Jul 30, 2021 | Governance, Innovation, Strategy
The old saying that ‘he who pays the piper calls the tune‘ is almost always true.
The piper in this case has been the orthodoxy prevailing over the past 40 years in Australian manufacturing.
I have been actively observing the trend towards outsourcing for a long time, deeply concerned that as a country we were collectively making a huge mistake, by focussing on lowering costs by outsourcing. By slicing off the things that are not deemed to be ‘core’ in some way to your profitability, you can reduce costs while maintaining revenue.
I guess it is much easier than being truly creative, taking risks, betting on a future different to the present.
As a result, manufacturing businesses in this country have progressively outsourced manufacture of sub-components, then whole components, then manufacture and assembly of finished products, and finally, because the manufacturers in China, Vietnam, or Thailand are closer to the technology, the design.
All Australian manufacturers, those few that have survived so far, are left with is a brand, with nothing to support it.
A brand without the supporting ‘brand infrastructure’ is a bit like a heavily inflated balloon. At some point a bugger with a pin will come along and, ‘bang’, you have nothing left.
The bugger with the pin proved to be a virus.
Supply chains have been ‘kneecapped’ and there is suddenly a recognition of the need for ‘sovereign manufacturing’.
Being driven by short term profit at the expense of long-term commercial sustainability has been a dumb choice.
I understand how it has happened.
Along with outsourcing manufacturing, we outsourced good old common sense to the educated but inexperienced crowd who applied IRR (Internal rate of return) and RONA (return on net assets) models shoved down their throats in MBA classes. These led to incremental investments in little, short term things at the expense of longer term and less certain but potentially bigger returns, to satisfy IRR hurdles. Reductions in the denominator in ROI calculations by flogging off productive assets made them look good by increasing RONA numbers.
They forgot that cash, and intellectual capital are not ratios, you either have them or you do not. Without cash you will be dead tomorrow, without the intellectual capital underpinning operations, you will be dead by a slower route, but just as dead.
Covid has awakened us to the effects of those decisions made over an extended period. Question is, do we have the resources and resolve left to start playing a different tune, one that common sense rather than capital ratios dictates?
I truly hope so for the sake of my grandchildren.
Header cartoon courtesy www.Gapingvoid.com
Jul 7, 2021 | Governance, Management
Small and medium businesses have many advantages over their larger rivals. They also have many disadvantages, which centre around the more limited resources they have to get the job done.
One of those disadvantages rarely spoken about, but sadly, present too often, is the lack of robust book-keeping procedures, which can and too often does, enable fraud.
This comes usually from the lack of internal controls, coupled with the ‘all hands in’ necessity of SME’s which means basic financial security measures are curtailed. For example, the recording of both debtors and creditors is in the hands of one person, or even simpler, there is little scrutiny on such items as credit card usage.
The propensity for fraud, and/or misleading financial reports and results can be looked at in a similar manner to fire.
For fire to occur, there needs to be 3 things in place. Fuel, oxygen, and heat. Take away any one of these 3 factors and fire cannot occur. If there is no fuel, it will not burn. Take away oxygen by covering the fire with water, or a fireproof sheet, and it will not burn, take away the heat source, and the fire cannot start.
It is the same in finance.
The 3 factors are opportunity, pressure, and rationalisation.
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- Pressure. For an individual to perpetrate a fraud, there must be some pressure for them to do so. Some situation in their lives that makes them take what they know is a risk creates the pressure to take that step. Debt, divorce, a burning desire to own something they cannot afford, and so on. Then there are a few who are just opportunistic, and when the opportunity arises, will leverage it.
- Rationalisation. The individual must be able to rationalise the fraud, stealing by another name, in some way. They need the money more than the company, nobody will notice a bit going missing every month, ‘I have been underpaid for the value I add’ and so on.
- Opportunity. There must also be the opportunity for the fraud to be perpetrated. The easiest way is to gain access to cash before it is counted, as in retail environments, but the lack of controls in a bookkeeping function or warehouse can have the same impact. I have seen payments clerks set up an account for a phony supplier, generate invoices from that phony, and pay them. I have also seen an order for 10 pallets have 11 pallets loaded onto a truck for delivery and the extra pallet not accounted for. This may not be financial fraud, it is stealing, and the effect is the same. Involving more than one person to perpetrate a fraud makes many types more possible, while at the same time, offering greater detection opportunity.
Remove any one of the 3, and fraud is far harder. Not impossible, but harder.
