The timeless principles of successful business strategy corporate sustainability as the new driving force

termism is even more common for the private companies listed on national stockexchanges where the pressure for delivering quarterly results is the norm!For business leaders, it is diffic

Management for Professionals

Management for Professionals

More information about this series athttp://www.springer.com/series/10101

Eric Viardot

The Timeless Principles

of Successful Business Strategy

Corporate Sustainability as the New Driving Force

Second Edition

Eric Viardot

Department of Strategy, Leadership and People

EADA Business School Barcelona

Barcelona, Spain

ISSN 2192-8096 ISSN 2192-810X (electronic)

Management for Professionals

ISBN 978-3-662-54488-4 ISBN 978-3-662-54489-1 (eBook)

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Printed on acid-free paper

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The registered company is Springer-Verlag GmbH Germany

The registered company address is: Heidelberger Platz 3, 14197 Berlin, Germany

For this second edition, I would like to express my gratitude to Daniela Barrenecheaand Nathaniel Dolan for the careful review of the manuscript I am also verygrateful to Dr Prashanth Mahagaonkar, Ruth Milewski, and Michael Bursik fromSpringer to have this revised version published with a complete creative freedom.Finally, I thank my wife Anne for her patience and her faithful support

v

1 The Importance of Sustainability in Corporate Strategy 1

2 Why Are Corporate Ambition and Culture Vital for Sustainability? 3

2.1 An Agenda 5

2.2 A Compass in a Tornado 6

2.3 A Filter for Selecting Development Paths 7

2.4 A Unifying Cement 7

2.5 A Strategic Ambition Needs to be Completed with an Outstanding Corporate Culture 8

3 Treasuring Selected Customers: The Secret for Sustainability? 11

3.1 The Importance of Customers 11

3.2 The Principle of Deep and Constant Understanding 12

3.3 Needs and Wants 14

3.4 The Principle of Market Focalization 15

3.5 The Choice of Profitable Customers 16

3.6 Offering More Than the Benefit: The Total Value Equation 18

3.7 Benefit, the Central Core of Value for Customers 19

3.8 Nurturing Customers’ Loyalty 21

3.9 Communicate with the Customer 21

4 How Do Enduring Firms Outlive the Environment and the Competition? 25

4.1 Political and Legal Environment 25

4.2 Economic Environment 26

4.3 Socio-cultural Situation 27

4.4 Technological Environment 27

4.5 Ecological Constraints 28

4.6 The Ethical Imperative 28

4.7 The Principle of Permanent Monitoring 29

4.8 A Definition of Competition 30

4.9 Identification of Competitors 31

vii

4.10 Competitive Asymmetry and Doppler Effect in Competitive

Identification 32

4.11 How Do Sustainable Firms Outlive the Competition? 33

5 Why Sustainable Firms Have a Superior Management of Capabilities? 37

5.1 Resources 37

5.2 Skills 39

5.3 Identifying Capabilities 39

5.4 Utilization of Various Capabilities Available 40

5.5 The Main Principles of Resource Management: Threshold, Exclusivity, and Mass 41

5.6 Managing Skills 42

5.7 The Principle of Alignment 42

5.8 The Principle of Capabilities Rationing 43

5.9 The Principle of Valorization 44

5.10 The Principle of Constant Flexibility 45

5.11 The Principle of Singularity 46

5.12 Capabilities Development 46

6 Selecting the Right Organization and Structure for Sustainability 49

6.1 Functional Structure 50

6.2 Divisional Structure 51

6.3 Holding Company Structure 52

6.4 Matrix Structure 53

6.5 The International Organization: A Non-issue 54

6.6 Multidisciplinary Teams 54

7 Learning from the Operational Practices of Sustainable Companies 57

7.1 Disciplined Autonomy in Decision Making 57

7.2 The Principle of Efficient Simplicity 58

7.3 Wise Outsourcing of Operations 60

7.4 Hierarchical Frugality 60

7.5 The Practice of Continuous Learning 61

7.6 Accountable Control System 62

8 Innovation: The Central Way to Achieve Corporate Sustainability 65

8.1 Different Categories of Technological Innovation 66

8.2 Different Types of Organizational Change 67

8.3 The Reasons Behind Technological Change 68

8.4 The Origin of Organizational Change 69

8.5 Preparing for Change 70

8.6 Necessary Changes: Degree and Interest 71

8.7 Change and Available Resources 72

8.8 Capabilities that Must Be Preserved 72

viii Contents

8.9 Timeframe for Change 73

8.10 Employees’ Motivation to Change 73

8.11 The Leaders’ Ability to Lead Change 74

8.12 The Credibility of Leaders 74

8.13 Support from External Consultants 76

9 Managing Change and Transformation for Corporate Sustainability 77

9.1 Implementation of Technological Changes 77

9.2 Development of Technical Innovation 80

9.3 Implementation of Organizational Changes 81

9.4 The Principle of Systematic Experimentation 82

9.5 Controlling the Operational Timetable 83

9.6 The Appropriate Maneuvering Style 84

9.7 A Clear, Appropriate, and Reassuring Communication 85

9.8 Political Agility 86

9.9 Tenacity in Fulfilling the Change 86

9.10 Responsibility 87

9.11 Change in Times of Crisis 88

10 Growth Strategy for Corporate Sustainability 91

10.1 The Causes of Growth 91

10.2 Increasing the Number of Clients 92

10.3 Increasing Attractiveness 93

10.4 Exploiting an Excess of Resources 94

10.5 Achieving the Economies of Scale and Scope 94

10.6 Dealing with Risks Within the Environment 95

10.7 Responding to Shareholders’ and Managers’ Desires 96

10.8 The Routes to Growth 96

10.9 Specialization 97

10.10 Vertical Integration of Capabilities in Existing Businesses 98

10.11 Leveraging of Existing Capabilities Across New Businesses 98

10.12 Total Diversification 99

10.13 Diversification: The Case of Internationalization 100

10.14 External Growth 101

10.15 The Limits to Growth 102

11 The Value of Great Execution and Humility for Sustainability 105

11.1 Quality of Operations 105

11.2 From Success to Failure 106

11.3 Sustainable Companies Avoid Being Blinded by Present Triumphs 108

11.4 Accepting Decision Sharing 109

11.5 Organizing the Succession 110

12 Conclusion: Timeless Principles of Corporate Sustainability 113

Contents ix

The Importance of Sustainability

This book is intended for those who run, or want to run, a business whatever its size

or activity, but with the objective to make it sustainable so that it will be a legacy forthe future generations Indeed the premise of this book is to consider than thepurpose of strategy is not simply to win in the short term but also to endure and

to stand the test of time But while it is usually possible for a company to betemporarily profitable it is much more difficult to sustain corporate success over along time Only a limited number of companies are able to achieve such a feat, eventhough they are not often in the media spotlight

In this regard, companies are like empires The most spectacular are not sarily the most efficient or the longest-living In fact, the famous empire ofAlexander the Great lasted only 12 years, and those of Hitler and Napoleon Iboth fell after 19 years Conversely, the Ottoman Empire lasted for nearly

neces-650 years; the Roman-Byzantine Empire survived for almost 1500 years and theEmpires of China and Japan remained even longer Despite their sometimesdiscreet place in the history books, those empires left their mark on mankind

Similarly, sustainable companies do not always create a buzz even though theyare present and numerous Today approximately 1700 companies worldwide havebeen active for more than 150 years Of these 1700 companies, 250 have been inoperation for more than 400 years Some have remained modest in size while othershave become powerful multinationals The fact that they could survive and prosper

is the best example of strategic success in contrast to the many others that haveperished Naturally the goal of enduring companies is to be significant over time,and not just to linger and survive Indisputably, there is a greatness in building anenduring firm which achieves long standing recognition at local, national, or globallevel for the value of its products or services

However it is not easy to grow a sustainable company because the pressure ofimmediate issues in front of the vagueness of the future is driving corporate leaders

to focus on the short term Often this trend is reinforced by a compensation systemwhich rewards short term performance over long term results Naturally, short-

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termism is even more common for the private companies listed on national stockexchanges where the pressure for delivering quarterly results is the norm!

