What is the single source of competitive advantage in the 21st century?

What is the single source of competitive advantage in the 21st century?

Nov 26, 2018 | Governance, Strategy

Competitive advantage used to be about the sum of scale and the efficiencies that could be applied. Businesses like GM, GE, Exon Mobil, Wal-Mart all built scale and efficiency as the core of their success.

Our economies and institutions ran on the basis of scale and efficiency. Our political systems were fuelled by  the notion that those in charge accepted a moral obligation to be honest, tell us the truth, and act in our collective best interests for the long term.

Now things have changed.

Competitive advantage is now more about connections that deliver the scale. The planets biggest businesses, Apple, Amazon, Alphabet, Microsoft, Facebook and Alibaba, now have connections as the common element of their competitive advantage.

Over the weekend I heard Donald Trump in an interview propose that he had a ‘Platform’ in his followers on Twitter, Instagram and social platforms generally, that removed the need to rely on the institutions that had built the US. His platform was the people, he argued, with whom he now had a direct connection, independent of the institutions.

Love him or hate him, it is hard to disagree.

Equally, the Liberal wipeout in Saturdays Victorian elections will I suspect be sheeted back to the absolute lack of trust in the Liberal party generally, fuelled by the shambles in Canberra over the last decade. The Labor party should also be very careful, rather than crowing their success, as we trust them no more than the Libs.

It seems the foundation of the 21st century will be trust.

Hard won trust is easily lost, and very hard to win back.

As businesses and institutions build scale based on connections, those connections will be fuelled by trust. The absence of Trust will come to mean that your ability to build competitive advantage will be compromised. The strategic and marketing task of both public and private institutions, can be boiled down to the simple proposition that they need to be trusted, and that we, the great unwashed who vote with our feet, money and loyalty, require that they earn that trust, it will no longer be just given.

To reach that point, they need to build up the real evidence that they can be trusted, that they will act in our common interests before theirs, as distinct from the fluff and bullshit currently churned out by their publicity lackies.

As I look forward, I can see no driver of success more important than outlining a goal, articulating the route toward the achievement, then being held accountable for the actions that take us towards the goal.

In a word, trust.

Header photo: Christmas 1914 on the Western Front.

How much should I spend on that winning that tender?

How much should I spend on that winning that tender?

Oct 2, 2018 | Customers, Governance, Strategy

 

That is a common question, which requires some rephrasing to be answered with anything other than ‘It depends’

‘How much should I invest to increase my chances of winning that tender’ is a better question.

Would you spend 20k to have a 50/50 chance of a $5 million contract?

How about if your chances of success were only 20%. Would you still spend the 20k?

There is a continuum here, one that should change with your circumstances, and your judgement of your chances in the tender process. The management challenge is quantifying the level of risk tolerance that exists at that time.

‘How much should I spend’ is a form of question that implies a short term is involved, ‘How much should I invest’ implies a longer term. It may only be a semantic difference, but  there is a great difference in the manner in which you approach the tenders preparation.

Quoting on tenders has two elements, the first is that now it is a tender, the implication is always that you are just one of several to tender, so it is an auction, of sorts.

The second is that there is never a sure fire thing, even when you have the inside running for any one of a large number of reasons, the most usual being incumbency of some sort. The fact that there has been a tender made public is an indication that the tenderer is not only looking for a price, they are looking for ideas.

To some questions you should be asking yourself:

