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strategy and business
 / Summer 2007 / Issue 47(originally published by Booz & Company)


Recent Research

The authors found that the company’s planning process had, historically, been driven largely by the sales function. Sales directors responsible for regional markets made initial forecasts, which they then passed on to operations and finance. The process was ad hoc, with important communication as likely to take place in hallways as in formal meetings. Armed with these forecasts, the finance department created plans and monitored results. Finance tended to pressure the sales team to hike up its forecasts so that the company could meet its financial goals. Meanwhile, because people in the operations group were generally skeptical of the forecasts from the sales team, they made their own forecasts to put the best light on potential inventory shortages for which they might be blamed. Similarly, the marketing director took the forecasts from sales and factored in the possible effects of promotions and other activities.

This flawed system eventually contributed to an inventory write-off equaling about 10 percent of revenues and the recruitment of a new CEO and executive group. One of the new arrivals was given the task of improving the forecasting process. A fresh approach was launched in 2002 and was fully in place a little over a year later. This new method demanded that the company’s functional groups agree on overall forecast, rather than continue to produce their own biased predictions.

This brand of consensus forecasting was led by an independent group called the Demand Management Organization, which managed, synthesized, challenged, and created projections of likely demand. Freed from functional self-interest, forecasting quickly became more robust and useful. In the summer of 2002, the accuracy of sell-through forecasts was only 58 percent. By the fall of 2003, it was 88 percent. Moreover, inventory turns increased, on-hand inventory decreased, and obsolescence costs were slashed.

Although feeding accurate information into the forecasting process is clearly critical, this research suggests that companies also need to consider social and political agendas when they are designing forecasting processes. And the authors contend that the simple tactic of giving responsibility for planning to an independent group within the organization can reap impressive dividends.

The Value of Innovation

Michael G. Jacobides ([email protected]), Thorbjørn Knudsen ([email protected]), and Mie Augier
([email protected]), “Benefiting from Innovation: Value Creation, Value Appropriation and the Role of Industry Architectures,” Research Policy, vol. 35, no. 8, October 2006.

It is not always the innovator who captures value from an innovation. In the 1980s IBM developed the first mass-market personal computer, which rapidly became the industry standard, but financially, Microsoft and Intel benefited from it the most. A decade later, Apple coined the term personal digital assistant to describe its innovative Newton; however, it was the Palm Pilot PDA that enjoyed the first mass-market success.

According to Michael G. Jacobides, an assistant professor at the London Business School; Thorbjørn Knudsen, a professor of marketing at the University of Southern Denmark; and Mie Augier, an assistant professor at Copenhagen Business School, these examples illustrate the profound risks inherent in innovation, even for those able to overcome the larger challenge of bringing a new product or technology to market.

How can innovators ensure they enjoy the fruits of their labors? The authors describe the traditional strategy as “attempts to fortify the fortress.” Innovators erect barriers by asserting their intellectual property rights through the use of patents and trademarks. But, although this approach can slow down imitators, say the authors, it never eliminates them because patents expire and trademarks do not completely prevent other firms from copying. Consequently, the authors offer an alternative strategy, one that takes advantage of “industry architecture” (an idea first introduced by David Teece, a professor at the Haas School of Business, University of California at Berkeley).

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