Archive for October, 2009|Monthly archive page

Recession Lessons #2 – The End of Employee Loyalty?

Karl Marx’s clarion call, “Workers of the world unite, you have nothing to lose but your chains” may be resonating much more these days than in the past.  Large, well-paying sectors like financial services, automotive and construction, quickly and with little warning, have shed millions of white and blue collar jobs during the past 16 months. Layoffs have occurred in every recession and every industry.  Yet, this time things may turn out differently and the entire economy will pay a steep price in the long run.

According to a survey by the Centre for Work-Life Policy (as reported in the The Economist Magazine), the proportion of employees professing loyalty to their employers slumped from 95% to 39% over the June 2007 to December 2008 period.  The study also found that the number of employees trusting their employers fell from 79% to 22% over the same period.  Perhaps, shell shocked employees may be overreacting to the worst recession since the Great Depression.  However, other evidence supports the hypothesis that there is a permanent shift in employee attitudes and behaviors.  A survey by DDI, an American consultancy, found that more than half of all employees were “stagnators” (i.e. the employee has little interesting work to do and little hope for promotion) and that half of these people planned to look for a new job once the economy improves. 

The most obvious reason for this unhappiness was the massive and rapid job loss.  A who’s who of corporate America pruned hundreds of thousands of jobs including Merck, Schering-Plough, eBay, Chrysler, Yahoo, Whirlpool and General Motors.  Upwards of 200,000 Wall Street workers lost their jobs. 

One area where companies failed their employees was in the mixed messages they communicated.  Many firms sought to deepen their relationship with employees beyond merely a pay-for-work contract.  Employers would be friends and partners in addition to bosses.  Examples of this approach were company-supported socializing, on-the-job catered meals and flex time.  At the same time, these same firms were ratcheting up the expectations.  They consistently increased workloads, demanded higher productivity, and regularly trimmed staffs, both in bad and good times.   Not surprisingly, employees were bewildered by the inconsistencies.  The severe recession became a catalyst in exposing employer hypocrisy (or employee naiveté), triggering attitudinal change that ranged from cynicism to downright hostility.

Pervasive employee dissatisfaction and turnover will have serious financial repercussions including:  reduced productivity for the remaing employees; higher HR costs (e.g., recruiting fees) and; a greater risk of skills and manpower shortages.  Longer term, a shattered employer-employee covenant may increase unionization rates and lead to a permanent loss of competitiveness due to loss of key competencies and institutional memory.

What can employers due to repair this frayed relationship?  

  • Come clean with employees, even with bad news – Honesty and transparency builds trust and enhances the credibility of the message and messenger;
  • (Finally) make HR strategic to the organization – Senior management needs to pay more than lip service to safeguarding and enhancing human capital and corporate culture;
  • Don’t overreact when bad news hits – In many cases, senior management was (understandably) over-zealous in shedding workers.  A more prudent approach in the next downturn will help ensure the firm is better positioned for the inevitable upswing;
  • Rehire laid off workers first – Nothing may do more to rebuild loyalty and capabilities faster than to rehire laid off workers when conditions improve.

For more information on our services and work, please visit www.quantaconsulting.com

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Google Android – Invasion of a Disruptive Cell Phone Technology?

Thanks to a powerful value proposition, Google’s Android operating system (OS) may be on its way to disrupting the cell phone industry.  The notion of disruptive innovation – first introduced in 1995 by Harvard Business School professor Clayton Christensen – centers around the emergence of a new product that serves the market in a unique and compelling way, typically by being lower priced or designed for a different set of consumers or needs.  Often, disruptive products will quickly capture  market leadership.   Not surprisingly, Android fits this description in many ways.    

Though not quite a full scale invasion, Android has secured an important beachhead among cell phone manufacturers.  Currently, Android has an install base on 1.8% of smart phones worldwide (Gartner Research).  Although modest, this share is about to rapidly increase.   

