Mar 3, 2023 | Strategy
Strategy is an exercise of informed fortune telling.
What will happen if we do this? Is that better than if we do that? How will others react, do the ducks really all align the way they seem to?
A thousand questions we set out to answer, to allocate our resources to best leverage the outcomes we plan/hope will emerge.
It is a messy business, full of uncertainty, mistakes, dead ends, and outright failures, most of which we hear little about. Instead we hear a lot about the few successful exercises in strategy, the few that work as hoped, or as is usually the case, not as planned, but great outcomes.
We read about the success because people are able to analyse them with the benefit of hindsight, which delivers to those developing the strategy, a sense of prescient certainty that they almost never deserve. Fact is, your strategy will never be spot on, the magic is in the ability to adjust tactically on the run, while achieving the outcome for which you planned.
The strategic process benefits greatly from being subjected to informed and critical thinking being applied to the inputs, both quantitative and qualitative. The greater the level of critical thought and diverse thinking that can be brought to bear on a strategic challenge the better.
The context of strategy implementation is always different to the context in which you do the planning, simply because it is the future, and things evolve in unpredictable ways.
I expect that in about 12 months there will be a rush of erudite papers and articles reporting on successful Corona instigated transformations. Strategic initiatives that make the protagonists look like they had great foresight others lacked. in fact, in most cases they will have ended up with the lollies despite being as confused and muddled as the rest of us during the lolly fight.
They had the benefit of hindsight to clean up their bedrooms before anyone came along for a look.
Strategy is messy because in development, it lacks hindsight.
Feb 15, 2023 | Branding, Innovation, Strategy
Bing and its sibling ‘Edge’ have been coming third in a one-horse race for a long time now. Suddenly the emergence of the AI equivalent of a plutonium battery powered race whip in the form of ChatGPT has delivered a proper kick up the arse.
The world has changed, pivoted on a dime as they say, as a result.
No longer will Google search be the only game in town, and Chrome the default browser housed on 98% of devices. The new race has begun with a wider field, and no doubt some roughies hiding in the wings.
Microsoft announced 2 weeks ago that it has extended OpenAI’s models across their Azure services, widely used by developers, so who knows what might spring out of that. Last week Microsoft confirmed ChatGPT is being incorporated into Bing and Edge.
Google have the most to lose here, so have scrambled to announce they intend to incorporate their version of OpenAI’s google-killer ‘Bard’ into search making it more ‘ChatGPT like’. It is just a pity the horse stumbled at the first hurdle by failing to answer a simple question, leading to a share price nose-dive into the turf.
This is a must win race for Google, as 80% of their revenue comes from advertising. With hindsight, they have bet the farm on the one horse, never a great strategy in a volatile environment.
It is going to be interesting!!
Feb 10, 2023 | Innovation, Strategy
Never have I seen a more definitive example of Clayton Christianson’s ‘innovators Dilemma’ than what is being played out right now, in front of our eyes.
In summary, the dilemma is that dominating incumbent businesses are loathe to change the model that made them dominating incumbents. This results in them failing to innovate in ways that have potential to erode the cash flow from former successes.
Christianson had many examples in his book originally published in 1997, but none better than the existential crisis being faced by Google from ChatGPT, launched in November 2022.
Googles control of the search market is almost absolute, with a share of well over 90%. When you add in the rebranded search engines that simply use Google under another name, like Apples Safari, and discount the mistakes that lead to Microsoft’s Bing being clicked, it is probably 97% or above.
Ask Google a question, and the first 5 or 6 responses are ads. They represent potential answers to your question, but just potential from the indexed websites. The revenue from those ads that also follow you around the web is 80% of Googles total revenue, most of the balance coming from ad revenue on YouTube. After scrolling through the ads, you will have to skim and review a number of possible sites that may deliver you the answer you are seeking.
Ask ChatGPT the same question, and you get back one answer. No ads, yet. You may have to become increasingly explicit in the question you ask, but the response time is close to real time, and you get the best answer available. It may not be the perfect answer, although we can expect it to improve, but it will save heaps of time.
Google claim to have a similar system sitting on the shelf. In addition, they made a $400 million investment in an AI start-up called Anthropic in late November, just after Chat was launched. I’m sure they have the capability to deliver an answer to Microsoft, as they have been playing with AI for a long time. Perhaps they did not launch because it is not yet perfect, what new product ever is, but more probably they delayed because it is a threat to the existing revenue of the business.
