Archive for December, 2009|Monthly archive page

Acquisition Lessons from the 2009 GM & Ford Fire Sale

The Big 3 automotive unbundling is underway. In short order, GM will be shedding its Saab & Hummer niche brands while Ford will sell off its premium Jaguar and Volvo divisions.  These divestitures bring full circle a failed acquisition strategy that begun over a decade ago with great promise, fanfare and investment.  What can executives considering acquisition opportunities learn from this tale?

Realizing post-acquisition synergies is the sine non qua of acquiring new brands

In hindsight, cash-flush GM and Ford overpaid for their marquee brands and then failed to leverage their scale economies and expertise. Often, there are good strategic reasons to acquire niche brands.  However, making the investment pay out is dependant on the tricky business of getting certain things right such as operational integration, portfolio marketing and technology sharing.  After 10+ years of trying, GM and Ford never did exploit potential synergies across the company – if they were there in the first place – or improve each brand’s competitiveness and profitability.

Understand what needs fixing and leave the rest alone

GM and Ford did not seem to understand what they were buying or the importance of “strategic fit.”  They offered the niche brands a lot of what they really didn’t need at the time (e.g., distribution, strategic procurement) and little in terms of what they did need to accelerate their business (new technology, manufacturing etc.).  Complicating  integration and product planning was the challenge of getting high volume Middle America manufacturers to understand the culture and the nature of lower volume, craft-oriented European producers.

Reinforcing and leveraging unique brand positioning is critical

GM never did figure out what the Saab stood for other than being different and quirky. For example, when GM attempted to expand the Saab franchise by putting its nameplate on a Subaru – known  as “badge engineering” in industry parlance – consumers saw right through the gimmick and shunned the product.  Jaguar, plagued by quality issues, never regained its historical brand strength, falling further behind Mercedes and Lexus. Despite recently building some stylish cars, Volvo was unable to expand beyond its core safety positioning.  Meanwhile, others like BMW and Mercedes successfully encroached upon it. 

Build and design where you sell

Mercedes, BMW and Lexus build cars in North America, the largest premium car market in the World, in order to minimize the impact of currency fluctuations, improve delivery and design cars to suit local tastes. Strangely, Jaguar, Volvo or Saab never shifted significant operations to the US. When the US dollar weakened versus European currencies, GM and Ford ended up losing money on every car it sold in North America.  Furthermore, Saab, Volvo and Jaguar’s design and build quality never approached the appeal of equivalent North American models sold by German and Japanese producers.

Be wary of smaller but focused foes

This old adage has been said many times but is worth repeating.  Diversified producers like Ford and GM, challenged by competing portfolio demands, will often have difficulty competing against focused smaller players like BMW who can devote resources and management time to a few product areas.  Furthermore, neither GM nor Ford was able to fully leverage their considerable resources or expertise to improve the competitiveness of their acquired brands.

Hindsight is always 20/20 and it’s easy to be an armchair quarterback today.  Ford and GM’s acquisitions were not destined to fail.  However, the likelihood of a successful acquisition can be improved through better acquisition integration as well as less strategic hubris.

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

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7 Simple Rules for Using Sustainability to Drive Innovation

Many executives face a strategic dilemma.  On one hand, regulatory requirements and public sentiment are pushing them to direct scare resources to environmental initiatives that are not seen as enhancing competiveness.  At the same time, executives know that they need to germinate innovation in order to drive product differentiation and sustain margins in highly competitive, global markets. 

Can organizations reconcile these two seemingly incompatible business objectives?  Yes.  What is needed is a new strategic paradigm that sees sustainability and innovation as mutually reinforcing.  In essence, formal and voluntary sustainability requirements (e.g., reduce, reuse and recycle) can provide a major impetus to product and process innovation.  For example, firms can drive cost savings through reduced raw material usage or greater energy conservation.  Furthermore, higher revenues could be generated through higher margin enviro-friendly products or developing new business models. 