For business leaders, it is difficult to resist to the emotional dimension ofachieving short-term gains while long term success requires discipline and a strongand persistent mindset in front of the many market instabilities and uncertainties,such as the recent financial crisis of the last decades or the current digital revolution.This observation leads to the second premise of this book: corporatesustainability depends on rational audacity In recent years, under the guise ofgrowth, increasing shareholder value, leadership assertion, adaptation to hyper-competition, and for many other reasons, leaders have been encouraged to take risksand not hesitate to be adventurous This attitude has its limits, and its consequencescan be witnessed in the defeat of many firms

Of course, together with imagination, audacity is an essential quality of ship It allows leaders to achieve their dreams and gives them the moral boostneeded to face adversity But it must be tempered with circumspection andcarefulness

leader-Such prudence is not fear but rather reflection on competition and oppositionalforces; it is a set of boundaries and contained therein are choices to protect theinterests of the firm It instructs to avoid engaging recklessly in any action, and ifone comes along to prepare extensively It imposes planning for adequate andappropriate resources It requires collecting information to avoid pitfalls It is thesource of a deliberate strategy with a premeditated and safe progression It requests

a sense of anticipation like the game of golf where each shot is played in tion for the next one

anticipa-Rational audacity thus conveys leaders of sustainable companies to act in adifferent way than those of most firms As this book will illustrate, their strategydeviates from the usual management models For example, these business leaderscan both dream and take risks while retaining a sense of reality by devisingexperiments that are contained yet systematic They look for growth opportunities

in times of crisis and control their costs in the growth phase, while the directors ofthe majority of other companies wrongly do the opposite

This book examines the timeless principles of business strategy used byenduring companies because they offer some interesting characteristics whichdeserved to be considered in order to achieve corporate sustainability Along thedifferent chapters, the reader will find why those firms have a strong corporateambition and culture; how they treasure customers and outpace the environment,including the competition; in what way they manage their resources andcompetences differently than other firms do; what are their organization andoperational practices for sustainability; why is innovation is essential for them;how they are able to change and transform time and again; what does growthrepresent for them; and how they value great execution and humility

In each chapter, we illustrate our observations by referring to sustainablecorporations without mentioning names This choice is deliberate because we donot want to isolate any particular firms nor single out a strict example to follow Thesecrets of long-lasting firms is to have no reference model

2 1 The Importance of Sustainability in Corporate Strategy

Why Are Corporate Ambition and Culture

Sustainable companies have an ulterior purpose beyond money For them, ability is a means but not an end

profit-In fact they know that, apart from financiers and some shareholders, few are inlove with profits To sustain, they envision the world differently and they share thatdream with their customers, their employees, future employees, and all those who atone time or another are in contact with them

Enduring corporations have an ambition They call it a mission, a great plan, or abusiness project Beyond the name, this ambition reflects what the company wants

to bring to the world, sometimes with a social, political, or ecological connotation

It comes with the definition of core values to be respected to achieve that end It ismore than just a vision because it does not stagnate as mere illusion but emerges asreality

Large corporations in the past were formed with the goal of making electricity orwater available to the public Today, corporations want to transform the world bydiffusing computer services or mobile phone technology to reach the maximumnumber of individuals on the planet

But it is not always about changing the world or ushering in social upheavals.Sometimes the strategic ambition simply revolves around everyday life Manybusiness successes are built on the simple desire to bring more beauty, ease, andconvenience to customers by offering hair dyes, disposable pens, or rubber tires

In all cases, the ambition of sustainable firms is defined in relation to theirexisting or future clients Indeed, a strategic ambition based on the mastering of aparticular resource or in reaction to competitors rarely resists the ravages of time.Thus, some corporations set their ambitions to become the champion or leader of

a new technology often presented as revolutionary It is a worthy but risky goal.Obsessed with mastering the technology, these companies neither want to knowabout nor are they interested in alternative solutions Soon their technology lagsbehind others and they eventually disappear Such is the fate of many ‘high tech’companies, even when they have acquired a large size

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Being ahead of their competitors is not an end in itself except for those with afull-scale competitive spirit Once this goal is achieved, the only remaining objec-tive is to stay on top as number one This can help motivate some employees whoare proud to work for the “best” company in the sector However, other employeesneed something more exhilarating for them to stay with the biggest firm in thesector.

Size is not everything Even if the media, financial analysts, and consultantsfrequently measure the strategic success of a firm in terms of its magnitude andsales volume This is an oversimplified shortcut that ties a firm’s performance to itscapacity to generate revenues

It is a worthy indicator, but it is not always the most relevant to evaluate thesuccess of a company nor its ability to survive Other data is also appropriate tomonitor, such as profitability, quality of solutions, customer satisfaction and loy-alty, and the internal atmosphere that makes a company a desirable workplace forits employees

Companies that succeed in the long-run generally have a large-scale, long-termcorporate project This strategic ambition presents numerous advantages for theirleaders First, it provides a framework to clarify priorities and to structure punctualtransactions to be achieved Next, it is a compass that indicates the direction for allemployees A strategic ambition is also a filter that helps executives sift fordevelopment opportunities Finally, it is the cement that unites different functionsand departments which can be quite heterogeneous within a firm (see figure2.1)

Fig 2.1 The benefits of a strategic ambition

4 2 Why Are Corporate Ambition and Culture Vital for Sustainability?

2.1 An Agenda

The foremost advantage of having a corporate ambition beyond the simple quest forprofitability is the ability to guide the company towards long-term milestones.When leaders know where they want to go and what they want to do, they canorganize themselves in time

For example, choosing a launch window is a strategic decision by nature Todefine their investment policy, leaders must decide when they want to make profits:now or later? If it is now, that means prioritizing immediate return on investmentand raising share price If later, then it means seeking for the largest market share,investing in innovation and quality, and then considering the return on investmentthat follows This helps reduce capital requirements by increasing the productivity

of exploited assets

Experience shows that companies with a long-term vision always prevail overthose that emphasize short-term profitability Examples are in such industries asautomobile, electronics, air transport and banking, to name a few

Naturally, this great ambition must be supported by the shareholders andmanagers at the same time Some investors such as pension funds, families, orsovereign wealth funds are willing to wait a long period for a return on theirinvestment They adhere to a strategic ambition and are convinced of its impact

to guarantee the long-term success of the company

On the contrary, other types of shareholders, generally investment banks orsaving funds, want quick financial returns They are often responsible for manybankruptcies because they push leaders to sacrifice long-term development forshort-term profits

These investors are rarely found in the capital of sustainable corporationsbecause their leaders take great care in keeping them at a distance or preventingthem from securing a majority of votes in the decision-making A good way tocorporate sustainability is to choose the shareholders and build a strong relationshipwith them

The strategic ambition needs to be executed at the right time by the head of thecompany It is easier when the project is orchestrated by one individual, especially

if it is the founder, as opposed to several people who may have different ambitions

It is also more difficult when the firm is controlled by managers whose sation is based primarily on short-term success, as with stock options Problemsalso occur when leadership changes hands too quickly forcing strategic plans toshift direction according to newcomers In this instance, these plans can be confus-ing for employees as well as customers or shareholders

compen-Thus, sustainable companies change their leaders with less frequency In tion, these companies plan and organize the transfer of power from one leader toanother This allows them to avoid rifts or abrupt changes to strategy that coulddestabilize their structure It also ensures a continuity of purpose and action toachieve the company’s ambition

addi-2.1 An Agenda 5

For a small company, the integration of new hires is manageable because theyrepresent only ten or so new people a year They can be on-boarded by managersand more experienced employees who already know the company.

