Mar 18, 2022 | Change, Leadership, Strategy
Like it or not, official figures or not, inflation is back with us.
Inflation consumes cash like a ravening beast, but often goes unremarked until the 11th hour, by which time it is often too late.
Official figures always lag reality, and forecast models are only as good as the input data. My models are based on conversations with the owners and managers of SME manufacturers, very sensitive to rising input prices, and the ways they are responding.
Every input to manufacturing is in the beginning of an aggressive price surge that may see many go to the wall. Many SME manufacturers, those with whom I interact most frequently will see that wall close up for a number of obvious reasons, sadly mostly obvious only with hindsight.
- They use a standard cost model. Whether this be in a fancy enterprise tool, or excel, the product costs spat out are a function of the input costs. Typically, a standard cost system is reviewed and updated on a schedule, most often half yearly. When input costs are increasing rapidly, you quickly fall behind, and play catch up not only too ,late, but to the point where the input costs stood when the review started.
- Variances are insufficiently recorded and understood. A good standard cost model will throw variances from the standard. These may be reviewed monthly, but are they sufficiently well understood, and more importantly, does anyone take action to address the negative variances in input costs?
- Too few have visibility both forward and backwards into their own supply chains to understand the impact of rising inflation on both the supplier and customer side. In the absence of this insight, the forecasting tends to be both slow, and understate the impact.
- There is a strong resistance to increasing prices, not just from the sales force, generally over sensitive, but from senior management who do not get rewarded for rocking the boat. This results in price increases being too low, and too late. Do the maths and calculate the relative impact of losing a few sales by increasing prices, to keeping them low to retain sales at a lower margin. It almost always pays to increase the price.
Apart from addressing the 4 points above, what else should you be doing?
Act faster.
When you act faster than your competitors in a volatile environment, it leads to competitive advantage. The OODA loop at work. The enabler of speed has become digitisation, which requires investment in capability and takes time, but can deliver real time information, vital in a volatile environment.
Direct communication.
Direct and concise communication with others in the supply chain, and your own procurement people, dealing with supplier invoices every day, is essential. Being close to the action enables you to move quickly in response to changes and opportunities that emerge.
Reconsider your pricing model.
Most businesses have a price list that for ease is general, being the base from which various discounts and promotional opportunities flow. Being general means that you are probably leaving money on the table, as different customers will have unique needs and levels of price elasticity. Understanding these differences and pricing accordingly is both challenging and profitable. You might even take the opportunity to change completely your pricing model, usually extremely hard to change when things are predictable.
Change prices more frequently.
Find a way of enforcing some sort of dynamic pricing process. Developing the processes that will enable dynamic pricing will become a necessary competitive tool, impossible until recently, simply because the degree of data granularity was not available. Now it is, so there should be no excuse to at least embarking on the journey.
Understand the whole supply chain.
Develop a whole of supply chain understanding, knowing where the profit pools and points of stress hide to be able to anticipate and adjust to them, as the impact of inflation rolls through.
Operational Flow.
Removing choke points in all your processes releases capacity you have already paid for. This observation is as valid in the support and revenue generation processes as it is in manufacturing.
Apply Pareto
We all accept that 80% of your profit comes from 20% of your customers. In times of inflation, the need is for real growth of revenue and margin, not the inflated numbers, while holding costs. The most effective way to do this is to prune activities that fall in the tail of the Pareto. Double down on where the real margins are. The same logic applies to the products you supply. Weeding out those legacy products that no longer play a valuable role in the value proposition of the business will release capacity that can be used more productively.
The aggressive application of the Pareto principal always removes transaction costs that are hidden simply because they are hard to quantify. The choke points removed to enhance flow, will also remove transaction costs.
Strategic priorities
Focussing on strategic priories while managing a crisis is a very challenging double act. When time is not on your side, acting decisively is all that is left. Capex is one of the first things to be delayed when times get tough, along with advertising. While it is an understandable reaction, it is also the wrong one. History tells us that those that double down when others are pulling back benefit in the medium term. Do not let the organisation lose sight of the long term, this coming crisis will be over at some point, replaced by the next one.