Since the early days, Google has sat on its mountain of cash and not innovated. They have fiddled at the edges, as shown by their site that keeps tabs on their hits and misses, killedbygoogle.com but never confronted their cash cow, search, with any sort of innovation that might eat their breakfast. This is in stark contrast to what Apple has been prepared to do, several times.
Whatever else happens, ChatGPT and its backer Microsoft have taken the initiative, and I suspect this will be the best $10 billion investment Microsoft has made in decades. Incorporating ChatGPT into Bing suddenly gives Bing a reason to exist and a competitive advantage to which many will be attracted.
I can only imagine there are late nights in Sundar Pichai’s (Alphabet’s CEO) office currently as they try and figure out a way to combat this competitive threat while preserving their river of cash from advertising.
As I wrote this post, Google shares tanked and Microsoft announced a new generation of Bing running the next iteration of ChatGPT, customised for search.
Header: Google meets ChatGPT in the style of Monet in blogs used courtesy Dall-E, ChatGPT’s graphic AI stablemate.
Update No. 1. Feb 10, 3 hours after the original publication. probably the first of many.
I came across this Google post on their own site, via Visual Capitalist. If anything, it absolutely confirms the contention in the above post that Google have badly fumbled the ball. Timing is a much underrated quality in marketing. On several occasions, I have done the right thing at the wrong time, usually well before the market is ready, and failed as a result, only to see a competitor succeed at a later date.
Feb 8, 2023 | Governance, retail, Strategy
We all need to eat, but we seem to take for granted the access to processed and fresh food and groceries. To consider the ‘food industry’ as one entity ignores the entirely different strategic drivers of the three main components: Raw material production or ‘farming’, Manufacturing, and retail.
They should be treated separately as while interdependent, they are driven by entirely different forces.
In addition to food products in the FMCG basket, you have many non-food items from cleaning and homewares to health, beauty, and personal and pet care categories. Go into any supermarket, and these non-food categories take up somewhere around 20% of shelf space.
Farming.
The ‘family farm’ used to dominate the farming sector, but that is diminishing as scale enabled by capital takes the place of family intergenerational ownership. Costs come down with corporate ownership, but you are most likely to see agricultural monocultures emerge, as short-term financial returns creep up the priority list.
The register of foreign ownership, flawed as it is, records in the latest report June 2021, that 14.1% of agricultural land is in foreign hands, up from 10.9% the previous year. The National Farmers Federation estimates that 99% of farm enterprises are owned by Australians. Clearly the big are getting bigger at the expense of the small.
The infrastructure necessary for the management of farm production requires substantial investment, the rail networks have broken down, and the roads are a mess. This is a long-term problem, and the logistic costs of farming will increase faster than the inflation rate.
Manufacturing.
A report from the AFGC concludes that profitability is declining, due largely to the concentration of retail, and that imports will gain ground as a result. Currently the food & beverage manufacturing industry employs 276,000 people, 40% of them in regional areas, and has an output value of 127 billion, 32% of total Australian manufacturing output. In other words, it is big and diverse both geographically and demographically, and therefore should hold a significant place in the thinking about how we educate and groom future leaders.
The gross figures for the industry indicate that there is almost 30% of production value exported. Problem is that the vast majority of this is raw or minimally processed meat and grain, employing few people, anywhere in their supply chains, and competing in commodity markets.
Of The 8 directors of the Australian Food and Grocery Council, the industry’s ‘representative’ body, one is the CEO of an Australian beverage company, the other 9 are all the chief executives of multinationals. This is not a bad thing beyond the obvious fact that it perpetuates the lobbying and resulting policy positions of government in favour of MNC’s vs the locally owned industry.
As a young bloke coming into FMCG in the late 70’s after a few years as a nomad, there were many businesses of a whole range of sizes and types to work for. Over time, the number and diversity has been radically reduced. Significant industries like dairy are now almost complete branch offices of multinationals. The exception is produce, where there are still many farming suppliers, although there are now a few very big consolidators, like Costas, who dominate the supply chain into retail. There are no proprietary produce brands in retail, beyond a couple of minor organic brands. Retailers have ensured that they absorb all the proprietary margin in produce.
If there is a light in the tunnel starting to be seen evolving as a result of the disruption of supply chains, and the low profitability of FMCG manufacturing, it may be Bega. Bega Cheese, which was rescued from the clutches of the receiver by now foreign owned Dairy Farmers Ltd way back in (about) 1991, has been able to expand by buying the Port Melbourne site of Kraft, as it was taken over by Mondelez, and ending up being able to buy the Vegemite brand, and more recently the rebranded peanut butter business. Perhaps this is the beginning of a resurgence?