Even if executives don’t see the compatibility between innovation and sustainability, they will have to learn to deal with the trade-offs in terms of focus and capital allocation.  Based on my consulting experience and a good article from the Harvard Business Review,  I have developed a series of first principles for using sustainability to stimulate major leaps in innovation:

1.     View compliance as a business opportunity

When it comes to environmental policy, regulations eventually migrate to the toughest standard.  Companies can choose to ignore or delay their response but eventually they will have to be compliant.  An early and corporate-wide embrace of compliance based on a single and forward-looking norm can bring many savings including economies of scale, optimized operations and improved corporate image.

2.     Search and reapply the lessons of others

Despite the relative newness of environmental regulations, companies can still leverage considerable learnings from other firms.  However, companies should modify these best practices to suit their business model, competitive environment and culture. 

3.     Inculcate sustainability throughout the organization

Senior management support is important but insufficient in itself to catalyzing innovation.  In addition to being aligned, the employees need to be empowered to use innovation to drive sustainability and business results.    Furthermore, firms need to weave sustainability metrics into their planning and performance measurement systems to ensure the change sticks.

4.     Implement ‘quick wins’ that have a positive business case

Quick wins are critical to proving a business case, generating learning and securing alignment. Smart companies start with small pilots, course correct as they learn, and scale rapidly.

5.     Design sustainability into your offering

Although it is a laborious and expensive process, designing sustainability into the product is often the best way to reap business and environmental benefits.  As well, careful attention should be paid to the entire customer experience.  There are often considerable opportunities to reduce cost, minimizes waste and message your environmental credentials in areas such as service, support and distribution.

 6.     Leverage your partners

Leveraging your supply chain and channel partners through collaborative problem-solving and planning is a critical strategy to maximizing the scale of innovation and improving performance. Part of this involves setting bold yet achievable sustainability targets with your partners.  This will help secure their attention and commitment while triggering their own innovation activities.

7.     Explore new business & operating models

Environmental regulations can be highly disruptive to a market leading to a reordering of customer needs, a change in the industry cost structure or the introduction of new technologies.  To leapfrog competition and reduce business risk, companies should consider adjusting their go-to-market strategies to reflect the new realities as well as to exploit market openings.

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

Consumer Electronics Establishes a Military Beachead

Many of the Military’s most impressive technological advancements – notably the Internet, Microwave technology and GPS navigation – have found widespread consumer application.  However, the product and technology tide is beginning to flow the other way, from the consumer to the military market.  According to the December 12, 2009 edition of The Economist, consumer electronics and video-gaming manufacturers are capitalizing on favorable pricing and technology trends to make small but important inroads into the Defense market.   The business potential for the consumer electronics industry is compelling.  Global defense spending of $1.5 trillion per year dwarfs the global consumer electronics market of around $700 billion.

A number of popular consumer electronics products have found widespread military use, including:

  • The United States Air Force recently order 2,200 Sony PlayStation 3 (PS3) video-game consoles to build a supercomputer cluster to run R&D applications.
  •  American personnel in Iraq and Afghanistan are using Apple’s iPod and iPhones as translation devices and to view intelligence information.
  • In Iraq, soldiers are using Xbox 360 video-game controllers to operate small robotic vehicles and drones used for battlefield reconnaissance.

There are many reasons why Defense departments would be interested in consumer electronics.  Firstly, the price of most high performance consumer products such as graphics cards and processing chips is a fraction of its military-spec equivalent.  Secondly, a dynamic, volume-based global consumer electronics industry regularly delivers technical performance, inter-operability and miniaturization as good if not better than what is available through dedicated defense contractors.  Thirdly, unlike military products, consumer electronics typically coalesce around common hardware and software standards enabling products and components to be used in novel, yet compatible, ways. Finally, procuring commercial off-the-shelf products is often faster and easier than military products.

Given specific requirements and unique conditions, it will never be feasible to replace most military equipment with civilian electronic products.  However, replacing  a modest 5% of military purchases with civilian products could increase total consumer electronics sales by over $75 billion. Many Defense Departments seem amenable to exploring further purchases.  For example, a consortium of British defense contractors, commercial aerospace companies plus Williams (the Formula 1 racing team) has set up a not-for-profit laboratory to study how commercial technology could be used to improve the cost and effectiveness of military R&D work.

