Jul 15, 2020 | Change, Strategy
Crises always drive rapid change, and this Corona crisis will prove to be no different. Many enterprises will flounder and disappear, but others will emerge, not just to take the place of the dead, but to build value in different ways.
The law of diminishing returns that had held true for most of the 19th and 20th centuries turned around, beginning in the 1990’s with the flattening of productivity increases. Slowly, scale had become its own worst enemy, as it outgrew the ability of the corporate bureaucracies that evolved to operate productively.
Manufacturing became organisationally top heavy, and productivity improvement became very hard to extract in anything more than small steps.
Even harder to find is relative productivity improvement. When everyone is increasing productivity at around the same rate, along a predictable curve, there is no net competitive improvement.
We had the early stages of the digital revolution in the mid 1990’s, culminating in the enormous profits of the so called ‘unicorns’ that emerged in the early 2000’s. These defied the rules of diminishing returns, and grew on the back of network effects and negligible marginal costs. In the process, they made their owners multi billionaires and rock stars.
Perhaps we have reached a tipping point, where the dollars flowing from the digitisation of our lives is starting to reach its limits?
Despite the enormous wealth and power delivered by the digital platforms, they still supply only a small part of what we need, and do not supply any of the basics, food, shelter, or clothing. They just make these things easier to get, and sometimes cheaper.
However, the application of digital capability to the manufacturing processes that deliver the things we need to live, may be in the nascent stages of reversing some of those limitations of scale.
Over the last decade, most of the unicorn wannabee’s have floundered, with a few notable exceptions. Their market valuation tanked, and in the recent case of WeWork, blowing up in spectacular fashion. Meanwhile, the market value of manufacturing businesses, those that produce the things we need to live, have not been as affected. However, when compared to the valuations of the digital platforms, their performance looks tepid at best. This comparison has sucked the life out of manufacturing investment, as investors seek quick wins.
Productivity increases, soaring in the latter quarter of the 20th century have flattened out, despite the ubiquity of software.
It was not supposed to happen like this.
Partly this flattening is because the barriers to entry have been radically reduced, and in many cases, removed. Meanwhile the benefits have moved very slowly from the owners of the software to those that use it.
Our productivity will rise again, as digital tools are developed and deployed into the production of the physical things we need and want to live comfortable lives.
The future is digital, but the emphasis will be in different places.
The evidence is all around if we look.
Tesla is just a car, re-imagined with a digital heart, Apple became the most valuable company in the world by adding a physical retail arm to their digital portfolio, and Amazon purchased the physical supply chain of Whole foods for US$16.5 billion, and got their money back overnight with the increase in their stock value.
Locally, the response to the Corona bug in manufacturing forums has been all about the deploying of digital capability to the production of physical things. This is together with the recognition of the importance of a sovereign manufacturing capability.
We are, maybe, approaching a huge inflection point.
A few weeks ago, I watched the Prime Minister speak at the National Press Club. If even a modest part of the rhetoric converts into action, we will be better off. When talking about the technical education system, he used the same phrase several times: ‘Why pour more money into a dud system?’ This is an overt acknowledgement that the current system is absolutely broken, and needs to be fixed if manufacturing jobs, with the social stability they generate, are to re-emerge.
What do you think?
Jul 13, 2020 | Communication, Customers, Strategy
Writing an email sequence is not as easy, or effective, as the videoed on-line courses (special deal $695, ends at midnight) would have you believe.
The templates and advice is all pretty vanilla although useful, but does not get to the heart of why people buy from you, and how, amidst the tsunami of stuff coming at them, they pick out yours.
Many seem to think digital is different from the old fashioned advertising I grew up with, and it is, tactically, but strategically, it is the same.
A potential customer goes through some sort of journey that differs in every case, but generally follows a process:
- recognition that there is something of interest out there for them
- Awareness that the stuff out there has relevance to them as a solution to some sort of a problem they have, or have recognised as a result of the discovery process.
- The problem now seen becomes something that has a value in its solution
- There is activity seeking that solution
- Choosing a supplier, and installation of the solution
- The after sales process, where they can be persuaded, assuming you did a good job, to be an advocate for the problem you solved for them, and more specifically for you as the solution provider.
The process by which this all happens is not a nice logical ‘Sales funnel’ where progress is made in an orderly manner. In reality is looks more like a huge ball of tangled fishing line, a real mess. Seeking to put order to the mess makes sense so long as you do not lose sight of the simple fact that the whole thing will resist the orderly, sequential nature of software, and revert to the mess at any and every opportunity.
The targets of your ‘content’ at each stage also has wrinkles.
You have current customers, the easiest to reach, potential customers, those you really want to reach who may have the problem unrecognised, some who may have recognised their problem, and you have advocates, those who might amplify your content.
