Economies of technology, not of scale, will be the drivers of success in the future

Economies of technology, not of scale, will be the drivers of success in the future

 

8 years ago I did a research project that required me to have a look at the future of intensive horticulture. As a part of that project I spent a month in the UK looking at what was happening, and was astonished to see the beginning of a production ‘flip’.

Horticulture is relatively intense compared to other forms of farming, but it still required lots of land, water, and labor. In the UK I discovered technology was in the early stages of taking over. Innovators had ‘flipped’ the model and were producing vegetables in capital and IT intensive greenhouses. The day I visited one of the leaders, Barfoots of Botley in 2010, they were completing the commissioning of the first 3 anaerobic digesters  at their main farm in Sussex, using the green waste from produce grown in greenhouses which was already powering the indoor growing beds and packing shed.

In the 8 years since, the progress has been amazing. AeroFarms in the US has attracted significant venture funding, and is one of those changing the face of agriculture by bringing it back to where the population lives, and Barfoots has expanded geometrically.

In Australia we have  very few  examples of this sort of innovation. One is Green Camel farms at Cobbitty on Sydney’s southern outskirts, which has combined greenhouse production of organic herbs and tomatoes with an aquaculture infrastructure producing barramundi in a closed loop system.

The point is that agriculture, like all other industries is being disrupted by technology in ways almost unforeseeable a decade ago.

Technology and capital intensity is replacing scale as the defining feature of success.

Lean Manufacturing seeks ever smaller production runs delivering an even flow of finished product matched to customer demand, as it evolves, eliminating WIP and finished goods inventories while delivering customer specific finished products with minimum lead times.

The days of huge integrated manufacturing plants cranking out product at volume to reduce costs by finding the economies of scale are gone.

Equally, production volumes from thousands of acres of open farmland will be replaced by a vertical capital intensive farm in a disused warehouse somewhere  in the inner city, close to consumers. Bit hard with livestock, but what are feedlots if not capital intensive small footprint farms?

Irrespective of the manufacturing environment, and I see agriculture as just another form of manufacturing, with inputs, WIP, risks, lead times, and all the rest, ‘de-scaled’ manufacturing will become the model our grandchildren will be familiar with. They will probably also be making engine parts in their bedrooms on desktop printers, it will be as normal as CAD software is today.

Header photo: Aerofarms towers

PS. After reading the post, a friend in the business sent me this link to the Panasonic vertical farm in Singapore. The more I dig around, the more convinced I become of the speed and volume of changes about to hit the supply chains of horticulture.

Pharmacists: Amazon is coming for you!

Pharmacists: Amazon is coming for you!

 

My mother lives by herself in a large regional city in NSW. At 90 she is pretty remarkable,  although some of the bits are wearing out, so she has a pharmacological regime that would make your average teenage party-goer green with envy.

Her pills are made up from the actives by a local chemist with the compounding License that allows him to assemble her prescriptions and combine them, which he then delivers weekly in a pack that reflects the changing nature of the prescriptions written by her doctor.

A great service, and the young entrepreneurial pharmacist has the geriatric market in the town sewn up.

I was thinking of him last week when I saw that Amazon had bought US startup Pillpack for almost a billion dollars. As  a result, the share prices of listed pharmacy retailers, Walgreens and others fell into a hole, a now common outcome when Amazon comes around.

Jeff Bezos has long signaled his interest in the pharmacy market, being a part of Drugstore.com in the 90’s which was eventually bought by drug store chain Walgreens for $400 million, and closed down. He has made other investments in various areas of the health industry over a long period, which should have provided an early warning alarm to the incumbents.  More recently he has launched a venture in collaboration with Berkshire Hathaway and JP Morgan to disrupt the huge but cosey health insurance market.