Innovation.
Innovation is an investment in future cash flow. While it is usually expensed through the P&L, which is in my view a misleading treatment of an investment, it often suffers the same fate as marketing activity and capex. I break it out separately as it is even more often dismissed than either of the others, and is arguably at least as important.
Cash management.
All of the above are about the management of activities as they all impact on cash flow. This is critical at any time, but never more so than when there is a spurt of inflation coming at you. Managing by the P&L as many do, can be very misleading. Set aggressive targets for working capital, and aggressively apply them. Your suppliers and customers will be feeling the same pain. The risk of blowing out debtor days is real, as your customers will be looking to extend their payment terms, as you try and extend yours.
The risks associated with inflation are huge if you are too slow, or ignore it completely and hope it goes away. On the other hand, many opportunities will open up for the agile amongst us.
Header cartoon credit: Scott Adams and Dilbert. Again.
Mar 9, 2022 | Leadership, Strategy
Consider what has been called: ‘The dichotomy of control’.
Is this thing I am considering in my control, or not?
In the words of Epictetus, a slave who lived early in the first millennium in the time of Nero, and a key figure in the evolution of stoic philosophy: ‘Some things are in our control, and others are not. Things in our control are opinion, pursuit, desire, aversion, in a word, our own actions. Things that are not in our control are body, property, reputation, command and in a word, whatever are not our own actions’
These words recognise we are powerless over the conditions that affect us, but have absolute power over how we choose to respond.
We can and should very deliberately choose which strategies we deploy.
In a way, a slave 2,000 years ago was also laying the foundation for Daniel Kahneman to win a Nobel prize in 2002. His work identifying the ‘Fast and Slow’ nature of our behaviour and the impact those human processes have on the choices we make reflects the way we consider and respond to choice.
Given that ‘Strategy’ is at its core about choice, this distinction should be amongst the first we make in the evolution of a strategic plan. The choices then continue as we move from the macro of strategy down to the micro of tactical implementation.
Game theory is also a core strategic foundation. The question: if I do A, what response will that draw from competitors? Will it bring in new competitors? Will I succeed? Will my bosses approve? and so on. These are things that in commercial life need to be considered. They do influence the decision you take, but in the end, they are out of your control, and the best you can do is to anticipate, and accommodate the possible responses. However, it should not be a barrier to make that tough choice, as in the end, you cannot control, what others do. Trying to anticipate and calculate all possible competitive responses to a choice you might make is a great way to ensure you never make the choice, as most of us do not like to be wrong.
In commercial life, those that are successful are regularly making uncomfortable choices with less than all the information they might like. Nevertheless, they make the choice, take the action, while being sensitive to the feedback they are getting. When the choice made turns out to be good, double down, when it is not so good, back up. Either way, you have learnt from the experience.
Such a bias for action enables you to get inside the ‘competitive loop’ of your opposition, and even when you make a miscalculation, you can adjust faster than they can, and will turn out on top in the end. This is the basis of John Boyd’s not so famous but competitively essential idea of the ‘OODA loop’.
As an aside, I find it fascinating that the teachings of a Roman slave 2,000 years ago could have so much relevance to the competitive environment in which we need to survive today. It is a sure indication that while the tools and competitive environment will change, human nature and the way we think is evolutionary, over a very long period, and will not change at anything like the same rate.
I will finish this post with another quote from Epictetus that we should all take note of as we set about ‘aligning’ our activities across functional silos, and engaging others in a mission of change.
‘It is impossible for a man to learn what he thinks he already knows’
Think about that the next time you fail to convince someone of the need for change.
If you wanted to take a dive into this ‘Stoic’ philosophy, a good place to start would be with the writing of Ryan Holiday.
Mar 7, 2022 | Change, retail, Strategy
The supermarket business model, like most others, is evolving as we watch. It is slower in Australia than elsewhere given the challenge of distance and the stranglehold of Coles and Woolies. Nevertheless, it is evolving, and we can learn from elsewhere.
