What does the end of cheap money mean to manufacturing SME’s?

What does the end of cheap money mean to manufacturing SME’s?

 

The inflation figures released this morning put the annualised inflation rate at 5.1%, up from 3.5% at the end of the December quarter last year. While it may bounce around given the volatility of fuel and food prices, the trend is very clear, and the current election driven lucky dip of spending promises will not help. This increase in a single quarter is the largest I can remember since the mid eighties.

Australia is in for a rocky ride, and it will not matter who wins on May 21, the impact will be felt in every corner of the economy, and by every Australian.

For SME’s who have weathered the challenges of covid and are now experiencing the added burdens of broken supply chains, and lack of labour, while trying to re-establish some level of certainty in their businesses in an environment where demand has ramped up, the prospects are daunting.

Irrespective of the decision made by the Reserve next Tuesday, to raise the cash rate from the current 0.1% to 0.4% or 0.5% which seem to be the prediction of the majority of economists, the squeeze is on. Raising the rate during an election campaign will test the independence of the reserve bank. I bet there are some phone calls being made!

How will this impact your business?

Those impacts will vary enormously depending on the industry circumstances. The rate that gets all the attention is a weighted average, with the actual sector numbers varying from a slight reduction in communication costs, to a 13.7% increase for transport costs.

  • Labour costs will soar, as the demand for labour continues to grow, while immigration is still constricted, and the cost of living blows out.
  • Transport costs, which most just see in the petrol prices at the local station, which impact everything that moves in the economy will quickly feed into cost of goods sold in every product category.
  • Businesses will see a sudden increase in their accounts receivable days, their cash conversion cycles will become longer.
  • There will be pressure on margins from multiple fronts. Volumes will be constrained as supply chain failures impact, and competitors scrambling for volume will be more likely to reduce prices to grab that extra sale. At the same time, costs are increasing, and price increases will be harder to get, as buyers exercise their buying power and shop around.
  • You will be pressured by your suppliers for quick payments, as they are being squeezed for margin, just as you are.
  • General overheads will increase. We have seen significant increases in lease costs for small factory spaces, insurance costs will be turbo-charged after the floods, fires, and pestilence of the last 2 years, down to the little things like costs of coffee for the lunchroom. All these individually manageable cost increases cumulatively add up to substantial and hard to control increases.

So, what should the SME’s that wish to remain successful be doing?

  • Customers shopping around for a deal in greater numbers can present an opportunity for those who understand the drivers of Value for customers in their specific market.
  • Resist the temptation to cut marketing and selling expenses. History demonstrates with absolute certainty that those that keep marketing when their competitors shut down in tough times not only do better during the tough times but retain their positions after the worm has turned. Optimising your marketing expenditure is not the same as cutting it.
  • Actively engage employees and stakeholders in ways to maintain profitability. This should always be a priority, but is more pressing and visible in tough times.
  • Focus on the 10 tactics outlined in the Inflation Busting Roadmap published previously
  • Consider from the perspective of necessity the five types of cost in your business, with particular attention being  given to the last three, as that is usually where the opportunities hide.

Many have not experienced a spurt of inflation before, the last serious spurt was in the mid-eighties while Paul Keating was treasurer. In management terms, this was over a generation ago. If the experience of those times would be of benefit, give me a call.

The header graph is from the ABS website updated as the announcement of the scary 5.1% heqadline inflation rate was announced.

 

The essential 2 faces of marketing

The essential 2 faces of marketing

Our enterprises are organised vertically, by function. Accounting, IT, HR, and so on, all vertically arranged to accommodate the leverage of resources that scaling of the output of those functions delivers.

Customers do not give a toss about your internal processes. Their only concern is the degree to which you can deliver the value they have paid for, the solution to the problem, the salve to their irritant, the mechanism to enable them to grow.

‘General management’ is a term that implies cross functional knowledge and accountability. Often however, the reality is different.

Functional expertise does not necessarily translate into cross functional effectiveness. Almost all ‘general managers’ irrespective of their title, are in that role because of functional skill and success.

Successful marketing by contrast relies on being able to assemble cross functional expertise and capacity in the absence of the functional power to do so. Marketers are the internal representatives of customers and potential customers, as well as being the custodians of the future cash flow initiatives of an enterprise.

