Archive for July, 2009|Monthly archive page

Classic Rock and the Art of Inventory Control

If there was ever a lesson in always counting the inventory, then the story of Wolfgang’s Vault needs to be told.

WV is the largest online repository of rock music and memorabilia, dating from the 1960s through the 1980s.  Hundreds of original musical recordings have been re-discovered including concerts from the Grateful Dead, Led Zeppelin, Bruce Springsteen, U2 and Jefferson Airplane to name but a few famous performers.  The memorabilia includes millions of actual concert posters, t-shirts and concert tickets leading some rock historians to call this the biggest archive of classic rock history ever assembled in one place.

The origin of this treasure trove were the collections of legendary music promoter Bill Graham. Many say Graham literally invented the concept of the modern rock concert. Graham saved anything and everything from each concert he ever put on, from his early days in San Francisco’s Haight Ashbury right up to his untimely passing in 1991.

Upon his death the Company, Bill Graham Presents, was sold and resold several times to a variety of industry players.   All of Bill’s huge collection was stored in a warehouse below the office, unknown to any of the proprietors. Carelessly, none of them ever bothered to look through the “junk”, until Bill Sagan bought the company. Sagan was a more diligent type so ventured into the warehouse right after closing the deal.  He immediately understood his good fortune.  A couple of years of secretly cataloguing and valuing everything turned into what is now Wolfgang’s Vault (named after Bill Graham’s given first name).  Today, experts have estimated the value of WV’s recordings and memorabilia to be around $100M.  Not a bad return on assets and capital.  Currently, VW’s recordings are available for free with the collectibles offered through an online store.

Clearly, counting the inventory can sometimes pay off big time.

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AOL’s AWOL Strategy

I recently read an excellent NY Times narrative that looks back at the trials and tribulations of AOL since 1998.  (In the interests of full disclosure, I briefly worked at AOL back in 2005)  Trials and tribulations is putting it mildly.  AOL’s purchase of Time Warner in 2000 for $165B has been an unmitigated disaster for shareholders and employees not to mention many disgruntled customers. What was once touted as a new economy colossus has now become an instructive case study in what not do strategically.

I have outlined some of these lessons below:

1.         With acquisitions, you can’t just talk about delivering revenue synergies through cross-selling services and content sharing.   Although AOL understood the potential, they were never able to realize many synergies tracing to overly autonomous business units, poor technology and executive performance metrics that did not align with the greater good.  Management needed to prioritize these mandates, allocate sufficient resources and maintain a sustained commitment to reap all the potential. 

2.         Properly integrating different cultures is critical to achieving a higher performance entity.  AOL has always been distracted by internecine warfare between AOL and Time Warner executives.  Furthermore, there have been ongoing problems integrating the unique cultures, from the renegade, “change the World” types at AOL and CompuServe to the button-down, old economy world at Time Warner.

3.         Large legacy businesses make Companies vulnerable to disruptive products, changing consumer behaviors and new business models.  For example, by being too dependant on their lucrative dial-up franchise, AOL was unable to move quickly enough to build leadership share in the broadband market, not to mention penetrate the digital download, file-sharing and VOIP businesses.  

4.         Its tough to compete against well-focused and well-capitalized foes across all product categories in all segments.  Despite its size, it is not likely AOL could have effectively competed against Comcast, AT&T, Google, Apple, Skype, Microsoft and Yahoo not to mention countless others.  AOL may have been better off to spin out some of their businesses to improve competitiveness or to pull out of them totally (VOIP for example) to save capital. 

5.         Consistency and realistic forecasting is a prerequisite for success.  The article elegantly documents the twists and turns of a schizophrenic corporate strategy and the embattled executives that had to execute it. Moreover, it should be abundantly clear by now that over-hyping your business is a recipe for disaster.

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Why Do Business Initiatives Fail?

Companies too often ignore or merely pay lip service to understanding why expensive, high profile initiatives (e.g., new product launches, acquisitions and geographic expansions) fail.  There are obvious reasons for this including the desire to avoid embarrassment, a lack of relevant or timely information and internal politics.  However, this painful process must be undertaken.  Large organizations maintain market biases, organizational gaps and strategic flaws that can handicap all plans and activities. Often, the flaws are hidden, are difficult to separate from the cultural fabric or, even if acknowledged, are difficult to overcome.  Understanding and preempting an institutional predilection for failure will go a long way in reducing business risk and improving the odds of success with new initiatives.

