Archive for November, 2009|Monthly archive page

Is Busy Work Choking your Organization?

Why are people working harder and longer than ever before but accomplishing less?  One hypothesis is that they are victims of a syndrome known as Busy Work (BW).  Simply put, BW is non-essential yet chronic organizational activity that does not link to value creation.    BW is pervasive among individuals and groups regardless of level and department;  it is often visible to casual observers as well as managers. For the individual, examples of BW include regular meeting attendance on an observer-basis only; spending an inordinate amount of time on analytical activities and; producing reports that are not reviewed or acted on.  Worryingly, employees often don’t even realize they are wasting their time and others, instead viewing their efforts as plain (and often frustrating) hard work.  In most cases, their managers are part of the problem.  They encourage and reinforce BW by rewarding its behaviors through political support and positive performance appraisals. 

BW exacts a large cost on organizations.    BW complicates resource allocation, slows down execution speed and generates higher labour costs through reduced productivity.  BW’s more subtle impact includes decreased employee satisfaction, poor strategic alignment and reduced focus on critical tasks.  In my experience, up to 60% of a firm’s junior and senior staff directly undertake BW activities, wasting anywhere from 20-50% of their time on an ongoing basis.

BW is often found in large organizations with high degrees of complexity (product, supply chain, process), geographic dispersion, and an inward-looking or dysfunctional culture.  Typically, these enterprises compete in mature markets with low long planning cycles and low levels of dynamism.  Industries prone to BW include Banking, Healthcare, Communications and Insurance.

How do you know if your organization suffers from BW?  The following are some tell-tale signs:

  • An employee’s work is not consistent with their job descriptions;
  • There are misalignments between corporate strategies & goals and what people do;
  • Email in-boxes are regularly filled at the beginning and end of each day;
  • Widely-attended, unstructured meetings take up a majority of an employee’s time;  
  • People regularly produce reports or memos that are ignored.

The only way to minimize BW is to address the root cause of the problem: namely, work habits, corporate values and measurement systems.  Senior leaders need to take a top-down approach to organizational performance by triaging attention and resources on core activities, streamlining processes and empowering the right employees to make decisions.   Some strategies to accomplish this include:

  1. Drive down decision making and empowerment to the right individual and team;
  2. Utilize standardized communication templates;
  3. Deploy knowledge management tools to foster a free circulation of information;
  4. Mandate individuals who propose change to implement their work;
  5. Reduce the amount of staff activities (read: administration) on key line functions;
  6. Articulate succinct strategies with goals, and cascade them down &  across the organization;

Reducing BW is not easy as any effort would likely would bump up against vested interests, management indifference and overlapping responsibilities.  Yet, in a cost-conscious and competitive economy, can companies afford not to tackle BW’s pernicious waste of time and effort?

For more information on services and work please visit us at Quanta Consulting Inc.


Microsoft: What’s in Store for their Company Store?

Microsoft, following other major brands like Apple, Nike and Ralph Lauren recently launched their first company store in Phoenix Arizona to showcase their latest Xbox, PCs and Zunes.  The Microsoft move is widely seen as a bit of catch-up with rival Apple, which at the end of 2008 operated some 247 retail stores around the world. Considering Microsoft’s product dominance, what took them so long to get into retail?

There are many good reasons for manufacturers to display its wares within their own retail environment. For example, a company can create the best merchandising and brand experience for their products and services. As well, companies can use retail space to build a footprint in underdeveloped markets or learn more about their consumers.  Despite these benefits and Apple’s trailblazing, Microsoft may have delayed retail expansion out of concern for triggering major channel conflicts with its retailers (or, cynically, to cope with an onslaught of walk-in users with buggy software). 

On the other hand, perhaps Microsoft uncovered what a Wharton School of Business and INSEAD study recently concluded.   Namely, that operating company stores in the same market as your retail channel does not saturate markets, create inefficiencies or promote channel conflict.  In fact, the opposite is the case:  the rising tide of a company store lifts all retail boats.