  • How valuable is the tender to me? If the tenderer is your biggest customer, and you are an incumbent for this sort of job, the answer would probably be very valuable, not just for the job being tendered, but for the ongoing relationship and flow of further work.
  • What is the strategic value of the customer? This will often be a similar answer to the previous question, but your largest customers always started as a new, much smaller customer, and grew, so considering how ‘strategic’ they may be is important. An acquaintance of mine has what he calls a ‘green-keeping’ business that specialises in public spaces. He will do everything possible to win tenders put out by public bodies, councils, schools, and the like, as each one he wins is strategically important not just to the current cash flow, but to the position he holds in the competitive field.
  • How unique is my solution? When you can do something none of your tender competitors can do, price becomes less important. Following the above example of the green-keeping business, he owns a tractor towed machine that ‘cores’ a surface, an important factor for vigorous grass growth on areas like football fields. All of his competitors need to hire such a machine (sometimes from him) as the need arises which adds a significant cost to maintenance and a resulting reluctance, which often enables him to get a superior outcome.
  • How close is the strategic fit of the tenderer to the profile of my ideal customer? Every successful business has an idea of what their ideal customers look like, and the closer to the ideal profile a tenderer is, the more important it will be to win a tender that arises from them.
  • How does the job fit into the existing workflow? When you have a ‘hole’ in your work flow, filling it becomes more urgent, the alternative being to cover the overhead costs from reserves or remove them. When the latter course is taken, it can be hard to resource back up when the work flows in again.
  • How does the job fit my capability mix? A key part of having a profile of the ideal customer is that the mix of capabilities you can deliver exactly matches what is required by the tenderer. Having to buy in a capability you do not have is a strategic decision, and should be made carefully.
  • What is the net cash flow from the project over the life of the project? To do any sort of financial calculation, this forecast is an absolute necessity. It should be done in any case, as you are bidding for the contract, and therefore should have calculated your costs and the financial benefits and risks. This is all that is needed for a financial calculation.

 

Having determined how important the job may be to win, the task is to increase your chances and decide how much to invest in winning.

There are two variables, the amount you invest, and the chances of winning the tender. To do a financial calculation on the options, you could use a function called  ‘Net Present Value’  or NPV. We all recognise that a dollar today is worth more than a projected dollar tomorrow. The value of tomorrows dollar being reduced by  the amount of inflation, and the certainty of the projected cash flow from the project.

To do an NPV calculation, you need to have projected the cash flows to which you are applying the formula.

The NPV formula is simple in principal: Assume an amount of $20,000 is outlaid with the projection that in the following 3 years the project will deliver 100k/year positive cash flow in current dollars, and the discount rate is 5% to allow for 5% inflation.

The cash flow looks like:

$20,000 initial investment, followed by year 1 net cash flow of $100,000, plus year2  100,000 X .95 = $95,000 plus discounted year 3 of $90,250.

The net cash flow from the project is therefore $285,250.

Therefore the net present value of the initial investment at the end of the project is $285,525 – $20,000, or $265,525. In this case, it would seem that the investment of 20k in winning the tender would be a very good investment indeed.

The discount rate can be changed to reflect not just the future value of current dollars, but to also  reflect the risk of not winning. This can be a more complex calculation, but relatively easily done with a formula called Internal Rate of Return (IRR) available in every spreadsheet package.

These two calculations, NPV and IRR are routinely done in tandem by accountants to calculate a risk adjusted return from an investment.

When considering the question ‘how much should I spend on this tender‘ they will together be very handy tools.

Cartoon credit: Scott Adams and Dilbert.

A marketers explanation of Free Cash Flow.

A marketers explanation of Free Cash Flow.

Sep 3, 2018 | Governance, Management

The net flow of cash into and out of a business is to my mind the most vital measure of the success or otherwise of that business, captured in the cash flow statement.

The P&L, and Balance sheet, vital as they are as performance measures, can be susceptible to ‘management’. The flow of cash is less able to be similarly ‘managed’

It is however, like all numbers, subject to the context.

Free cash flow is the cash generated by a business less its Capital expenditure.

The summary formula is: Net operating cash flow – Capital Expenditure. (Capex)

It is a very simple calculation once you have the cash flow statement in hand.

Free Cash Flow can vary dramatically over periods of time, so the trends are a vital part of the consideration. A business might invest a lot today in capital that is expected to deliver profits in the future, and should not be penalised for doing so, rather it should be supported, so long as the investments are sensible, which is another whole set of considerations. Every business needs to invest in the productivity of existing assets by way of renovation and replacement, as well as supporting innovation and maintaining regulatory compliance.

The trends in free cash flow and Capex expenditure are key measures of commercial sustainability.

I have seen businesses being tarted up for sale that display impressive increases in free cash flow over a few years, but as always, the numbers can lie. When you go behind them, the Capex has been restrained to the long term detriment of the business, to make it more attractive in the short term.

As an antidote to the rosy picture that can be generated by reducing Capex, I like to see the free cash flow and capital expenditure trends on the same sheet of paper, and being a marketer, as a graph. You can go one step further and break up  the Capex into three categories:

Capex spent for regulatory and compliance reasons

Capex spent for productivity and capacity reasons

Capex spent on new products and processes.