There are many simple things that management of any enterprise can do to minimise the occurrence of fraud in their business.
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- Separate the recording from the physical. The obvious example of this is the use of a till in retail that records the products and amounts bought, which then must be reconciled with the actuals in the cash drawer. This also records the products being sold which can be reconciled with stock records in a stocktake, further eliminating a source of opportunity.
- Separate the two sides of a transaction or create transactions as a data collection point. For example, the separation of the recording and payment of a debt should be separate to avoid the ‘phony’ customer situation. In a factory, you might institute a data collection point using bar coded pallet numbers on transfer from the factory production floor to inventory. This separates inventory from the waste stream, sometimes the source of an opportunity, as it was in the example noted above. This latter example also offers management some of the data necessary for improvement projects as an added benefit.
- Regular and close management of the debtors and creditors ledgers with the bank accounts. This will detect unauthorised payments made from the bank accounts.
- Restrict manual transactions, particularly where they involve cash.
- Control access to the books to ensure accountability of individuals for accuracy and completeness.
- Build in multi person authorisation into standard processes.
- Have clear transaction audit trails, that are monitored.
If some of these seem a bit ‘over the top’ for an SME, I understand. However, the volume of fraud that goes undetected and unreported is huge, and very damaging for an SME without the financial depth to easily navigate the losses.
Implementing some simple safeguards is just responsible business practice.
Get some help if you need it, and usually the return on a modest investment will be very quick.
Jun 30, 2021 | Change, Governance, Marketing
I have been at this ‘marketing’ game a long time, long enough to know that the bits you see, as a customer, prospective customer, or just by accident, are only the tip of the iceberg.
For many so-called marketers, what you see is the whole iceberg, they are ignorant, wilfully, or otherwise of the underlying factors that go into making a success of the process of ‘marketing’.
Despite the market research, social tracking, customer satisfaction measurement, and all the other stuff that we can do, the customer is often ignored.
Why is it so??
- There is little ‘fit’ between the market and the product/service being offered. This is usually because there is no ‘seat in the boardroom’ for customers. This should be the responsibility of the marketing people, but they so often revert to cliches and fluffy qualitative assertions that they are ignored. I really like the practice of Amazon, where there is an empty chair in every meeting, signifying the customer.
- Products are designed back to front. Businesses assemble the resources they have available, and build products they think customers will buy, rather than identifying customer problems and working backwards to assemble the resources that solve them.
- Marketing is usually seen as a subordinate function. The heads of the accounting, engineering, and operational functions are more likely to wield corporate influence than marketing. Partly this is the fault of marketers, who have systemically failed to speak the language of the boardroom. Marketing, which is about the future, tends to speak ‘qualitative’ whole other functions are all about the past, and can speak authoritative ‘quantitative’. This difference makes them more believable, as our brains like the certainty of quantitative. Partly also it is a failure of leadership. How many CEO’s are you aware of that have ‘marketing’ as their core skill?
- KPI’s rarely involve customer metrics of any value. I am a huge fan of tracking performance, but measures that do not relate to the manner in which the job done satisfies customers is a metric that is only looking internally. Some are necessary, but most are not, in my experience. Then, you see the occasional customer metric touted, and it is the number of likes on a social platform, vanity measures that again mean nothing. In fact, such measures are worse than nothing, they are misleading.
- Marketers by their nature are looking forward. This tends to enable them to be blinded by the newest shiny thing that emerges. This constant response to the shiny object serves to erode any focus and consistency of brand building, customer awareness and loyalty. When you are constantly moving around from video to podcasts, clubhouse, Tik Tok, and all the rest, you become hard to follow.
- Poor key strategically important customer definition. Too often marketers are unable to focus on the niches where the really powerful returns hide. The old cliché that you cannot be all things to all people prevails. The more important to the few who will buy your products and nothing else you are, the better. The temptation however to try and broaden the appeal, just a bit, to get a few more customers just dilutes the power of the value proposition.
- Innovation is messy, suboptimal, and experimental. Marketing and strategic development, whether it be of product, brand, customer groups, geographies, always has significant elements of trial and error, risk, and the inevitable failures. In enterprises that run on continuous improvement and optimising processes, this ‘messiness’ is unacceptable, and so is minimised. The result is the evolution of the enterprise stalls for lack of innovation, and marketing cops the blame. The corollary is that marketers are intimidated by their KPI’s and the status quo, into not making waves, so are always playing safe. This results in bland, undifferentiated marketing that has little impact.