Why is it that so few marketers make it to the ‘GM’ role? Why is it the tenure of senior marketing individuals is far shorter than the tenure of their senior functional peers?

Marketing, being about the future, requires foresight, an ability to deal with ambiguity, and a willingness to make decisions with less than complete information. Surely these are useful leadership skills?

It normally takes a while for the future to arrive, so success is hard to measure except with hindsight. It also make more obvious the inevitable mistakes that occur when a marketing function is seeking competitive advantage. Being wrong as you often will be when predicting the future, is rarely an ingredient in successful corporate pole-climbing.

Successful marketing requires horizontal skills as well as deep vertical ones concentrated on the tools to be used on the levers to be pulled. Of all of them available, the most important are in the hands of their functional peers, so horizontal, collaborative skill is an absolute requirement of successful marketers.

Often it is just called ‘leadership’

Why is most current marketing such crap?

Why is most current marketing such crap?

 

We are confronted every day with hundreds, thousands of messages, all competing for our attention. The volume has ramped up exponentially since the net delivered access to anyone with a connection.

The vast majority are tactical thought bubbles, cat photos and brain farts by people vying for attention, but then not knowing what to do with it when they are the winners of the lucky dip.

‘Yesterday’, access was not so available, you needed lots of money, which ensured there was a barrier to entry not hurdled by the figurative cat photo.

The generation of revenue, the process that encompasses both ‘Marketing’ and ‘Sales’ is a continuum. Sales comes in right at the end, at the point of, or near to the transaction. Marketing is the longer-term stuff that provides the opportunity to open and lead the process culminating in a transaction.

Think of it like a race.

Are you running a sprint next month, or a marathon?

If it is the sprint, training can be short sharp explosive sessions. You focus on the detail, short sharp sprints, and many of them.

By contrast, if it is the marathon, training for a sprint will not get you far. You need to have longer sessions, building slowly to the marathon distance.

Building a relationship that leads to making a sale is a marathon, not a sprint.

Most of the marketing I see is designed as if the race was a sprint. Usually this is the wrong training, as in most instances beyond small value commodity items, you need to get set for the marathon.

As a result, you have all this crappy tactical sales stuff thrown at you daily, which is rarely of any interest, so you turn off. Turning off just encourages the tactical digital set to chuck more crap at you in the hope that something sticks.

When you have to churn out new messages daily, weekly, it removes the opportunity for creativity, the building of the relationships that may lead to something meaningful at the end.

Most so called ‘marketers’ brought up on a diet of digital are unfamiliar, and as a result do not deeply understand this more strategic approach. They set out to sprint in a marathon, and end up coming in at the tail, assuming they actually finish.

 

Header photo: Marathon startline 1904 Olympics

 

 

 

Technology Intensive Differentiation: The new marketing El Dorado.

Technology Intensive Differentiation: The new marketing El Dorado.

 

There is a reallocation of capital from advertising to R&D evolving. Elon Musk may be the typifier. Tesla spends nothing on advertising, relying on Elon and social media, plus all the commentary he generates. Meanwhile, Tesla put $1.5 billion (in 2020) into R&D, representing triple the amount spent/car of the next biggest spenders, Ford, and Toyota.

R&D is the new differentiator, replacing the confected differentiators of the age of ‘mass marketing’

This is a sea-change, the old model was to make mediocre products, and use money to drive mass distribution, and big advertising budgets on TV to drive volumes. The amount of R&D was small, advertising budgets big.

The Korean vehicle maker Hyundai announced in December 2021, that it will close the internal combustion engines R&D group, and redirect funds to Electric development. All carmakers currently reliant on internal combustion will be thinking along the same lines, although to date they seem to have hedged their bets. They must look longingly at the market cap of Tesla, hovering over $1,000 a share, with a PE ratio in the stratosphere. Tesla is worth more than the next ten biggest carmakers in the world combined, astonishing, and unsustainable in my view. Even the second and third US pure EV plays, Rivian (101 billion), and Lucid (72 billion) start-ups who sell almost nothing, are worth more than all but the top 3 carmakers we all know of, Toyota, Volkswagen and General Motors.

This capital reallocation is happening all around us; vehicles are just a convenient metaphor for the trend across economies.