The further audience is the wider community, out of whom all the other three groups emerge in one way or another.
Therefore, you need to mix and match between the mediums and the message to maximise the outcomes of the investment in content. You do this by the combination of focus on specific market personas. This includes personalised messaging of current and past customers, as well as more general communication of the problem/value proposition equation to gain reach into the varying audiences, to generate marketing leverage.
How deeply have your considered your mix of content and medium to reach your preferred audience?
Header credit: Maksym Kopylov via Flikr
Jul 8, 2020 | Governance, Leadership, Strategy
I am not in the habit of quoting V. I. Lenin, but he did get some big things right.
‘There are decades where nothing happens, and there are weeks where decades happen’
We are in one of those ‘weeks,’ the inflection point of a lifetime for most of us.
Almost every trend we look at, and forecast by, is somewhat linear. There will be bumps and jumps, but overall, looked at over time, they are linear.
Most business models are built on the automatic assumption of those linear trends holding true. Our institutions utterly depend on that being the truth. As a result, when the inflection point comes, it is traumatic; the response slow and often inappropriate, assuming all will return to a ‘new normal’, that it is just another bump in the road. Perhaps a nasty one, but a bump nevertheless.
I suspect that is not the case currently, this is not a bump in the road; this is a U-turn down a bush track into the unknown.
Forces build for a while in the background, looking linear, and then some sort of catalyst creates a confluence that totally changes the forces that drive the industry. The resulting chaos creates opportunity as much as it creates uncertainty, disharmony and dislocation of the pre-existing status quo.
Today, we are watching as several trends come together, which will create a new normal, looking little like the old one.
The digitisation of everything, has taken a dose of steroids since January, changing the way we shop, communicate, and work. To me it looks a bit like I imagine the confluence of the internal combustion engine and electricity looked in 1920. They had been around for a while, but suddenly converged to become transformative powerhouses that led to a 50 year burst of productivity increases.
Similarly with education. We have been wandering down a road of increasing commercialisation of education, marketing a tertiary qualification to Australians as the road to a good life and to international students as the ticket to wealth and a visa, while gutting the development of trade skills. Suddenly we have closed borders, the major source of international university students actively discouraging coming to Australia, and a massive shortage of depth of trade skills we cannot fill with 457 visas.
The education sector is in deep financial and philosophical trouble.
What about energy? For years we have clung to coal as not only our primary energy source, but as a huge magnet for international investment and export commodity sales, to the active exclusion of alternatives. Now we have wind and solar producing energy more cheaply than coal, and technology rapidly solving the storage problem. At the same time, the distribution of power is changing rapidly from a centralised system to a localised one. That confluence must be producing a bad case of reflux in Canberra. Political donations, existing political institutions, and relationships will not be enough to stem the tide, and the outcome is likely to be bloody, inevitable, and very soon.
Coming at us are revolutions in biology, driven by gene therapy and CRISPR. The human genome was first mapped in 2003, at the cost of billions. Now you can send a sample along and get your own map for a couple of hundred dollars. CRISPR, discovered in 2012, has accelerated our gene editing capability faster than Henry Ford’s production line accelerated the manufacture of cars, and look what happened then. Massive investment in roads, the 2 day weekend, and people travelled daily further than they had in a lifetime just a generation before.
That is before we consider the coming tsunami of AI, Quantum computing, additive manufacturing, and the new materials being developed with properties that seem to be out of the mind of Jules Verne.
As the old Chinese proverb goes: ‘May you live in interesting times’. We are, and to some measure that will be due to the changes driven by the Chinese journey out of poverty into world dominance in just over 30 years. This is trend reaching a tipping point without a lot of notice, or thought about the consequences.
Are you ready?
Jun 19, 2020 | Marketing, Strategy
‘The bug’ has given us a once in a generation opportunity to make change. Things that may not have been possible, have suddenly become not just possible, but necessary.
While most of the focus is automatically on cutting costs, the greater long term benefit is in the optimising of current expenditure. Arbitrarily cutting costs, as often happens in extreme circumstances, always results in throwing out a few babies with the bathwater.
Revenue generation, the combination of sales and marketing budgets, is usually the first to feel the knife when times get tough.
However rather than just ‘cutting’ across the board, or making the obvious decisions by cutting the biggest items first, consider the opportunity to optimise, and how this will deliver cost savings. More importantly, such an exercise can increase the productivity and long term impact of the investments you make, as well as reducing costs.
Classifying all expenditure into ‘buckets’ so that you can then allocate a weight to their relative value, and concentrate on those from which you can extract productivity increases, is a sensible first step.
All expenses can be classified in two major axes:
- Fixed to variable or discretionary expenses. Those that are not able to be reduced or improved, to the extreme of expenses which are entirely discretionary, such as media spend.
