Nov 16, 2022 | Innovation, Marketing, Strategy
One of the standard assumptions about strategy is that it evolves from the top. Those at the top of the organisation have access to all the information and resources necessary to craft the strategy that will then be deployed through the organisation. Then, crucially, they have the power to make those critical resource allocation decisions that drive activity. Sometimes that strategic development process is assisted by people from a range of functions and levels, all given the opportunity to have their say, and be a part of the process.
When you think hard about it, this top-down dynamic, however it is constructed and communicated is a load of old cobblers.
It should never work that way if what you want is an optimised outcome.
The objective of strategy is to figure out how to outcompete the competition, current, emerging and potential. That implies that strategy should be born at the point of competition. This point is not the supermarket shelf, the procurement office of customers, or in the boardroom, but in the definition of the source of the competitive advantage you are creating.
Building competitive advantage is a long-term task that requires choices to be made about the way available resources are to be deployed. If the competitive arena is based on the outcomes of R&D, as it is a digital product, then you had better allocate the resources to ensuring you are at least amongst the best in the field. Similarly, if it is in the excellence of customer service, you had better build the infrastructure to ensure no customer is left waiting and wondering.
This sort of analysis consumes time and intellectual energy from a wide range of stakeholders, not just the few sitting around the senior management table.
Clearly there can be an internal conflict when a business has more than one offering that have different points of competition.
That challenge can only be managed by ensuring that there is a source of common leverage that can be applied to all the product portfolios. Usually this will prove to be a brand that has built the credibility necessary to be compelling in both arenas.
A current client has two competitive arenas with entirely different business models and sets of capabilities necessary to support them. However, the physical products are very similar, emerging from the same technology ‘home base’. The strategies being deployed are different, although there is some commonality in the value proposition, but tactically, they are entirely different. Two years ago, there was a third product range that seemed to be an obvious extension, but proved to be a major distraction, as the competitive coalface was focussed elsewhere. As we lacked the resources to accommodate three, the product category was exited. That has proved to be a good decision, albeit very tough at the time.
The moral is to craft your strategy around the competitive arena where you must win to be commercially successful. If you cannot win in a definitive manner, the better choice is to exit and deploy the released resources where the return for winning is higher.
This is challenging stuff, so call me whan a bit of wisdom from experience might help.
Oct 6, 2022 | Innovation, Marketing, Strategy
We all understand what a post-mortem is: an analysis of why something after the fact. It deals with history, then usually when something has failed. We review the drivers of success less often than examining the reasons for failure, then allocating responsibility.
Planning a marketing program is in effect a ‘pre-mortem’, a plan of action that will, with good management, robust analysis, and a bit of luck and timing, deliver the anticipated outcome.
Logically, it makes sense to ask the sorts of questions typically asked at a marketing post mortem, when a plan has failed, before the failure, as a means to anticipate and answer the questions, offering an opportunity to fix the problems before they happen.
Based on the many marketing pre and post-mortems I have done, following is a list of the 10 essential questions to ask yourself and your team before pushing that great big ‘Go’ button.
Where did the revenue come from?
Growth is not possible in the absence of revenue, where did the revenue come from, and almost every marketing plan I have ever seen calls for growth. Less often do they articulate where it will come from., and the consequential reactions of those who might be losing out.
Current customers, new customers, channels, business models, products, technical achievements, geographies, and so on. However, do not just list them, articulate in some detail how it has happened. Again, that past perspective adds real ‘grunt’ to the conversations.
I used to refer to ‘Share of Throat’ when planning for FMCG. It implies that competition is not just the alternative products in the category, but everything that is competing at the consumption occasions. For example, a hugely successful new product was Ski Double-Up, launched in the late eighties. It brought new consumers, older men, into the market. It did not compete for a place on the breakfast menu, it was a healthy, convenient, and tasty snack product that filled a need in older men that frankly we did not fully recognise before launch. It opened up an additional avenue into men’s throats replacing pies and sandwiches.
Where did the capital come from?
Growth is a veracious consumer of resources, particularly capital. How did you fund that growth? Reinvestment of retained earnings, capital raising from friends and family, or from the markets, public and private, debt finance considering the necessity for assets as collateral? What alternative uses for the capital consumed were considered, and why is the investment in marketing a superior choice?
What is the dominant business model?
Are you a middleman, retailer, on-line item sales, subscription sales, did you achieve a position to monetise arbitrage opportunities, and so on. Digital has delivered a host of new and emerging business models to us over the last decade, but one thing that has become clear, if it was not already, is that differing business models do not live comfortably in the same house. Therefore, if your revenue streams come from different business models, the structure of your resulting business needs to be decentralised by those differing business models.