I can only wonder at the hand wringing going on in the Walgreens board room. They had a decade to build a moat around their business,  but failed to do so, and now the pirate has returned. This is exactly the same mistake Blockbuster made a couple of years later, by dismissing the overtures of Netflicks, and disappeared as a result. By contrast, the young pharmacist in Armidale will be well insulated, and I suspect will have his own plans to keep his business thriving. Meanwhile I suspect the Pharmacy Guild in Australia will again tread the road of trying to use the regulations as a protective mechanism, and try to fight the tide of change, which is ultimately going to fail.

As I have noted before, love him or hate him, Jeff Bezos is changing the world, perhaps like none before him. The incumbent public  and private institutions of our democratic western economy simply seem unable to accommodate the inevitability of the changes and their impact, and show no sign of being able to evolve sufficiently to do so. The assault on the pharmacy market is simply another example of the speed and certainty of change, which without sufficient ‘strategic intelligence’ being applied, will be the end for status quo driven incumbents.

When you need some of that rare strategic intelligence, more focused than is demonstrated in these pages, call me.

 

8 ingredients for  an idea stew

8 ingredients for  an idea stew

Ideas do not emerge from nothing, despite the hype, they do not just appear in the shower. They are always a product of a process, conscious or unconscious that connects and curates thoughts, knowledge, ideas from other domains, that can be used in a different way, connected where there was not pre-existing connection, and that have a hook of some sort that does something new. As J.M. Keynes observed:  ‘The difficulty lies not so much in developing new ideas, but in escaping from the old ones’

Ideas evolve and like any evolution require a set of conditions that encourages individual survival, evolution over time, and eventually success for a very few.

There are 8 ingredients to an idea stew.

Allow Prep time.

Every stew has a base, a foundation upon which the variations can be built. While the base is often obscured, it is nevertheless critical. Taking your time to determine just what you have available for  the stew, that will meet the objective, and then organizing the ingredients in the right amounts to be added in a sensible order with any necessary ‘sub-assembly’ being done will improve the outcome. Your idea stew is built in the same way, on a solid  foundation with research, and the results of previous trial and error to hand. The more work you put into the prep, the better the outcome usually is.

Have a pot.

To create a stew, you need something in which to hold the ingredients as they cook, each ingredient influencing the others, and the outcome. Making a great stew without the resources necessary, the time, access to ingredients, the right implements,  and obviously a kitchen, is pretty challenging, next to impossible. While you do not necessarily need the top of the range, you do need enough to manage the process with some degree of control and efficiency.

Have a deadline.

Usually when preparing a stew, it is for something specific. Dinner tomorrow night, for the weekend when the neighbors come over, or standby for the freezer.  Creating an idea stew is no different. The presence of a deadline, perhaps counter-intuitively, creates tension, pressure to get things done, and it focusses attention on the details so things do not get left undone.

Have a picture of the outcome.

The stew you are cooking has to serve a purpose, it has an audience, and the audience shapes the stew. Just as you would not put a pile of chili in a stew your young kids will be eating, you need to ensure that the ingredient in your ideas stew are consistent with the sort of outcome you are seeking.

Be prepared for diversity.

Sometimes, someone who may be a great pastry cook, but knows little about stews can bring across something from his discipline that adds something very different to the stew.  While this diversity in the ‘cooks’ often draws comment, the last thing you want if you are looking for a different stew, is to have only those who are used to the current recipe involved in thinking about the options that may be there.

Have a process plan.

Every stew is made in some sort of sequence, separate steps taken in some order, with interdependencies amongst the ingredients. While each step is not necessarily fixed, there are some things that must come before others can be properly done, to get the best outcome. A stew also takes time for the flavor to develop, for the little touches to be added that make all the difference, a pinch of this, a dash of that, all in the context of the plan, to avoid mucking up the result with that little last minute addition.

Creativity: The vital ingredient.

