Aug 8, 2024 | AI, Management
AI promises a multitude of productivity benefits for all enterprises.
For the thousands of SMEs competing with much larger rivals, AI offers the potential for easily accessible, reliable, and credible data on an unprecedented scale.
One such opportunity lies in market research, which has often been out of reach for SMEs due to its high cost.
AI systems are sophisticated probability machines. Given a base to ‘learn’ from and a set of instructions, AI can predict the next letter, word, sentence, illustration, piece of code, or conclusion. Feed it the right data to learn from, prompt that ‘learning’ with instructions, and the probability machine goes to work.
‘Synthetic data’ is the analysed outcome of a well-articulated AI search for relevant data from publicly available sources, potentially enhanced by data from a company’s own resources.
For instance, an FMCG supplier might need ‘attitude and usage’ research to support ranging of a new product in major retailers. Traditionally, they might spend $100-200k on a combined qualitative and quantitative market research project, which could take several months to complete.
Way out of the reach of most SME’s.
Alternatively, they could invest $15-25k in an AI application to scan social media, relevant publicly available statistics, and their own sales and scan data. This AI-generated ‘synthetic data’ might not be quite as accurate as a well-designed and executed market research study. However, it could be produced quickly, relatively cheaply, and be sufficiently accurate to provide compelling market insights and consumer behaviour forecasts.
Suddenly, opportunities previously out of reach for SME’s can be leveraged. Combined with their shorter decision cycles and less risk averse nature, SME’s now have the potential to haul back some of the ground they have lost to deeper pocketed large businesses.
Header illustration is via a free AI tool. it took less than 30 seconds to brief and deliver.
Aug 5, 2024 | Management, Operations
A phrase I am hearing a lot in conversation with my networks is: ‘this business model is capital light‘. It seems to most aspiring entrepreneurs this is preferable to ‘Capital heavy’, for the obvious reason that the upfront cash at start-up is less. However, while useful, it also is only one way of looking at a business model and its associated strengths and weaknesses.
Capital-intensive businesses have high fixed costs compared to variable costs, making them vulnerable to a slowdown, as they are very volume sensitive. Their breakeven point is higher than businesses less capital intensive. However, once they reach that break-even point, most of the rest is profit.
The obvious contrast is between an oil refinery or steel-making plant, to an accounting or law practice. The former needs considerable capital deployed before there is any consideration of the labour, management, and raw material required for conversion. The latter requires just offices and capable personnel.
In effect, Capital Intensity is a measure of how many dollars of capital are required to generate a dollar of sales?
Capital intensity requires that the assets be procured in order to be operational. This can be a mix of cash retained from earnings, or available from shareholders, loans, or ‘outsourcing’ manufacturing to a contractor who has, or will add, capacity for ‘rent’. An additional source is from suppliers so long as your debtor days are less than your creditor days, in which case, your creditors are in effect adding to the funding of your business.
Often you will see the term ROCE or Return On Capital Employed in financial reports. This is simply the ratio of profit to capital. If you generate $1 in profit for every dollar of capital, you will have a capital efficiency ratio of 1:1.
It is a useful macro measure of the efficiency of the capital used in the business, just as it is a valid calculation of the efficiency of a machine: Revenue/Capital cost of the machine.
Successful businesses use capital to generate revenue and profits, the more successful you are, the better you have used the capital deployed.
How much capital is required to generate your profits?
How to Calculate Capital Intensity
The capital intensity formula is:
Capital Intensity = Fixed Assets / Total Revenue
Example
Imagine a company has $100,000 in fixed assets and $1,000,000 in total revenue. The company’s capital intensity would be: $100,000 / $1,000,000 = 0.1
This means that the company needs 10 cents of capital to generate every dollar of revenue.
Increasingly, the capital required early in the life of a business is reducing as digital technology evolves, removing the capital requirement as a barrier to entry to many industry segments. This is leading to a transfer from capital intensive to ‘technology intensive’, which is in turn becoming increasingly complex and expensive as technology evolves at an accelerating rate, and the business cycles become shorter.
As the old saying goes, there is never a free lunch!
Jun 5, 2024 | Governance, Leadership, Management
The word ‘argument’ has many meanings, depending on the context. It can mean a friendly difference of opinion, a negotiation point, a statement of reasoning a lawyer might use, to an expression in a mathematical formula.
A quarrel is far more specific, requiring a disagreement, the cause of which is often lost in the chaos of emotion a quarrel elicits. The only other meanings of the word I can think of is as a collective noun for a group of energetic and opinionated mammals noisily exchanging insults, such as monkeys, squirrels, cooks, and lawyers. It also refers to the tip of a crossbow bolt.
There is a standard three step formula for making an argument stick in the minds of the receiver. It is evident in every news cast you ever heard, the ‘newsreaders secret formula.’
- Tell them what you’re going to tell them. This is always called ‘the headline’.
- Tell them. The story, or series of stories.
- Tell them what you told them. Restate the headline, and any conclusion or resulting actions that emerged.
To win an argument, as you would a negotiation, debate, or in court, you need to modify the news readers trick by adding a step.
That step is analysis of a guiding fact, or set of facts.
This enables you to analyse those facts in a way that leads you to the conclusion you are arguing for.
For the sake of ease of use you can break this into a pneumonic ‘CRAC’
- Conclusion. State your conclusion.
- Rule. Identify the fact or facts upon which your conclusion is based.
- Analysis. Provide an analysis of how that rule makes any conclusion other the one you’ve reached invalid.
- Conclusion. Restate the conclusion.