Telcos have been busy spending money on mobile infrastructure over the last 20 years. Coverage has been the competitive differentiator. What happens when technology takes over, as is happening, and you can run a 5G network via an AWS type server farm? Suddenly physical infrastructure becomes redundant, and the location of competitive advantage moves dramatically.

FMCG suppliers used to be major contributors to media profitability via TV advertising. Now, as a result of supermarket chains exercising their power over the point of sale, consumers have a vastly reduced brand choice as the margin pool shifts towards retailers. On the other side of the equation, retailers are themselves facing aggressive competition for the customers attention and orders, a trend evident before 2020, but turbocharged by covid.

I ask myself where can technology drive innovation in FMCG that cannot easily be copied, so the investment by the supplier has a chance to pay dividends?

Plant based packaged meat substitute foods may be one answer. As we learn how to edit genes to produce the enzymes that generate flavour and texture, capital and technology can be applied to intensive farming, replacing low tech and land intensive meat production. The evolution of some produce types in capital intensive glasshouses and aquaculture combinations may be the thin edge of the wedge.

The marketing differentiator in the future will be the leverage technology and intellectual capital offers to the smart marketers, not a line extension or modest evolution of current products backed by mass advertising. Put more simply, ideas, and the intellectual capital that generate them are the new competitive differentiators.

 

 

 

The unfortunate unintended consequence of Google.

The unfortunate unintended consequence of Google.

 

Google has been a revelation, all the answers you need at your fingertips, or so it would seem.

What is the consequence of this instant question gratification?

Do we ask better questions, or just more superficial ones?

Does the volume of questions we ask, to which there are instant answers, substitute for the value of the fewer but deeper questions we used to ask?

My clients and those in my networks hear me rambling on about what I regard as the key to success. That single characteristic I have seen in all successful people I have known, and watched from a distance. Yes, they are all smart, and yes, they are all motivated to success, but underlaying those two factors is a third characteristic:

Curiosity.

I have never seen someone who is smart, and successful, who is not also curious. I have also seen many who have both of those characteristics, but are not successful. Generally, they strike me as not being also curious.

I use Google and Wikipedia every day to answer questions that emerge as I service clients and write this blog, but neither offers the catalyst to a post. That catalyst is curiosity, sated by the deep but selective ‘backgrounding’ I do of books, podcasts, blogs, journals, and absorbing informed commentary.

They are where the catalysts are hidden, uncovered by curiosity.

Social media, Google and Wikipedia specifically have sated our curiosity at a superficial level. No longer do we have to search for answers to questions, they are dished out for us, making life easy, but reflecting the superficiality of the answers to the superficial questions we ask.

Are our lives better because of this ability to get immediate answers to questions?

Undoubtedly yes, but are the questions as useful, offering the deep insights found as we used to dig around for answers, often finding that the initial question was inadequate, superficial, or simply the wrong question.

I like books, my car is a mobile library from which I can consume from a menu of offers in the idle moments between the busy times out of my home office. The one I pick at any time is most likely the one that relates to a question on my mind at that time, or that throws light on a topic of current interest.

Thanks Google and Wikipedia, you have made my life easier, both because I can find the answers to superficial questions, and because most of my competitors stop there, at the superficial.

You need books to go deep.

 

 

 

 

 

The 10 most read StrategyAudit posts of 2021

The 10 most read StrategyAudit posts of 2021

 

At the end of the year, it seems sensible to have a look at the posts that generated the most traffic. Surprisingly, none are posts that have gone up in this most challenging year, not an outcome I anticipated. This demonstrates the long-term value of a blog of this nature. Collecting and curating ideas and perspectives over a long period becomes an investment, certainly for me as the writer, and hopefully for those who choose to follow, or just dip in from time to time.

In order, from the most viewed, the 10 were:

5 key factors to consider when planning your budgeting process. January 2020.

https://wp.me/p5fjXq-2sN

This post was the first of 2020, and did generate some traction early on. However, in the early parts of 2021, when suddenly businesses had to rethink their budgeting processes in the face of Covid it took off. It will no doubt kick along again in the early part of 2022, which is unlikely to be much more predictable than the year just finishing.