What are some key success factors for consumer electronics firms looking to penetrate the military market?

Know your Customer – Obviously, military needs and usage are very different.  The PS3s purchased by the USAF are not something a 12 year old could ever purchase in a Best Buy.  These special units run Linux, a free open-source operating system, and will be networked using Gigabit Ethernet, a commonly used office networking technology.

Treat Defense as a unique channel – Selling to the Military is notably different from selling to consumers & retailers.  For one thing, there is usually an extensive bidding and due diligence process.  As well, securing military business usually requires a persistent, direct-sales approach that often leverages ex-Military personnel as sales reps.

Be patient – Even though military designer and procurement agencies are warming up to commercial products and components, they still move much slower (but occasionally much faster) than their civilian counterparts.

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

Finding the First Mouth in Word-of-Mouth Marketing

Word-of-mouth marketing such as viral or buzz initiatives are in vogue these days thanks to the popularity of social media networks and the ubiquity of wireless device.  Word-of-mouth techniques are about getting customers and key influencers to spread the word about a new product through their social or professional networks. This type of marketing has generated significant interest within industries that leverage the power of customer referrals such consumer goods, hospitality and software services as well as more recent applications in the pharmaceuticals, gaming and movie businesses.

There is one problem: marketers often don’t know what works, what doesn’t work and how can you define a ROI.  Trial and error has been the standard approach but a new study is providing hard evidence to aid in program design. New research from the Wharton School of Business explored the effectiveness of typical word-of-mouth advertising for new drug prescriptions in some key markets  Researchers tracked how prescriptions of a new drug spread from one physician to another, depending on who talked to whom and referred patients to whom.  The researchers mapped the connections to understand social/professional relationships and referral patterns as well as  identifying and measuring the role of key influencers or “seeders.”

The study’s key conclusion was that typical word-of-mouth targeting against self-selected key influencers or those who had the most connections may not be as effective as previously thought.  Instead, program success or failure is often dependent on finding the best “seeders” who typically fly below the radar.  These people are well-connected and respected evangelizers existing at the hub of social networks, who will embrace a product and promote it widely among the people they know.  

As evidence, the researchers found that the entire network actually divided into two sub-networks split by ethnicity.  One physician, number 184, who was way down the Key Opinion Leader (KOL) list in terms of number of connections and public prestige, ended up being the key connector linking both networks.  Without the connecting power and informal status of physician 184, a pharma marketer would have not have been able to drive the maximum effectiveness and efficiency of a word-of-mouth marketing program in the total market. 

Other study findings should influence strategy and program design:

  1. Product word-of-mouth effects can and do happen over social networks.
  2. Target networks and seeders come in many sizes and shapes based on a variety of socio-economic and psycho-graphic criteria.  One important factor in identifying the best “seeders” is how their peers perceive them, as opposed to how people self report their status (a common way of identifying KOLs).
  3. Of specific interest to pharma marketers, the most influential person may not be the most visible KOL but rather one that carries significant yet informal prestige and connectedness among their peers.
  4. Word-of-mouth effects can impact opinion leaders as well as followers, in contrast to what is often believed (that only followers are affected by social influence).

Clearly more research is needed that links word-of-mouth flows to actual marketing programs and ultimately to measurable purchase behaviours.  However, this Wharton research is a start and should provide some evidence-based principles to improve viral or buzz marketing planning and design.

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

Will Anyone Pay for the News Online?

Not too many will, according to a recent UK study published by Oliver & Ohlbaum, a media consultancy.  O & O surveyed British newspaper readers and subscribers about where and how they accessed their news on the Internet. Not surprisingly, Britons are similar to their North American cousins.  They are promiscuous content grazers who do not want to pay for online versions of newspapers they willingly purchase offline.  And why should they?  Readers have enjoyed free and unfettered access to the vast majority of newspaper content for well over a decade. 

However, other findings in the study are more interesting and will challenge the conventional wisdom of most newspaper pundits:

Conventional Wisdom:  People will buy their favourite newspaper and visit its website for the same content plus value-added offering such as videos and blogs 

Finding: People buy one newspaper but usually frequent other newspaper’s online properties.  For example, fans of the Daily Telegraph, Britain’s most popular daily paper, got just 8% of their online news at its web site.  Instead, these readers spent twice as much time at other newspaper web sites.