This CRAC process was used very effectively recently by an acquaintance chairing a community group that was protesting a pending building approval decision of their local council.
She stated that the approval, if it was to proceed, was in defiance of the councils own regulations.
She then cited the specific regulations.
She then pointed out the specific parts of the pending approval that was in breach of the regulations, and why they breached them.
For good measure she also pointed out 2 other proposals similar to the one that appeared to be about to be approved, that had been rejected on the basis of the specific parts of the regulations stated previously.
She then repeated the conclusion that the project was in defiance of the council’s own regulations, and therefore should not proceed.
It was an impressive performance, well planned, well executed, and ultimately successful after some embarrassing back downs by several councillors.
With a bit of practise, it is easy to use, and always better than resorting to a quarrel.
Header cartoon credit: Scott Adams and his mate Dilbert.
May 24, 2024 | AI, Management
Management is all over the place, scrambling to ‘get AI’.
A common failure of that scramble is a reality: rubbish in — rubbish out.
Outcome quality depends on two factors:
- Data quality. The quality of the data that is used to generate that outcome. The quality, depth and breadth of the data is dictated by the databases on which the system was trained,
- Instructions given. The instructions you give the machine will drive the type and weight it gives to the available data in response to your instructions.
AI is a ‘machine’, an electronic warehouse of information it makes available on request.
They are machines, not people. They cannot ‘think, they do as instructed, using predetermined ‘training’ to prepare an answer.
Most people are radically unprepared for the changes coming.
The best known problem solving metaphor has always been Einstein’s.
He observed that if he had an hour to solve a life defining problem, the 1st 50 minutes would be spent defining the problem, the rest is just maths.
It is identical in the deployment of AI.
It seems to me that when a system ‘hallucinates’ it is a sign that it has been inadequately briefed. Think about the briefing as you would explaining something to any intelligent 10-year-old!
Keep it simple.
Explicitly define what information is to be used.
Explicitly define the objective to which the information will be directed.
Explicitly give any contextual information that may be helpful.
Explicitly define the range of outcomes you might be looking for.
The key to leveraging the speed and depth of data made available by AI systems is in the preparation of the data and the matching of that data to the problem being addressed.
If you use this simple process, the one you should have practised on your children, you can dodge the expensive and largely useless ‘prompt engineering’ courses, books, and gurus that have sprung up like mushrooms after rain. They are there to drain your pockets by offering seemingly easy solutions to difficult challenges.
There is no such thing as an easy solution that negates the necessity to ‘do the work’.
Header credit: DALL-E.
Mar 8, 2024 | AI, Management
Cash flow is often described as the lifeblood of a business.
While it is correct, it leaves a lot on the table.
If cash flow is the lifeblood, you also need a heart to pump it around the body. The leaner and more efficient the body in which the heart resides, the easier it is to pump, reducing the stress on the mechanism, reducing risk.
Similarly, to be effective blood requires oxygen to be attracted and distributed through the system.
Oxygen is what keeps everything working, it is the source of the power required to run the system, without which the system rapidly grinds to a halt.
In a business context, the oxygen is the input of information, the lungs and heart are the analysis and leveraging of that information, and the culture of the organisation is the body that holds it all together.
You go to the doctor to get a physical, where do you go to get a ‘commercial’?
An accountant will give you part of the picture, based on the books.
A ‘lean’ expert might offer many insights into the operational processes, particularly in a factory, and at the same time offer cultural insights.
A ‘6 sigma’ expert will deliver an arithmetic analysis of the efficiency of each part of a process.
A marketing expert (if you can find a bullshit-free one) will give you opinions based often on questionable and partial information, and usually biased towards their particular view of the role of marketing.
A sales expert will opine that everything else will be OK if you just get more leads for them to convert, and here is how!!
The point is that each will give you a picture of your business as they see it based on their experience, training, predisposition, domain knowledge, and their own assessment of WIFM.
Finding someone who ties all that together, and offers a complete, unbiased, and expert picture is a challenge.
Dec 18, 2023 | Leadership, Management
At this time of the year, there is much thinking going on in relation to the manner in which incentives will be applied in the coming year, for which you are preparing the budget.
There are many and varied schemes, most of which are geared in one way or another to a threshold, above which the incentive kicks in.
It can be anything from a sliding commission, to share allocations, holidays, and goodies from the local store.
99% of those I see have one common characteristics: they are known, the thresholds are clear, as they are seen as the motivating factor. They can also be gamed in all sorts of ways, particularly by those in sales. When the commission is based on revenue alone, that can be achieved by giving big discounts, the timing of invoices can be varied, ‘channel stacking’ becomes common.
These sorts of incentives are usually ineffective, because they become taken for granted, and are always ‘gamed’ by staff.
In the early 50’s psychologist B.F. Skinner did a series of experiments, using rats and pigeons as subjects, since validated widely. He used a box that became known as a ‘Skinner box’ in which he placed the hungry subjects, and a lever. The rats and pigeons pushed the lever, and could gain an intermittent reward of food. They soon learned that pushing the lever sometimes delivered a reward, so they pushed it more and more, each intermittent reward reinforcing the behaviour. The variability of the reward when it is intermittent tends to increase the speed with which the subjects pushed the lever, a few will keep pushing despite the calorific value of the intermittent rewards being less than the calories required for life.
This behaviour can be seen in any room containing poker machines. Some players will, despite knowing the odds are against them, keep pushing money into the machines, hanging out for the intermittent reward of the clatter of coins in the tray, and the psychological reassurance that goes with it.
Why not use the same sort of thinking to manage your incentive programs?