 

3 essential pieces of the supermarket business model. November 2014.

https://wp.me/p5fjXq-1pd

First published way back in 2014, this post has been number one or two in the most read posts every year since. Clearly the elements of the supermarket business model retain an abiding interest. Retail is also the core of my corporate experience, now 25 years behind me. Many of the illustrative stories in these pages come from that time, as the lessons are timeless. The tools have changed, the behavioural foundations remain very consistent. Even amongst the massive switch to online retailing in the past year, the foundations of retailing have remained consistent. The pace has increased geometrically, and the logistics are new, but the basic requirement for success, to add value to the consumer, remains exactly as it was.

 

The 4 dimensions of project planning. August 2017.

https://wp.me/p5fjXq-1Gz

Every business is a mass of individual and group projects of various types and importance. This post offers a framework to consider when going about the planning processes. Planning is another form of predicting the future, and as we know, that is not a reliable process. However, planning ensures you are better prepared than just relying on being reactive as circumstances change. As Eisenhower noted just before the Normandy landings in 1944 ‘In preparing for battle, I have always found that plans are useless, but planning is indispensable’

 

The 5 strategic dimensions of price. October 2018.

https://wp.me/p5fjXq-2ba

To my mind, this is one of the more important posts I have written amongst the 2100 over 13 years. How to set and maintain optimum price is a challenging, even confronting task, too often not given the strategic importance it deserves. After all, every added dollar of revenue you can extract from the marketplace falls straight to the bottom line, and it is the one driver of profitability over which management has absolute control. It is one of a number of posts around price that are in the archives.

 

A marketer’s explanation of Net Present Value. February 2018

https://wp.me/p5fjXq-20v

Net Present Value, or NPV, is an accounting term thrown around with gay abandon by accountants, assuming everyone understands what it means. Over the years, very few marketers I have known had a clear understanding of NPV. Hopefully, this post helped some in those conversations with their accounting peers, trying to get their own back for all the jargon marketers habitually use, by using a bit of their own.

 

A private note to the chairman. April 2013

https://wp.me/p5fjXq-10x

This one was a surprise. It is an old post from 2013 that paraphrases a conversation I had with the chairman of an organisation on whose board I sat at the time. We had failed to agree for some time over a series of questions that could be characterised as the priority list against which the board should have been making resource allocation decisions for management to execute. At the time I was pretty fired up, and subsequently resigned the role. On rereading the post, I would not resile from any of the items listed, and would offer the same advice were I to be in a similar situation again.

 

How to wield Occam’s Razor to build robust strategy. June 2016.

https://wp.me/p5fjXq-1Rd

Occam’s Razor seems to have become a bit fashionable recently which is perhaps why this post got a guernsey in the top ten, after languishing with the ‘also-rans’ for 5 years. The advice however is sound, seeking the simplest possible explanation that fits all the facts, no matter how unexpected it may be. In a complex and volatile world, simplicity is one the hardest things to achieve.

 

Classic Marketing Strategy: Before and After. September 2016.

https://wp.me/p5fjXq-1Il

The title says it all. Marketing is about delivering a value proposition to those who may engage and make a purchase. Showing how the outcome of the purchase delivers a positive outcome has always been, and will always be a powerful way to communicate. I used myself as the example, having just had a couple of ‘headshots’ to replace the one I had been using, which was ‘homemade’. It might be time for an update, although the years and inactivity of Covid have not done me any favours.

 

Problem solving continuum. June 2010.

https://wp.me/p5fjXq-k3

This post was a very early one, proposing the idea that every problem sits somewhere on a continuum that describes the way in which management goes about finding and executing a solution. At one end workarounds are common, to the other end where difficult problems are subjected to continuous improvement processes. There is much more that could be said, and a number of subsequent posts addressed some of these items, but given the interest, this idea will receive greater consideration in 2022.

 

The 7 mental models for Successful marketing. June 2017.

https://wp.me/p5fjXq-1Rw

This 10th inclusion reflects on a very personal experience that highlighted to me the simple fact that while the tools of marketing have changed radically over the last decade, the foundations have not changed at all. It is one of the longer posts in the archives, running to almost 3,000 words, and includes an audio version delivered at a small business seminar tagged on the end.

 

To those who have followed, commented, or just ‘dipped in’ occasionally, I extend my thanks, and hope that you continue to draw some value from my musings.

Have a great 2022, it can only be better than 2021.