The researchers used a series of mathematical models to simulate and analyze the marketing and price-setting behaviors of independent and manufacturer-owned retailers.  The model showed that when company stores and independent retailers compete in the same market, manufacturers typically set relatively high prices for goods in their own stores. Higher price points creates room for independents to reduce discounting (versus when company stores aren’t present) thereby improving their margins. Additionally, the presence of company stores can induce independents to increase their marketing efforts resulting in greater support for the manufacturer’s brand and overall brand sales in the market.

Given these conclusions, do company stores end up putting the manufacturer brands at a disadvantage?  Not according to the research.  Independent retailers end up charging more for a given product when competing against a company store than they would if competing only against other independents. Having higher pricing is crucial for the manufacturer to preempt channel conflict and to support its premium brand positioning.  Furthermore, the research shows that independent retailers will undertake greater marketing effort when competing against a company store since they can benefit from significant “effort spillover” from the manufacturer’s store – the phenomenon of one retailer’s marketing and product education efforts helping to create a sale for another.

As for Microsoft, the question remains whether their stores will mirror the success of Apple or the failure of Gateway, a computer company that gave retail a try during the 1990s and closed its 188 retail shops in 2004.  A major reason for Gateway’s failure was its inability to create any in-store or brand sizzle for their discount PCs-in-the-box.  Microsoft’s first store is not lacking in “experiential” impact but many things can still go wrong.

Microsoft rarely undertakes an initiative without considerable research and investment.  Look for them to make an impressive retail debut, although achieving Apple or Nike standards may require a 2.0 launch.

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Risk is Not a Game: How do Banks Mismanage Risk?

How did global financial institutions mess up so badly in 2008? In three words, poor risk management.  Of course, financial institutions can suffer major losses even when their risk management is first-rate after all, these firms are in the business of assuming big risks to reap large rewards. And, risk management is hard to consistently get right in the best of times. Nonetheless, the potential for catastrophic losses – trading, legal and otherwise – within the firm and the financial sector require Banks to improve their risk management performance.   

To do this, it is crucial that these companies understand the flaws inherent in the current risk management model.  According to an excellent article in the Harvard Business Review, financial institutions mismanage their risk in 6 ways.  The article’s key conclusions are summarized below:

  1. Over-reliance on historical data – The rapid financial innovation of recent decades has made historical data less useful in predicting risk, particularly catastrophic meltdowns like in 2008. In essence, poor data can make sophisticated risk models ineffective when market conditions change quickly and with high volatility.
  2. Focusing on narrow measures of risk – Traditional daily measures of risk (e.g., Value at Risk calculations) can’t capture a company’s full exposure when market fundamentals are shifting quickly. Furthermore, VaR models are weak at identifying two other kinds of daily risk:  the risk of catastrophic losses that carry a small probability of occurring and; the daily portfolio risk when the firm is stuck with that portfolio for a much longer period than was anticipated.
  3. Misunderstanding knowable risks – Risk managers often fail to recognize and account for the magnitude and correlation of various risks (market, credit and operations) that is found within their purview.  For example, hedging (e.g., counter-party exposure), market-concentration and value-assumption risks are often underestimated or unaccounted for.
  4. Overlooking concealed risks – Risk managers often have their hands full dealing with reported risk.  However, concealed or hidden risk, whether through employee intent, management oversight or process breakdown, can generate massive losses like what was experienced by the French bank Société Générale in 2007.  These kinds of risks tend to expand in financial institutions where the culture, compensation plan and operating model do not align with risk management strategies. 
  5. Poor communication up to senior management – Complex and expensive risk-management systems can induce a false sense of security when their output is poorly communicated to top management and the Board.  Bad communication could involve a delay in getting key risk information to senior decision makers or it may be manifested in the massaging or misrepresentation of key risk information.    
  6. Inability to cope with rapid change – Given that markets are dynamic, the risk characteristics of securities may change too quickly to enable risk managers to properly assess and hedge the risk, especially within the context of minute-to-minute volatility.  Additionally, the introduction of mark-to-market accounting can also complicate the ability to manage and hedge risk.  Finally, many firms also underestimate the the likelihood and impact of political upheaval on their risk exposure.  For example, each of the emerging BRIC countries (Brazil, Russia, India and China) has had recent bouts of political and economic instability not to mention significant and ongoing disputes with neighbors.

