Are you ready for the massive disruption of the coming inflection point?

Are you ready for the massive disruption of the coming inflection point?

 

 

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?

 

 

How do you manage the inevitable Corona –led marketing budget cuts?

How do you manage the inevitable Corona –led marketing budget cuts?

 

‘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.

 

 

 

5 lessons to apply as you rebuild Post-Corona.

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.

The single word that delivers sustainable profitability. 

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.

 

In search of ‘Rundle’

In search of ‘Rundle’

Subscription revenue is the new normal
What you may ask, is a ‘Rundle’?

 

A new word, made up to represent a ‘Recurring Revenue Bundle‘, an idea whose infancy was spent in software, but that is now reaching puberty in other markets.

 

The result of this pubescence is that business models are in the midst of  radical change from ‘Ownership’ to ‘Usership’. The revenue and marketing models of software have moved from purchase to  subscription, and following will be, almost everything that can be bundled as a service.

 

This is not a new idea, it is the foundation of the success of Xerox, charging by the copy, rather than selling copying machines, and Gillette in its early days, giving away the razors in order to sell the blades.

 

Given the boldness of that forecast, there is another thing that will emerge:  Control of distribution will  be essential. If you have a recurring revenue model, and no control of your distribution, you will be screwed.

 

Let’s consider cars, personal transport. Are we beginning to see the trend now, as differing companies place cars for ‘digi-rent’ in heavily populated neighbourhoods around the inner city. If you are going to digi-rent a car, it will not usually matter what the car is, beyond a functional definition: takes four kids, has a bike rack, and so on. So, the power of the brand of car will move towards the platforms that rent them out. If you are running Ford, or Mercedes, you need control of the platform from which the cars will be Digi-rented, in order to keep being able to move cars off the end of the production line.

 

What then will differentiate the Ford platform from the Mercedes platform? 

 

Distribution.

 

You can see the beginnings of the battle to come in the subscription entertainment services. Netflix Vs HBO Vs Stan, and all the rest, now including the newly launched Apple TV and Disney. There is not room for them all, so there will be billions thrown at content, and most will end up  in the hands of the few who control the distribution, building arithmetically on the recurring revenue.

 

My prediction is that Disney will be one of the last standing. They have a great brand, huge back catalogue, the cash reserves to churn out more great stuff, but their most important asset is the extension of the subscription services into other revenue sources. Licencing, Disney world, holidays, games, and all the other areas where the Disney brand has an existing or expandable position. The other winner will be Amazon, who have a platform, including Prime, that is in 55% of US homes, and rapidly taking over in other geographies. Distribution is automatic and bundled. The current leader, Netflix, is out on its own, great first mover advantage, but lacking the broad competitive base of Disney and Amazon.

 

The rest, beyond the very specific, super focussed services that will inevitably emerge, are toast.

 

Instead of products, you will be seeking to create ‘Rundles’ or Bundles of a value proposition to keep people coming back for more, rather than marketing to convince people to buy again.

 

The strategic task: Build barriers to churn.

How to insulate your business from the inevitable recession

How to insulate your business from the inevitable recession

 

The inevitability of a bad deterioration in the economy is now absolute. No more fluffing around with nice, reassuring words, the  consequences of this Corona pandemic will be an economic and social clusterf**k.

So, in these circumstances, how do you insulate your business from the effect, and even make some competitive and strategic headway?

Five things I have learned over my 45 years in business, the last 25 of them helping SME’s improve, and from time to time, survive, often in adverse circumstances. Over the course of that 45 years, I have lived through a number of events that caused significant distress at the time, and resulted in massive changes to the way we live and work. However, none I suspect will be as cataclysmic as this current crisis. Nevertheless, the lessons from the past can be applied to the present, so long as we do so recognising they will not be just copies, they will have their own characteristics, and some nasty traps for the unwary. 

 

Have a strong balance sheet.

This means having cash reserves. In tough times, nothing is as valuable as cash, it delivers flexibility and options, without which you are at the mercy of others. In days of low interest rates as we have, many have been seduced by the siren song of leverage. It is the ‘ make your assets work harder‘ pitch of those in the financial leverage game. Leverage however, works both ways, and in a downturn, accelerates the rate at which you go broke.

If you are leveraged, deleverage as hard and fast as possible, and hoard your cash.

 

Have a plan

While plans are made to be broken, at least you are able to track where the divergence happens, figure out why, and how to do it better next time. Planning effectively requires that you have a common strategic objective, broken down into ‘nested’ tactical objectives. This cascading of objectives ensures that priorities are clear, that the required resources and capabilities are delivered to the points they are needed to achieve the objectives, and deliver the best return.