- Marketers are not often the smartest people in the room. It seems to me to be a sad fact that this is often the case. From the outside, marketing looks easy, so those who do not seek or are unable to make the grade into professional training often seem to gravitate to marketing. Of the outstanding marketers I have seen and hired, many seem to come from a professional background. Scientists, lawyers, accountants, engineers, looking for something that values their creativity in bigger doses than their first profession. Running a marketing function in a large company for some time, I always went looking for these people when hiring, although it did take me some time to figure it out.
- Marketers fail to engage the other functions that are critical to success. Marketing is the only function that needs the co-operation of others over whom they have no functional control, to be successful. While this is a great test of leadership, it most often ends in tears. How often have you seen an operations manager whose KPI’s are all about factory efficiency, take a hit because the marketing manager wants to do a factory trial of something the ‘Ops’ people regard as a fantasy?
- The pace of superficial change is faster now than ever before. However, human behaviour does not change easily. The tools we use are becoming like our underwear. The reasons we wear underwear do not change, but the brands, types, cuts, and colours of the underwear we buy can change easily. This profound difference is most often shovelled under the carpet, kicked away by the seeming attraction of an apparent change in short term choices we make, which are at odds with the underlying drivers of behaviour. The unfortunate added outcome of this is a dilution of the creative impact of advertising communication. When you have to produce volumes of ‘content’ on a short term timetable, the impact of that communication is necessarily diluted. We fail to give the creative part of the communication process sufficient time to generate the attention and magnetism required in a frenzied world of fragmented communication.
- DIY syndrome. Marketing, like everything else has become increasingly fragmented, and specialised. No one person can cover all the required bases, any more than a doctor can be a specialist in more than one narrow niche of medicine. Yet many fail to recognise the competitive necessity of engaging specialists for specialist tasks. This can be addressed in large companies by very specific job descriptions and skills of those employed, but in SME’s, it requires often expensive specialists to be engaged on an ‘as needed’ basis.
The good news is that all these shortcomings can be overcome. The bad news is that it takes large doses of experience, leadership, and time, to do so
Header cartoon credit: www.TomGauld.com in New Scientist.
Jun 25, 2021 | Governance, Management
Often when seeking advice, we set out to find those who have ‘Domain’ knowledge’. Those who know what we need to know because they have ‘been there done that’ or have studied the domain extensively for one reason or another.
When you break it down, there are three components to building valuable domain knowledge:
First hand experience.
There is no better way to gain a feel for a market than to be out there, in the weeds, dealing with the drivers of performance as well as the day-to-day challenges that arise. Understanding ‘why’ things happen is infinitely better than just being able to observe them happening, it gives you a sense, an instinct that cannot be easily defined. Hands on experience and exposure to a market and its drivers offers the opportunity for the nuanced understanding you may be looking for. Fingerspitzengefuhl‘ is a German word for it.
Helicopter view.
In a helicopter, you are high enough to see the whole domain, but still low enough to be able to see the features that make up the whole. Importantly, you can zoom in and out to investigate features that grab the attention in some way, to examine how they work, and the relationships they have to other features in the terrain.
Through others eyes.
Being able to see and objectively assess your value proposition from the perspective of your ideal customer is vital, a basic discipline of marketing and sales. Why should they buy yours, and not the offering of the opposition? You also need to be able to look at yourself through the eyes of your competitors, seeking the points of relative weakness and strength, the potential paths to a greater share of wallet, or attracting new customers. Others, not necessarily those with whom you are commercially engaged can also have an influence in the way you deploy your limited resources. Regulators, interest groups, research bodies, and others can all have an influence on your enterprise. Being attuned to the potential impacts of those views is an important component of domain knowledge. Just look at what a small group of animal rights activists did to the live cattle trade to Indonesia a few years back. Irrespective of your views on the rights and wrongs, they managed to totally change the face of a large industry almost overnight.
Most business owners find themselves short of the time and expertise to build a nuanced view of their domain. Confirmation bias also tends to rob them of breadth of view. Engaging an advisory group, or individual is the best way to fill in the holes and build long term success.
Jun 10, 2021 | Change, Governance, Management
Culture change is perhaps the hardest challenge to be faced by any leader. It can evolve over time, with patience and commitment, but every successful change I have seen comes after a catalytic event of some sort.
Many years ago, I worked for a manufacturing business that had built a new factory in the west of Sydney, which had more than its fair share of teething problems. The production the factory was supposed to absorb and build upon came from an inner-city site that had been operating for almost 100 years.