As the above points indicated, conventional approaches to risk management are challenged to handle today’s sophisticated financials products and volatile markets not to mention working within traditional banking processes and structures. New risk management models and strategies will be needed to cope with these issues.

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Smarter Segmentation

A fundamental task of marketing is to perform segmentation analysis. When properly applied, segmentation guides companies in tailoring their product and service offerings to the groups most likely to purchase them at a price that generates sufficient profits.  Unfortunately, many companies incorrectly segment their markets around factors that are not strongly linked to consumer outcomes, profitability or strategic fit.  As a result, these firms do not maximize share and profitability and are vulnerable to competitive advances.

Most companies segment around a single dimension such as product performance & image, price point, usage or psychographics.  While these are relatively easy to comprehend and measure, they often miss the mark in terms of effectiveness and efficiency.    For example, segmenting by feature or functionality often leads to product improvements that are irrelevant to a consumer’s fundamental need and desired outcome.  This type of segmentation also tends to inflate the cost structure due to wasteful R&D and marketing expenses.  Segmenting by customer type also creates problems of its own.   When marketers design a product to address the needs of a typical customer in a demographically defined segment, they cannot know whether any specific individual will buy the product.  Marketers can only express a likelihood of purchase in probabilistic terms.

Psychographic segmentation is even more nebulous as a tool.  Psychographics may capture some truth about real people’s lifestyles, attitudes, self-image, and aspirations, but it is very weak at predicting what if any of these people is likely to purchase in any given product category.

A better approach to segmentation considers different and multiple factors in aggregating like customers and prospects.  Some of these dimensions include: 

The job to do – Focusing on what outcomes customers actually want will help define what the segment, product and usage boundaries should be.  To quote the famous Harvard Business School Professor, Theodore Levitt, “People don’t want to buy a quarter-inch drill. They want a quarter-inch hole!” Arm and Hammer baking soda is an excellent example of job-focused brand that has been extended much farther than traditional baking soda to new usages and markets (think laundry detergent, toothpaste and deodorant).

Link to corporate strategy – Segmentation decisions must be dynamic, reflecting major new strategic moves instead of focusing only on targeting customers in traditional markets. The segmentation analysis should examine the need/outcome states of adjacent markets as well as under serviced or dissatisfied users in traditional markets.  A good example of successfully linking multiple segments to strategy has been the evolution of Apple from a PC-only business to a wireless and consumer electronics powerhouse.

Adjacent revenue pools – To grow revenues, a company should understand what makes its best customers as profitable as they are and then seek new customer segments who share at least a couple of those characteristics. Many banks such as Wells Fargo and ING do an excellent job of ‘following the money’ into new and lucrative product segments.

Although segmentation can illuminate market potential, it lacks the predictive power of actual purchase behavior including usage, brand switching, and retail-format selection. To uncover this information, researchers can utilize laboratory-like simulations like conjoint analysis to measure how purchase behavior would change when you change product features, pricing or channel options.

To sustain profitable growth, marketers must use smarter segmentation strategies to link their products to how customers actually live their lives and how their company competes today and tomorrow.

For more information on our work and services please visit us at Quanta Consulting Inc.

Management Consulting is Dead…Long Live Management Consulting

Times are tough in the guru business.  Management consultancies are facing falling revenues, fading differentiation and more challenging service delivery.  True, the advice business is cyclical and we are witnessing the worst downturn since The Great Depression. However, though reliable data is difficult to source, anecdotal evidence suggests that the market is losing confidence in the traditional management consultancy model, and for good reason. 