According to the New York Times, all four of the largest carriers in the United States have now agreed to offer Android phones. Previously, Android was available on only one handset through T-Mobile (via HTC). Going forward, Samsung, LG, Kyocera and Sony Ericsson will be making Android devices; twelve Android handsets have been announced this year, with dozens more expected next year.  HTC, a major cell phone maker, expects half its phones sold this year to run Android. Interestingly, another disruptor, Dell, is using Android for its entry into the cell phone market.  In many cases, Android phones will be replacing the incumbent OS, most often Windows Mobile. 

What is driving swift manufacturer and carrier penetration?  For one thing, Android is free.  In the price sensitive handset market, free is very compelling when a product like Windows Mobile adds $15-25 to each handset.  Secondly, although a first generation product, Android has garnered solid consumer acceptance.  A J.D. Power survey of cell phone OS satisfaction rated Android ahead of BlackBerry and Microsoft but still a distant second behind Apple’s iPhone.  Thirdly, unlike current operating systems, Android is available as open source code, so anyone can use or modify it.  Despite modest market share, Android has attracted one of the largest followings of application developers. Finally, Google is not resting on its laurels.  They are rapidly introducing regular updates to Android which will improve performance, functionality and stability.

Android’s disruptive power is indicative of Google’s commitment to winning in this space. Google is aggressively approaching the cell phone market with deep cash reserves, free of legacy technology & channel issues, possessing a powerful ad model and with a wealth of software expertise. Not surprisingly, Google has a history of disrupting other markets and business models including online search and internet advertising. 

Android’s push has major industry implications beyond market share:

  • Android’s zero cost (today) could significantly reduce industry margins and profitability by forcing manufacturers to reduce pricing; 
  • Similar to what occurred in the PC hardware industry, open source Android will hasten the commoditization of smart phones and lead to an explosion in available apps and tools;
  • An emphasis on the consumer market will place significant product and price pressure on market leader Apple and may hinder RIM’s attempts to expand beyond their core business franchise;
  • Google will add another important weapon in its fight with Microsoft for desktop application supremacy and mobile integration.

Although the current OS incumbents may be comfortable at the present time, lets check back in 18 months and see how Android is fairing.

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Recession Lessons #1- Look Who is Growing!

Recessions are opportunities for firms to move up as well as slow down.  While most firms hunker down to weather the storm, it is quite common for market leadership to permanently change.  A significant amount of research confirms this. 

Some Bain Consulting analysis of the1991-92 recession found that twice as many laggards (bottom quartile firms) made a leap to market leaders (top quartile firms) in the recession versus non recessionary times.  Furthermore, a US McKinsey study discovered that one-third of banks and two-fifths of industrial firms fell out of the top quartile of their sectors during the 2001-2 recession.  Significantly, most of these shake-ups became permanent.  According to Bain, 70% of the companies that improved share and performance in the 1991-92 recession preserved those gains into the subsequent market expansion.  On the other hand, less than 30% of the companies that fell back in the recession were able to recoup their losses in better times.

The current recession is unlikely to buck history.  While it is too early to identify winners and losers, I can draw on my learnings from earlier recessions to identify several conditions that increase the propensity and potential success of major strategic moves:

  1. Growth imperative – Some companies traditionally emphasize growth regardless of immediate economic conditions. Firms like Goldman Sachs, Intel and Google would support Craig Barrett’s (former CEO of Intel) philosophy:  “You can’t save your way out of a recession;  you have to invest your way out.”  Moreover, these Type-A firms rarely carry out expensive, skills-gutting and demotivating “purge & binge” hiring practices.
  2. Corporate muscle – Size matters, especially in recessionary times.  Strong market shares, buying power and cash reserves can be leveraged to vertically integrate key parts of the supply chain, outflank competition or extract deeper discounts from suppliers.  For example, McDonalds is opening up to 1000 new stores; P&G is undertaking its biggest expansion in 170 years, building 19 new factories globally and; PepsiCo is investing $6B to take control of its two largest bottlers.  Well-heeled corporate buyers can also take advantage of challenging times to make acquisitions at lower valuations. A BCG study of US M&A activity between 1985-91 showed that deals done during recessions generated 15% higher returns to shareholders than those during boom times.
  3. Competitive weakness or retrenchment – The natural tendency of many firms in recessions is to focus on short term results and abandon or defer important business-building activities and initiatives.  This strategy is often self-defeating.  It leaves firms vulnerable to more aggressive or forward looking players (see point 1).  And, retrenching companies end up being less prepared to take advantage of the inevitable upswing. 
  4. Customer and market openness – Customers and markets are often most open to change during difficult times.  Aggressive and innovative firms will exploit powerful market forces like sustainability, social media and globalization to serve customers better and cheaper, and potentially create new markets.  In fact, many of today’s leaders  (e.g., CNN, FedEx and Microsoft) were launched with disruptive offerings during bear markets. 