In those years there had been built up a powerful culture of management Vs workers, and fierce demarcation battles between the many unions on the old site, several with only one or two members, desperately trying to build their position.
This toxic mixture was transferred to the new, automated site with the predictable results. Manufacturing productivity was appalling, labour relations non-existent, demarcation disputes ongoing, the place was on the brink of being closed as the biggest disaster since the Titanic.
In a desperate dispute, to make a point, someone (no charges were ever laid) resorted to arson in the warehouse. The damage was extensive, and the already hobbled ability to produce saleable product was almost destroyed.
However, it was a monumental catalyst for change.
In the middle of the night, I found myself driving a forklift, working shoulder to shoulder with warehouse and production staff clearing stock from the refrigerated warehouse into trucks for transport to outside storage.
This would have been absolutely unthinkable just 24 hours before.
Suddenly, everyone in the plant recognised that their jobs were about to go, forever. The unionised workforce recognised that those in so called ‘management’ were just people who wanted, like them, to do as good a job as they could. We found it was easy to communicate without the artificial barriers that had existed, and we all had a common purpose, to survive.
Within a few months, after enormous effort and collaborative changes unthinkable before the fire, the business had been transformed. The fire had been the catalyst for a determination to acknowledge the failures of the past, and to accept massive change was necessary, welcome, and in the interests of every stakeholder.
In a small way, this is what is needed in Australia.
A common purpose, clear and consistent communication, determination, and goodwill.
This does not mean there will not be fierce debates, and difficult decisions that need to be made, but it does mean that there is a general understanding of why those decisions were made.
After royally stuffing up the reaction to the fires in December 2019 and January 2020, the government recognised their failings when the Corona virus took hold. It served as a catalyst, and suddenly there was bi-partisan and general community agreement that change was needed.
We moved forward.
As things quietened down, the collaboration and goodwill dissipated, partisan politics and apparently ill-considered and reactive decisions taken by fragmenting politics at all levels re-emerged, driving people apart.
Question is, can we restore the emergent culture of goodwill and collaborative communication that served us well in the crisis? It is the same question commercial leaders need to ask of themselves after experiencing a catalytic event.
Do we have the leaders capable of driving the culture change necessary?
How do we assemble the resources necessary?
Can those with vested interests in the status quo, resistant to the changes, be shunted to the sidelines?
In the case of ‘Australia Inc’, failure to respond will leave all our children and grandchildren poorer: financially and emotionally.
Header cartoon credit: Dilbert, again. Scott Adams and his mate have a knack of hitting that vital nerve.
Jun 8, 2021 | Governance, Marketing
Part of the job of marketing is to make the complex simple and understandable, while retaining the essential core of the proposition.
As Einstein said, ‘Everything should be made as simple as possible, no simpler’.
This is the same logic used by ‘Occam’s Razor’, which summarised tells us that the best theory is the simplest one that still explains all the facts. Arthur Doyle’s character Sherlock Holmes was referring to both these when he said: “When you have eliminated the impossible, whatever remains, however improbable, must be the truth’
However, there is a point beyond which the process of simplification becomes corrupted by the selective choice of facts and variables, of leaving out those that might deliver a conclusion different to the one that is preordained, and preferred
People are not stupid, but sometimes they are lazy, do not have the technical knowledge to fully understand, or their cognitive capacity is consumed just by living, and a host of other mental barricades.
However, that is no excuse to oversimplify the complex when the complex is important, or to be sufficiently selective with the facts to be grossly misleading.
Successful long-term marketing depends on the truth, expediency may be attractive in the short term, but is poison over a longer period.
Our current PM, labelled ‘Scotty from marketing’ by that most reverential publication, the ‘Betoota Advocate’ has gone too far.
He has been conducting a masterclass in oversimplification on one hand, and obscurification on the other, for political purposes. It has been going on for some time now, and it is time to stop.
To be fair, ‘Scotty’ is not alone in the political sphere, (and I use the word political in its broadest sense), but he does set a very high bar.
We, the electorate, are not stupid. We may be disengaged, cynical, selfish, and mostly put our immediate family and community above the greater good, but treating us as stupid is a bridge too far.
It is easy to go too far in simplifying a message, which then is read as patronising, self-interested, and with little relationship with the facts. This erodes credibility, and therefore the ability to get anything done by any means other than leveraging institutional power.
Header cartoon courtesy Tom Gauld in New Scientist magazine.