But the situation is much more complex for large firms that annually recruitthousands of new employees in ten different countries around the world Addition-ally, when they are unable to find profiles internally, they recruit externally formanagers to supervise these new hires However, these external managers rarelymaster the culture of their new company immediately Usually it is no more than theprinciples and values they need to communicate to their subordinates

This is when the strategic ambition plays a key role in structuring the behaviorand roles of all new employees It helps them to navigate their routine activities; this

is particularly valuable when the organization has not had time to fully implementall operational processes, as is always the case in periods of strong growth.Experience shows that only firms with a strategic ambition navigate successfullythrough periods of rapid growth Others lose their identity and become disjointeddue to the speed of growth caused by integrating too many different elements indivergent directions

To overcome the difficult conditions in periods of crisis, it is extremely useful tohave a long-term project This serves as a compass for the leaders to focus onessentials and find or redefine the company’s core business

At some point, internal crises arise from personal conflicts to arguments amongdifferent stakeholders, shareholders, and employees In this case, the great commonpurpose acts as a catalyst in bringing various parties to their senses It curbs theanimosity and keeps the energy towards achieving a collective goal, greater, andnobler than the aspirations of each person or group

Similarly, when the pressure of an emergency to halt certain activities or sellcertain assets occurs, the strategic ambition helps leaders in making choices so they

do not sacrifice unduly resources that will be needed later to accomplish theambition after the crisis

Furthermore, having a project is tremendously important to make the most of alltactical opportunities as they arise in a difficult environment Sustainable firmsknow how to make good use of economic crises and do not let themselves bedestroyed by them

As such, during the Great Depression of 1929, suppliers of industrial productssuffered, but companies that made consumer goods for mass consumption grewtogether with campsites, air transport, radio, and cinema

6 2 Why Are Corporate Ambition and Culture Vital for Sustainability?

Similarly, after the crisis following the dot-com bubble burst, many companieswent bankrupt whereas many others took the opportunity to strengthen theirposition in their markets.

2.3 A Filter for Selecting Development Paths

Chief among the roles for leaders of sustainable companies is to focus on ment opportunities One must not be confined to dealing with day-to-day problems

develop-or else one risks spending valuable time extinguishing fires without improving theorganization

From this perspective, having a strategic ambition in place narrows down thechoices that can otherwise be tough to make when there are opportunities fordiversification

It always seems enticing to develop a new activity because it is requested bycustomers, prompted by public authorities, or already penetrated by competitors.But the final decision criterion is the potential contribution of this new activity tothe attainment of the firm’s strategic ambition

A strategic ambition also allows leaders to set up a framework for growth,choosing between internal development, partnerships with third parties, or acquisi-tion/merger with outside companies In each case, it assists in evaluating the bestsolution to help achieve the company’s ambition, given the available resources.This applies in any circumstance In times of growth, acquisition opportunitiesare plentiful and can make easy money A firm should not abuse them and risk afatal demise from acquisition indigestion

A period of economic crisis is also an opportune time to buy lesser or growing rivals to gain market share However, as resources are limited in times ofscarcity, leaders of enduring companies focus solely on the opportunities thatcontribute fully to the success of their strategic ambition This prevents themfrom dispersing and squandering scarce resources

The lack of common purpose can aggravate into fratricidal conflicts in whichdivision directors spend more time quarreling among themselves than fightingagainst external competitors They have it their individual ways and look after

2.4 A Unifying Cement 7

their future alone The result then is a more or less a rapid disintegration of theconglomerate.

This equally applies to companies that are not as diversified There is always therisk that functional departments lock themselves in an individual logic of speciali-zation They consider only their own objective (maximizing the revenue, on-timeproduction, achieving maximum profit, etc.), which is sometimes contradictory tothat of other departments

However, as in any team sport, it takes more than a small group of brilliantindividuals with their respective specialties to succeed Often in sportscompetitions, teams of average but motivated players outperform teams of out-standing talent

This can be explained by the good coordination that exists among individuals,which is important because it yields collective efficiency This is not everything.The shared desire to succeed in a common goal unites the energy that each memberdeploys to achieve the common goal, and the company’s strategic ambition is theglue that holds its various departments and activities together

Ultimately, the inner strength of a company to live and grow for years or evencenturies is the result of a dream come true This dream thrills the employees, theinvestors, and the partners of the firm This may only happen if it touches thecustomers, since nothing is possible without them Table2.1summarizes the majorbenefits of a clear and strong strategic ambition

2.5 A Strategic Ambition Needs to be Completed

with an Outstanding Corporate Culture

The study of sustainable companies shows that setting up a clear ambition isindispensable but not sufficient to achieve long term success This is becausehuman beings are not only rational but also emotional Buying into a strategy

Table 2.1 Major benefits of a clear and strong strategic ambition

An agenda for

prioritization

A compass for direction A filter for selection A cement for unification Guide the

company towards

long-term actions

Channel energies in the right direction

Set up a framework for growth

Make the firm bigger than just a collection of brilliant individuals Allow to select

the right time

horizon

Structure the behaviors and roles

of new employees

Chose the best options according to available resources

Escape the internal fratricidal conflicts Get the support of

shareholders and

stakeholders

Focus or redefine the company core business

Arbitrate between organic growth and external development

Optimize the coordination between various departments Stabilize

leadership and

reduce leaders’

turnover

Exploit tactical opportunities in a tough environment

Prevent the dispersion and squandering of scarce resources

Communicate to everyone a shared desire for achievement

8 2 Why Are Corporate Ambition and Culture Vital for Sustainability?

does not mean that it will be automatically translated into an emotional ment to apply it Consequently, sustainable firms reinforce their strategic ambitionwith a strong corporate culture in order to convert strategic decisions into effectiveactions and guide their employees’ daily decisions and behaviours.

commit-In general, culture defines how people behave both when they are around othersand when they are alone For a firm, corporate culture determines how things aredone through a set of behaviors, values, and visible symbols Culture can be defined

as a web of meanings made of repetitive habits and emotional responses whichreflects the way the people feel, think, and perform

Corporate culture of many long-lasting companies combines three major ment of success: the ability to create passion for what the firm is doing, a unique anddistinctive identity, and an alignment with the strategic ambition in terms ofbehaviours, values, and symbols

ele-Among the values and behaviours that can be identified as important for cessful firms are achievement, adaptability, accountability or ownership mindset,collaboration, creativeness, delegation, fortitude, honesty, innovation,performance-orientation, risk taking, and solidarity Sustainable firms do not fea-ture all those cultural traits but each one shows four or five attributes which supporttheir strategic ambition effectively

suc-When synchronized with the strategic ambition, corporate culture stimulates theenergy and the engagement of all the employees, from top to bottom A strongcorporate culture is key to executing the strategy in a sustainable manner Actually

if strategy shapes culture, sometimes it is the other way around Some strategicdecisions can emerge from the prevalent mental models, the cognitive limitations ofthe employees, and the political feuds taking place in large organizations

In that situation, the strategic decisions are often irrational or mostly inwarddriven; they tend to forget what is happening in the external environment and theyare often pushing for a status-quo This is a recipe for strategic failure This is whysustainable companies always demonstrate a robust strategic ambition, so thatcorporate culture does not dictate strategy but serves it