For more information on our services and work, please visit the Quanta Consulting Inc. web site

Why Do New Products Often Miss the Mark?

Thousands of new & improved products are launched into market every year. These initiatives represent billions of dollars in investment, the commitment of millions of work hours and the reputation of thousands of managers.  Given this sizable commitment, are corporations getting a return on this investment or would they be better off spending their time and money on other growth strategies like advertising, price discounts or M&A?

If market share and profitability is your measure, most new product investment can be considered a serious waste of capital and effort. According to Harvard Business School Research and Quanta Consulting experience, no more than 10-20% of all new product innovations deliver positive ROI and target market share 12 months post launch.  For new products that reach this first hurdle, fewer than 50% are flourishing by year 3. 

A number of internal and external factors contribute to this low success rate. For example, companies often deploy significant capital on R&D yet under-invest in sales and marketing, dooming awareness building and consumer trial.  In other cases, firms fail to follow through on a well-planned strategy by executing poorly in the manufacturing, distribution or sales domains.  Finally, bad luck plays an under-appreciated role in scuttling the best laid plans and products. 

Our experience suggests that from a consumer’s (jaded) perspective, the majority of “new and improved” products are neither very new nor significantly better than the alternatives.  Furthermore, given the ‘perform or perish’ model of many retailers, new products are launched in an environment where they either hit quickly home runs or are de-listed, even if sales are generated.

There are many reasons new products fail to meet business and consumer expectations:

1.         Most product categories exhibit significant consumer inertia

  • Consumers often underestimate the benefits of the new product; new benefits are not relevant to consumers or; the new benefits are poorly messaged and supported through packaging and advertising.
  • Consumers over-value the utility of (and the potential risk of leaving) the incumbent product.
  • Despite using the product, many consumers are simply disinterested in the category and will always gravitate to a default behavior and brand (i.e. what mom bought) regardless of inducements or marketing efforts.

2.         Management over-exuberance for the new product

  • Managers typically over-estimate the value of the upgrade, often because they are psychologically vested in the new product initiative.
  • Most managers are consciously or sub-consciously driven by institutional factors including:  performance measurement systems, departmental influences (e.g. R&D, Sales) and corporate values that reward employees for launching new products even if they are problematic. 
  • Many executives willingly follow their peers, historical precedence and industry best practices [sic], which embrace new product development as conventional wisdom.

The potential gap between a consumer’s inertia and a manager’s exuberance could result in a substantial value mismatch between what the buyer wants and what the marketer gives them. This gulf can be so big as to doom any new product launch before it even hits the market and even if it delivers real benefit.  Many marketers do recognize these challenges and typically deploy a variety of carrots and sticks to change purchase behavior and usage. However, even with tantalizing and expensive incentives, many consumers may never switch to the new innovation, unless forced to.   Click on this link for some tips on how to improve the odds of new product success as well more details on our and the HBS research.

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Are You Closing the Online Deal?

According to the New York Times, one of the dirty little secrets of e-commerce is how many customers proceed to an online checkout and then walk away from the transaction without purchasing anything.  Low closing rates (the ratio of potential sales at final confirmation to completed sales) represents a serious customer service issue and missed revenue opportunity for retailers, particularly given the growing importance of e-commerce, the cost of building and maintaining e-commerce sites and the need to deliver a compelling brand experience.

While there is no industry wide data, some e-commerce companies estimate that only about 3 percent of shoppers who visit an e-commerce site buy something.  When these consumers actually do load their shopping carts, as many as two-thirds of them end up abandoning the transaction.