- The second axis is tactical to strategic. The short term expenditure which can reasonably be expected to deliver a return in a very short term, to the other end of the scale, the strategic expenditures which are normally those that appear to be in the ‘important but not urgent’ pile.
The manner in which you go about optimising your expenditure will be a function of your competitive context, the financial and strategic position you are in, and the strategic priorities in place. It will also reflect the attitude of the person delivering the instructions. Therefore, it is also a measure of your effectiveness at arguing the role that investment in marketing has to the health of the enterprise.
Your fixed marketing costs are items like employee costs, marketing software licences, retainers paid to service providers, and are often overlooked, or just cut arbitrarily. In the absence of a critical review, mistakes will be made.
Discretionary costs are often heavily weighted towards media, and they are very easy to cut. This will deliver a short term cost saving while often compromising the commercial sustainability of the enterprise.
History shows us that those who continue investing thoughtfully in the tough times, benefit hugely as the better times return.
When instructed to cut costs, do so with an intensive focus on the relative revenue and margin generating productivity of the cost you are about to cut, and to the long term impact that will have on the enterprise.
Jun 1, 2020 | Leadership, Strategy
As it seems we are slowly going to come awake after the close-down, it is timely to consider the steps we need to take to ensure that we survive the revival. Over 45 years of working with all sorts of businesses, in all sorts of situations, there are a number of common lessons that may be useful for you to consider.
Lesson 1. Cash availability.
You need cash to rebuild. During the downturn in activity, hopefully you have ruthlessly husbanded your cash, sold unnecessary assets, reduced inventory, reduced your cash conversion time, and cut out the ‘fat’ that accumulates when times are not so tough. Having cash on hand offers you the agility to be opportunistic.
The best way to preserve cash is to stop doing the things that lose it.
Generating cash by increasing debt can be attractive at a time of low interest rates, but debt driven cash also works against you if the plans you have do not work out as expected. Leverage works both ways.
Lesson 2. Have a plan.
This is generic advice, but you must have a plan. In the absence of a plan that is the framework for the allocation of limited resources, you will end up chasing your tail. In summary, you actually need several ‘nested’ plans that cover the key activities, each level driven by the others, but contributing to the achievement of the overall objective.
- Strategic plan: identifies the key overall objectives for the enterprise, defining broadly which markets, customers, technologies, geographies and channels that will be the priority.
- Revenue generation plan: identifies in more detail where and how the revenue will be generated, and the resources necessary to achieve the revenue.
- Financial plan: Projects the detail of the costs and returns generated by the activity. Usually these will be expressed as an annual budget, but given the uncertainty of the future, I strongly favour a rolling three month financial plan that acts as a go/no go trigger to other activity. This provides management information on an ongoing basis that enables the people in the organisation to learn, and make better decisions as a result.
- Operational plan. For manufacturing enterprises, planning your operations is essential, as they can be significant consumers of cash. Managing inventory and the optimisation of process flows through a factory will be an ongoing challenge. Operational planning is also essential in service enterprises, but is less obvious, as the key operating assets walk in and out of the building every day, or at least they used to, now they may just log on and off.
- People plan. An enterprise cannot function without people, they are the glue that holds everything together. Therefore deep consideration of the people and capabilities they bring, and that you can help them develop, is essential to success. For SME’s, finding and keeping good people is a significant challenge, and a huge cost burden when mistakes are made. As general Eisenhower observed: ‘Plans never work, but planning is essential’
Lesson 3. Ensure everyone is aware of the ‘Money in Vs Money out’ equation. Every individual in an enterprise has some level of control over this money in/out equation. Often it will be just the recognition of the cost of their labour compared to the value of the output they generate. The greater the awareness of the equation in an enterprise, the greater the chance that cost savings that do not impact on revenue will be identified and acted upon. While you cannot save your way to prosperity, every person in an enterprise should be focussed meaningfully on the equation, and optimising the expenditure of the key resources: money and time.
Lesson 4. Continuous improvement. Every profitable enterprise is a collection of processes that deliver, in some way, value to a customer. The profitability challenge is to do so at a rate less than the cost to the enterprise to supply it. Simple. However, collections of processes inevitably generate waste in many forms, which when removed, save time and money, while maintaining enterprise margins. Every tiny improvement that can be made, should be, as improvement become cumulative, and over time delivers huge benefits.