A vigorous corporate culture also contributes to the creation and sustainability of

a competitive advantage because it cannot be easily identified and copied as it ismostly based on intangible values and behaviours associated with the employeesand the firms Only the symbolic elements of the culture are visible and they can beimitated; but they are not the most powerful elements of a corporate culture as theyare less influential than values and behaviours

Thus it is not by chance that sustainable companies are building and fostering astrong, unique, and passionate corporate culture around the key values they con-sider as fundamental to achieve their long term strategic ambition They make surethat their members make the right decisions and ‘do the right thing’ when they are

at work

2.5 A Strategic Ambition Needs to be Completed with an Outstanding 9

Treasuring Selected Customers: The Secret

it is the company that needs customers and not the reverse

3.1 The Importance of Customers

For any business, customers are as vital as the air we breathe Because withoutcustomers a company may not survive, grow, or be sustained

By purchasing products and/or services, customers assure revenues More sothey provide the cash flow essential for the firm’s operations They also participate

in the firm’s growth and profitability As a matter of fact, the more they buy, themore the firm’s market share and dominance increase over its competitors At thesame time customers allow the firm to achieve economies of scale, building uponprofitability or allowing price cuts to reach new buyers

Finally, regular customers are key assets to ensure corporate sustainability First,

by definition, loyal customers will return in repeated intervals to the same chant They typically spend more than average, buy more often, and promote thecompany’s offer to their friends and loved ones, who may potentially become newcustomers

mer-Having loyal customers as capital ensures long-term revenues, market share, andprofitability, all the essential conditions to grow sustainably as illustrated inFig.3.1

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Sustainable companies, therefore, do all they can to always have customers andthey never take their eyes off the customers They love their customers, and thereverse is also true These firms understand, listen, pamper, and inspire dreams.For this reason, enduring companies constantly study the characteristics andexpectations of all existing and potential customers because they want to under-stand them better in order to propose them the best offer always That is how thosecompanies have discovered that markets are rarely homogeneous Be it individuals

or organizations, customers rarely share the same expectations, needs, or wants.Sustainable corporations segment their markets by identifying sub-groups of simi-lar customers

Then they apply the principle of focalization to avoid spreading themselves toothin Consequently, they set priorities for customer groups to target They do notstop there Having produced and sold the best solutions tailored for these targets,they make every effort to pamper existing clients to keep them as long as possible

3.2 The Principle of Deep and Constant Understanding

Sustainable companies evidence a constant need to deeply understand thecharacteristics and the expectations of existing and potential customers in order

to provide them with the best offer Over time, many enduring companies findthemselves serving two types of customers: individuals and businesses Even ifthese two categories sometimes buy similar products, their characteristics and modioperandi are radically different and require a deep understanding (see Table3.1).For instance, individuals usually make their own decision to buy a product.Sometimes they may do so by taking the advice of a family member

Fig 3.1 Customers are key

success factors for long term

sustainability

12 3 Treasuring Selected Customers: The Secret for Sustainability?

On the other hand, in a company or an administration it is rare to have a singledecision maker who buys a product There are certainly some exceptions like smallbusiness owners or end-users in large firms when product cost is low Nevertheless,

in general, the decision to purchase a product or service is made by a professionalbuyer Who takes into account user needs and expert recommendations in the case

of complex solutions If the amount is high, the decision entails involvement fromthe Finance Department or the Chief Operating Officer

Consequently, impulse purchases are rare for companies while they are quitecommon among individuals Besides, volumes, rhythms, and values of productspurchased by businesses are generally much higher than those made by anindividual

Behaviors are also different Consumers are sensitive to brands and often buy foremotional reasons so they are not always rational

Professional buyers, on the other hand, esteem efficiency, performance, orprofitability of the products rather than appearance They are less affected by thesentimental or humorous aspects of the solution they seek They are also moredemanding on the after-sales service quality, especially for products or services thatcould entail a significant loss of revenue Consumers are attentive to after-salesservice as well but they do not possess the same degree of urgency or requirementvis-a`-vis suppliers

Sustainable corporations always apply the principle of deep and constant standing So they know how to distinguish between the two categories ofcustomers—consumers and private or public organizations—by proposing differentsolutions and avoiding mix-ups between the two segments

under-It may sound easy yet many companies do not know how to do it For example,many firms have ruined their business-to-business distribution channels by sellingidentical solutions at lower prices to private consumers So their industrialcustomers went to buy directly from retailers instead of their usual specialtydistributors

In other cases, some mass consumption companies failed to grow and to tain their presence in industrial markets even though they succeeded in distributingtheir consumer product to the general public It happened when those firms failed toadapt to the demands of professional customers businesses, such as, for instance,

main-Table 3.1 Main differences between consumers and business customers

Consumers Business customers

Usually a single decision maker Typically a professional purchasing organization Emotional motivations are important in

the buying decision

Rational criteria—such as efficiency, performance,

or profitability—prevail Highly sensitive to brand More concerned with the price/performance ratio

than just the brand name Less consideration to post-sales services

before the buying

Very demanding on the after-sales service quality 3.2 The Principle of Deep and Constant Understanding 13

when then refused to invest in implement a commercial structure dedicated tobusiness customers.

Enduring firms are able to understand and anticipate the evolution of theirclientele before others For example, they have successfully developed Internetsolutions that add to their traditional activities while other firms have been slow toreact to the digital revolution Some companies have even gone bankrupt quicklybecause they did not understand these changes among their customers They havenot evolved and were overtaken by competitors that were more in tune withcustomer expectations

3.3 Needs and Wants

Sustainable companies are successful in converting and retaining customers Theirsecret lies in their ability in responding not only to the needs but also to the specificwants of their customers

Need and want are two different concepts A need arises from a state of craving(to be hungry, thirsty, healthy, wealthy, or to yearn for recognition or to be loved,etc.) A desire—or want—corresponds to how customers would like their needsmet For example, faced with the need to drink, individuals may choose between analcoholic or non-alcoholic drink; if they opt for the latter, they may prefer drinkingfruit juice, soft drinks or water; if they wants water, it can be still or sparklingwater, etc

Thus, in front of the same need—in this case, to be thirsty—different wantsgenerated will belong to different groups of customers depending on what theywant to drink

Identifying these segments of customers and gaining insights into theirexpectations is essential According to their needs, each group of customers mayassign different values to products offered on the market

Sustainable firms have a lot experience in this matter When they turn to themass consumption market, they identify customer segments of consumersaccording to the demographics (age, gender, etc.), geographical, economic, social,and cultural characteristics They also use behavioral criteria allowing them toclassify customers according to how they use a product and how often, or theirattitudes or expectations towards it

This kind of study is why enduring firms have seen the gradual decline inpurchasing power of middle class in recent years This has resulted in a significantsales decline in mid-range products Conversely, products or services that are eitherlow-price or top-of-the-line have enjoyed a strong growth

Sustainable companies know that the time spent on buying a product has alsobecome a prominent choice factor for consumers in developed countries Today,time plays an equally important role as price (or cost) in the purchasing decision.Consumers do not want to lose time buying certain categories of products orservices that they can easily and quickly buy on the Internet or in distribution

14 3 Treasuring Selected Customers: The Secret for Sustainability?

centers closer to home And speed affects perception: walking up a hill is differentfrom driving up a hill Speed also changes the customers’ behaviours.