One approach I use is adapted from Strategic Studies. In this academic discipline, generals, analysts and historians use failure analysis to understand what went wrong with military encounters so history does not repeat itself. One fine example of this thinking is Cohen and Gooch’s book, Military Misfortunes: The Anatomy of Failure in War.  The authors  use various military setbacks as case studies to highlight 3 common military failures: of anticipation, of learning and of adaptation. 

Within a business context, a failure to anticipate occurs when executives are caught napping by a strong competitive move because they either misread or ignore market signals. A failure to learn takes place when Companies continue to execute the same, ineffectual strategies despite evidence or experience that they don’t work.  Finally, a failure to adapt arises when executives don’t adjust their plans when faced with unforeseen and threatening competitive actions that don’t jive with conventional wisdom or their previous successes. 

Performing an objective and comprehensive debrief is one of the best guarantors that failures do not repeat themselves-at least in the short term.  Once Companies understand the institutional basis for failure they can deploy a variety of process tools and organizational changes to preempt (most) future setbacks.  Moreover, these enhancements can also better align strategy with metrics, improve communication flows, augment knowledge management and improve market analysis, synthesis and reporting.

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IT Innovation is Coming to Health Care

Over the next few years, the Canadian health care system will be one of the places to witness rapid IT adoption and the emergence of unique business models.  Fact is, our system will have no choice but to change. Many factors are combining to create a petri dish for innovation: an ageing population will increase the demand for health care; tight spending will continue to limit the availability of services; the emergence of an electronic medical record (EMR) capability (the Ontario eHealth fiasco notwithstanding); and growing standardization and interoperability between systems, thanks to emerging middleware solutions.  Moreover, President Obama’s $40B healthcare IT stimulus is likely to catalyze the adoption of EMR and new operating models in the US health care system.

Canadian decision makers may want to consider one of these innovative strategies:

1.          Satisfy the American demand for medical tourism – According to Deloitte, up to 750,000 Americans travel yearly for medical tourism.  Although difficult to measure, the global medical tourism market is $1.0B-$2.5B, growing at approximately 25%-50% per year. Canada is an ideal destination for these consumers.  We combine many natural advantages (proximity, language, similar medical standards) with “best in class” medical expertise in a wide variety of areas. Though there will be many political and bureaucratic hurdles, I’m sure there are creative ways to address this potential while maintaining the essence of our system.

2.          Commercialize their intellectual property – We have world class medical technology, services, people and infrastructure but lack the urgency and comfort (with a few exceptions) needed to generate revenue from them.  Our hospitals and research organizations will need to adopt a more aggressive, market-driven approach as well as attract the business skills and partnerships needed to commercialize these opportunities.

3.          Create on-demand IT service models – There are emerging private sector models that could be leveraged for healthcare.  For example, large healthcare organization could generate revenue by marketing on-demand medical software services over the internet to smaller healthcare institutions using a Cloud Computing strategy.  As well, with a Grid Computing model, multiple hospitals could aggregate their computing resources to boost overall processing power, reduce cost and generate revenue by selling surplus compute cycles to other research-based firms.  Naturally, there will be many challenges to deploying any of these models including privacy and security concerns as well as cultural and organizational impediments.

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Cultural Studies…P&G

P&G Brand Management was my first job after graduation  At the time, P&G was known for, among other things, it’s highly developed (some would say elitist) culture. During 4 years of service, I was inculcated with the P&G way of thinking and doing things. 

Fast forward, I often work with executives on defining the key ingredients needed to germinate and implement cultural change. Much of my analysis is based on what has worked in other firms and industries, customized for the client.  More often than not, the lessons I learned at P&G, most of which are now considered ‘best practices,’  is what I  would recommend and deploy  In essence, the corporate culture defines how an organization thinks and acts based on its people, values, history and practices.

The following is my top 10 list of key P&G practices and values that have helped build its strong and vibrant culture. 

  1. Establish a common creed – P&G embraces and lives certain axioms like the ‘Consumer is Queen’;
  2. Lead by example – The CEO and executive teams personify the culture and consistently reinforce it through their actions;
  3. Hire and train right – The right people, properly developed and led , will develop a unique esprit de corps geared to high performance;
  4. Establish clear roles & responsibilities – Transparent authority, direct reporting lines and delineated responsibilities leads to faster execution and reduced politicking;
  5. Communicate regularly up, down and across the organization – Breaking down silos ensures everyone is aligned and has access to the relevant data to make better decisions;
  6. Focus on innovation – P&G was and remains one of the most innovative global firms across all areas of activity including product development, marketing and structure;
  7. Maintain organizational flexibility  – Structure and process reflect corporate priorities, not the other way around;
  8. Make data-driven decisions – Decisions carry a lot of credibility and rapid buy-in since they are based on comprehensive financial, consumer and strategic rationales as well as multi-functional input;
  9. Leverage internal and external best practices – P&G quickly leverages what works in other businesses and geographies
  10. Promote from within – Well understood expectations, evaluation criteria and mentoring requirements ensures consistency and human capital development while reducing politicking.