Retail.
Grocery market size and share in Australia is debateable depending on what is included. By most analyses, Woolworths has around 37% share, Coles 28%, and Aldi, now the real third force 11%, and the wholesaler supplied groups around 7%. The remaining 17% is made up of a patchwork of fresh and farmers markets, direct from farm delivery, small independent retailers, and convenience outlets.
In addition to grocery, there is the huge food service market, varying from the local owner operated restaurant and takeaway, to fast food chains and five-star dining. This sector consumes a large amount of product and employs thousands of people.
The power wielded by this bloc of 76% of grocery sales is immense. As they have scaled out of the ruck that was the retail playing field in the 70’s and 80’s, taking over or leaving to the receiver less robust competitors. They have squeezed manufacturer margins by a range of strategic weapons that are a classic case study of Michael Porters 5 forces. In response, manufacturers have similarly scaled by using regional manufacturing hubs, most often in Asia. The impact on domestically owned manufacturing has been dramatic, accelerated during the period where the $A was above parity with the $US, which encouraged wider adoption of house brands manufactured overseas, wiping out what remained of locally owned manufacturing. With a couple of notable exceptions, (San Remo, and now Bega, and Sanitarium who do not pay tax, for example) Australian owned food manufacturing is down to sub scale cottage manufacturers relying on the fragmented but still difficult 24% not controlled by the three retail gorillas.
It is fair to acknowledge the strategic failure of local management, while throwing rocks at the retailers. There used to be major FMCG brands owned by domestic businesses, built up over extended periods that failed to recognise the long-term strategic importance of maintaining their brands. Instead, they surrendered to the tactical demands of retailers for short term promotional dollars that assisted retail margins while keeping prices low. Short term, consumers may have benefitted from the price competition while having significantly less choice. Long term, they face the impact of an economy that has only a tiny proportion of its biggest manufacturing industry being able to make strategic choices driven by domestic priorities.
A few thoughts about the future.
Technology cannot do anything but increasingly impose itself on the industry, in all its components. Australia is already a world leader in the development and deployment of Agricultural technology. Failure to accelerate the rate of innovation will find Australian agriculture losing the current productivity edge we have, as while we are really good farmers, the soils of the continent are old and poor, subject to significant climatic risks Therefore to keep our position, we must continue to be smarter.
Innovations in retail are happening elsewhere. ‘Amazon Go’ type technology will transform the shopping experience, and home delivery will not be going away. Meanwhile Australian retailers are wedded to optimising the business model that has made them successful in the past. This will open up opportunities for alternative retail formats and processes.
Retailers are good at retailing, but have been proven to be lousy at product innovation. In the past, product and category innovation has come from businesses tapped into the consumer psyche. Unfortunately, those businesses are virtually gone, so where is the next innovation going to spring form? Certainly not from the office of a buyer whose KPI’s are all about margin today
The logistic infrastructure so vital in a country as large and diverse as Australia is in poor shape. Rail networks are broken, roads are going the same way, a trend recently accelerated by flooding, and you cannot get drivers of heavy and long-haul equipment easily. The median age of all transport drivers is approaching 50, and long-haul semi drivers is now 55, and they are not being replaced. When considering specialised driving jobs like picking up cattle from farms, the situation is already dire.
In summary, the Australian food industry is faced with a series of significant challenges that have evolved over a long period. They will not be effectively addressed by industry or public authorities that think in terms of only a four or five year strategic horizon.
Note: this post was first published in the auManufacturing Linkedin group in December last year.
Feb 3, 2023 | Branding, Demand chains, Marketing, Small business, Strategy
Woolworths last week announced they would close 250 of their current 300 in store butcher shops. Clearly, centralisation and opacity of the supply chain that serves customers via Woolworths is geared to the lowest common denominator, price.
At the other end of the scale is Wolki farm in Albury. This is an integrated farm to retail supply chain that innovates at every point. Rather than just trying to do the same job as always for a lesser cost, they re-engineered the whole chain. From their website: ‘We are the connector between the conscientious consumer and quality produce’
Their 24/7 retail outlet in Albury is just the end of the chain, but full of innovation. I do not normally inhabit TikTok, but this video of owner Jake Wolki’s view of the future was referred to me by a (younger) friend, who knows my views about agricultural supply chains.