Perhaps a better word is ‘catalyst’ in a commercial context, as there are elements of creativity in all of us. However, for many it has been beaten out by the education we have, the institutions we work for, and at a more base psychological level, some of us are simply not risk-takers, not outside the box thinkers, so are of limited value for creative input. It is in effect the difference between a very good cook, and a chef. Give a great cook a complicated recipe and they will execute it by following both the recipe and the methodology, but give them a limited pantry and no recipe, and many will struggle. By contrast, the chef gets bored with the recipe, and  prefers to experiment. The outcomes are varied, most will be disasters, bit a few will be spectacular successes. Businesses succeed by doing the same things over and over, getting  better at it all  the time. A necessary ingredient of this mix is to get rid of those who cannot follow the process. However, for a business to renew itself, to cook an entirely new stew, it requires those who do not go by the rules, who think outside the box, sometimes outside the postcode. You also need to keep diligent records so that the unexpected great outcome can be reproduced, often a challenge for the creative ones who get bored with the recording when they can be doing. Pity you got rid of them all because they are a pain in the arse to manage!

Ask a friendly customer.

Asking someone you hope might put their hand into their pocket and give you their heard-earned in return for a taste of your stew seems to be a good idea at some point before you commit to the expensive launch. Generally, the earlier the better, and the more informed and critical their opinion of your evolving stew, the better.

What does the FMCG future look like?

What does the FMCG future look like?

It is easy to be critical of just about anything, much harder to be constructive, and make suggestions about how to  change the things that attracted the criticism.

In my case, I have been critical of the retail gorillas, Coles and Woolworths for some time, specifically their capacity to change what appears to an outsider, to be their strategic priorities.

As a shareholder in both however, (via managed super rather than choice) I have been rewarded by the returns.

So, I am going to stick my neck out and make some observations, in no particular order, and would welcome feedback.

Delivery services.

Busy crowded lives seem to require a delivery service, and Coles and Woolies have dabbled in it with the delivery trucks we now see around. I have not used either, but several acquaintances have, several extensively, and generally just shrug with resignation at the inaccuracy, inconsistency and uncertainty involved, and wonder if it is worth it. Perhaps the order/pick-up combination will be the answer to the ‘last mile’ problem, as most of us have cars.

In the US there is a service called ‘Instacart‘ that appeared to be doing an ‘Uber’ on grocery shopping and distribution. In Australia, ‘Uber eats’ seems to be bobbing up everywhere, delivering from all manner of food service outlets. Shopping and delivering seems to be a small step to take, or just the delivery part after order assembly in store.

By contrast, Kaufland in Germany appears to have walked away from their on line grocery services, citing the costs of the ‘last mile’ making it unprofitable. This is in the face of Ocado in the UK seeming to go from strength to strength.

In summary, a lot of experimenting to do before the best model evolves, but the common element appears to be basket size. Encouraging on line shoppers of any sort to increase the order size makes some of the other problems less important. It is a standard retail metric, and even more appropriate for on line.

Digital marketing development.

Amazon has mastered the art of cross selling and using feedback to overcome the barrier of not being able to see, touch and feel products as you can in a bricks and mortar store. The current on line gorilla catalogues are just that, catalogues, little more. No cross selling, no recipes, no personalisation based on browse and purchase history, no seasonal suggestions beyond the digitisation of the generic  ‘shop now for Christmas’ stuff. With a few digital tweaks, the current catalogues look like the pages of Co-Op ads in the Wednesday afternoon  newspapers that used to be an important part of dealing with the gorillas.

Opportunity waiting?

Store automation.

Amazon has ignited retail with Amazon Go, poking into action all sorts of activity from the usual suspects as well as some unexpected places.

Hema supermarkets are quickly opening stores after 18 months of testing and development in a Shanghai pilot. Owned by Alibaba, the tech in these stores and the levels of service they offer will, or should concern the two Australian gorillas. Alibaba also has a pilot unmanned Tao coffee shop. I wonder at the quality of the coffee, but who would want to bet against that being commercialised?.  Another Chinese start-up called ‘Bingo Box‘ is planning unmanned convenience stores after a (reported) successful pilot in Shanghai taking Amazon Go type technology a step further.