P&G’s culture is not without its fault and strains.  However, most firms would be doing well to check off half of these points.

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Richer consumer insights via ethnography & anthropology

In today’s hyper competitive consumer goods, healthcare and service industries, achieving meaningful product differentiation has become quite difficult.  Part of the challenge is in gaining a thorough understanding of a consumer’s functional and emotional needs.  Too often, overt response-based qualitative research tools like focus groups and 1:1 interviews don’t go deep enough in uncovering unmet needs and purchase drivers.  That’s when savvy marketers turn to consumer ethnography and anthropology for help.

Ethnography uses qualitative techniques to better understand what consumer want and how they purchase through researching their behaviors, attitudes and external influences. Some common tools include: voice of the customer studies through the product awareness/evaluation/purchase and service continuum;  observational research at evaluation and point-of-purchase moments, and (secret and overt) day-in-the-life interviews around product usage. In other situations, marketers can use anthropology to better understand the key role culture, values and religion plays in motivating consumer behavior.  For example, I have used anthropological research in the hospitality sector to help design a customer experience that takes into account the subconscious drivers of body image, socio-economic aspirations and wellness. 

A detailed review of observations, respondent feedback and societal norms is often synthesized to reveal hidden consumer needs, habits, influencers and barriers which are then used to better design, position and promote products & services. Ethnography and anthropology are superior qualitative research tools because they focus on what consumers do and how they act, in addition to what they say.

Many marketing and product design challenges could benefit from an ethnographic and anthropologic lens, including:

  • Uncovering unmet consumer needs and segments;
  • Launching new products and new geographies;
  • Rebranding products with little or no functional superiority;
  • Designing the optimal consumer experience including stores, service channels and marketing aesthetics.

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Ford’s Strategic Choices

I recently took delivery of a new Ford SUV.  Apparently I am not alone.  Ford has registered solid market share gains in 2009 driven by new competitive products and pricing plus attracting the “Loyal Domestic” segment from GM (Government Motors) and Chrysler. Many of these customers share a newfound respect for Ford, given that did not take any government bail-out money or seek bankruptcy protection. 

So things are looking up for Ford, or are they?  In the short term, Ford is caught between an automotive rock and a capital hard place.    One threat is their newly streamlined Big 2 rivals, recently retooled from a $62B bailout and bankruptcy protection.  On the other side are the more financially secure (yet also challenged) Japanese, South Korean and German competitors who continue to deliver excellent products and are now are also expanding their distribution and marketing footprints. Worryingly, the German and French governments have identified Fords’ main competitors as “national champions” worthy of strategic support.  Finally, the entry of some new  players like Tata (India) and Cherry (China) with new, low cost models could pose significant market share and margin risks to Ford’s core North American market.  Overlying all of this is an estimated 10-15% in excess capacity globally and the continued recessionary impact on consumer spending.

There are a number of strategic options for Ford, some of which are-

  1. Reposition the company & brands away from the wreckage of the Big 2, as a revitalized green, design and technology-focused car company. Ford’s latest ads seem to be signaling this.
  2. Mimic the successful Renault-Nissan tie up by seeking strategic partnerships with complementary firms to secure greater scale, technology and market access. Potential partners include PSA Peugeot Citroen, Mitsubishi or Hyundai;
  3. Build some “home field advantage” in Europe to secure strategic government assistance. The UK could serve as a home base as Ford already is number 1 in market share and has been operating there for over 90 years;
  4. Do a better job of leveraging European technology and design into North and Latin American models.  Traditionally, Ford has been very poor at this.  

So far, Ford has won some key battles but will they win the war?

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Fill in the blank…Goldman S_chs

I suspect more than a few of you would consider adding a “u” instead of an “a.”

I’m not interested in debating the ethics of GS potentially awarding its employees in 2009 up to $18B (according to some analysts) in bonuses right on the tail of the firm posting an impressive $2B Q2 profit. (For the record,  I do have serious ethical concerns with it.)