The challenge both retailers are setting out to address is the core challenge of marketing: how to create and communicate value that motivates customers to a transaction facilitating longer term engagement.
Woolworths (and Coles, Aldi, et al) do it by price and convenience. They might mumble about quality, but it is at best a second order priority. As long as it is edible, legal, and delivers the category target margin, it is OK. By absolute contrast, Wolki’s (I do not know them at all, had not heard of them until last week) are clearly focussed on quality, product provenance, and integrity. The price they charge for their produce will reflect all that, but no consumer who is looking for the cheapest cut of meat is likely to find it at Wolki’s. What they do get in detail is supply chain transparency that delivers the provenance and guarantee of quality of the product they are about to buy.
That may interest only a small proportion of the market, but that proportion is significantly larger than it was just a couple of years ago, and will continue to compound.
It seems to me that Woolies are repeating the mistake they made with Thomas Dux 6 years ago. They are ignoring the messages being sent by consumers from the ‘edges’ of their customer base that ‘Mass’ was not acceptable. More probably, they are choosing to ignore those consumers in favour of low cost supply chain control, and reluctance to rock the competitive ship by innovation. Perhaps they will prove me wrong, and use the remaining few in store butchers to experiment?
Photo credit: Wolki Farm from the website
Feb 1, 2023 | Analytics, Governance, Strategy
Mark Zuckerburg has a lot to answer for, disrupting as he has the lives of my children. However, he is also very smart and rich, so being annoying must have something going for it.
When pitching the $5 billion Facebook float in 2012, Zuckerburg wrote to prospective shareholders via the prospectus, a letter that outlined his vision of what Facebook had become, and would continue to be.
This is to my mind the crucial paragraph, buried in the body of the letter.
“The Hacker Way is an approach to building that involves continuous improvement and iteration. Hackers believe that something can always be better, and that nothing is ever complete. They just have to go fix it — often in the face of people who say it’s impossible or are content with the status quo”
It now seems he has taken that perspective of his obsession to the world of virtual reality. He has invested billions of shareholder funds in his personal vision, triggering a loss of billions from the market value of Facebook, now Meta. He does not seem to care, but many other shareholders do. They must be getting very annoyed about now, the value of their shares dropping 70% from its peak 15 months ago.
At some point, businesses must develop stable, repeatable processes that just gets the mundane stuff done.
Facebook did that with remarkable efficiency for a long time, creating a river of cash. However, ‘hacking’ has taken hold.
Hacking to improve mundane processes should be part of the culture, so long as the experimentation is part of a managed process. The alternative to that discipline is chaos.
Mixing the cultures that accommodate the disciplined repeatable processes that get the bills paid, and the sometimes chaotic, creative environment of “hacking” is a function of the leadership of the enterprise.
Management needs to be “Loose” to accommodate the creativity and experimentation necessary for process improvement, while being “tight” to enable the learning that comes from experimentation to be incorporated into standard procedures when they prove to be an improvement.
Loose/tight management, is the environment in which “Hacking” Kaizen, or whatever you choose to call it thrives.
‘The Zuk’ has imposed his single minded obsession with hacking on the culturally poisonous monolith he created, because he can. If his VR vision becomes a reality, Meta share price will not only recover, but break all records. I do not expect that at any time soon, particularly if as rumoured, Apple comes out with their version. Meta now faces a governance challenge that could be a real game-changer.
Addendum February 4, 2023.
This article from the Statista website details the progression of losses Meta has booked on Zuks metaverse bet. $US13.7 Billion in 2022, on an increasing trend. While the share price has dropped dramatically, if you look at the PE ratios before and after the drop, it seems to me that the price is settling back to where an old fashioned investor, one who expected a return from dividends rather than capital growth on the basis of a never ending share price increase, might expect it to be. The same comment can be applied to many other digital pletform stock price drops over the last year or so. Fundamentals kicking in??
Addendum 2 February 5, 2023.
They are coming thick and fast!. I read this ‘Wired’ article by the brilliant Cory Doctorow this morning. It explicitly defines the life cycle of social platforms, something we all ‘sort of’ knew but dismissed in favour of the value for early adopters, progressively locking in users, at the same time they squeezed the algorithms to generate ad revenue. Doctorow calls it ‘Enshittification’, a lovely word. Towards the end of the article is a quote from a very young Zuckerberg ”I don’t know why tney trust me, Dumb fucks’. Here is the news Zuk, we don’t!!