It also seems obvious that there will be automation applied to the routine and labour intensive job of shelf filling, facing up, and highlighting offers of various kinds. Wal-Mart is experimenting with that idea in 50 stores, using robots to check inventory stock weight, location and pricing, and the other US retailers are not being left behind. Kroger is playing with mobile apps, to communicate offers, lists, coupons, and personalised messages, as well as scanning items in store to reduce checkout lines.

Supply chain automation.

Somebody, somewhere,  will apply Blockchain to the entire supply chain for a product. It will be  kicked off by a consumer taking a product from a shelf, being relayed back through the chain, creating production orders, invoices, inventory management, all ending up in an automated Kanban system at the store selling face, creating a genuine demand chain. The technology to do all this exists, in pieces, so putting it together will not be far off.

The only thing certain about the above thoughts is that there are many I have missed.

Photo credit; Mark Stevens via Flikr

The downside of FMCG retail scale.

The downside of FMCG retail scale.

Woolies and Coles have around 75% of FMCG sales in this country, depending on whose numbers you believe, and which categories are included.

They have huge scale, from the farm gate through the supply chain to the consumers wallets. As a result, their cost of capital is low, as lenders, both cash and equity see the risks as being low. When you add in their ‘trading terms’ as a component of  their cost of capital, as it should be, the numbers would look even better. Pay your suppliers in 90 days, having used your scale to reduce the price to subsistence levels or lower, minus  the deductions for whatever you can dream up, during which time,  the stock has turned over several times.

Bargain!

By contrast, the small suppliers, those few that are left,  are seen as poor risks, which in fact they are being an endangered species. Their costs of capital are high, as are their operating and working capital costs, which leaves little to nothing to be invested in the future of their businesses.

That is why they have mostly disappeared. Their management has been unable to balance the competing demands of low price and increasing operating costs, such that even large seemingly successful businesses became smaller unsuccessful ones to be sold off to whoever had the cash. Consider Goodman Fielder, SPC, Dairy Farmers, National  Foods, CSR, …… need I go on?

The long term problem that this trend delivers is that innovation, the creation of new value for customers, and the lifeblood of retailers comes from the edges, from outside the  status quo. It is usually those smaller, entrepreneurial businesses that get in there and have a go, take a risk, and survive on their vision, wits and determination, that deliver the category makers.

Pity they are almost all gone, and what we have left is a number of ‘traditional’ retailers seeking to optimise their existing operations, while having nothing to fight the well-funded disruptors coming to eat their lunch.

Woolworths emasculating and closing Thomas Dux is the classic case of corporate strategic blindness. Now they have backtracked with the very well thought out new Marrickville Metro store, which is not Woolworths, but the ghost of Thomas Dux back to haunt them. Meanwhile, Amazon is really innovating, taking their pilot Amazon Go store public a couple of weeks ago, in a move that goes well towards defining the store of the future.

The downside of scale is the conservatism and lack of real innovative and strategic vision that comes with a business intent on optimising the current model. If that worked, Olivetti would  still be a significant player in the document creation business, Kodak would still be creating memories,  and Microsoft would still be a near monopoly.

Header credit: apologies to Monty

How does the Amazon innovation formula keep replicating?

How does the Amazon innovation formula keep replicating?

Amazon is an astonishing company for a whole lot of reasons, but there is one that is not front and centre in most conversations I have seen and in which I have been involved. This is the means by which Amazon just keeps on innovating, genuine, disruptive innovations, time after time, at astonishingly small intervals.

Note: This link is to an expanded version of this infographic from Visualcapitalist.com

 

Amazon must have the internal processes that enable it to punch out new businesses, and business models that way a factory stamping machine pumps out widgets.

The biggest impediment to efficiency on a widget machine is the changeover times between widget sizes and internal specifications.

