Archive for May, 2010|Monthly archive page

Achieving Strategic Success by Studying Failure

Conventional management thinking holds that companies can be successful if they can adopt the same best practice strategies that have made other companies successful. Perhaps, but reality is less certain.   An old adage illustrates the point. Imagine you are in the Antarctic watching a group of 5 hungry penguins peer down from an ice flow at a school of fish.  They want to jump in but are hesitant because penguin-eating walruses are lurking about.  The first penguin decides to throw caution to the wind and jumps.  Seeing the first penguin merrily eating fish with no walrus in sight, the second and third penguins jump in and begin their feast.  After seeing their three friends gorging, the last two penguins find their willpower exhausted and plunge in.  However, two problems await them.  Firstly, there are a lot less fish around thanks to the gluttony of the first three penguins.  Secondly, a ravenous walrus has witnessed the scene and is headed straight for them. 

Mirroring the strategies of others becomes problematic when sameness leads to industry-wide price declines, undifferentiated products, and rising input costs.  For example, how many companies can compete in a given market on a low price or premium market position?  Furthermore, aping other firm’s strategies often serves as an excuse not to improve your own core competencies or undertake sufficient analysis in the first place. 

Based on our firm’s experience with a number of packaged goods, IT and banking clients, combining failure analysis with best practice research is a proven way of approaching strategy development and project implementation, especially for risky initiatives like price changes, product launches and new market entry.

If blindly following others is not always ideal, how can companies leverage failure analysis to improve strategic and implementation decision-making?  Below are some of our guiding principles:

 Avoid the blame game

A proper assessment will only occur when individuals, departments and business units feel they can speak frankly without punishment and have the time to carry out a proper, retrospective analysis.  This state can only occur when senior leadership (as well as the performance measurement systems) establishes a climate or trust, fairness and transparency.

Know thyself

Savvy firms recognize latent managerial and institutional biases and seek to mitigate their effects by using independent consultants to run the analytical process as well as leveraging specialized tools such as anonymous feedback.

Fully debrief all failures

All key internal stakeholders need to support and undertake a 360º analysis that looks internally as well as seeking feedback from customers and suppliers.  Unless your firm is always a first mover, you could learn a lot from the failures of key competitors as well as other companies who have undertaken similar strategies.

Appearance vs Reality

Failure analysis is a simple idea yet many organizations find it hard to do.  Why?  Individuals don’t always know (or acknowledge) the root causes of a failure as opposed to the identification of symptoms or popular scapegoats.  Not surprisingly, data on failures tends to disappear as unsuccessful companies  either go out of business or change their approach.  Furthermore, getting alpha managers to accept, understand and discuss their failures is not something they line up to do. Finally, many enterprises see little upside from failure analysis when they can do little to reverse the negative outcome. 

Studying successes without also looking at failures will create a misleading, if not entirely wrong,  picture of what it takes to succeed, to the detriment of the organization and the careers of senior leaders.

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

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In Web Retailing, Pay Attention to Where Your Consumers Reside

Conventional wisdom suggests that the power of the Internet enables online retailers to dispense with traditional purchase dynamics when pursuing borderless commerce.   However, two recent studies published by The Wharton School of Business challenge this view suggesting that old economy factors continue to play a vital role in driving online retailing.  The papers looked at the effect of location and physical factors (e.g., consumer proximity, product availability etc.) on Web retailers seeking to reach potential buyers who reside in an area where their purchasing needs and decisions make them a minority.

The first paper, “Traditional and IS-enabled Customer Acquisition for an Internet Retailer: Why New Buyer Acquisition Varies by Geography and by Method”  compares the effectiveness of traditional marketing tools for reaching customers (e.g.,  advertising, referrals) with Internet-specific tactics such as key word search and social media.  The researchers used zip code-level sales data from a large Internet retailer to study how the proximity of customers to one another, retail coverage and convenience affected the performance of each customer acquisition program.

Surprisingly, the results indicated that offline word-of-mouth effects had an especially significant impact on Internet customers, while online word-of-mouth is, on average, less effective.  The key difference was that it was more powerful to communicate trust (critical for word of mouth effects, brand building) through offline means than through an online environment.  Put another way, shoppers living in different cities with different physical store environments etc are less likely to build trust online and therefore leverage influences like referrals.  Since Web retailing offers considerable marketing flexibility, this suggests that marketers ought to consider different acquisition strategies that are customized for local market conditions (i.e. by zip code versus region), customer needs & physical proximity.   The paper goes on to add “…traditional marketing efforts are still important to firms in the new economy and provide some evidence that geo-targeting will be vital to the success of Internet retailers, especially those with limited resources.”

The second paper “Preference Minorities and the Internet: Why Online Demand Is Greater in Areas where Target Consumers Are in the Minority,” also studied Internet retailing but in the context of the physical world.  The researchers investigated the optimal strategy to acquire customers whose shopping needs might be different (i.e. preference minorities) than the majority of the people in a given geographic area. For example, young parents living in a zip code populated mostly by elderly people would find fewer offerings in local stores because the retailers need to devote the bulk of their shelf space and inventory to meeting the demands of the majority of their customers (i.e. the elderly).