What is the ideal corporate structure?
Have you remained private, are you publicly owned, a partnership, Joint venture, franchise system? There are many options, and as in the previous question, siblings rarely successfully live in the same house.
What capabilities were required to succeed, and where did you find them?
This is a question in two parts. Firstly, what capabilities were required from individuals, technical, strategic, financial, and all the other factors that make human beings able to contribute? Secondly, what were the organisational, leadership and cultural factors that enabled the organization to leverage the capabilities the individuals brought in each morning as they turned up to work.
Which customers, markets, products, technologies, relationships, were critical to the success? The answers to these questions are at a ‘must know’ level. Why did those customers come to you, choosing not to go to a competitor? What is the factor that differentiated you from the others?
Which competitors proved to be the most potent?
Anticipating competitive action, and planning to accommodate the impact is a necessary part of every plan, as noted previously. This is perhaps the most common failure amongst marketing plans I have seen, and to be fair, written.
A long time ago I was with Cerebos, one of the brands I managed was Cerola muesli, at that time a successful brand, and I was keen to expand the brand footprint. I saw a gap in the market between muesli and corn flakes, this was 35 years ago, and there was not the wide choice we have now. We developed a half way product we called ‘Cerola Light and Crunchy’ and launched a test market in Adelaide.
At first, we did remarkably well. The logic we employed was well accepted, the retailer sell in easily achieved targets, and consumer off-take was strong after the initial burst of advertising.Then in came Kellogg’s with a look-a-like product, ‘Just Right,’ and their resources just blew us away, Light &Crunchy never had a chance in the face of the weight of the competitive reaction by Kellogg’s.
That is a lesson I did not forget. With the benefit of hindsight, it was obvious, poke a bear in the arse and he is going to turn around and give you a whack, and I did not anticipate the power of it, and I should have. Never made that mistake again.
Where did the new competitors come from?
New competition almost always comes from the fringes, and often outside the normal scope of most extrapolative planning. Looking widely at what is happening in other markets, and other technologies may offer insights to where new, and probably more potent competition may come from. Honda started in motor bikes with the Honda 50, selling it to students in California as cheap local transport. None of the incumbents, Triumph, Norton, Harley, saw them coming, they thought they were toys, being bought by people who would never buy a big bike. Blockbuster ‘owned’ video, and could have bought Netflix for $50 million, but thought them irrelevant, not even an irritation. 5 years later Blockbuster was broke.
What is the emerging source of customer value in the market?
Nothing new will be bought in the absence of a strong reason to switch from the incumbents, which always means new value has been created, somehow. How did your create yours?
What did we do wrong, and what did we learn?
You learn more from your mistakes than you do from the things you got right. Make sure ‘learning is part of the cultural DNA of your business.
When you have the answers to all these questions, found with the benefit of the virtual hindsight, you will be in a very powerful marketing position, able to write the plans that double-down on the things that will deliver the objectives and success
In other words, execute the plan.
Header credit: Talisa Chang via Medium
Sep 30, 2022 | Governance, Leadership, Strategy
At a time when the market value of a business bears no relationship to the financial balance sheet, when PE ratios of market darlings are counted in geometric multiples, something is wrong.
Currently the PE ratio of stock market darlings: Apple at 33, Microsoft at 39, Alphabet (Google) at 34, Facebook at 30, and Amazon an eyewatering 68, are completely disconnected to the tangible assets of the businesses. By contrast, the PE ratio of some of the industrial stocks which built the economies we currently enjoy, GM 9, Ford 9, GE zero, (25 years ago the biggest company in the world is trading at a loss) still reflect tangible asset values.
The governance and operational reporting of business is often left in the hands of the CFO. They produce all the numbers and do most of the analysis of those numbers, as well as determining the investment choices other functional heads make by way of budgets, and the accounting for the spending of those budgets.
Several things have changed recently, on top of the rapid change that was proceeding up to 2020. The drivers of our economies took a dose of steroids from Covid, which not only accelerated the rate of change, but drove it in unpredicted directions.
- The accounting function deals with patterns and reporting that relies on history. This is a very poor guide to what happening around us now. The landscape has changed fundamentally, and that rate of change is not slowing down.
- Legacy systems now includes much of the stuff that was installed last year. Digital transformation has happened, redundancy is now counted in months, not years and decades.
- Business models have changed dramatically. Online ordering, and ‘no touch’ delivery of various types, previously struggling to get a foothold in many categories have taken off, while those that were already strong, have had their pedal to the metal. Legacy business models are dead. For accountants, trying to make sense of all of this while knee deep in the financial and governance accounting required, have run out of the gas necessary to accommodate it.