Four years ago, with great fanfare, Tesco in the UK launched a discount supermarket chain they called ‘Jack’s’. It was intended to compete with discounters Aldi and Lidl, to be the British hammer blow on the invading German discount retailers.
At the time, it seemed to me that the game was already up, that the position the discounters had carved in the market would be impervious to the exhortations of then Tesco MD David Lewis, calling Britain to arms.
Prior to the launch of Jacks, there was considerable shuffling of deck chairs as other retailers, Sainsbury and Asda particularly adjusted to the discounters by M&A. Since then of course we have had the fiasco of Brexit, still evolving amongst the shattered supply chains. This has been graphically illustrated by the carnage at the port of Dover, and inability of British farmers to farm in the absence of eastern European labour.
Now Jacks is closing, its promises of stores in every major town never eventuating. Jacks only ever opened thirteen stores, six of which will be converted to Tesco, the other seven just closed.
At the time in a post I reminisced on the demise of discounters in Australia, saying ‘I suspect history will reveal that Tesco has made a huge blue’. At least they recognised the mistake relatively early and reversed course under a new MD.
Given Australia tends to follow the evolution of the British supermarket sector by a year or two, what can we anticipate domestically, particularly from the two current retail gorillas, Woolies and Coles?
- I would not expect either to make the mistake Tesco made and open a discounter. In the past, both have dabbled with discount retail brands, none of which have survived. Besides, they have both watched as Aldi has carved out a place without launching a discount rival, it is unlikely they will change direction now.
- The doubling down on home delivery will continue, as will the logistic arrangements that support home delivery, and the technology that enables it.
- Retail is fragmenting. Consumer behaviour is evolving rapidly, accelerated by Covid. There is an obvious trend towards on-line and specialist retail using multiple channels of distribution, attracting consumers from their large-scale competitors by offering other than ‘average’ products. Some retailers are designing their stores as an ‘experience’ as much as a place to shop. These stores are a brick in the brand building wall, and are in effect, another form of media as well as a retail outlet. Apple saw this first, opening stores progressively around the world. By the traditional retail measure of success of margin/sq foot, Apple is now the most successful retailer in the world. At the other end, we see small stores, even ‘pop-ups’ selling very specific and focussed ranges. In between, shopping malls have passed their peak, the massive floor space they occupy will need to be re-purposed, at least in part. The potential here is for locally focussed office and residential hubs with a mix of specialist stores and entertainment venues.
- Direct to consumer from the farm is increasingly possible and attractive. Farmers markets will continue to grow and nibble away at the supermarket share of produce, by delivering superior taste and quality. I love so called ‘summer fruit’, peaches, nectarines, and plums. Finding any in a supermarket that do not feel and taste like a cricket ball is impossible, as they are picked in bulk and green to survive the supermarket supply chain. They may look OK, but the taste is what really counts, and here they miss out badly to specialist stores.
- Harris Farm has considerable potential if they can resist the temptation to become more like a ‘chain’. Woolies had a go at high quality specialist food retailing with Thomas Dux, and at first got the recipe right. Sadly, success breeds intervention by the back office boys who never actually see a customers, which resulted in ‘Dux’ being sent to the naughty corner to die.
- Automation in big distribution centres will continue to drive costs out of the system. Ocado, the British online grocer is licencing their technology around the world. Coles did a deal with them back in 2019 to build two automated fulfilment centres, which will feed into their home delivery strategy and no doubt generate a lot of thinking for the standard supermarket Distribution Centre logistics chain.
- Aldi will continue to grow, more slowly than to date, as they expand store numbers in an already saturated market. Costco with currently thirteen locations around Australia have the potential to double in the next few years. Their differentiator is an entirely different business model, which is very hard to copy for any established retailer.
- The demise of proprietary brands in Australian FMCG has probably reached its lowest point. Coles and Woolies have ransacked the profitability of their supply base, who have responded with little or no investment in genuine innovation, ultimately the only source of real growth. I suspect that some smaller brands may start to reappear as Coles and Woolies seek to differentiate themselves from each other, Aldi, and the alternative distribution channels slowly emerging.
