Archive for September, 2009|Monthly archive page

Successful Strategy Execution – Lessons from the Military

It is widely acknowledged that without successful execution the best strategic plans often fail to meet expectations, resulting in wasted capital, reduced morale and organization disruption.  How can organizations bridge the gap between plans & actions and desired outcomes & actual results?

Firstly, it useful to review some of the barriers to successful execution:

  • Strategic plans are often poorly communicated down and across the organization, and lack a suitable strategic rationale;
  • Overt or hidden organizational friction gets in the way of smooth execution. Examples include: personal agendas impacting tasks, competing corporate priorities, poor operational accountability,   turf wars and changing organizational structure; 
  • The right information is not available to the right people at the right time

Companies can learn a lot about strategy execution by studying how militaries perform their missions.  The history of war demonstrates that “no plan survives first contact with the enemy.”  Historically, Generals have had to frequently make plan and resource adjustments as the situation changes, thereby slowing down the overall speed of execution.  To cope with this, many militaries have adopted a concept known as Mission Leadership (ML).  Basically, ML involves 3 core principles based on where and how leadership and decision making is exercised:

  1. Leaders provide and communicate clearly defined, succinct and understood military objectives through their subordinates;  these objective are trackable and are delivered with context;
  2. Leaders allocate resources to accomplish the task, provide dispute resolution and restrict their span of control so not to limit their subordinate’s freedom of action;
  3. Empowered and creative subordinates decide within their delegated freedom and available information how best to achieve the mission in the time allotted.

Corporations and militaries share similar external and internal states.  For example, both types of organizations compete in rapidly-changing environments characterized by a lack of (or imperfect) information, limited resources and internal misalignments.  Because of these similarities and it’s proven success on the battlefield, ML has been adopted by companies as diverse as Pfizer, Walmart and Diageo.

What have these industry leaders learned from ML?

  • The primary role of senior leadership is to identify key strategic priorities and objectives that support the business vision and then find the right combination of people, resources and structure to deliver maximum focus on these objectives;
  • To ensure accountability, the objectives must be measurable, tracked and linked to individual and departmental goals through performance evaluation systems;
  • A higher frequency and simpler style of communication is critical to ensuring alignment;
  • For effective decision making, employees need a clear understanding of personal and departmental operating space and their interdependencies with others;
  • There must be wide distribution of the strategic rationale and other critical pieces of information to guarantee clarity of purpose;
  • Leaders need to be facilitators that create the right environment for success including: delegating decision making down the organization, enabling a risk-friendly culture, stimulating cross-organizational adoption of best practices, and encouraging tactical improvisation for problem solving and stretch performance.

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Move over Walmart, here comes Amazon

If current trends continue, an important milestone in Amazon’s history will pass later this year.  For the first time, global sales of media products like books, DVDs and music will be surpassed by sales of general merchandise.  Founded 15 years as an online bookseller, Amazon is already considered an online mass merchandiser where one could easily purchase Pampers and Power Drills as well as Police Academy II and the Police’s Greatest Hits.  This is no surprise to the millions of consumers who now shop online for everything.  According to ChannelAdvisor, an eBay-backed firm that helps major retailers sell on the Web, e-commerce purchases are projected to make up 15% of total retail sales within the next decade, up from 7% today.  Should Amazon be able to maintain its share of this growth, it will soon rival some of the largest global retailers, including Walmart.

Amazon’s odds are good given their powerful competitive advantages. The lack of physical stores and an ability to turn inventory in less than 65 days (before they have to pay suppliers) allows Amazon to maintain negative working capital (thereby maximzing cash flow) and a lower fixed cost structure while supporting aggressive pricing and superior product selection. Furthermore, an “always-on” Web presence of their full selection allows Amazon to generate sales 7-24, an important advantage during the crucial Christmas season.  Finally, Amazon plans to dramatically expand their private label offering beyond the hundreds of items currently available.  This will allow them to secure greater discounts from manufacturers as well as enhance their own brand equity.

Although Walmart continues to dwarf Amazon in terms of  revenue and profitability, Amazon’s share price, reflecting future prospects, tells a different story.  Today, Amazon’s shares are priced at 60 times earnings versus 15 times for Walmart.

Having bested scores of booksellers, electronics stores and online sellers like eBay, what are the implications for the retail industry of Amazon, The Worlds Online General Store?