- Suddenly there are new power bases within an enterprise. All sorts of ‘Chiefs’ have emerged from hiding, and a few new ones have popped up. CDO (chief digital officer) CMO, CIO, and others that now have as much grunt at board level as the CFO, changing the nature of boardroom debates. ‘Traditional’ accounting is struggling, and largely failing, to keep up with the reporting and forecasting of increasingly fast cycle times and changing market and regulatory demands.
- How should the CFO deal with the accounting for innovation and change? The key for them is to learn much more quickly than they are used to doing, so they can recognise the demands, risks and costs of innovation, and think their way around the legacy accounting systems to deliver some sort of innovation and qualitative scorecard that fills the need for quantification.
- Sorting out Capex priorities, used to be done by business plans and discounted cash flow models driven by the often optimistic forecasts of marketing people. They usually relied on history to deliver an extrapolation, with allowances for the vagaries of new stuff. The time frames are now much shorter, the 10-year depreciation schedules allowed in financial accounting have become irrelevant when you are dealing with radically shorter equipment life and competitive needs.
- The significant move has been from a balance sheet that had little influence exerted by qualitative stuff, to a balance sheet structure that absolutely fails to reflect the real value of an enterprise, i.e.: what is in people’s heads. Those assets walk out the door every night and make choices about what to do tomorrow. This was previously a challenge, now it is a huge problem. The stock market calculations of start-ups with small if any revenues, but a few employees with a great idea can run to billions in the extreme case. They are backed by no hard, resalable assets at all, making valuation a nightmare for accountants.
What is a Strategic balance sheet?
Just as businesses undergo a regular financial audit, to ensure the appropriate governance and consumption of the enterprises resources, and account for the gains and losses of owners’ equity, so should it undergo a process of a Strategy Audit.
The financial balance sheet has a key role in articulating the ‘balance’ of assets and liabilities built up by the business, the difference between those totals is the owners’ equity, or what is left over to repay owners for the risks they have undertaken in lending the enterprise their money.
A standard balance sheet is a document assembled with historical data. It is subject to considerable ‘management’ by the valuation and classification methods employed in determining how an item will be treated.That is no longer even a fraction of what is requred to reflect the real competitive and strategic health of an enterprise.
Strategy drives the way resources will be deployed today in an effort to harness and maximise the potential for future returns.
This process of identifying the drivers of performance, and forecasting the optimised outcomes, is considerably harder than simply extrapolating the past. The only thing we know for sure about the future is that it will not be the same as the past, and even present.
Therefore, the strategy audit process is more qualitative. This does not mean that data and critical thinking should be thrown out the window as often happens, it makes it even more critically important.
Building a Strategic Balance Sheet is an iterative process. As you cycle through the expected costs and outcomes of strategy implementation, you will learn more and more about the relative weight, timing, cause and effect chains, and the trade-offs that exist between them. Being difficult to do means very few are doing it.
What an opportunity for those few who can get their heads around the drivers of strategic success and start to quantify them.
What do you think?
Send me your suggestions.
Sep 16, 2022 | Change, Governance, Strategy
In an economy desperate for productivity, how often does stupid, mindless bureaucracy get in the way?
This is not an argument against bureaucracy, rather it is an argument for strategic common sense. It is a nonsense to apply one standard across a myriad of differing circumstances, allowing no margin for reasonable error, then penalising tiny acts of reasonable noncompliance that do no harm.
A tale of woe.
One of my mates runs a small freight company based in a town in the central west of NSW with his two sons. He carries a range of agricultural goods, from grain to fertilisers to live animals, and has built a successful business by skilfully providing specialised services requiring investment in customised trailers designed to meet these specialised needs.
I spoke to him on the phone yesterday as he fumed at yet another example of bureaucratic stupidity making his life a misery.
One of his sons had been pulled up earlier in the day and fined $600 for being 40kg overweight in a 68,000 kg load of grain, loaded from a farm silo without a weighbridge. This is an error margin of .059%, hardly earth-shattering, presenting no danger to anyone, and absolutely understandable given the lack of expensive public infrastructure at the loading dock. The monitors on his axles, properly calibrated and checked, showed no overweight at the time of loading. His assumption is that one axle was in a very slight depression not visible to the naked eye in the loading area.
This is the second time in a few weeks this has happened.
His solution: get out. He can retire, remove the stress of running a small capital intensive business, and his sons will make more money doing something else. Meanwhile, the grain, and live animals he transports either stay where they are, or the costs of moving them go up dramatically as the haulage contractors either charge more to cover the risk of such tiny errors, or simply take less on board.