A similar approach applies to professional markets Customer sub-groups ing similar needs are identified either by their characteristics (size, location, activ-ity, type of organization), or according to their behaviors (product usage, method ofpurchase, benefit sought or attitude towards the product)

shar-Market segmentation is a necessary step in comprehending markets It is aprerequisite for applying the principle of focalization

3.4 The Principle of Market Focalization

Sustainable firms focus on a limited number of market segments They choose aspecified number of targets rather than indiscriminately taking a global pool ofcustomers (See Fig.3.2) The reasons that sustainable companies have embracedthe principle of market focalization are manifold

First, they have learned that it is an error to try to reach all customers with asingle type of offer The reality, in this case, is that its impossible to meet thediverse needs and wants expressed by multiple customers

Some companies try to offer the same product to all customers This model onlyworks in a situation of monopoly where there are no competitors, thus only oneviable option for customers Apart from cases of regulated monopolies, there are

Fig 3.2 The principle of market focalization

3.4 The Principle of Market Focalization 15

few situations where a company will never meet a competitor capable of proposing

a similar or even better solution for specific customer segments

Gone are the days during the 1930s when a famous American industrialist saidthat his customers could have a car painted any color they wanted as long as it wasblack Today overproduction is omnipresent; the customers decide what they want

to buy, not the suppliers

Another justification to abide by this principle of focalization concerns thelimited resources of a company No company today is rich enough in resources tohandle all markets at once This is why public service monopolies, such as electric-ity, are backed by the state to secure infrastructure financing and operation ofservices, because only the state has almost limitless resources

The ultimate goal of Market Focalization is to commercialize a unique solutionfor each different customer in a one-to-one marketing approach This can beachieved with a relative ease in professional markets where there is a limitednumber of customers in the range from ten to hundred It is more difficult inconsumer markets made of thousands or millions of individuals impossible to beknown personally However the recent development of the Internet marketingmakes now available a huge amount of individual data related to each consumer;this is clearly opening new avenues for developing more personalized offer toconsumers

3.5 The Choice of Profitable Customers

One of the secrets to sustainable business success is to select profitable customersand avoid others It is not uncommon to see situations where half of the profits comefrom only 10% of the customers However, what really counts for the long termfuture of a firm is not revenue It is profitability

Profitability is the true measure of effectiveness in making money by way ofspending less than what is earned Profitability also secures investment that will inturn allow the company to ensure its future by developing and adapting to changes

in customer base and the environment

For this reason, sustainable corporations measure the performance of their salesnetwork in terms of margin rather than revenue

Yet many companies are content to judge the success of their vendors or theirdistributors based on business volume concluded, i.e the number of customersmultiplied by unit purchases In this game, it is easy to boost sales while still losingmoney But in the long term this can only lead to bankruptcy

Enduring firms analyze the profitability of their customers They do this byconsidering the products purchased together by a customer and not only the salesmade product by product Sometimes a product is not profitable, but it generatesadditional purchases of other extremely profitable products Good example arespare parts or maintenance services

Profitability from a customer includes all the goods and services purchased over

a period of time Sustainable companies know the long-term value of their

16 3 Treasuring Selected Customers: The Secret for Sustainability?

customers, measured by the number of annual purchases made by a customermultiplied by the number of years that the customer will be buying from thecompany The sum of these accumulated earnings make up the value of customerequity Substantiating a loyal and stable customer base represents a veritable assetfor enduring firms (Fig.3.3).

With a few exceptions, sustainable companies do not engage with non-lucrativecustomers They bring little income and consume valuable resources that could bebetter used to satisfy interesting customers Non-lucrative customers are handed tocompetitors who strictly reason in terms of customer volume rather than commer-cial viability It keeps them busy and weakens them

The only non-lucrative customers to retain are opinion leaders because whenthey buy a product, other customers imitate them These are stars, elitists, and sportschampions with whom the general public identifies

These are also “pro-users” who use the product intensively such as sportsprofessionals with athletic equipment Their expert opinion serves as a referenceguide to other customers in the market Some companies are also “pro-users.” Theyconstantly test the latest innovations and their authoritative opinion is considered byother companies belonging to the same sector

The return from opinion leaders is calculated by considering the total volume ofbusiness generated by their reputation in addition to the products they purchased orthe costs associated in providing these products In reality, they are not just merecustomers, but also communication and sales media, so they should be treated

as such

Serving non-lucrative customers is suitable for a short period if a company wants

to earn market share by cutting prices to destabilize the competition This is alsoapplicable when introducing a new product to augment its acceptability A lowprice—whether “loss-leader price” or “penetration price”—can promote trying outand adopting the product

But it is a risky strategy, as it lasts only for a short time Experience shows thatwhen time comes to raise price, it is usually difficult not to lose customersespecially those who do not accept the price increase and stop buying the product

Fig 3.3 The long term value of a customer is a gold bar for long term success

3.5 The Choice of Profitable Customers 17

The principle of focalization does not preclude giving attention to othersegments that were not originally targeted Several sustainable companies haverealized that some clients buy services and products not originally designed forthem For example, many individuals in their 1940s buy products designed foryoung people Also, many men use their wives beauty products Finally, someretirees have an inclination for cheap, small cars conceived for a younger market.Sustainable companies are attentive and responsive to this group of unintendedcustomers.

Enduring firms constantly listen to the market They visit retailers, surf theInternet, and go to places where their products are used in order to know whotheir customers are They realize they can never know enough about theircustomers This is the key to their success, because they do not linger on pastsolutions to keep up with their ever-evolving customers

3.6 Offering More Than the Benefit: The Total Value Equation

Another success secret of sustainable firms is their ability to target their customersbased on the value of the products they are able to provide

In order for customers to be willing to pay a certain amount to acquire a product

or use a service, it is necessary that the offer holds a value in their eyes

This value can be formulated as follows: V¼ (B þ Ca)  (P þ Cp) The valueexpected by the client (V) is composed of benefit (B) that the product gives thecustomer coupled with competitive advantage (Ca) The value (Bþ Ca) is reduced

by product price (P), and it is also necessary to subtract the physical cost ofpurchase (Cp) which includes time spent with the order, delivery time, installationtime, installation conditions, etc

It can be deduced, among other things, that when Ca is negative, the customerwill buy from the competitor Moreover, if the value (Bþ Ca) is less than the totalcost (Pþ Cp), the customer will not buy in any case; yet a low price (P) can beneutralized by a high physical cost (Cp) which then removes any interest in theproduct or service (Fig.3.4)

Fig 3.4 The value equation

18 3 Treasuring Selected Customers: The Secret for Sustainability?

3.7 Benefit, the Central Core of Value for Customers

The proposed benefit to the customer is the determining factor in the valueequation It is benefit that initiates the customer’s desire to purchase Leadingcompanies know that this proposed benefit must always be considered from thecustomer’s perspective, never that of the firm A famous shoe designer, founder ofone of the largest shoe companies, once said: “I do not sell shoes, I sell beautifulfeet.”

Customers rarely buy a product for what it is but for what it brings They buypleasure, health, recreation, the opportunity to rejuvenate, beautify, to be different

or to do as everyone else, to escape the routine, to discover new things, or to enjoybeing at home

For some customers, the product value is not merely limited to material gain, butrather the final purpose of purchase The question no longer concerns what theproduct brings to the customers, but why they need it This explains the success offair-trade products built on transparency and respect for independent producers toachieve greater equality in global trade

The same product can be a source of different interests for different categories ofcustomers Some prefer convenience or design while others appreciate ease of use

or time saving, fun or innovative aspects, elegance or simplicity, and finally, somewill be sensitive to the product’s social or ethical impact

Services have different characteristics when compared to products quently, their nature determines a unique value for customers

Conse-First, services are often intangible for customers Unlike products, customerscannot touch services, at least not directly For example, a trip has no physicalcharacteristic except the time spent in moving from one point to another Transpor-tation mode—bicycle, train, car, plane, etc.—transforms it into reality, although theprimary value of a journey is the destination What good is a cheap or luxuriousflight if the travelers do not arrive at their final destination?