Management consulting is now a mature industry.  Given a plethora of suppliers with ‘me-too’ offerings, Clients are demanding more value at lower cost.  Furthermore, companies want a clearer view of what consultants do and how their recommendations link to value and action. Finally, Clients continue to have nagging concerns that many consulting firms are much more motivated to sell services than to act in the Client’s best interest.  Many factors are driving the change in Client needs, including:

The “product” is maturing – The days of Clients blindly following the latest management fads are long gone.  Management consulting has entered the stage in the life cycle when it’s no longer a hot item that everyone wants to buy at historically inflated prices. 

Consulting inputs are plentiful – Consultancies are facing competitive blowback from laid off consultants who now compete with their former employers for business at a fraction of the fee.  As well, thanks to the Internet and globalization, Clients have access to a greater wealth of information about their customers, competitors etc. than what was available even 10 years ago.  

Clients are getting wiser – Savvy Clients are increasingly bidding out projects and demanding knowledge transfer to ensure they maximize value.  Many firms now realize they don’t need large consulting teams to get results quickly.  Often 1-2 consultants, supported by internal resources, is more than sufficient to address most business problems.  Finally, Clients are demanding actionable recommendations that are grounded in the reality of the organization and available capital & resources.

Clients are in-sourcing – Many Fortune 500 Clients, tired of expensive fees, have created internal consulting groups to deal with major strategic issues, change management initiatives etc. In many cases, the companies hire talent directly from the consultancies, who bring with them the same models, skill sets, and processes that were prevalent at their prior firms.

In many consultancies, service and operating models are being recalibrated to address Client demands.  For example, Quanta Consulting Inc. is enhancing value, accountability and transparency in a number of impactful ways, including:

  1. Assisting with project implementation – Clients are very concerned about consultants leaving them with projects the organization can’t integrate or assimilate. Helping the Client with implementation increases the consultant’s accountability, improves their understanding of key business issues and enables strategic or tactical course correction if required.
  2. Delivering projects through Clients not beside them – Leveraging and leading Client teams on project delivery (as opposed to bringing in a squad of external consultants) helps reduces consulting fees, promotes knowledge transfer and minimizes consultant-employee friction.
  3. Move to a stakeholder-based service model – Many consultancies focus and organize around delivering projects not cultivating relationships.  We see projects as part of a longer term “stakeholder” relationship, similar to an ‘Agency of Record” model.  With this type of relationship, the consultant becomes a trusted and embedded “coach,” supporting and counseling the organization on a regular basis, often at no charge.

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iGetit – iTunes and Pricing Digital Content

Are iTunes and other purveyors of digital content leaving revenue on the table with their pricing practices?  Many suspected this and now there is empirical research to provide evidence.

Before April 2009, every iTunes song was sold at a uniform $0.99 price.  (Only after April 2009 has iTunes switched to a tiered pricing system albeit a crude one). Yet, in virtually every other market, similar products are sold at different price points reflecting diverse product attributes & configurations, local market conditions and different competitive environments.   Why do online content retailers like iTunes offer uniform pricing when others practice price discrimination?  

Based on what I have witnessed in firms selling digital content, their pricing strategy was not rooted in deep customer analytics and demand elasticity studies. Rather, the rationale for uniform pricing centered on the need for simplicity and the desire to get a $0.99 price point.  Revenue modeling was performed in a quick n’ dirty fashion and was driven off of the yearly revenue objective, as opposed to what would be the projected bottom-up demand at various pricing levels.  While simplicity and speed are their own virtues, new research suggests that iTunes and other digital content retailers can maximize profits through different pricing schemes.

A new study from The Wharton School of Business studied how buyers and sellers of online music valued songs under different pricing schemes.  Studying over 23,000 different song valuations over the past 2 years allowed the researchers to measure total revenue based on different demand projections at various pricing levels.  The conclusions were very interesting. The seller’s revenue was maximized at a uniform pricing per song that ranged from $1.46 to $2.30, significantly higher than iTunes’ $0.99 per song.

