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Published: November 29, 2005

 
 

Best Business Books 2005: Strategy

Our favorite category is No. 3, and it is a good illustration of the authors’ approach. By “profit drivers” or “key metrics,” they mean the way a business keeps track of what it sells and how it makes money. These metrics represent some of the most fundamental yet unexamined elements of any business. Eight of the 40 market-busting moves involve changing key metrics. One move is to radically change what the company sells. Broadcasters, for example, shifted their model from offering free television to consumers by selling advertising, to a new model in which consumers paid through subscriptions. Another market-busting move is to radically improve productivity, as National Credit Systems, a collection agency, did when it reduced its fees from the industry standard of 40 percent of collections to only 8 percent, by improving the effectiveness of letter writing — the lowest-cost and most effective way to collect debt. A third move is to improve cash flow velocity, ideally to achieve negative working capital (payables greater than receivables plus inventory) as Dell Inc. does. The fourth metric-oriented move is to reduce asset intensity, by relying on contract manufacturers or information technology outsourcers.

The other four market-busting moves in this category involve redefining the key metrics of the company’s customers to enhance their profitability or address their pain points. Monsanto developed seeds that improve yield and reduce the use of expensive and environmentally dangerous chemicals. General Electric’s businesses send Six Sigma teams to help customers address their problems. UPS recently branched out from its core business of package delivery into other businesses that improve customers’ cash flow, like repairing Toshiba laptops for Toshiba — eliminating steps in the process, integrating repair and shipping activity, and reducing the time taken to repair a broken PC.

We do not recommend MarketBusters with the same enthusiasm as Blue Ocean Strategy. It is a slow read — more a reservoir of analogies to reference as part of a strategy process than a book to read from cover to cover.

Vast New Markets
C.K. Prahalad, in The Fortune at the Bottom of the Pyramid, studies more fundamental value innovations than those described in Blue Ocean Strategy and less familiar analogies than those offered in MarketBusters. Although Fortune isn’t positioned as a business strategy book (it is also reviewed in the Globalization essay) but rather as a new approach to “eradicating poverty through profit,” we consider it a must-read for strategists.

Professor Prahalad’s starting point is the attractiveness of the potential market of the very poor — what he calls “the bottom of the pyramid.” It is a huge (distressingly so) market:

If we take nine countries—China, India, Brazil, Mexico, Russia, Indonesia, Turkey, South Africa, and Thailand—collectively, they are home to about 3 billion people, representing 70 percent of the developing world population. In [purchasing power parity] terms, this group’s GDP is $12.5 trillion, which represents 90 percent of the developing world. It is larger than the GDP of Japan, Germany, France, the United Kingdom, and Italy combined. This is not a market to be ignored.

But, according to Professor Prahalad, it’s not just size that makes the bottom of the pyramid an attractive market for results-minded executives. Customers in these markets are brand conscious (as well as value conscious), and readily adopt new technologies — far more than do customers in more familiar markets at the top of the pyramid. Three examples illustrate the radical change in business model required to profitably serve the bottom of the pyramid.

Casas Bahia, Brazil’s largest retail chain, with sales of 4.2 billion reals ($1.6 billion) in electronics, appliances, and furniture, targets the very bottom of the pyramid: Seventy percent of its customers have no consistent income. Although Casas Bahia’s operations employ familiar retail best practices such as extensive use of technology and TV advertising, aggressive negotiations with vendors, efficient warehousing and logistics, and daily managers’ meetings to review operations, the company’s credit and local delivery practices differ radically from the norm. Casas Bahia extends credit to customers that others don’t consider creditworthy through a passbook requiring small installment payments made monthly in the store — a system that not only maintains a default rate lower than the industry average but also builds the customer relationship and facilitates sales of additional products. Financed sales account for 90 percent of sales volume. Delivery — and repossession of the product should customers fail to make installment payments — is accomplished by a company-owned fleet of 1,000 trucks with 2,500 drivers and crew, including some trucks small enough to maneuver through shantytowns. Like all of Professor Prahalad’s examples, this business model works because it leverages underlying values within the culture of Brazil’s poor: relationships, responsibility, and self-esteem.

 
 
 
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