The nature of the Capex can tell you a lot about the health of the business, and its prospects.

Cartoon credit to Scott Adams and Dilbert. 

The 7 foundations of a successful enterprise

The 7 foundations of a successful enterprise

Aug 31, 2018 | Governance, Leadership, Strategy

 

I was asked the question ‘what makes a truly successful enterprise’ at a workshop that had strategy development as its purpose. It is a regular question that I get in various forms, and a question that I ask myself from time to time.

The easy answer is the marketing responses:  know your customer, understand your markets, select the market niche in which  you compete in and dominate it in some way, all of which are correct, but are not the full answer.

The full answer lies in having the right foundations for the enterprise, foundations upon which everything else is built.

Like the foundations of a house, they are rarely visible, and almost never all visible at the same time.

It seems to me that they also create a virtuous circle, and the lack of one impacts on the others in a manner greater that you would expect.

None have anything to do with the tools that are used, particularly all the new digital tools and platforms.

Have a clear, well communicated strategy.

Strategy provides the framework within which enterprises make decisions at all levels that add to the value of the activities being undertaken. It is as much about what you will not do, always a harder choice than what you will do, as it requires the killing of someone’s ‘baby’ idea.

A strategy that is held in the c-suite, no matter how good it is, will be compromised by not being communicated throughout the business as the decision making foundation. Whether you set out to be the low cost supplier, supply only those  who fit a certain profile, deliver continuous innovations, whatever it is, make sure everyone understands it.

Execution.

No plan is of any real use until it is used. Execution of the plan is 9 tenths of the game. Relentless focus on the strategy, and execution with the appropriate feedback loops that enable tactical adjustments to be made as new information emerges makes a strategy successful. Without execution, strategy is just a set of potentially good ideas and vague promises.

Business model.

Many managers spend inordinate amounts of time thinking about the structures of their businesses, often missing the key component of the manner in which it delivers value to the key group of customers articulated in the strategy.

20 years ago, the number of potential business models was limited by the physical limits of communication and logistics. While this still applies, the flow of information facilitated by the net has changed the face of business, and has spawned a pile of new business models  and ways to reach customers and deliver value. It also seems that business models have trouble cohabiting. Therefore  choices need to be made that should be dictated by the strategic priorities.

Talent.

Businesses are just places where people gather to do the work, so the better the people the better the work. You need talented people to get the work done, a business is nothing without people. Taking this one step further, it is really the networks of people that deliver value.  ‘Joys law‘ named for Sun Microsystems co-founder Bill Joy holds that ‘no matter who you are, most of the smartest people work somewhere else’. The self-evidence of this statement should encourage management to find ways to include some of these people into their commercial ‘eco-systems’. In a small way, many Australian businesses are doing this already,  outsourcing increasingly complex tasks offshore. The initial push is usually cost, but many are finding that quality can be as good as or better than is available locally.

Behaviour.

The way people behave, collectively,  becomes labelled ‘culture’. Culture is usually described in the terms first used  by Michael Porter 30 years ago, as ‘The way we do things around here‘ which is also a description of the behaviour that prevails. Is it collaborative, congenial, non-discriminatory, a meritocracy? Again, the sort of behaviour you nurture is a key determinant of the culture that evolves, and should make up a key component of individual and group KPI’s.

Leadership.

The behaviour of people is driven by the leadership style of the ‘boss’ and senior group. Together they dictate the terms of the culture, select the appropriate talent for the tight reasons, select and deploy the KPI’s based on the behaviour required to execute the strategy. Falling back on the wisdom of Peter Drucker, again, who said ‘Management is doing things right, leadership is doing the right things‘. It is the leadership that extracts performance from an enterprise beyond the average, the willingness to be held accountable, inspire, and explore.

Timing.