 

Have a spring clean

Every enterprise carries the imprint of its past, often deeply buried. Many should be jettisoned  during the bad times, when it is easier, which has the effect of delivering a leaner more responsive enterprise as things improve. Apply the Pareto principal to everything you have and do: customers, processes, product lines, employees, inventories, fixed assets,  and suppliers. Clean out the ones that do not deliver value in excess of cost, and that are inconsistent with the more focussed strategy you will have developed. Hidden deep in most businesses are transaction costs, which are almost always a source of significant cost reductions  and ‘no-cost’ capacity increases. Eliminating the friction that generates these costs, will save time and money, deliver ‘no added cost’ capacity, and make customers very happy.

A question I ask my clients at some point is: ‘What would a VC do if they bought this business? Everyone understands a VC investment is always on the basis of a fast profit. Invest, optimise, sell. The question and subsequent conversation focusses the mind on what actually generates the value customers are prepared to pay for. Sometimes there are regulatory costs, and there will be a core of necessary cost that enables operations, but the rest is on the block. 

 

Focus on getting money in, not just cutting costs

Cost cutting is the reflexive response to a cash crisis, and short term it works, but not in the longer term. To use a sporting analogy, you cannot win a game by being defensive, the very best you can do is have a draw. Having a draw in these circumstances means you go down the gurgler with all  the others. No, you have to find a way to expand, get new money in the door.

 

Let the inmates run the asylum.

Post this Corona crisis, the world will not just go back to the way it was. Many of the changes necessary to beat this thing will be baked into the way we interact with each other. Work and the expectations of our institutions will be forever altered. Setting out to manage these changed dynamics without the appropriate level of change in management processes and behaviour will lead to inevitable failure. Following are a few thoughts on the pivotal changes necessary

  • Remote work. The most obvious is that we will all be more attuned to working remotely. While it was an increasing trend prior to the bug, it has become a tsunami in the past few weeks and it will not go into reverse. Therefore, the management  task is how to harness and leverage the capabilities of a remote workforce. Most senior managers are of the vintage that did  not grow up with digital as an automatic and natural part of their lives, and for many this is a scary prospect. Most have accommodated the digital revolution in some way, but the institutional cultural barriers that remain in their hands, need to be dismembered.  
  • KPI’s need to be set on outcomes, not activity. No longer will presence at a desk, and seemingly adequate levels of activity be enough, it is the outcomes that will dominate. This change requires a whole rethink of the manner in which performance is measured in most organisations.
  • Management behaviour has to change. The best leaders and managers BB (Before Bug) spent a significant part of their time ‘walking around’, and communicating face to face. Time spent understanding the problems and opportunities for individuals, and groups of individuals at every level paid dividends. This face to face, personal interaction will no longer be practical. Leaders need to develop processes that deliver that sense of personal interaction to employees and contractors operating remotely. This means they have to have in place systems that deliver emotional security and stability while focussing individual and group effort on achieving a common goal.
  • Transparency creates accountability. Instinctively, we all know this, but for so long, information has provided power, so it has become the default to hang onto it. No longer will this be the case. Leaders will create accountability by being transparent themselves, and forcing that transparency through the organisation structures to the lowest levels. This change will be very uncomfortable for many, and will lead to a wholesale turnover in older managers who simply cannot make the changes necessary. This will lead to a social challenge for us all. However, those managers will be replaced by younger ones who are more attuned to accountability based on outcomes rather than presence. All those who have not read Ray Dalio’s book ‘Principles’, should use this downtime to do so. It lays out a comprehensive and compelling argument for what Dalio calls ‘radical transparency’. This will become, I think, the emerging  default.
  • Communicate, communicate, communicate. The options for communication have exploded, in the post bug world leaders will be using all of them, continuously. The communication is an essential ingredient in the mix of creating transparency, accountability, and focus on a common objective. It will require entirely new processes and habits to be developed, replacing old ones, and a radical reordering of the priorities of many managers.
  • Creativity will flourish, if you let it. Crises always lead to creative solutions to existing problems, and innovation to create opportunities in areas not previously recognised. The two world wars last century led to an explosion of technology, Microsoft was launched during the 1970’s oil crisis, the iPod launched in the aftermath of the dot com bust, and the 2008 meltdown led to Uber and Airbnb. All of these were spawned outside any corporate boundaries, except perhaps the iPod, but Apple was as good as broke at the time, so had little to lose. 

When you need the wisdom of having lived through it all before, and learnt from the experience, give me a call.