Worryingly, closing rates may be getting worse.  According to comScore, the number of 2009 Q2 visitors to e-commerce sites who eventually bought something shrank for many sites versus the year before.  For example, there were 26 percent fewer buyers at Gap.com and 30 percent fewer buyers at  Zappos.com.  There are many reasons for customers to walk away from their purchases:

  • The online customer experience is poor. For example, the navigation, messaging or ease of use could be ineffective or even broken;
  • Many customers prefer to use online visits for research purposes only, with no intention to buy;
  • In the internet, comparison shopping is a click away and many opt to shop around;
  • Many customers become reticent about making payments online at unfamiliar sites;
  • Online buyers are more susceptible to a fear of regret before they decide to purchase a product.  With competing products a click away and no social stigma or store-induced urgency to buy, consumers often give in to this fear and become complacent thereby postponing or avoiding purchase.

Improving low closing rates even marginally could yield significant revenues gains in a 2008 online market that transacted over $130B in purchases and is growing substantially year over year. 

How can companies determine if they have a closing problem and what are the causes?

  1. Stress test their site to ensure proper functionality and easy navigation;
  2. Compare the site metrics at each stage in the online buying process to understand where customers drop out.
  3. Understand where customers go after they leave your site and why.  Good old fashioned qualitative research can help.  As well, some software tools enable companies to track customer behavior once they leave their site.
  4. Benchmark your site against your key competitors to ensure you are competitive on the fundamentals such as selection, merchandising and pricing.  As well, compare your site with other best-in-class online retailers like Amazon, Home Depot and L.L. Bean to make certain you have the right functionality. 

If you build it, consumers will come but they may not buy.  Savvy marketers know that they have to exert as much effort on driving closing rates as they do designing functional sites and building traffic. 

For more information on our services and work, please visit www.quantaconsulting.com

Private Equity: 2010 & Beyond – The Times They Are a Changin

The economic shocks of 2008 will trigger major changes for the Canadian and US Private Equity industries in the short to medium term, if not forever.

Knowledge@Wharton, a publication of Wharton Business School, recently published a report on the future of the Private Equity industry. According to the report, changes will be manifested through reshaped portfolio investment decisions, innovative capital structuring and new operating models for many firms. One example is the amount of equity required. Deals that settled for just 15% in equity a couple of years ago now require 35% to 40%, and up to 75% for some smaller buyouts. Moreover, a “wall” of refinancings due in 2012 will challenge the survival of many portfolio companies and PE firms as well. Furthermore, with leveraged buy out activity at a nadir, many Private Equity funds will increasingly take on the role of a turnaround specialist by investing in distressed firms. Finally, we will see the emergence of a robust secondaries industry (the buying and selling of pre-existing PE commitments) as Private Equity firms look to extricate themselves from losing commitments.

In The Coming “Wall” of Refinancings, Private Equity players will be scrambling to prepare for the onset of refinancings beginning in 2012. Savvy Private Equity firms should be focusing on optimizing portfolio company operations, exploring new positions in the capital structure and considering strategic, synergistic transactions.

The article, Continuing Defaults by Private Equity Portfolio Companies Transform the Middle Market, discusses the rebirth of the traditional middle-market deal. Opportunities, or “gems,” are still available for investors in midsize deals if they approach transactions creatively and consider taking new and innovative positions in companies’ capital structures.

A key conclusion of True Turnaround Specialists are Poised to Survive in Today’s Challenging Private Equity Market is that PE firms are turning away from leveraged buyout deals towards investments in distressed companies. Specialists in distressed businesses expect a tidal wave of private equity deals made in 2006 and 2007 to go bad in the next few years. Given the number of opportunities and the lack of bankruptcy credit, many restructurings will occur outside of bankruptcy court and could result in swift liquidation.

Finally, Private Equity Secondary Funds: Are they Players or Opportunistic Investors? looks at the activities of investment managers involved in the private equity secondaries industry, the buying and selling of existing PE commitments. Wharton sees distressed sellers continuing to act as a source of growth through 2010 and predicts the role of secondaries will grow over the medium and long term.  These firms provide a good source of short-term liquidity, allowing larger PE positions to change hands and making it easier for investors to adjust their PE portfolios.