The Wharton researchers went further and evaluated a variety of pricing strategies.  One scheme, which is currently being utilized by iTunes in a limited way, considered a song-specific model.  In this strategy, more popular or contemporary music would carry a higher unit price than older music.  The results indicated that this tactic would raise total revenues by only 3% versus a uniform price strategy.

The model that maximized revenue (and generated a 30% lift versus the best uniform price point) was where the online seller charged an entry fee for use of the service and then a modest fee per song.  The study determined the optimal entry fee to be $21.19 and the optimal price per song to be $0.37.  Some firms have figured this out.  Spotify, an iTunes rival, has developed a similar “all you can eat” model with its premium service.   Interestingly, the research also showed that bundling songs (similar to an album) with a higher package price – but at a per song discount to the $0.99 price point – produced almost identical revenues as the entry fee plus price per song model.

As any COO worth their salt will tell you, there is always extra cost (e.g., complexity, implementation) to deploying multiple pricing schemes as compared to a uniform pricing strategy.  However, as the Wharton study proves, it should be possible through comprehensive research and testing to determine the optimal pricing model and price points that maximizes revenue, safeguards customer goodwill and minimizes operational cost.

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Leveraging Your Core Competencies: Know Thyself…

…was inscribed at the temple of Apollo at Delphi.   The ancient Greeks could teach the modern corporation a thing or two about running an enterprise.  In the context of business strategy, knowing thyself is the process of understanding your firm’s core competencies so you can compete more effectively and reduce risk.  A Core Competency is a deep and unique proficiency that enables a company to perform better than competition and deliver unique customer value. Strong competencies are always embodied in an organization’s culture, collective skills and shared experiences;  they ultimately will deliver market leadership and industry-leading profitability. 

Global leaders like Cisco, P&G, Goldman Sachs, Toyota, Google and Walmart regularly examine and leverage well-honed core competencies that sustain their competitive advantage.  Examples of their strengths include:  uniquely managing a complex supply chain (Walmart, Toyota); regularly bringing winning innovations to market (P&G, Goldman Sachs) or; seamlessly integrating acquisitions & technologies into the core business (Cisco, Google).  These firms not only understand their strengths and weaknesses; they also relentlessly augment and leverage their competencies through investment, employee recruiting and knowledge sharing.

There is considerable strategic and organizational value to understanding your firm’s Core Competencies, including:

  • Developing competitive and differentiated market positions and strategies that capitalize on corporate strengths;
  • Unifying the company’s lines of business and functional groups through a common market position;
  • Improving the transfer of knowledge and skills across the company;
  • Deciding and aligning around priorities and resource allocation;
  • Supporting decision making around outsourcing, divestment and strategic partnering;
  • Creating new markets while quickly enter emerging markets;
  • Enhancing the brand image and building customer loyalty.

I have worked with a number of firms who were challenged to define in concrete terms their strengths and weaknesses.  To assist them, we utilized an analytical framework that gathered and synthesized the collective learning within the organization as well as external best practices.  Our methodology includes the following steps:

  • Identify the firm’s key abilities and redefine them in terms of easily-understood, organization-wide strengths;
  • Benchmark the firm with other companies with the same skills to ensure that it is developing unique capabilities while acknowledging strategic gaps;
  • Uncover what capabilities its customers truly value, and invest accordingly to develop and sustain valued strengths;
  • Create a strategic road map that sets goals for competence building;
  • Encourage communication and involvement in core capability development across the organization;
  • Preserve core strengths even as management expands and redefines the business;
  • Outsource or divest noncore capabilities to free up scare resources that can be used to deepen core capabilities.

Understanding your company’s strengths and weaknesses is often easier said than done.  Many firms lack sufficient data to analyze their business.  There is often a reluctance or inability to share information between functional groups and divisions. And, some companies display institutional biases towards certain activities or plans.  In other cases, many organizations are unable to strategically focus or to adopt the steps necessary to transform their business. 

Recognizing what you do better than your competition may be the most important factor in consistently generating growth, maximizing financial returns and minimizing business risk.

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