These standards are set and enforced by the ‘National Heavy Vehicle Regulator’ which has operations in each state. In NSW, there are 310 admin staff and 250+ compliance inspectors, according to their website. I wonder if any will jump in a truck to move the freight when my mate closes his business?
Who knows how the standards are set.
My assumption is that the big operators, Linfox, Toll, and perhaps a few others sit around with a few bureaucrats, agree some stuff, and go to lunch. The big operators go from weighbridge to weighbridge, they are unlikely to ever go up a muddy track to a paddock to take on a load of cattle or sheep to go to the abattoir, or a load of grain in an isolated silo going to a processor.
Is it any wonder it is getting harder to keep the supply chains moving, when the experienced owner-drivers are being driven from the chain by bureaucratic short sighted stupidity imposed for no good reason. The undertrained and inexperienced drivers being pushed in to fill in the gaps are a greater danger to themselves and everyone else on the road than a truck 0.059% overloaded, driven by an experienced driver with skin in the game.
Update: September 23, 2022. This ABC article dramatically underscores the point made in the post.
Sep 14, 2022 | Change, Management, Strategy
Scaling is the objective of every SME I have ever dealt with; they all want to get bigger. In every case they have the same three challenges.
Which activities do they Eliminate?
Which ones do they Delegate?
Which ones do they Automate?
EDA: the challenge of every SME.
The common challenge in them all is that they require change, and human beings, particularly busy ones, avoid change. This is the case even when they recognise that in the longer term, the change is necessary. The problem is finding the time to invest in figuring out what that the change must be, as that is an investment of time that is at a premium, without an immediate return. Besides, change makes us all uncomfortable.
Elimination.
This should be easy, but is often hard. The test is to define the value of the action, and if it is less than the cost, eliminate it. Before desktops, managers relied on regular printouts from mainframes to give us the information needed. Those under fifty may not remember the big dot matrix printed files that emerged in continuous sheets, often for further analysis by hand. These reports tended to multiply like rabbits on heat. One report responding to a once off information request resulted in that report being produced every time the report cycle ran, weather it was needed or not. In an effort to reduce this tree killing activity, I once put a line through most of the list of reports produced weekly for my department, not telling anyone, waiting for the screams. They did not come, nobody noticed. Eliminated. A simple example of what often needs to be done.
Delegation.
If it cannot be eliminated, can it be delegated? Someone who costs 150/hour doing a task that can be done by someone costing $50 is simply a non-productive use of resources. Again, delegating is easy to say but often hard to do. Everyone has established routines and delegating requires trust and change.
Automation.
When a task is necessary, cannot be delegated, and is done more than once or twice, it should be automated. The opportunity for automating tasks is limited only by imagination, the determination to do it, the time to specify it, and usually a modest investment of time and money. Automation of what used to come to me in huge printed blocks from a mainframe has been done by the advent of personal devices and ‘apps’. Information can easily be consolidated and tailored for the specific needs for which it is required. While the goalposts are continually moving as to what can be done, there is no task in an SME I have seen that cannot be at least partially automated.
EDA should be a standard item on every management improvement agenda.
Sep 2, 2022 | Marketing, Strategy
Some hard lessons will need to be learnt by the new crop of marketing managers who have never faced the evil of a recession, and even worse, one that has inflation as its bed-fellow.
Stagflation.
This is not supposed to happen, but it is, and we are seeing the first hints of it currently. Inflation growing rapidly, full employment, low interest rates lifting rapidly, we are facing an economic jigsaw that is defying conventional thinking.
Gone are the days when marketing could believe that failure was good, it was a learning opportunity for leveraging in the next round of potential failure. Increasingly the built in tolerance to failure will be tested, with an increased focus on pre experiment due diligence to reduce its incidence.
At last, we will revert to the core of business sustainability: Profit.
The absence of profit means that eventually, depending on the depth of your pockets, you will go broke. Nonetheless, marketing wankers for the last decade have been seduced by the comforting idea of ‘Purpose’. Often this seems to have overridden the old fashioned idea of delivering value to customers that leads to making a profit.
Every brand has a purpose they say. Heavens, I just want my washing soap to be an effective cleaner, my toothpaste to clean my teeth and leave a nice taste, my internet connection to work, and my car to start on cold mornings.
Having an explicit, relevant, and well understood Purpose is great. It provides a focus for the strategic choices that need to be made, and acts as an aligning ‘North Star’ for all stakeholders. However, purpose over profit is stupid, and the price of stupid is extinction.
Header cartoon credit: Thanks again to Scott Adams and Dilbert for clarifying and simplifying a complex question.