Many companies will suffer.  For example-

  • Retailers that sell relatively undifferentiated products like jewelry and hard goods will feel the wrath of Amazon’s lower pricing and greater selection.     
  • Branded manufacturers will likely face increased pricing pressure as well as new listing and ancillary fees.  Firms like Nike that historically have chosen not to sell through Amazon may find themselves unable to resist one of the largest (and only growing) retail channels.

 Although a threat to some, a larger Amazon share represents an opportunity for others-

  • Good retailers that focus on service and a rich customer experience should be able to compete with Amazon, especially with products like clothes and sporting goods where sales expertise or a visual inspection is important
  • Many small sellers will benefit from Amazon’s larger market footprint through participation in their affiliate sellers program, whereby they sell their wares through Amazon’s e-commerce platform.  This program is crucial for Amazon, representing 30% of their total revenue.

It is likely that Amazon will continue its relentless advance.  How other retailers respond will help determine whether Amazon begins to challenge Walmart or whether it continues to be a large, albeit niche, player.

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Patent Place – Patents as Financial Instruments

Traditionally, patents were the purview of inventors, geeks and  lawyers.  Not anymore.   These days, well-funded hedge funds and private equity firms would be just as  likely to be studying patent filings. Patents, also known as intellectual property (IP), are now considered part of the Alternative Investment (AI) asset class alongside derivatives, distressed debt and hedge funds.  Similar to other assets, patents are now being bundled, marketed and traded with increased frequency between a greater number of brokers, financial and technology companies. 

Although the market is in its infancy, it is enjoying rapid growth in terms of transaction value and the number of industry players.  According to the Economist Magazine, the patent market is growing 20-30% per annum. iPotential, a patent-brokerage firm, estimates that $4B worth of patents were bought and sold last year.  And, some of the largest capital pools have gotten into the game.  Intellectual Ventures, an invention creation and licensing company, has spent the better part of a $5B capital raise buying patents.  Fortress, a large hedge fund, is said to own over 27,000 patents. Not surprisingly, the most sought after patents are those that are found in high growth, venture capital-rich markets such as bio-technology, telecom, medical devices, and software. 

Patent sellers are technology developers like IBM who seek to monetize their non-core IP in order to focus on other technologies or generate short term profits.  In other cases, universities, inventors and hospitals sell patents when they lack the resources and expertise to commercialize it themselves.  Some firms, who find themselves in financial turmoil, often shed non-performing assets like IP.  Finally, bankruptcy administrators look to sell IP in the hope of recovering some cash for creditors. 

Patent buyers range from strategic corporate acquirers who want to enter new businesses to investment firms who seek to flip assets in a young and relatively imperfect market.  One of the more controversial groups of IP buyers are pejoratively known as “ patent trolls.”   These companies seek to generate long term income streams by buying up all the patents they can find in target technology sectors.   When these firms believe their patents have been breached, they typically defend them aggressively, especially when the potential returns are lucrative and the defendants are well-heeled, as was the case with RIM in 2008.

Although IP is poised to become another high return AI, there will be challenges to growth.  The relative illiquidity of the market, the lack of market information and the esoteric nature of much of the technology makes valuing IP, especially portfolios of patents, fraught with difficulty.  Furthermore, given the large amount of litigation and time associated with establishing IP ownership rights, it is very likely lawyers will play as important a role as inventors and traders, adding cost and uncertainty.

However, likely the greatest impetus for growth will be the emerging ecosystem of research firms, brokers and consultants that will help value, categorize and track IP buying and selling.  For example, a newly launched IP exchange enables an index of patent-focused shares to be tracked by exchange-traded funds.  Increasingly, it looks like IP is moving out of the basement lab and into the financial mainstream.

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Why Should a Customer Buy from You? Improving your Value Proposition

Marketers are increasingly being challenged to differentiate, support and communicate their product or company’s value proposition versus the competition.  This problem is even more acute in industries like health care, commodities and services that do not sell packaged, branded products.  The fact is, most company’s position and promote the same things.  For example, how many times have you heard firms in your industry advertise that they have the best price, performance or service, and yet provide little support to back it up?

