel each other out to reduce power <br> to near zero. Thus you can be in a hot category and fail to <br> execute, producing a near-zero result. Similarly, you can <br> execute like crazy in a dying category and have an equally <br> disappointing outcome. But when you get the powers aligned, <br> when each is reinforcing the others, then the magic they call <br> synergy appears, and very good things can happen indeed.<br> In this chapter we are going to summarize the forces <br> incorporated at each level of the Hierarchy of Powers frame work<br> and call out the management issues that get addressed <br> at that level. This will provide a road map for the rest of the <br> book. Each of the subsequent five chapters will drill down <br> into the dynamics of one of the five levels of power and <br> present specific models to address the issues that pertain to that <br> level, illustrating how they apply to particular situations and <br> concluding with an extended case example to pull everything <br> together. A concluding chapter will recap this material and <br> describe how it can be integrated into an annual planning <br> process that, yes, does include circulating last year’s operating<br> plan, but in the proper place and at the proper time.<br> For the rest of this introductory chapter, just sit back and <br> get the lay of the land. As you read along, take some time to <br> register how each type of power influences economic performance<br> and think about the impact it might be having on your <br> enterprise.<br> CATEGORY POWER<br> Category power is a function of the demand for a given <br> class of products or services relative to all other classes. <br> Categories in high demand, like smart phones, storage systems, <br> and cloud computing, are more successful than their peers <br> in securing customer budgets to fund them. Thus they grow <br> faster and typically enjoy better profit margins. So participating<br> in a powerful category is a very good thing indeed. <br> Conversely, participating in a low-power category, such as <br> desktop computers, wire-line phone services, or e-mail, is an <br> exercise in playing on the margins. It can be quite profitable, <br> but you definitely have to watch your step.<br> Being able to enter new categories and exit old ones is <br> fundamental to freeing your company’s future from the pull of <br> the past—but it is not easy. Moreover, the challenges of <br> maintaining a balanced portfolio of categories increase with the <br> continued success of any franchise. Companies under $1 <br> billion in revenue and under fifteen years or so in age typically <br> have monolithic portfolios, made up of many products but all <br> in the same category. It might be storage, or security software, <br> or mobile devices, or enterprise resource planning (ERP). <br> But at some later stage, typically through mergers and <br> acquisitions, the corporation transforms into something more like <br> a holding company, in which multiple heterogeneous categories<br> combine to leverage a unified supply chain and a global <br> sales and services footprint. This is when the fun starts.<br> Each category in a portfolio has its own unique dynamics. <br> At the same time, however, the enterprise as a whole is held <br> to a single report card for its collective performance, most <br> visibly represented by its quarterly earnings. As an agent <br> of the investors, the management team is responsible for <br> maintaining a portfolio that maximizes quarterly returns <br> over time. In this context, last year’s plan inevitably favors <br> the current portfolio, even when its quality may be deteriorating.<br> And because it is a rare organization indeed that can <br> decide to kill anything and an even rarer one that can actually<br> succeed in doing so, deterioration is not an uncommon <br> state of affairs.<br> To escape this gravitational field, you need to both <br> objectively assess your current portfolio and identify credible <br> category alternatives that are extremely compelling. This <br> exercise usually goes by the name of portfolio management and <br> is a standard part of an enterprise planning process. The core <br> questions upon which it builds include:<br> Investors will pay a premium for revenue in these categories, so you want to <br> maximize their share of your overall portfolio.<br> Investors discount this revenue, and so you want to minimize its share.<br> Different strategies assign different weights to these three <br> elements, so you want to make sure your weighting is <br> consistent with your strategy.<br> Executives often express envy about other <br> businesses that are in higher growth categories than <br> they are, but the truth is, getting your company into <br> the right categories is your responsibility as an executive.<br> Portfolio management questions are typically asked and <br> answered once a year, with the expectation of staying the <br> course in most years. Nevertheless, as experienced investors <br> will tell you, category performance is the number one <br> predictor of company performance. No business can outperform <br> its category over time. So being in the right categories at the <br> right times is crucial to long-term success.<br> At the time of this writing, for example, Apple is enjoying <br> exceptional financial returns, in part because it participates <br> in a number of high-growth categories—smart phones, <br> digital music distribution, and touch-screen tablets, to name <br> three (all of which owe much of their fantastic growth to <br> Apple’s extraordinary innovations in each). At the same <br> time, Dell is struggling economically and, not coincidentally,<br> participates in none of these categories. As a result, <br> it is in the process of repositioning itself as more of an <br> enterprise company, competing against IBM and HP. On the <br> other hand, a decade ago the shoe was on the other foot. <br> Dell was the darling of the tech sector, right at the heart of <br> a vibrant PC category, and Apple was a marginalized and <br> fading star. That’s how category power works. As the Beach <br> Boys used to sing, “Catch a wave and you’re sittin’ on top of <br> the world!”<br> But this raises a larger, darker question. What do you do when <br> you know you do not have the right mix of categories, when you <br> know you are missing out on a hot opportunity, when you know<br> you are clinging too long to a dying vine? Recall that litany of <br> gone but not forgotten enterprises from the previous chapter? <br> Those were not good companies—they were great companies. <br> So we must not underestimate the potential impact of being <br> unable to reallocate resources to enter and exit categories at <br> appropriate times.<br> And why would we be unable to? Because we are unable <br> to negotiate our collective release from the pull of the past <br> and the tyranny of last year’s operating plan. That plan <br> institutionalizes the current set of categories, granting each one <br> its allotment of resources, resources sufficiently in demand <br> to be jealously guarded. Thus we institutionalize a mentality <br> of scarcity, one that has no word of welcome for a newcomer.<br> So when we dig into category power, we will spend only a <br> little time on how to determine what categories we should be <br> in, and a whole lot of time on how to counteract the forces <br> that are keeping us from actually getting there.<br> Within a given category, company power reflects the status <br> and prospects of a specific vendor relative to its competitive<br> set, power typically signaled by that company’s market <br> share. Note that the same enterprise can have different levels <br> of company power in different categories, so total company <br> power is based on the sum of the positions it has in the total <br> set of categories that make up its revenues, multiplied by the <br> power those categories have in their own right, as well as by <br> whatever synergy there may be among them. This is the <br> calculus of investor valuation, and as you may well appreciate, <br> there is plenty of room for multiple points of view. <br> <br> <p> <i>(Continues...)</i> <p> <!-- copyright notice --> <br></pre> <blockquote><hr noshade size='1'><font size='-2'> Excerpted from <b>Escape Velocity</b> by <b>Geoffrey A. Moore</b> Copyright © 2011 by Geoffrey A. Moore. Excerpted by permission of HarperBusiness. All rights reserved. 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