- The big retailers will, or should, start to experiment with some of the technology proving successful in the US and China. The obvious place for such an experiment is in some of the CBD locations they both have. Shoppers looking for a quick shop for dinner as they run for the train home, might value the sort of service offered by Amazon Go and others.
- Managing inventory for suppliers will become even more difficult. Retailers are continuing to reduce their order quantities while increasing the order frequency and placing rigid delivery times on suppliers. This volatility is making supplier demand planning progressively more challenging, while getting paid in a reasonable time means they are funding the retailers. I suspect there will be technical solutions to demand planning evolving that involve AI, interacting in real time with store traffic, weather, and events to deliver a demand number by location. It may be that the DC starts to pack retail shelves, which are delivered on a roll in roll out basis to stores, removing the in-store labour and reducing back store footprint size. At Dairy Farmers 30 years ago, we experimented with this idea for fresh milk, and while it was promising, it did not catch on. Just 30 years too early?
- The physical movement through the supply chains is an increasing problem for supermarkets. Traffic density, and fewer drivers available as the old guard retires, unreplaced by a new driver cohort willing to accept the rigors of driving semis in heavy traffic for 12 hours a day. Combined with the challenge of demand planning, this will increase the number of product out of stock at the retail face, encouraging consumers to alternatives.
No business model remains unchallenged, and can remain unchanged in the face of evolving competitive circumstances. The supermarket business model is no different, although proving to be more resilient than I had thought it would be a decade ago. The core assumption of the business model however remains unchanged. They control a choke point in the supply chain, and take a margin that reflects their power on both sides of that choke point.
Feb 28, 2022 | Leadership, Management, Strategy
History is littered with examples that convincingly make the case that a battle on two fronts can never be won.
Our business literature is similarly littered with examples of business failure brought on by the competing demands of too many markets calling on a common set of resources. The metaphor of war is routinely used in business literature, I have used it myself many times. Phrases like ‘the high ground’, ‘resource mobilisation and concentration’, ‘overwhelming force” and so on.
How odd then to find myself saying that success absolutely relies on being effective on two fronts at the same time.
Those fronts are not different enemies, or geographic locations, distribution channels, customer groups, or any of the other regularly used differentiators, but they can be all of them.
The two fronts are ‘attack’ and ‘defence’.
The disciplines used to assemble and deploy scarce resources to take advantage of opportunities, look for new products, and outflank the opposition whilst defending your home ground are common to all situations.
Resources are limited, opportunities to use them are not.
How many successful football teams have you seen that cannot both attack and defend? The really good ones swing from one to the other, and back again seamlessly, without a loss of position or momentum. Each player knowing their role in any given situation, understanding how that role contributes to the overall outcome of the play in progress, and ultimately to the score at the end of the game.
The best I have seen at this in recent times is the Melbourne Storm rugby league team. Irrespective of personnel on the field, every player knows his role in both attack and defence, and swings seamlessly between them in concert with every other player on the field.
It is the same in commercial life.
The imperative to grow also means that the home base, the source of the cash today, is effectively defended even as it evolves to deliver cash tomorrow.
I am constantly reminded of Charles Darwin’s observation that ‘it is not the strongest of the species that survives, nor the most intelligent, it is the one most adaptable to change’
How good is your organisation in this tug of war operating on two fronts?
Jan 24, 2022 | Leadership, Management, Strategy
As I observe the better performing manufacturing businesses around, I see some components not spoken about in any of the verbiage that comes from the various interest and political groups.
These common themes are:
They are close to customers.
This means they are less price sensitive than competitors and are focussed on building a bigger pie in collaboration with their customers. As a result, they always outperform those trying to grab a bigger part of an existing pie using price as the primary driver.
They have high level trade skills.