Truth be told, firms that can not demonstrate and communicate compelling and relevant differentiation will have an extremely difficult time gaining market share over the long term, without significant price discounting, corporate acquisitions or competitive missteps.  A significant body of research confirms that a lack of differentiation is inevitably linked to lower pricing levels and margins.

How do companies end up misreading and misrepresenting their value proposition?  For one thing, there are significant human and organizational barriers to seeing the problem, including:  executive-inspired groupthink, limited customer contact, and a lack of critical information around product performance, competition etc.  Moreover, questioning the value proposition often becomes a “third rail” issue because it gets to the core of what a company is and what it’s employees do day-to-day. 

For firms to flourish, they need to regularly understand their competitive position.  To do this, they first establish whether there is a problem.  Here is how I help determine that:

I often play a little trick on the senior leadership team, including the CEO and marketing head.    Before meeting, I briefly scan what key competitors are doing and saying.  Then, I quickly review what the client’s value proposition is and how it is being communicated.  Then, I gather together senior executives from across the organization and ask them to privately write down the 3 reasons why customers should do business with them, as compared to key competitors.  For the last step, I share the answers with the group.  To their surprise (but not mine), the responses usually encapsulate different clichés like service, responsiveness or performance – similar to what is being said by competitors.  The point is simple:  if companies don’t understand if and why their value proposition resonate, neither will customers or channel partners.

Much of the problem lies in the haphazard way marketers develop and message their value propositions.   One “best in class” approach is to conduct a yearly and systematic review of your competitive position by category, including: 

  1. Understanding the customer’s key functional and emotional needs;
  2. Analyzing the true advantage or benefit that your product delivers;
  3. Confirming the “reason why” or proof for this benefit;
  4. Identifying whether you consistently deliver on your value proposition;
  5. Reviewing whether your value proposition is communicated in a meaningful fashion. 

Most firms have value propositions.  The very successful ones make them relevant, credible and different.

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The High Cost of Free – The Freemium Revenue Model

Is there truth to Milton Friedman’s famous adage that ‘there is no such thing as a free lunch’?  Many technology executives would say no.  Once the sole purview of retailers, consumers goods firms and media channels,  giving away free products and services is now the rage in a number of sectors including software and social media.  Many Web-based B2C and B2B companies, like YouTube, Facebook and Skype, have attracted attracting millions of users by giving away their service in the hope of making money from them in the future through premium upgrades, advertising and up sells like support and documentation. 

This Freemium business model is appealing for firms that enjoy high gross margins, low distribution costs, and where the software purchase cost is a small proportion of total cost of ownership.  On the consumer side, convincing only 1% of millions of users to pay is enough to reach profitability, given rich margins.  The economics are also appealing for B2B software vendors.  Software purchase cost often makes up only about one-fifth of the total cost of IT ownership once integration, training and support are factored in.  For a solutions provider, giving away proprietary or packaged open source software (which helps lock clients in) but charging higher prices for other necessary services has proven to be a lucrative model for many firms including Red Hat, Sun and Dell.

However, while appealing in principle, freemiums are a challenge to make work.  According to reports, Flickr, Skype (which eBay wants to unload), and YouTube are not yet in the black while many others suffer in the twilight zone of low market penetration.  For many of the popular social media sites, advertising and affiliation programs was always the easy answer for making free pay. But that rarely covered expenses even before a glut of advertising space and a severe recession cut the revenue stream. 

Firms that are tempted by the Freemium strategy may want to consider a few things-

  1. Fickle consumers – With zero sunk cost, many consumers will quickly jettison free products or services (can you say Friendster, MySpace) even when there are switching costs.  Ensuring loyalty let alone driving conversion to paid products is difficult to do without higher marketing spending and regular improvements to the customer experience. 
  2. More complex offering – Firms need to define, market and organize themselves more broadly as a solutions providers versus pure-play software builders.  This challenges focus, scalability and operating leverage.
  3. Lower brand value – Free product usually signals low perceived value and brand image.  With that comes low emotional commitment and product loyalty.
  4. Reduced strategic flexibility – Without the pricing lever, charging nothing gives you little strategic room to attract customers outside of functionality and user experience, all of which can not be supported by zero operating margins. 

Perhaps Milton Friedman was on to something after all.