The production of a service is performed at the time of consumption Unlike aproduct that can be consumed or used several times, consumption of a service—banking, tourism or beauty, for example—is unique It is a singular experience,which eventually may be repeated although each time in distinct conditions.The value of a service can vary depending on the conditions under which theservice is performed Thus, the value of a given meal in a restaurant variesaccording to the dish selection, the chef’s skill, the server’s mood and availability,

or even the diner’s state of mind during the meal

Finally, unlike other products, services cannot be stored For example, availablehotel rooms unsold one night may not be sold the next day, even with a rebate.Service availability is directly dependent on the production infrastructure available

at a given moment

Thus, the value of a service for customers may decrease greatly when there arebottleneck issues at peak times which generate wait and frustration There areexceptions for some sporting events or concerts of popular artists; on the contrary,

3.7 Benefit, the Central Core of Value for Customers 19

in these cases, the excitement and frenzy are parts of the experience of participating

in an event perceived as rare and exceptional

To measure the value sought by customers, sustainable companies have a simplemethod: they ask them what they want Interviews can be formal or informal, short

or long Some interviews are conducted with the aid of questionnaires to be filledquickly by a large number of individuals Others take the form of semi-directivediscussions with a smaller pool of respondents lasting two or three hours

For years, surveys through interviews have been the preferred source of mation But they have one big drawback: sometimes the respondents evade tellingthe truth or they forget what they do exactly In fact, there is often a gap, willful ornot, between the response of customers and their actual behavior

infor-Aware of this bias, sustainable companies now go beyond market research anddeclarative data (see Fig.3.5) They observe directly their customers’ behaviorwhen they buy at the point of sale They even go to customers’ homes to examinethe actual conditions of product use The results of these in situ investigations aresometimes far from what clients describe in interviews or questionnaires

The most advanced companies act in the same way for their products indevelopment Before even launching them on the market, their marketing researchdepartments have the new products tested by users and not just by laboratoryresearchers

It is in the actual context of use that these companies can actually understand theconcrete value of their products as seen by customers It also gives them theopportunity to find ideas for additional benefits which could be offered to thecustomers

Fig 3.5 How to know always better the customers

20 3 Treasuring Selected Customers: The Secret for Sustainability?

3.8 Nurturing Customers’ Loyalty

Sustainable companies are not satisfied just responding to their customers’expectations with an adequate offer Those firms know how to keep them for along time This distinguishes them from their more short-lived competitors.They are aware that any setback in a purchase may lead a customer to switchsuppliers because today’s customers are becoming more educated and less loyal.Therefore, sustainable firms ensure that the products they sell maintain a con-stant quality and homogeneity They also bring a rapid and effective solution to anyproblems their customers may have To achieve this, they mobilize adequateresources combined with impeccable organization that performs all operationswith minimal errors

They also develop one or more brands with a strong image to build customerloyalty Indeed brand brings a special identity to a product or service with a name,logo, slogan and color

Brand is also an opportunity to inspire clients and give them added meaning totheir purchase It helps create a psychological value to the product A famouspublicist compared brands to movie stars, noticing that each brand had its ownpersonality in the minds of buyers

A brand creates a unique and comfortable involvement for customers Havingtheir favorite brand, they no longer need to ask questions when buying a product of

a particular category

A familiar brand is also reassuring for customers when they know it well Lastbut not least, a strong brand image, clearly recognized, appreciated, and distin-guished from others is an additional way to prevent customers from purchasingproducts from competitors with a less attractive image

It is no coincidence that, in times of crisis, thus of uncertainty, consumers prefereither low-priced or top-brand products Woe betide those firms that do not provideone of these two types of products: they are the first to lose customers and to seetheir sales drop

3.9 Communicate with the Customer

Sustainable companies know that they must communicate their brands widely tohave a recognized and appreciated image They do this not only through advertisingbut also on product packaging, distribution sites, and through all the communica-tion media that may be reached through public relations

All this is costly but it takes time and money to establish a strong and sustainablebrand, even if a hint of creativity may sometimes make up for a slight lack orresources

Beyond the brand, all possible points of communication with customers areessential to establish a long-term relationship (see Fig.3.6) Any exchange withcustomers is a good opportunity to take advantage of their input, assessing theirsatisfaction, asking them which improvements or innovations they expect to see

3.9 Communicate with the Customer 21

“Autistic” and egocentric companies that ignore their customers never last long,even if they have a popular product at some point.

Moreover, the development of communication technologies provides increasingopportunities for interaction with the market In the past a company could find outwhat buyers thought by asking its sales people and distributors Today, evenwithout performing direct sales on the Internet, a company may interact with itscustomers by computer or cell phone, not only on its official website, but alsothrough discussion forums or ‘social networks’ that now feed word-of-mouthinformation about every important event in our society

Enduring corporations have learned to communicate with their customers over along period without seeming too artificial or tiring, taking care not to bore or irritatethem For those companies, to communicate means above all to listen and not justpassing information to customers Thus they maintain an interactive relationshipwith their customers, giving them many opportunities to provide feedback.Regular satisfaction surveys are indispensable but insufficient Indispensablebecause they allow assessment of customers’ opinions, and insufficient becausethey are mainly declarative and not based on actual observation

Responding to product problems and answering to customer reviews are yetanother opportunity of exchange These transactions are generally conducted byafter-sale service But various studies show that this type of exchange is equallyineffective Many customers “vote with their wallets,” and when they are notsatisfied, they do not spend time complaining They switch providers This isparticularly true for low-price and low-involvement products or services

Sustainable companies establish communication plans which provide them withvarious opportunities to communicate regularly with their customers to maintainloyalty The correct method is to pet them without spoiling them Otherwise theywould become too demanding and difficult to satisfy

Enduring firms can give presents or make customized special offers at certaintimes of the year outside sales periods They know how to surprise their customers

Fig 3.6 Capabilities for

creating and sustaining

customer relationship on the

long term around the brand

22 3 Treasuring Selected Customers: The Secret for Sustainability?

without upsetting the product value characteristics that they are used to (low price,good quality, high performance, unique design, etc.).

Above all, they take into account the opinions of customers to apply all requisitechanges to products or operations To achieve this they rely on informationprocessing systems powerful enough to store all the data, which can representseveral million stored messages They also have an internal unit that uses all thedata cascaded from their customers to amend concretely the company’s processesand products This skill is one of their secrets for differentiating themselves fromcompetitors and sustaining despite their customers’ innate inconsistency

This is how they manage to transmit passion for their products or servicesthrough generations of users This is one of their differences from the majority oftheir competitors that perish as soon as their regular customers disappear

3.9 Communicate with the Customer 23

How Do Enduring Firms Outlive

the Environment and the Competition? 4

Surviving and thriving is primarily a matter of adapting oneself to one’s ment Companies are not exempted from this rule If the Earth is 4.5 billion yearsold, evolution took four billion years to find its way The first recognizable form oflife started to exist after 550 million years Mankind emerged approximately fourmillion years ago As for the oldest companies still in existence, they are less than

environ-400 years old

Then and now, the environment remains turbulent and changes constantly In thebeginning of this century, things have become more complex with the continuedgrowth of the human population, degradation of the biosphere, successive techno-logical revolutions, and the qualitative and quantitative increase of our knowledgesupplemented by the acceleration of globalized exchanges of all kinds

As good Generals recognize the field in which they will advance their troops,leaders of sustainable firms know the external elements of their firms in order toadjust to them They analyze the opportunities and threats that arise to better exploit

or counterattack them

A variety of influences shape the environment in which any organizationoperates They are grouped into six categories: political, economic, socio-cultural,technological, environmental or ethical (see Fig.4.1)

4.1 Political and Legal Environment

The political sphere exerts its influence on many activities of a firm: locally,regionally, nationally, and internationally When evaluating the possible impacts

of the political context on their businesses, leaders of sustainable companies takeinto account many factors They include government stability, fiscal policy, exter-nal relations with other countries, basic research or public education programs,partial or total nationalization risks, etc This list is not exhaustive

Governments also exercise power through their spending programs In oped countries, public expenses account for more than 20% of GNP Such

devel-# Springer-Verlag GmbH Germany 2017

E Viardot, The Timeless Principles of Successful Business Strategy,

Management for Professionals, DOI 10.1007/978-3-662-54489-1_4

25

expenditure makes the national and local governments the most important clientsfor certain categories of goods or services.

