3s & Cs
Introducing Kenichi Ohmae
Friends,
I hope that you and yours are well on this Friday morning.
To start this newsletter with an apparently now traditional short detour, I thought that I would give you all an update on the Strategy in Praxis book club.
As mentioned, feedback has been very positive, so we are going ahead as planned. The book featured will be the strongly reviewed The Management Myth by Matthew Stewart; a critical yet entertaining deep dive into strategic management theory and practice that should fit the overall theme of this newsletter to a tee.
The official starting date will be March 1. Before then, I would love for those of you who will be joining to comment on reading cadence. We all have work to do and lives to live, so I am sure that everyone recognizes that some may struggle to find time to read. At the same time, we have to actually finish what we set out to do. So, what would be best for you? Let me know.
A separate email on this topic will also come later today to those that have expressed interest. If you want to join but have not yet registered, just send me an email via this link.
The book club is free, but exclusive to subscribers.
Back to business
The object of today’s analysis is the 3C model created by Kenichi Ohmae, a man whose CV is the size of a phone book (remember those?). Although his training originally came from natural sciences, including a doctorate in nuclear engineering from MIT, he eventually went on to run McKinsey’s Japanese operations and founded its strategic management practices.
In short, Ohmae’s argument - first introduced in Mind of the Strategist - centers around the idea that the only way to achieve a competitive advantage is by balancing three elements in a strategic triangle: the corporation, the customer and the competitor.
Given what we have established about the external (represented best by the Porter school of thought) and the internal (exemplified by the resource-based view of the firm and core competences), another way of visualizing the model is as a Venn diagram:
From this follows, as Ohmae’s reasoning also does, that a corporation-led strategy is chiefly concerned with building robustness by focusing on what the organization does best and maximizing its strengths. No company will be able to lead in every category, so it makes apparent sense to attempt to gain an edge in a specific key function (such as corporate culture, image, products, technology and so on). Over time, this may also lead to organic improvements in other areas or create enough room allow investment in order of strategic importance.
Anything not considered essential, whether in terms of strategic functions or pure operations, can be outsourced in the name of cost reduction. Subcontracting is largely considered a non-issue; it is only by not moving production quickly enough, particularly if wages rise, that risks really materialize.
The focus on costs is consistent throughout Ohmae’s argument, which is perhaps not entirely surprising given the time in which he originally formulated it. Corporations are said to perform best when a), reducing basic costs more effectively than the competition, b) exercising higher selectivity in terms of what orders to accept and solutions to offer (thereby cutting unnecessary functions and dropping functional costs faster than sales revenue), or c) combining certain key functions within the corporate umbrella, thereby sharing overhead costs.
It is worth noting, of course, that out of these three methods, only function-sharing is strictly speaking internal only. ‘More effectively than the competition’ is a relative measure by nature, while supply and demand have to do with the market (or ‘customers’, to use Ohmae’s own terminology).
Speaking of which, a customer-based strategy is an expression of market orientation and rooted in segmentation and targeting; identify a market subset and satisfy its need. This should primarily be done on customer objective (what many of us today would call category entry points), market coverage (cost vs reach) or user mix, and continuously updated.
Lastly, the competitor-focused strategy is one of differentiation; purchasing, design, engineering, sales, pricing and servicing are all considered sources thereof. In other words, differentiation can be both perceived (e.g., via brand-building advertising) and functional (e.g., fixed cost ratios).
Somewhat lost in translation
Although Ohmae’s creation is simple, there is a lot to like about it. Unlike many similar models, it successfully manages to avoid the either-or narrative. The 3Cs are not about the internal or the external, but both and more.
Some are sure to consider the model too simple, yet what corporation-competition-customer means for any particular organization should undoubtedly vary, and there is ample opportunity to go as in-depth or advanced as is required. Nobody is forcing anyone to follow Ohmae’s reasoning to the letter; one can be market oriented without segmenting and targeting narrowly, for example. Much like the 4P model in marketing, this improves the longevity of the 3Cs dramatically (even if those who are poor at their jobs and therefore prefer paint-by-numbers strategy are likely to find it too abstract).