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Improving your Carbon Competitiveness

Many corporations have been inundated with demands from customers, investors, governments, environmental groups and employees to measure and reduce their greenhouse gas emissions, particularly their carbon footprint. Simply put, a carbon footprint is the amount of carbon dioxide that is emitted from an organization during its business operations.  While every industry is affected, the more vulnerable ones have the largest footprints, including: airlines, logistics, energy and manufacturing.   Though research is still in its infancy, the data suggests that a large number of consumers and resellers across every industry base their purchase decisions on a firm’s environmental positioning and impact. Furthermore, many fund managers are already factoring in environmental considerations in their investment decisions.  Responding to these imperatives, Walmart, has gone the furthest to appear environmentally-responsive by requiring its product suppliers to note on their packaging the environmental impact of its products, operations and supply chain.

There are good business reasons to know and manage your carbon footprint even if your firm does not sell to Walmart.  Firstly, you don’t want to be blindsided by government regulations (e.g., a carbon tax, Kyoto Protocols), competitive moves (e.g., revenue risk), or backlash from consumer & pressure groups (e.g., brand risk). In essence, superior risk management becomes a competitive advantage.  Secondly, reducing your carbon footprint can deliver compelling cost savings – in some cases up to 30% – as well as catalyze operating efficiencies.   Finally, your firm or product may already have a superior carbon footprint (e.g., Toyota Prius) that could be leveraged for increased market differentiation.

What approach can Companies take to become carbon competitive?

  1. Quantify your carbon footprint – Estimating an organization’s carbon footprint is basically an accounting exercise.  A variety of external consultants, standardized tools and industry-specific approaches are available.
  2. Benchmark versus your peers – Review what your competitors are doing and saying around carbon competitiveness to identify white space or gaps.  As well, explore best practices and key learnings from other industries to minimize your strategic and implementation risk.
  3. Develop a strategy based on your assessed opportunities and risks – Your strategy should mitigate your firm’s biggest risk factors as well exploit competitively-differentiating and revenue-generating opportunities. Use market, financial and environmental criteria to rank and prioritize your strategies and initiatives. 
  4. Implement and track – Carbon competitiveness is also about tweaking your product development, delivery model and supply chain to foster continuous improvement and carbon reduction tracking.
  5. Tell the appropriate story – Companies should be prepared to message their superior carbon reduction results while prudently positioning themselves in areas where they carry higher risks.
  6. Explore government assistance – There may be generous government subsidies and tax breaks available to stimulate carbon reduction efforts.

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Optimizing Corporate Social Responsibility Efforts

Today, few large companies have the luxury of going about their business without regard to how the local, national or international communities feel about them.  As a result of globalization, the rise of non-governmental organizations (NGOs) and the growing awareness around environmental and political issues,  the public eye is now focused on how corporations, regardless of domicile, impact society and supports its values.  In response to this activism, a growing number of independent stakeholders, from NGOs to investment research firms, now formally measure firms in terms of how they impact their communities – aka Corporate Social Responsibility – on a list of social, governance, financial, environmental and political dimensions. Poor rankings, whether deserved or not, can often lead to bad publicity, falling share prices, employee discontent, poor recruiting or government intervention.   Clearly, how firms perform with regards to CSR has a bottom line impact.  

Not surprisingly, managing CSR has become a corporate priority for many companies, especially in “sensitive” sectors like Oil & Gas, Retail, Pharmaceuticals and Financial Services.  For example, many CSR budgets are in the millions of dollars as firms look to generate goodwill by supporting charities; audit their supply chains to ensure child labor law compliance or; reduce their carbon footprint through proactive “green” initiatives. In addition, many firms support significant CSR initiatives by encouraging employee involvement during work time. Finally, many employees and executives are naturally interested in CSR activities, seeing it as a tangible and important corporate manifestation of their own core values.

In many circles, however, corporate CSR efforts have gotten a bad wrap, tracing to:  a lack of integration with corporate strategy; a short term, public relations bias and; poor execution.  Moreover, there is a cynical perception that CSR programs are a nefarious form of corporate meddling or as a sop to interest groups, vocal employees and government. Fortunately, there are now best practices that can improve the effectiveness and efficiency of CSR efforts.