Lesson 5. The inmates must run the asylum. The traditional model is top down by decree, but this no longer works well enough to be sustainably competitive. Part of the planning should be aimed at building the ‘engagement’ of every stakeholder at every level. We know enough about human psychology these days to know that crucial to this engagement is giving control of every individuals workspace to them, and manage by outcomes rather than by activity. The corona bug has accelerated the trend to remote working, the ultimate expression of this upending of the typical management pyramid, by a decade. The huge management challenge is to articulate the limitations of every individuals decision-making power, and for most businesses to completely throw away their existing personnel assessment processes. KPI systems are almost always based on activity, and need to be replaced with KPI’s based on outcomes linked to the overall strategy. This will be very hard for some large organisations where those that make these decisions to change owe their current position to being able to game the existing system. As a result, many will be reluctant, or indeed unable, to change themselves or the system.
It is easy to sit back and write a post such as this, based on 45 years of experience, but it is way, way harder to implement. It will take focus and determination, and some very tough choices to succeed. When you need some assistance, call me.
Header photo credit: Notre Dame rebuild. Diane Worland via Flikr.
May 15, 2020 | Branding, Marketing, Strategy
The single word that delivers sustainable profitability.
That single word used to be
‘Brand’, but no longer, despite the role of
intangibles in the market valuation of an enterprise.
With the tectonic changes in business models over the last 25 years, it seems the focus has moved to ‘Control‘. This change applies even when considering the legacy business models of the last century that are being renovated to meet the demands of this century.
You can tell the value of your brands, and intangibles more generally, if you look at your balance sheet and apply an ‘industry standard’ multiple to net assets. The difference between that number, and the saleable price of the business is the value of your intangibles. If it is a public company, the market value is simply the current stock price, but more complicated if the enterprise is not listed. However, the accountants will tell you there are benchmarks depending on the industry and your position in it. Their valuation will usually be a single figure multiple of the free cash flow, plus the recoverable value of assets.
That calculation simply does not compute with the stratospheric valuations of the successful tech companies around, or the volatility of their stock prices, so something is missing.
A few of the ‘old industry’ businesses with deep branding, also defy that quantitative logic, but not many. P&G’s Tide detergent in the US, Vegemite here in Australia, Coca Cola, and a few others defy, for the moment, the trend to homogeneity.
The common theme amongst those whose valuations defy the accountants calculations, largely the ‘new age’ unicorns, is captured by that single word: Control.
They all have some level of control over the value chain that reaches the end customer.
Remember Netscape? It was the original web browser that delivered smooth browsing to web walkers. It was sensationally successful, paving the way for the web trawling we all now just accept as a normal part of life. Killed off by Microsoft, who at that time had a virtual monopoly over peoples PC’s via MS Office. Microsoft simply bundled Explorer into Office, free, and whammo, Netscape is dead. Microsoft controlled the distribution channel, so was able to squeeze out Netscape.
Domestically, the NSW dairy industry used to be a regulated monopoly, delivering monopoly power to the designated processors via control of the distribution channels, supposedly for social reasons. That monopoly ensured that there was no innovation, and nothing that would disturb the comfortable monopoly was allowed, until economic logic shone through, and deregulation occurred. In a day, deregulation demolished the control the processors had over distribution, and handed it over to those with the control of the channels: supermarket retailers.
That sudden change, for which the processors were largely unprepared despite years of warning, led to the current situation where there are now no domestically controlled dairy processing companies of any real scale.
Spotify, a genuinely innovative platform that has changed, again, the way we obtain our music, relies on Apple for its distribution via the Apple App store. It seems Apple is actively pushing Apple music, so the future of Spotify must be at huge risk, unless they can find a way to gain control of their distribution channel. Apple will squeeze them to death over time, and take not just the subscription revenue from the consumer, but also squeeze down the royalty payments to the music creators at the other end, building monopoly margins.
Nice work if you can get it!
Supermarket retailers around the world have played the same game for ages, nowhere better than Australia, where the two gorillas control somewhere around 70% of FMCG sales to consumers. Proprietary brands have all but disappeared, and most of those that remain have little real value, as the customers have been taught to buy on price by the retailers house brands. This has squeezed proprietary margins by restricting access to the consumers.
Monopolies are great, when you are the monopolist, oligopolies are almost as good, and when you reach unstated arrangements with the other oligopolist, the margins are terrific. Just look at Australia’s banks, who collectively are the most profitable in the world as a % of GDP. Their profits are boosted by the lack of competition, and small regulated number, while their duty of care to customers becomes almost irrelevant, despite their protestations to the contrary. Let’s not talk about Australian petrol retailing, another example of profitable oligopoly control.
Amazon controls a huge chunk of the on line market by direct access to consumers. Third party products sold via Amazon that are successful find themselves faced with Amazon branded competitors very quickly, as Amazon knows more about your financials than you do, and controls the relationship with customers. They will suck out the margins, competitive advantage and shareholder value.
The lesson: build vertical control of your distribution channels into your business model.
In years to come, there will be no alternative.
It will be expensive, and risky, and certainly different to the model those of us over 40 grew up with, but that is the new world of vertical competition we now live in.