Further, despite his call for what many would interpret as strategic focus, Ohmae makes a point of stressing that this should not translate to tunnel vision or an all-or-nothing approach; strategic planning, in his view, must be broad, comprehensive and allow for adaptation. This means that resilience very much remains a part of the overall corporate conversation, and that looking for the perfect strategy or the perfect competitive situation is an exercise in futility. Companies are much better off creatively and flexibly trying to find advantages at reasonable costs, a refreshing contrast to the unhinged spending sprees of so-called growth companies over the last decade.
Unfortunately, the modernity inherent in this argument is partly offset by other lines of reasoning that, conversely, today appear dated. The many (many, many) issues with the concept of differentiation aside, Ohmae’s engineering background, for example, means that his views on strategy are explicitly reductionistic; analysis is considered a ‘cognitive process of breaking a complex topic into smaller parts to gain a better understanding of it’. As we know, attempting to separate parts and find root causes in complex adaptive systems in order to better grasp emergent patterns is a fool’s errand. The whole is not merely greater than but also different to the sum of the parts. Organizations are not machines, nor are employees cogs.
There is also the question as to how well certain advice translates to business contexts outside of Japan.
Japanese business culture has historically been influenced by an honor system, particularly as it pertains to corporate relationships. This often takes the academic form of keiretsu; supposed clusters of independently managed firms that maintain close economic ties, either horizontally (cross-shareholding, intra-group financing through a central bank etc.) or vertically (multi-layered supplier systems around a core company).
Whether keiretsu truly exists in practice is admittedly a source of heated debate, but it is undeniable that companies such as Toyota have taken advantage of the fact that subcontracts are treated differently than they are in the West (a topic I will be digging into more in detail next week). The companies that are outsourced to often consider themselves, so to speak, part of the sphere even if they are only barely within it, and contracts (to the degree they even are required) are habitually extended automatically unless there is an explicit reason for termination. Not only does this mean that there is a mutual reluctance to change the status quo, but working with direct competitors, stealing profit schemes or leaking IPs would also go against the cultural belief-system.
While this may be changing somewhat with the times, relying so heavily on outsourcing for cost benefits still makes more sense in a Japanese setting. Unfortunately, as we are about to find out in seven days from now, the same cannot necessarily be said for the rest of the world.
Credit and criticism where due
In summary, then, Kenichi Ohmae deserves credit for promoting a more pragmatic view of strategic management and, in my view, thereby creating a superior baseline approach to some of the more famous (but also binary) Western schools of thought. Although the 3Cs will never detail everything an organization needs to do, that is also kind of the point for anyone looking to use them in practice; one can fill in the gaps with whatever analyses, strategies or operations are deemed suitable.
However, this also means that the model, despite its practical origins, is best applied metaphorically. Some of the supporting arguments hold strong still, but others crumble under scrutiny, especially when applied outside of the original context.
On that note, context is sometimes mentioned as a needed addition to the 3C model, typically alongside collaborators in one of the more popular versions (among far too many) of the 5C model.
This, to me, merely highlights a lack of insight into Ohmae’s work. Both aspects are already included in the original thesis, albeit not explicitly in its visual representation. Collaborators are clearly a key factor in outsourcing, while the context in which a corporation acts is central to the argument as a whole. While I will not deny that additions can (though seldom does) bring about improvement, doing so without bothering to first study the underlying subject ensures zero additional value. It is also intellectually lazy and potentially dishonest.
Next week, as alluded to above, we are going to do a deep dive into the merits (or lack thereof, stay tuned to find out) of outsourcing.
But first (and today last, but by no means least), I want to thank Tomo Kawai, who graciously provided invaluable insights into the Japanese way of corporate life. Without his aid, this newsletter would have missed the mark.
Have the loveliest of weekends.
Onwards and upwards,
JP