My contention is that the decision to go-ahead will have a large, negative impact on the GS image and could end up being a major strategic misstep.  In the immediate term, awarding such large bonuses so quickly after a massive government bail-out (note:  GS promptly repaid TARP funds) will likely hurt the GS brand, considered by many to be the strongest on Wall Street.  Although legal and probably consistent with employment contracts, paying substantial bonuses will expose the firm to continued accusations of greed, insensitivity and taxpayer exploitation.  Considering his public stance on good governance, I would not be surprised if the white knight investor Warren Buffet would be perturbed at the decision and bad press. It is usually not in management’s best interests to upset a major and very public shareholder.

Longer term, it is difficult not to believe that GS’s appeal as a business partner will not come under greater scrutiny in some circles, including all levels of government. I can just imagine the many politicians who want to re-regulate Wall Street rubbing their hands with glee over another example of corporate greed during a recession. As well, paying out bonuses may add fuel to the concern (correct or not) that the bail-out did nothing to reform the incentives and practices around financial risk taking, which once again may lead the sector towards self-destruction. This perception can not but hurt the standing of GS and the other banks, especially ones struggling to regain their footing.

I don’t know the details of the bonus structure nor the deliberations that will go into the ultimate decision.  What I do know is that something appears pretty rotten in the borough of Manhattan.

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When the Music’s Over…Decline of the Record Industry

Michael Jackson’s death reminded me of the crucial role his mega album Thriller played in saving the recording industry in the 1980s.  Only no one knew at the time that Thriller only delivered a musical Prague Spring, postponing the inevitable decline of a once powerful and very profitable industry.

Appetite for Self-Destruction, delivers an excellent study in how new technologies can disrupt traditional industries and how management hubris can blind them to effectively respond. The author, Steve Knopper, convincingly and breezily documents the decline of the music industry from the golden age of the CD through the rapid adoption of illegal file sharing and digital downloads to where we are today:  Big Music on life support.

It is now cliché that traditionally-minded executives in static markets rarely “get” technology making them vulnerable to disruptive technologies and business models like Napster, Craigslist and iTunes.  This may be true but the real lessons are more subtle than that.  Knopper points out that many executives did get “it” and substantially funded new digital investments and considered strategic links with the likes of Apple.  Furthermore, in the early stages of the digital revolutions, Big Music launched competing models to iTunes and Napster. Finally, some of the most impressive technology talent around in the 1990s was in the music business so there was no lack of great minds about.

So why did seemingly good intentions, early market entry and significant investment not translate into winning execution? Likely, many recording executives fell victim to a lethal combination of rich compensation incentives and career risk, if they did not meet aggressive corporate goals. In other cases, an industry drunk on 30 years of success would find it very difficult to rapidly evolve its strategy, business model and culture in the face of threats by twenty-something year old dot commers and while still continuing to bank significant profit.   More prosaically, some failure could be attributed to a weak understanding of emerging customer needs and poor product development.  Regardless, until corporations learn how to build in the capability and impetus to change as well as figure out how to design compensation plans and goals to balance short and long term needs, Appetite for Destruction will be repeated in other industries.

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Bored Directors…Improving the Performance of Boards

In today’s National Post, two lawyers, Jonathan Drance and Edward Waitzer, make a solid case for changing the role of the independent director. They recommend corporations follow the private equity governance model whereby the number of “non-management” directors shrinks to 6-8, their workload increases to 80-100 days per year and they accept performance targets.    For perspective, the typical public company director works just 18-25 days per year on typical Board duties.  Given the plethora of corporate governance fiascos, it’s hard to criticize the need for change.  However, any changes must take into account the realities of business complexity and corporate culture.

For one thing, large public corporations are extremely complicated organisms that are difficult for most insiders, let alone a director to truly understand, especially if they are in a part-time role decoupled from customers, operations and employees. Merely spending more time in the job with no line responsibility will not ensure better performance.  Secondly, a director is only as good as their commitment and experience allows.  To be frank, most directors are older men and women who often lack the expertise, incentives and passion to fulfill their current role, let alone a new mandate with performance targets.   Finally, to be truly effective, directors need comprehensive and objective information equivalent to what is available to the executive team.  Often, this is not provided in the format needed for quick assimilation and effective decision making.

Clearly, good governance necessitates directors engage more comprehensively on a more regular basis. Other changes could help, including:

  • Establishing a new Chief of Staff role, reporting directly to the Board, who ensures a steady flow of objective and synthesized information, delivered in a timely fashion;
  • Enabling directors to engage at any level of the organization for information or perspective, just as President Kennedy  used to do when faced with an obstinate bureaucracy;
  • Adjusting governance rules to require a Board-driven “Team B analysis” for major investments or risky decisions.

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