They have a higher rate of apprentices and tradesmen in their ranks. In the absence of publicly available vocational training, they find ways to deliver it to employees internally. This determination often extends to their key suppliers, adding glue to the supply relationships and enabling innovation through their supply chains. Skilled tradesmen are valued not only for the skills they have, but as people who have combined trade skills with experience, and are therefore tertiary qualified by an alternative route to a university degree. They are often better able to get stuff done as a result. Their deep respect for trade skills results in less turnover of personnel, delivering a substantial competitive advantage.
They seek tertiary educated employees.
The education does not have to be specific to the businesses, they are seeking people who have demonstrated a capacity to apply themselves, learn, and who are curious about what is going on around them. This looks expensive on the surface, but it gives them an ‘intellectual edge’ in the competitive game.
There is a continuity of leadership, and leadership style.
While the individual leaders might change over time, the style remains consistently participative and flexible. This leadership culture comes with a very clear set of performance expectations for individuals and the operations, which evolve in parallel with the strategic and competitive demands of the market.
Optimised and messy live together.
While there is a very strong focus on optimising operations, there is also a recognition that innovation, which is expensive, risky and messy, is fundamental to future competitiveness. They find ways to live with the ambiguity that comes from focussing on optimisation for the existing major part of the business, and exploration at the ‘sharp end’ where they are building the base for tomorrow’s cash flow.
They have big ambitions.
Their strategic planning sessions are not just extrapolations of the current in a nice location with a few beers for bonding. They deeply question the assumptions that shape the business, and allow many voices to be heard, and they reach for the ‘big’ outcome.
This is all effectively anecdotal, coming from observation rather than published data, so it may be a bit flimsy, but it does pass my ‘pub test’.
Header cartoon Credit: Hugh McLeod at www.gapingvoid.com
Jan 21, 2022 | Change, Leadership, Strategy
Momentum as we all learnt in high School physics is Mass X Velocity.
Decisions made have no mass, but they do seem to have the characteristic of building momentum.
Those businesses in my experience that have an overt bias for action make more decisions, get more done, succeed more often than those less willing to decide and act. They also make more mistakes, as they make choices with less than complete data, but are also willing to recognise mistakes earlier and back out, avoiding the ‘sunk cost’ syndrome.
Opportunity cost is hard, if not impossible to quantify, but it is clear to me that those who have the bias to action, make decisions and act on them, will suffer from opportunity cost less than those that wait for perfect, or just more information, by which time the opportunity had gone.
Dad joke:
Knock knock…..… Who’s there? ..….. Opportunity…………Opportunity who? ………….Silence………..
Opportunity does not knock twice!
There is a balance however.
Moving quickly in itself should not be the objective. The challenge is to quickly understand the balance of risk and reward that enables a decision and subsequent action that is important. It makes sense to spend more time considering a ‘bet the farm’ decision than one that is less likely to be catastrophic should it go pear-shaped. Some decisions can be reversed quickly in the event of new data emerging. The mistake is taken as a learning opportunity and embedded in the ‘wisdom’ of the enterprise, to ensure the same mistake is not repeated.
Amazon Prime has been the mother of all marketing tools, delivering Amazon a competitive advantage that has overwhelmed all comers. However, Prime was not born in its current form. It went through a number of iterations over an extended period as Amazon experimented, learnt and doubled down on what worked, while removing the pieces that did not.
Prime started as a ‘2 day shipping’ promotion in a narrow geography, under a promotional name. It evolved to 2 day shipping in the US as the standard, to expedited shipping for a fee, to free shipping with a Prime subscription membership. Over a decade, Amazon has progressively squeezed the time between order receipt and customer delivery at an astonishing rate, that competitors have failed to match. This progressive compression of their decision making and implementation cycle is a key to their competitive advantage.
This bias for action, transparent accountability and learning does build momentum, and once going, is very hard to stop, and almost impossible to compete with successfully.
Nobody ever claimed the prize from Colonel ’40 second’ John Boyd. He was never beaten in a dogfight simulation because he grabbed the initiative and held it, operating inside what he called the oppositions decision making cycle time.
This is decision making momentum, which he codified as the OODA loop.
To me it is one of the decisive competitive tools of the information age.