Quick changeover is a hallmark capability sought by manufacturing companies employing Lean thinking, and is a challenging proposition, even in a small, tightly run factory. So how does Amazon achieve it at scale in businesses as complex as it routinely disrupts.

Amazon started by flogging books, or as CEO Jeff Bezos  (apparently) liked to say in the early days, ‘we do not sell books, we make books easy to buy’

The hallmark of a successful lean implementation in a factory is that there are processes that take a prospective order through the whole ‘sales funnel’ to production, delivery, and ongoing relationship building. Lean practitioners call it the ‘Value Stream,’ the set of activities required to deliver value to the customer. These are all done the same way, every time.

The paradox is that this process stability is the foundation of innovation, you need a stable base in order to trial ideas at speed, then scale the ones that work. This is an idea sometimes hard to communicate but as fundamental as it gets to successful innovation and continuous improvement.

Amazon appears to have achieved this at scale, in a service business, typically harder than a manufacturing business to get traction.

How?

Amazon is organised just like a whole collection of independent business units, all cross fertilising, and cross pollinating each other, using (I suspect) what Ray Dalio would term ‘Radical Transparency‘.

The secret seems twofold:

  • The internal technology that Amazon uses across all its activities, is modular and scaleable.  It is in effect the machine enabling the manufacturing of Amazon widgets. This enables new businesses to be added the way you would add another coloured widget to the sales inventory of a manufacturing business. I suspect the scalability will be the source of the next round of disruptions coming to the fast moving goods retailers.
  • Each part of the business multiplies the customer impact of the ones next door, a ‘flywheel’ effect. Digital technology enables the network or ‘Flywheel’ effect to build momentum. The more eyeballs you have on one side of the network equation, the greater the value to the other side. This effect builds scale very efficiently once you have reached a tipping point, reflecting Metcalf’s law which states that the value of a network increases with the number of nodes in the network.  Amazon has created their own version of Metcalfe’s law amongst their own offerings, one product or service leading to the one next door.

Bezos has achieved something that I think will be studied for decades, and it is clear he is not stopping any time soon. The only thing that appears likely to slow the momentum is regulatory intervention. Amazon has 44% of  on line retail sales in the US, 35% of global cloud services, a market growing at 40% a year,  where AWS is bigger than the next 5 biggest combined. The list goes on. The point is, Amazon is chewing up competition everywhere, yet pays very little tax, $1.4 billion since 2008, while Wal-Mart has paid $64 billion over the same period, so in effect, Wal-mart is subsidising its greatest threat to eat its lunch. Outcomes and numbers like that will have to prod regulators into some sort of action, before Amazon (and to be fair, Facebook and Google are very similar, even more dominating in their markets)  is in a position of power so dominant that regulators cannot stop them.

Amazon, a product of the 21st century is simply outrunning the capacity of the institutions and public mind set of the 20th century by reshaping our world around us, and with our consent by unthinking compliance. They are being joined in this exercise by Google, Facebook,  Alibaba Tencent, and a few other aspirants like Netfliks, to dominate the way we think, behave and work.

Header photo Jeff Bezos circa 1998

 

Update June 2018.

Amazon bought on line pharmacist ‘Pillpack’  last week for almost a billion dollars, saw its own share price jump double what they paid at the same time industry incumbents collectively lost 10% market valuation. Jeff Bezos has signalled his interest in pharmacy in various ways for years, so this should not come as a surprise, but it seems to have done so, as the threat of Amazon had clearly not been priced into the market valuations of the incumbents.

The Pharmacy guild in Australia, one of the most powerful lobby groups in the country, should be asking themselves if they are next for the chopper.

Update August 2022.Amazon last month paid $A5.6 billion for subscription health service One-Health, which gives them a network of doctors surgeries around the US. If ever there was a huge industry mired in its own importance, removed from the needs of those it is supposed to service, and ripe for disruption, it is the US health care industry. It will be a tough nut to crack, others have tried and failed, but Amazon has the street-cred to make it happen. The ‘flywheel’ at work again.