For more information on our services or work, please visit www.quantaconsulting.com

Best Practice Branding in a Recession – Louis Vuitton

The recession is clobbering the luxury goods market, as falling incomes have curtailed customer spending especially in the near affluent segments.  According to Bain & Company, 2009 global industry sales are expected to fall by 10% to $225B.  Moreover, a number of venerable labels have either filed for bankruptcy (Escada and Christian Lacroix) or are considering bringing in partners (Prada Group). 

Tough times may not be a short term phenomena.  For the past 10 years, the key industry growth driver has been “aspirational” middle class customers, who make up 60% of the luxury market (according to Bernstein Research).  Worryingly, these customers’s attitudes and behaviors may be undergoing a paradigm shift. Bernard Arnault, chairman and CEO of LVMH (the largest luxury products conglomerate and Louis Vuitton’s parent) has said: “The word luxury suggests triviality and showing off, and the time for all of that is gone.”

However, one powerful brand is bucking industry declines and profitably increasing share.  In 2009, Louis Vuitton  has registered double-digit gains in every market while maintaining industry-leading profit margins of around 40-45%.  Indeed, Louis Vuitton has benefited from a traditional industry pattern that sees a flight to quality, established brands during difficult times. However, Louis Vuitton is pulling ahead because of their relentless focus on getting product, distribution, communication and pricing right.  For example:

Uncompromising Quality – Louis Vuitton has refused to cheapen its quality, production standards and materials for any of its products. Unlike many of its competitors, the company has avoided brand degradation by declining to license its brand to poor quality or unrelated products.

Savvy Marketing – Louis Vuitton has resisted the urge to move down market and compete with near-luxury brands like Coach in order to retain an air of exclusivity and premium price points. Furthermore, the company is also the only leather goods firm that never discounts its products, preferring instead to destroy obsolete inventory. Finally, Louis Vuitton has been very agile and sensitive with international expansion.  The firm is aggressively expanding into the lucrative Chinese market but with the same exacting standards that would befit a store in Milan or New York.

Operational Excellence – Louis Vuitton’s model of owning retail outlets has allowed it to maintain high standards and exert tight control over pricing, the in-store experience and inventory.  For example, the firm will quickly shift merchandise between stores to reflect changes in demand.  In addition, the company has adopted best in class production techniques (many from the car industry) to deliver process consistency, workforce flexibility and cost reduction.  

Continuous Innovation – To stay on the cutting edge of fashion with the right product mix, Louis Vuitton has invested substantially in design and creativity beyond its signature “Monogram” print. As well, the company has successfully launched a number of new and limited products in a variety of style and colors without cannibalizing its core leather bag franchise, introducing complexity or cheapening its image

Louis Vuitton’s story is a lesson to premium brands that to sustain success substance must accompany style.

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Driving Higher Channel Revenues and Performance

The current economic climate has challenged firms to maximize revenue from all sources while at the same time reducing sales & marketing costs and improving customer service. 

To accomplish this, many companies are looking to improve the performance of their reseller channel. Unfortunately, this is easier said than done.  All too often, well meaning channel strategies fail to meet the Supplier’s revenue objectives and expectations around effort.  In many cases, the Reseller’s strategy and culture are the culprits. In particular, the Reseller could be overly reliant on a single or small number of another company’s products to the detriment of your offering.  In other cases, the Reseller may be following a sub-optimal portfolio strategy of pushing every product without regard to what generates the most profit or best delivers on end user needs.  Finally, the Reseller’s culture and internal processes may favor some companies over others.  For example, the personal agendas of some sales people will trump the Reseller’s formal commitments.  Moreover, there is usually inertia within sales reps to take the path of least resistance and sell only what they know.

However, it is too simplistic to exclusively blame the Reseller.  Most of the time, poor Reseller performance is often the result of a misaligned and dysfunctional relationship with the Supplier.  This could be caused by: 

  • Insufficient resources – No one invests to win.  The Supplier does not provide sufficient marketing, training or product assistance while the reseller devotes inadequate sales and inventory support.
  • A lack of trust – Both the Supplier and Reseller often exist in different solitudes, seeing each other as necessary evils rather than partners.  As a result, both parties often assume or perceive hidden agendas, communicate poorly and ignore the spirit of their commercial relationship.
  • Inconsistent objectives and strategies – Both parties start off heading in the wrong direction.  Each often track different metrics, follow different market strategies and face different risk profiles.
  • Weak coordination between parties – The relationship is poorly implemented, characterized by low process integration, ineffective program execution and halfhearted relationship management efforts.