Like any major initiatives that cut across departments and stakeholder groups, astute firms have established clear CSR strategies to plan and manage their efforts.  Some of these steps include:

  1. Understand your CSR impact – Analyze and rank the dimension(s) of CSR that have the biggest negative (business & brand risk) and positive (brand-building, revenue) impact on your business.  Prioritize your CSR efforts against the most significant risk areas while leveraging CSR successes through marketing messages.
  2. Know where you stand – Benchmark your organization against key competitors and related firms across your relevant CSR dimensions.
  3. Develop a company-wide CSR strategy and message – Be clear, transparent and truthful about what you stand for, while ensuring all employees and functional groups are aligned. 
  4. Identify and communicate with key stakeholder groups – Maintaining honest and regular dialogue with the key research firms, NGOs, customers, suppliers and media contacts is critical to be seen as a proactive and supportive member of the community.
  5. Institutionalize CSR within the planning process – Consider CSR issues as part of the evaluation criteria for major initiatives and investments.
  6. Take a long view – Many CSR initiatives (e.g., increasing diversity in senior ranks) may take years to implement and should not be evaluated on the same time horizons or ROI criteria as other programs.

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Tide Basic’s In, Brand Value is Out?

I share at least one thing with P&G’s Robert McDonald (CEO) and A.G. Lafley (Chairman):  We all worked on P&G’s flagship brand, Tide.  I’m sure they agonized over a decision, I never believed was possible.   This year, P&G launched into a US test market a lower cost/lower performing version of its #1 selling brand, Tide.  The new product has been (strangely) named Tide Basic.   

Like many other consumer packaged goods (CPG) companies, P&G fortunes have hit the skids due to the poor economy and the growing success of private label products in key retailers like Wal Mart, Kroger and Target.  These products deliver solid (or good enough) performance with pricing that is typically 20-25% lower than the leading brand.  The results have been sobering. P&G’s Q4 profit was down $2.5B (-18%) versus same quarter a year ago while revenues dropped -11%. For perspective, the $3B Tide business has lost approximately 10% of its market share since 2007, despite a flurry of product enhancements.    

P&G launched Tide Basic to attract consumers who would otherwise buy cheaper private label products or who were penny pinching Tide loyalists who would momentarily trade down within the Tide franchise.  Historically, P&G has been successful with a trade down strategy with brands like Pampers and Crest.  However, many financial analysts and marketers, myself included, have serious doubts about whether this move makes sense for Tide.  Here’s why:

Trades Down Revenue

Tide Basic may cannibalize more premium Tide consumers than attract new users from other brands.  Furthermore, there is a risk that when the economy improves Tide Basic consumers will never return to its premium and more costly cousin when they realize they could get a similar brand at a 20% discount.

Hurts Tide’s Brand Image

If line extensions and flankers often degrade the image and growth of premium brands, I can’t see how a lower performing line extension will help one of the World’s strongest brands.  P&G may have been better off using Cheer (the value brand in my day) or launching a new, value-focused brand.

Ignores Roots of the Problem

Launching Tide Basic may not address two of the fundamental issues.  Firstly, how do you counteract the ability of retailers to control the shelf and develop their own premium private label brands?  One way is to secure direct access to the consumer.  Some game-changing strategies could include direct selling via the Internet or through buying small equity stakes in key retailers. 

Secondly, how can P&G use advertising and product innovation to reignite consumer “pull,” forcing retailers to either exit this category or level the playing field?  Tide could take a page from P&G competitor Reckitt Benckiser and refocus their efforts on better delivering on new consumer needs and ratcheting up marketing investment. Reckitt Benckiser has successfully (sales +8%, profits +14% in Q2 versus year ago) addressed market challenges by moving up-market with improved products and a +25% increase in marketing spend.  

Overlooks Changing Consumer Perceptions

The worst recession since 1929 may have changed consumer perceptions of value and importance of the category, at least in the short term.   Consumers may be shunning premium brands because the alternatives are good enough or because they want to devote less (scarce) disposable income to premium brands, especially in non-sexy categories like detergents.  To address this, P&G may need to recast the value proposition of Tide. They could either: 1) enhance Tide’s performance and value through innovation to better justify the brand price premium (very difficult to accomplish) or;   2) reduce the shelf price to better bring the price-value equation in line with private label brands (very expensive to sustain).  This stategy has been followed in other categories by other CPG companies including Unilever.

Whatever path P&G takes, its shareholders, competitors and retailers will be paying close attention.

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