Finding:  People not only ignore their favourite daily’s web site but they tend to move down market and to other media channels.  For example, Daily Telegraph readers preferred to read online tabloids like the Sun and the Daily Mirror over their own or other similar quality online newspapers.  Conversely, Sun and Daily Mirror readers tended to visit higher quality newspaper web sites more often than their favourite tabloid web sites.  Interestingly, more than twice as many Daily Telegraph readers frequented a non-newspaper online news site, the BBC, than visited the Daily Telegraph web site.

Conventional Wisdom:  Online news aggregators like Google News, Yahoo!News and the Drudge Report are attracting newspaper readers directly away from newspaper web sites.

Finding:  Most people continue to visit directly their preferred newspaper web site versus going through an aggregator.  It appears that most readers do not understand or value enough the convenience of an aggregator and prefer to search for news themselves.

Conventional Wisdom:  Coordinated attempts by newspapers to charge for their content may be their best hope to finally create a profitable online subscription or content access model.

Finding:  People will strongly resist paying even if all newspapers begin charging for online content.  For example, when Guardian readers were asked to pay £2 per month to read their favourite newspaper online, only 26% said yes.  However, when the same people were asked the same question under a scenario where all equivalent newspapers charged for content, only 16% expressed a willingness to pay for their Guardian.  On the surface, this is a surprising result given that one would have expected the proportion willing to pay for their preferred paper to rise in a level-playing field.  Apparently, readers have gotten so used to getting their news for free “when needed, as needed” that they will strongly resist attempts by one or all newspapers to change the industry access paradigm.

North American newspaper executives should hesitate before jumping to conclusions from this study.   North American readers are not the same as UK ones, industry dynamics vary by market and the questions and scenarios were hypothetical. However, these findings do challenge the existing industry orthodoxy and should be considered.  However, newspaper owners should tread carefully with major access changes and think creatively about how they can modify a reader’s ingrained behaviours.

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

Back to the Future – The Revival of Vertical Integration

Is vertical integration as a business strategy back in vogue?  Perhaps if you see some recent corporate moves as the beginning of a trend. A number of bellwether firms have reversed outsourcing mandates and begun to  take key operations in house.  Two recent examples are Oracle’s purchase of hardware vendor Sun Microsystems  and PepSico’s acquisition of two of its bottling operations. PepSico and Oracle join other industry leaders such as ExxonMobil, Apple, Reliance Industries, American Apparel and Google who leverage vertical integration to drive competitive advantage. 

Obviously, a small number of corporate decisions do not portend a global trend.  And, there are still many firms that will continue to focus on core competencies and outsource non-core activities.  Yet, there are sound reasons to reconsider vertical integration as a core business strategy, especially when the firm has strong cash flows and ready access to capital.  Some of these reasons include:

Drive cost reduction

A difficult climate is forcing companies to challenge conventional wisdom around outsourcing and creatively think about how to cut costs and reduce complexity.  In many cases, outsourcing has not delivered target cost objectives and has too often led to significantly higher  indirect costs in areas like relationship management and travel.  Properly executed, vertical integration enables firms to deliver significant cost reduction by achieving higher scale economies and recapturing economic rent (i.e. the outsourcer’s profit).  Where some operations are outsourced as well as provided internally, vertical integration helps ensure suppliers deliver services at the lowest possible cost and highest quality. 

Improve supply chain responsiveness

Working with outsourcing partners has many benefits but high speed, flexibility and control do not rank near the top.  Redesigning outsourced operations, particularly fragmented and global ones, is nigh impossible in the short to medium term, especially under conditions of rapidly changing client tastes and fluctuating demand. Furthermore, once long term, fixed cost outsourcing deals are signed, the outsourcer often has little inclination or incentive to pass along efficiency improvements or innovation to their client.  