Political power can be seen through regulation, in the form of laws and decrees.Its ubiquity imposes itself on businesses, at least in developed economies Itincludes, among others, administrative authorizations to conduct or start a business,setting up minimum wage, working hours, or hygiene and safety practice standards.Non-compliance with regulation can result in fines at best and at worst the sinedie closure of the business This is an important element of the environment thatsustainable corporations have learned not to underestimate

Finally, besides the authorities in place, the political influence of some veryspecific categories of stakeholders such as media, political parties, and someparticularly effective NGOs must also be considered when it comes to mobilizingpublic opinion on a given topic

Fig 4.1 The different components of the environment of a firm

26 4 How Do Enduring Firms Outlive the Environment and the Competition?

They consider other significant data such as inflation and unemployment rates orincomes after taxes According to these parameters, the final consumers demandwill be more or less important and therefore determinant of the market share.While performing these analyses, leaders of long-lasting companies always keep

in mind that, in the economy, everything that goes up must come down one day.They also know that when the situation deteriorates, there will be a springboardhelping the economy to rebound They neither sink into blind optimism norexaggerated pessimism They avoid herd behavior and constantly prepare theirbusinesses for future developments

4.3 Socio-cultural Situation

Social structures and cultural norms may also have a huge influence on the businessworld Demographic change, education level, attitude to leisure, dominant values insociety, changes in lifestyle, and household size are all factors that influence thepurchasing volume and the consumption patterns of individuals

In this area, sustainable companies have as a rule to consider demographicchange as a long term, stabilizing and structuring trend Even if, on a day-to-daybasis, individual behaviors are a reflection of humanity: changing, often unreason-able, and almost always emotional

4.4 Technological Environment

The knowledge and technical processes applied to industry may also upset thetraditional economic battlefield This can be illustrated with the recent example ofthe fast Internet’s rate of diffusion which has destabilized some very largecompanies which have failed to adapt quickly enough

Information technology—such as mobile phones and social media, for ple,—has radically modified the way corporations operate today allowing them tomove faster, be more flexible and relocate more easily Those who did not catch upwith information technology were overtaken and many of them ceased to exist.Telecommunication networks of today have the same impact than railroad networks

exam-in the nexam-ineteenth century which turned some small villages exam-into flourishexam-ing citiesand others in ghost townships

However, if new technologies replace old ones they do not always kill themcompletely The Internet has not made television obsolete, although it has largelyreplaced it Similarly, television did not put an end to radio, and radio did not killthe cinema or printed media Some firms have prospered knowing how to maximizereturns from their existing technology in the face of competition from a sea of newtechnologies

At any rate, sustainable firms understood that no activity is protected fromtechnological innovation They therefore seek first to identify technologies that

4.4 Technological Environment 27

will develop in the future Then they measure the diffusion rate of these inventionsaccording to the users’ adoption rate.

Finally, they evaluate the consequences of these developments which can rangefrom a marginal effect to a sweeping change of how business gets done When theydecide to adapt to technological innovations, they do so in their own way and attheir own pace

4.5 Ecological Constraints

Respect for the environment is more pressing each day The demographic growthcombined with the current model of economic development exerts an increasingpressure over natural resources and the environment of our planet Countlessinitiatives are taken to try to resolve this problem both locally and regionally aswell as internationally

Accordingly, the United Nations (UN) is now promoting a sustainable ment model that serves as a reference for international agreements and nationallegislation Consequently, the regulations concerning waste management orpollutants emission into the atmosphere are becoming tougher and more stringent.Customers are also becoming more sensitive to the environmental impact fromfoods and how they are prepared Now sectors cannot afford to disregard theenvironment

develop-This constraint will increase in the future because it represents one of the greatchallenges of this century The very survival of mankind is at stake Enduringcompanies generally have a longer history than other companies; their leadersmeasure, perhaps more than others, their responsibilities in this regard

They are aware that we do not inherit the Earth from our parents but we borrow itfrom our children, as stated in a Native American proverb It is no coincidence thatthese companies are pioneers shaping corporate, social, and environmental roles onvarious national or international committees

4.6 The Ethical Imperative

Cynics will argue that it is only when business cycles switch, usually marked by aneconomic bubble burst, that ethics are brought back into fashion This is becauseany economic or financial crisis generates a lot of miseries such as bankruptcies andmassive lay-offs which usually translate into an increase of poverty, economicprecariousness, and social inequality

Then media, politicians, academics, or analysts point fingers to the businessesleaders who did not hesitate to breach ethical principles—and sometimes even legalobligations—to take excessive risks and to speculate in order to make more profitand to increase their companies’ share price on the stock market increasing share-holder satisfaction

28 4 How Do Enduring Firms Outlive the Environment and the Competition?

For a time, the executives of the companies which have not been ruined by thecrisis swear to respect the ethical principles of doing business so that the situationwill not repeat However, once the economy recovers, they forget their promisesand embark again on the quest for profit at any cost.

This observation, albeit effective, is misleading An analysis of sustainablecompanies shows that in order to grow over the long term, those companies dorespect the laws and comply with the basic moral rules They have figured out that ifthey fail to do so, it may cost them onerous fines, license suspension, or a permanentdamage to their reputation among customers, suppliers, and other stakeholders such

as bankers, government, or the media

Besides, the most advanced firms do not limit their moral obligations to merecompliance with the law They go beyond, considering that they have an ethicalresponsibility to their employees, customers, creditors, and even civil society as awhole

This is especially true for large firms whose turnover exceeds the GNP of somecountries Often going beyond the local regulations, they refrain from certainpractices for the sake of ethical principles

This concerns finance and accounting (insider trading, “creative” accounting,misuse of corporate assets, etc.), human resources (employment discrimination,privacy violation, working conditions, fair labor contracts, etc.), sales (false adver-tising, Ponzi schemes, price fixing cartels, corruption, etc.), production (unsafeworking conditions, use of toxic or fake ingredients, testing of products onhuman beings or animals, etc.), or industrial property (patent misuse to blockcompetition, counterfeit products or trademarks, etc.)

4.7 The Principle of Permanent Monitoring

The environment requires careful consideration because all elements are not pendent They are intertwined to make up a complex combination as hydrogen andoxygen amalgamate to form water

inde-For example, a political choice often has an economic component that can alsoinfluence social behavior Similarly, technological innovation can pose ethicalproblems that will solicit political reactions leading to new regulations with aneconomic impact

Moreover, this interaction is dynamic and evolves constantly For as Sun Tzusaid: “just as water retains no constant shape .there are no permanent conditions.”