The value of getting the timing right is a wildly underestimated contributor to success. From simple internal matters like making that key presentation to the directors when they have had a series of good results, to major external factors such as recognising the point at which a technology that may have lain dormant for years suddenly has a place. Penicillin, the computer mouse, digital camera, Wireless LAN, touch screen, and thousands of other innovations lay dormant, unused until something changed, creating an impetus for the innovation to be commercialised, often in ways unforeseen by the developers. They are in effect a solution to a problem not  yet identified, or sitting outside the sight of incumbents, or simply the wrong time wrong place in some trivial way. A personal example. In the very early eighties I worked for Cerebos in Australia, as a product manager for a number of their brands, Fountain amongst them. I saw an opportunity for a pasta sauce to complement the then very small, but expanding dry pasta market. Fortunately there was an Italian food technologist in the development team who developed a range of very good pasta sauces, which we launched in test market  in Victoria. The test failed, for a number of reasons, that had nothing to do with the quality of the products, or the strategic thinking that was behind them. Eighteen months later, Masterfoods launched ‘Alora’ pasta sauces and  built a category. In blind tests, when considering a second try, the failed Fountain sauces significantly outperformed the successful Alora products, but their timing was way better than ours.

 

When you need to inject the wisdom of ‘been there done that‘, give me a call.

 

Have the Liberals crossed their Rubicon?

Have the Liberals crossed their Rubicon?

Aug 29, 2018 | Governance, rant

In 49 BC Julius Caesar led his legions across the Rubicon river, the line that separated ancient Gaul from Roman controlled Italy. Ever since, the term ‘Crossing the Rubicon’ has entered the lexicon as describing passing the point of no return.

Last week the Liberal Party crossed its Rubicon, and I guess we will all get to judge the result in May next year. However, history tells us exactly what will happen.

Bill Shorten is in the middle of his “Steven Bradbury’ moment.  If he keeps his head down, he will be the last man standing, and as such, he will be PM next year. Perhaps not the next PM, that may be some apparatchik from the depths of the Liberal party, just before Christmas, but the next one to face the electorate rather than their mates in the house.

In this case, the Rubicon is not a river, and not even about the leadership, screwed up as that is, it is about that most elusive and challenging to define words: Trust.

We the electorate needs to trust our elected leaders to do as they say they will, and to act in our best interests.

Political parties in a democracy rely on trust to gain and retain power, trust in the institution the party represents, and in the people who are its face.

Both sides of politics have utterly blown it!

A political brand is a most fragile construction. In the Australian context, with compulsory voting and an institutionalised two party system, change is really hard, so to successfully make it, trust is an absolute pre-requisite..

Two words are missing from the whole debacle, which together go a long way towards building trust, along with the behaviour exhibited on a daily basis. The trouble for the political classes is that they are also a foundation of trust, acting in a virtuous circle,———-or not, as the case may be.

Courage

Honour.

Courage is something you find on the football field, or in the face of some adversity, according to the popular press, but is it, really? I suggest not of the sort we are seeking in our leaders.

Truly courageous people find moral courage, which is being prepared to stand against the tide for something you believe in.

There seems to be a significant lack of moral courage in the big house, just as we are facing problems that need it to be exercised.

I see very little evidence of honour on display, just tides of expediency and self interest, although there are a few small green shoots in the desert to give hope. Warren Entsch is one prepared to speak his mind, and my local member Craig Laundy stood himself down from the new ministry, it seems on principal. I am sure there are a few others, voices smothered by the political bullshit blanket.

Were any of our current crop of political ‘leaders’ to drop off the perch today, would they attract the sort of words that have accompanied the death of John McCain on Saturday? I doubt it very much. It would just be another scramble for pre-selection and a chance to jump onto the gravy train.

The long term challenge is how do we, as a community,  attract good people, those with the moral fibre we so desperately need, to the political table. The same disease seems to infect leadership in many places, as evidenced by two Royal Commissions currently in the headlines.  I do wish I had some sage and positive advice to replace the sarcasm and disaffection I feel.

 

Cartoon credit: nicked from the great David Rowe in the Fin Review.

 

What can our political clowns learn from Jeff Bezos

What can our political clowns learn from Jeff Bezos

Aug 24, 2018 | Governance

The current clown-party in Canberra brings tears of frustration one moment, scorn and anger the next, followed by an overwhelming sense of incredulity.

This was posted early Friday morning August 24th, and by the time you read it,  well, anything could have happened.

The one thing that I am sure will not have happened is that common sense will suddenly rain down on the Liberal party. Therefore,  they may have persuaded Fraser Anning to swap parties, again, with the promise of the Immigration portfolio in a reborn Abbott government.