My experience suggests that a company can improve channel performance by shifting from a reactive, product-based relationship to a proactive, strategic partnership.  To do this, companys should consider: 

  1. Concentrating on the ‘right’ resellers – Too often, Resellers are a poor strategic and cultural fit with the Supplier. Company’s can improve channel performance by better attracting, qualifying and vetting new Resellers, sharing best practices and culling under-performing Resellers who are unwilling to change.
  2. Upgrading the relationship – Strong partnerships are patiently nurtured, with equal attention paid to strategy and implementation.  Great relationships feature a fair revenue model with aligned incentives, have tight marketing integration and foster a barrier-free working relationship.
  3. Achieving buy-in from sales – At the outset, the Supplier must secure and build product & company awareness with the Reseller’s sales group while cultivating ongoing mindshare and shared objectives.
  4. Productizing your organization – The Supplier will need a compelling value proposition to the Reseller in order to build awareness, stimulate sales activity and sustain momentum through the challenging times. 

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Will Deceptive Marketing Cripple Pharma Brands?

Recent events suggest so.  Last month, pharmaceutical giant Pfizer agreed to pay $2.3 billion (the largest settlement ever levied against a US firm) to settle civil and criminal allegations that it violated federal rules governing drug sales and marketing for its pain-killer Bextra plus three other medications.  And the financial fallout will likely continue according to a paper recently published in the Journal of Marketing.  This study examined the financial implications of deceptive marketing on a drug company’s value.  The paper, “Regulatory Exposure of Deceptive Marketing and Its Impact on Firm Value,” analyzed the decline in shareholder value experienced by drug companies that have been the target of deceptive marketing citations by the U.S. Food and Drug Administration.   Specifically, the study identified a variety of deceptive marketing practices targeted at consumers and physicians, including 1) unsubstantiated superiority and effectiveness claims;  2) omitted risk information and 3) illegal marketing programs.

The study concludes that the identification and publication of deceptive marketing practices could result in a drop of 1% in a company’s market value, which translates into $86M of value destruction for a median-sized firm within the study sample.  These declines are in addition to any penalties leveled by the government or courts. In the case of Pfizer (whose market capitalization was nearly $98 billion in June 2009), a 1% drop in market value would equal  about $1 billion, above and beyond the agreed settlement.

Unfortunately, the Pfizer case is not the only example of deceptive marketing hurting a company’s share performance.  The paper reviewed 170 FDA letters citing inappropriate marketing practices, including promotion of drugs for so-called “off-label” uses-conditions for which the product was not officially approved by the FDA. One of the most famous and egregious examples of this was Merck’s marketing of Vioxx, which resulted in a multi-billion dollar balance sheet hit for the company.

Even if we accept these firms were acting ethically, there could still be many reasons why deceptive marketing occurs.  For example, there could be reduced marketing flexibility due to regulations; a product may not be superior to competition or; the product may generate a lower than expected value proposition (or higher risks) for patients.  To be fair, a number of internal and external factors generate powerful incentives to push marketing boundaries and to maintain inertia around hidebound marketing processes.  Yet, given the substantial risks, business practices will need to change. For example:

  1. Increase the efficacy hurdle rates for new products – stipulate that each new product must deliver better efficacy or lower risk versus alternatives;
  2. Refocus marketing spend towards increasing consumer and physician value – Compared to passive programs like advertising and promotion, some marketing initiatives like education and support programs could promote products and improve patient/physician satisfaction.
  3. Review how marketing is delivered through the organization – A typical drug marketer often comes up through sales with a sales-driven bias as well as little experience with branding, risk management and messaging.
  4. Improve risk management – Pharma companies should consider studying the lessons of other brand-sensitive industries like Financial Services to better understand the brand impact of marketing programs.

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