Enhance the customer experience

Improving your customer experience is one of the few areas that firms can generate sustainable differentiation.  To build a winning experience, companies need a high degree of control over their delivery model including a common vision, stable operating processes plus feedback mechanisms. Unfortunately, this is very tough to achieve when disparate firms are involved in the value chain.  As well, troubleshooting is often a challenge due to outsourcer process complexity and hidden employee turnover.

Reduce business risk

In dynamic markets, there usually is no problem in securing access to raw materials and specialized labour.  However, when economic or political turmoil occurs or markets become less competitive, companies run the risk of losing access to key inputs or operations.  Vertical integration can reduce business risk by ensuring these critical ingredients are available to the organization as needed.

It remains to be seen whether the actions of a few firms reverses 30 years of corporate orthodoxy around outsourcing’s superiority.  However, a number of trends may be creating a ripe environment for vertical integration including ever-shortening product lead times, continued economic turmoil and insecurity around access to specialized materials or skills. Should current economic conditions continue, we will likely witness  more firms seeking to control their value chain through vertical integration.

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

Rebuilding Corporate Reputations in Financial Services

The corporate reputations of Banks, Securities Firms and Insurance companies have taken a pounding over the past 18 months due to real and perceived recklessness, greed and incompetence. If we are to have functioning capital markets and long term growth, the credibility and stature of the industry will need to be restored quickly.

Unfortunately, the phenomena of ‘industry effects’ – the actions of one firm tarnishes an entire industry – is unlikely to improve the sector’s image in the short term unless all financial institutions begin to take tangible steps to restore their reputations in the eyes of key constituencies.  Without action, companies will have difficulties rebuilding shareholder value and coping with intrusive legislative meddling, increased regulation and consumer antipathy.  Additionally, an industry seen as lacking in ethics and credibility will be less able to input on critical public policy and regulatory issues like protectionism, banking reform and national security. What can FS leaders do to rebuild confidence?

Own the Problem

Given the recent pay controversies at Goldman Sachs, AIG and elsewhere, one can’t help but think that many leaders see current reputational problems as transitory in nature.   More worryingly, some executives may still be wedded to pre-meltdown thinking or could be suffering from some form of cognitive dissonance.  Fundamentally, FS executives must acknowledge and accept that today’s reputational challenges are more problematic than anything experienced since the Great Depression.

Manage Reputations Strategically

Given the financial and brand risks, reputational issues must become part of the Board’s mandate and purview.  Previously, these issues were left to marketers and PR agencies who often responded in a short term, ad hoc, and defensive manner.  Furthermore, reputational impact should be taken into consideration for all major initiatives.

Recognize the Dynamic Environment

Today, financial institutions must function in a highly charged, fast moving and almost predatory environment populated by hundreds of Web-based “citizen journalists,”  a global and participatory media, thousands of powerful non-governmental organizations and social media networks that connect hundreds of millions of people.   Together, these actors are using publicly available information to rapidly scrutinize a large number of companies (and their leaders), rendering traditional image-building PR tools and advertising less effective in addressing image issues.  Furthermore, the rapid dispersion of bad news to the mainstream can catalyze hitherto unengaged people into action, potentially providing the impetus for regulatory or legislative change. 

Know Your Stakeholders

Leaders need to better identify and understand the needs of each stakeholder, both direct ones like consumers & regulators and indirect ones like NGOs & bloggers.  Part of this research effort should involve understanding consumers and activists from a social/attitudinal perspective.  Furthermore, companies could improve their stakeholder understanding and influence by going beyond traditional PR approaches to mechanisms and forums that promote ongoing engagement.

Be Proactive with Your Message

In rebuilding their reputations, firms should heed the old adage that bad news drives out the good.  Therefore, companies need to proactively engage stakeholders in an integrated, yet customized, fashion.  For example, the CEO should lead the way, both publicly and privately, as a plain-speaking statesman for their enterprise.  Senior leadership should not shy away from debating the issues or communicating their internal policies on a variety of hot-button issues including executive compensation, risk management and their code of ethics.  Addressing stakeholder concerns up front through dialogue (as opposed to a monologue) will help reduce mutual hostility and foster trust.   

Now more than ever, it will be clarity, truth and engagement—not spin—that rebuilds and maintains strong reputations in FS.

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