Perhaps drawing a bit of a long bow, even for the clowns.

Arguably the most successful leader of the last 30 years on the planet is Jeff Bezos.

He has built Amazon from nothing to its current market valuation of $US1904 billion.

By contrast, Australia’s GDP was $US1323 billion in 2017.

In other words, Amazon, one company, is 44% bigger than the whole Australian economy. I know it is a bad case of comparing apples and oranges, but nevertheless, perhaps we can learn something from the leadership displayed by Bezos and apply it to the clowns.

Amazon is the creation of one man, so his views on what constitutes leadership should not be dismissed lightly.

Every new employee  is given the list of Amazon leadership principles as a part of their induction, principles that it seems Bezos is deadly serious about upholding.

I thought it might be amusing to apply them to the Federal parliamentarians generally, just to see how they stack up. I have given them a mark out of 10, with some commentary. Feel free to disagree as loudly as you wish.

Customer Obsession. We the voters are their customers, as well as their employers, and I see little evidence of real obsession on delivering value to us. In its place, I see a huge dose of flatulent cliché. 1/10.

Ownership. The essence of this is long term thinking, and not being prepared to sacrifice the long term outcomes for short term results. Long term to the clowns is what they are doing after lunch. 1/10

Invent and simplify. My sides are hurting from laughter. 2/10. (they got the extra point because at least I was amused)

Are right, a lot. They seem to be rarely right, although to be fair, there has been over time some level of good guessing. 3/10.

Learn and be curious. If ever there was evidence that the clowns cannot learn it is the current clown party. Only the clowns think that the electorate will look kindly on the after party mess. 0/10

Hire and develop the best. Some of those preselected by the various parties should not hold office in the local choir. Not because they cannot sing,  but because they are too stupid to realise that is what they are there for. Again, to be fair, quite a lot of them have demonstrated a modest IQ, sufficient to get them through a law degree. Enough said. 2/10.

Insist on the highest standards. I am conflicted with this one, as the standards of stupidity, narcissism, self-delusion, egotistical self-aggrandisement, and the ability to avoid answering any simple question with a simple answer have rarely been equalled. Clearly very high standards indeed, but not what Amazon looks for in leaders. 0/10

Think Big. They often seem to talk big, but the talking seems to be rarely matched by the thinking. However, again to be fair, there has been some evidence of thought, such as thinking the public would not notice their party. 2/10

Bias for action. If this lot were any slower, yesterday would catch up. 1/10

Frugality. They preach frugality, and are fairly successful in imposing it, on most of us who are not their mates, or able to demonstrate some important vested interest to be protected. It also seems they are able to become less frugal at the slightest whiff of electoral discomfort,  when they selectively bring out the porkers. 1/10 for effort.

Earn Trust. How do I give a negative mark in this silly poll? 0/10

Dive Deep. Bezos wants the leaders in Amazon to  be prepared to do anything, to get down in the weeds with their teams and stay connected. Perhaps the clowns just misunderstood and thought he meant our pockets. 5/10 for misdirected effort.

Have backbone; Disagree and Commit. I suspect Paul Keating said it best referring to (I think) John Hewson when he said   ‘he is simply a shiver looking for a spine to run up’. 1/10

Deliver results. It is hard to disagree with results, and Australia has had some truly good results over the last 20 years in comparison with most of the rest of the world. Some credit must be given, although the cynic in me wonders how much was sheer luck, and how good could it have been. 5/10.

Overall, the clowns should be proud, they have excelled at being clowns, although I suspect a few of them are really crying inside this morning.

Update 3.00 pm Aug. 24.

Can somebody please explain to me what just happened.

The Pratfall (the collective noun for a group of clowns, and very appropriate as well) in Canberra just rolled an elected PM, and we all know where that leads. To add to the burden of stupidity, they replaced him as PM with the architect of the now failed company tax changes, and as his deputy, the architect of the NEG, the stone upon which the former PM finally stumbled. While it may be a more likely outcome than Senator Anning becoming the Minister for Immigration, it is a close margin!

The next election will be an absolute rout. Mr. Shorten must be on his knees either thanking whoever he prays to, or splitting his sides laughing, perhaps both! Come May next year he will be leading in the next Pratfall.