As a consequence, sustainable businesses permanently monitor the context in whichthey operate

This versatile complexity makes it difficult to analyze in detail all the components of the external environment Efficiency dictates identification of themost important elements and their positive or negative influence on the companybusiness today—and, more importantly, tomorrow—in order to anticipate theconsequences

micro-4.7 The Principle of Permanent Monitoring 29

For example, regarding political factors, some U.S and European banks did notsurvive the last financial crisis because they did not have good political contacts thatmight have prevented them from going bankrupt and evaporating On the otherhand, those with a good network of relationships avoided bankruptcy and evenreceived government aid.

Similarly, in the economic area, large companies in the automotive field or airtransport went out of business because they failed to anticipate the downturn whentheir factories had already reached overcapacity

In the case of technological context, the music industry completely misjudgedthe destructive impact of the Internet and its development Firms in this sectorunderestimated the Internet’s capacity to digitalize and remotely download musicand video, rendering obsolete the traditional media such as CD’s and DVD’s Theconsequences of this technical change have also been accelerated by the socio-cultural developments In fact, children and teenagers now prefer computer games

to traditional games This development has eliminated traditional major toymanufacturers

Understanding the environment enables leaders of sustainable companies to bewell prepared in order to anticipate and to adapt to its evolution This is an extraskill towards becoming successful, especially when confronted with competition Itthen follows an Arab proverb which advises: “If you find yourself at war, positionyourself so that the sun and the wind are with you and not against you.”

4.8 A Definition of Competition

In the military, the competitors are the enemy against whom the general officerswill lead their troops to triumph in the war This analogy can be applied to business.Competitors are the antagonists that will prevent a company from achieving itsobjectives, thus threatening its survival Competitors can steal customers, blockaccess to certain distribution channels, bring better quality or cheaper solutions, ortake the best suppliers, etc

Accordingly, to survive and prosper, a business must maintain dominance,relative or absolute, over its competitors Otherwise it will be crushed and disap-pear, either being bought by a competitor or terminating its activity and liquidatingits assets

However, the term competitor comes fromcompetere in Latin which means “toseek together.” Originally, a competitor is a person who pursues a common goalwith others, but whose ultimate goal is to exceed them The competitor is all at once

an adversary and a peer, and even a partner in some occasions This interpretationcorresponds with how many leaders focus on the immediate competitors of theircompany

Competition in business is generally larger and more protean Indeed, the mostdangerous competitive threats often come from new entrants These actors areradically different from the companies already existing in the market

30 4 How Do Enduring Firms Outlive the Environment and the Competition?

It is more difficult to find the Achilles’ heel of an unfamiliar competitor whosecharacteristics and habits are unknown It is also more difficult to anticipate itspossible moves to win the battle.

We will see in the next chapter how enduring companies develop competitivedominance over their rivals through the use of available resources

To achieve this dominance, they previously identified and surveyed variouscompetitors to assess their capacity to inflict harm This enables them to choosethe opponents with whom they want to fight at a given time Then they can selectthe decision best adapted to win

But there are also direct competitors who play in a separate category They targetmarkets of different sizes or types They offer products or services other than thoseoffered by the company in terms of scale, variety, or even nature They areobviously more difficult to discern, but they are nevertheless detectable

Like planets in planetary systems are organized in orbits around a star, all directcompetitors tend to congregate in various competitive systems They gather around

a company of reference and adopt the same modus operandi As they are based on

an analysis of the environment and on resources which are relatively similar, theytend to have similar strategies

In addition, each competitive system, having its own logic, has its own barriers

to entry that must be overcome by those who want to become a member Thesebarriers are different from one system to another, and it is generally difficult for acompany to leave a system to enter into another group

It is often the companies that are most comparable that engage in the mostsavage wars within the group to gain control This is true especially in economicsectors which are young and developing In mature industries, companies thatsurvive the fierce competitive struggles are those that have found the wisdom toget along with their competitors However this does not always please theauthorities

The identification of direct competitors thus requires charting a map of thedifferent competitive systems in the market

Adjacent to direct competitors are indirect opponents They are disparate innature and therefore more difficult to discern They are more dangerous than theyseem They belong to two different categories

First are the companies offering substitute products The nature of solutionsproposed is different, but they serve the same needs of customers who may thenprefer these competitors to their usual suppliers

4.9 Identification of Competitors 31

There are also firms that enter the activity as newcomers They may already besuppliers or distributors who know the industry because they are intermediarieswithin the system They may also be companies that decide to diversify into newbusinesses Sometimes it will complement what they already know how to do Butthis is not always the case, sometimes there are firms that diversify in activities thatare radically different from their core business.

These new entrants show up generally during the growth phase of a market,when customers increase in number These unexpected competitors are attracted bythe prospect of achieving high turnover and margin

4.10 Competitive Asymmetry and Doppler Effect

in Competitive Identification

The competitive analysis should consider the asymmetry of proximity between thedifferent players This strategic concept was highlighted during the Pacific Warbetween Japan and the United States In the last years of the war, the U.S couldeasily approach Japan because they had installed bases on nearby islands Con-versely, Japanese planes had to fly nearly 9000 miles over the Pacific before beingable to attack the California coast An assault was therefore difficult

This asymmetry also exists for businesses It usually depends on the number ofactors involved For instance, this is the case in a country or an industry wheredistribution is highly concentrated and production is atomized In that situation, it isfairly easy for a wholesale distributor to find among the hundreds of existingproducers a manufacturer that will develop a new activity Conversely, it is muchmore difficult for producers to develop a new channel of distribution to the public.Their choice is limited to less than a dozen brands of major retailers that may rejectthe endeavor

Competitive identification is not impervious to the Doppler Effect either Theterm refers to the gap in assessing the extent of a wave when the distance betweenthe transmitter and receiver varies over time Thus, the sound of a car engine isdifferent depending on whether the vehicle approaches the receiver - emittinghigher pitch - or it moves away - emanating lower pitch (see Fig.4.2)

This is analogous to analyzing the competitors The further one is from reality,the more distorted one’s perception thereof, and the relevance of results will have to

be weighed for uncertainty That said, some companies tend to fantasize about theircompetitors, especially when they are different The competitors’ qualities orshortcomings are often exaggerated This becomes a problem when companieswant to emulate their competitors They replicate only the image they have ofthem not the reality Similarly, when companies seek to differentiate fromcompetitors they err on the elements of differentiation they should promote

32 4 How Do Enduring Firms Outlive the Environment and the Competition?

4.11 How Do Sustainable Firms Outlive the Competition?

In the military, strategic action aims at leading the enemy to negotiate or tosurrender sooner or later It is the same in business Sustainable firms have allsurvived countless battles with their competitors They were able to eliminate theirmajor rivals of any kind

Their leaders apply the principle of rational audacity They combine boldnessand courage with prudence and defense The evaluation of power balance, achievedthrough a proper understanding of the environment and the competition, guidesthem to take initiatives (see Fig.4.3)

At the early stage of their corporate life, when sustainable companies are stillyoung and small, their leaders use the principle of avoidance They develop theirfirms differently from existing major competitors by targeting customer segmentspoorly served by these competitors This allows them to develop a sustainable andoriginal competitive advantage It also gives them time and capability to acquire theresources and skills needed to attain sufficient size and deal with their opponentswho they may avoid, but never ignore

When a sustainable company increases in size, but is not yet dominant, thedevelopment strategy shifts to the conquest of markets belonging to othercompanies

Enduring firms first choose their targets because they cannot fight againsteverybody at once They rank their competitors according to the current marketshare as well as the future business risks they may represent according to theanticipated evolution of the environment and the customers

Sometimes top ranking competitors are the closest and most comparable to thecompany They are found within the same competitive system so they can easilyimitate movements and intervene in commercial expansion

Fig 4.2 The Doppler Effect

4.11 How Do Sustainable Firms Outlive the Competition? 33