The results show that the best way to target preference minority customers in specific geographic areas is through online-based strategy.   This makes intuitive sense as traditional local retailers will more likely cater to the preference majority customer needs and demand through shelf space, inventory, service etc. The study also found that online sales of “niche” brands respond more strongly to the presence of preference minorities than local online sales of “popular” brands do. This is because in geographies where it’s already relatively difficult to find a good offline assortment of popular brands, it will be even more difficult to find a good assortment of niche brands.

In general, where your target market is the preference majority in a given area, a judicious mix of on and offline retail strategies is the best approach.  However, where your target market is the preference minority, web-only retailing is likely the right strategy. 

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

Maximizing the Potential of Outsourcing Engineering Work

Few companies today would hesitate to outsource routine operations like IT services and call centers, but farming out engineering and product development is another story.  And for good reason.  Many companies have failed to achieve the same results outsourcing core engineering and product work as they have with back office operations.  In other cases, firms are reluctant to lose direct and visible control over mission-critical activities versus non-core operations.

Engineering and product development are expensive activities, making up between 3% and 10% of revenues depending on the sector.  There are compelling reasons to outsource this kind of work to centers like Bangalore, Shanghai and Budapest.  For one thing, potential cost savings are significant considering that offshore engineers earn a fraction of their North American or European counterparts. Secondly, most foreign engineers (particularly in IT) are trained in the latest tools and methodologies as opposed to many North American engineers who have only been exposed to older techniques.  Thirdly, for firms operating under strict time constraints the ability to conduct round-the-clock development over different geographies is very appealing. 

Outsourcing engineering has been difficult for many firms. For one thing, this kind of work is complex, expensive and risky, challenging even under the best of circumstances.  Secondly, these undertakings require a high level of internal collaboration as well as regular interactions with customers and suppliers. This level of engagement is not always feasible when key activities are offshore.   Engineering work also relies on all parties possessing a sophisticated grasp of the English language, something that is not always easy to find outside of English-speaking countries.  Finally, ensuring good project management and governance is always difficult but even more so when your team is 10 time zones away.

Given the potential benefits, it is likely more firms will dip their toe into outsourcing sooner rather than later.  According to Booz & Co., engineering outsourcing is currently a $30B market but it is expected to grow to $150B a year by 2020. To improve a company’s chances of achieving outsourcing success, Booz has come up with five key success drivers:

1. Choose the Right Project

Initially, choose projects with the best risk/reward profile, where lessons can be leveraged into future projects and where a business case can be defined. 

2. Identify the Appropriate Business Model

Unlike a typical vendor-run or captive arrangement, firms should consider other forms of outsourcing business models that ensure sufficient control, IP protection and shared risk & rewards.  Examples include Joint Ventures and Build-Operate-Transfer arrangements.  

3. Team Up with the Right Vendors

Firms must thoroughly identify, analyze and vet only qualified vendors using criteria that go beyond price and reputation.  These other factors could include engineering talent audits, capabilities assessment and employee attrition analysis. 

4. Create Iron-Clad Performance Metrics

Given the important of the work, both parties must jointly choose and track key performance metrics through comprehensive and well articulated Service Level Agreements (SLAs).  Outsourcers must be able to identify SLA variances quickly and enforce corrective actions as needed.

5. Establish a Strong Governance Structure

A strong and aligned governance structure encompassing both parties and based on clear reporting lines & roles is the most important success driver in any outsourcing relationship.  Projects require senior,  head-office accountability and ownership as well as empowered vendor leadership who have the authority to solve problems quickly and effectively.  

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

Slimming and Greening Your Supply Chain with Product Lifecycle Analysis

Many executives believe they are caught between a rock and a hard place when it comes to reducing supply chain costs at the same time of enhancing green business practices.  Can firms reconcile these two important objectives, which on the surface appear mutually exclusive?  Yes they can if their companies implement Product Lifecycle Analysis (PLA) programs on their supply chains.  A PLA is the process of understanding a product’s environmental impact from raw materials to disposal, and then redesigning each product to minimize its bearing both on their supply chain and environmental footprint.

Although PLA has no standardized methodology, many companies have successfully used this instrument to achieve significant cost reduction, improve sustainability results as well catalyze preparations for pending environmental regulations (e.g., cap and trade policies). The Initiative for Global Environmental Leadership in conjunction with Knowledge@Wharton recently published a paper, Green Evolution:  Managing the Risks, Reaping the Benefits in which it summarized PLA and outlined some best practice firms.  While some companies like Walmart have well-publicized PLA programs with ambitious goals, two enterprises, furniture maker Herman Miller and document manager Xerox, deserve special mention.

Herman Miller

Building an efficient, sustainability-driven supply chain is old school at this high-end manufacturer of office furniture.  According to its 2009 environmental report, HM has reduced hazardous waste by 95% and landfill waste by 88% since establishing ambitious goals back in 1994. Its customers obviously approve. More than half it’s annual sales come from products using “design for the environment” principles.  PLA thinking has also helped the company save nearly $4.6M by moving into newly designed LEED Gold-certified buildings.

Xerox

In addition to implementing its own sustainability efforts, Xerox’s is helping its customers green their supply chains and generate significant cost savings. For Dow Chemical, Xerox undertook a paper and printing analysis on their 16,000 printers.  A collaborative process helped decrease the printer install base by over 65% to 5,500 units.  This reduction saved an estimated $20M-$30M in printing costs and dramatically cut Dow’s environmental footprint.  Xerox is also using a proprietary Sustainability Calculator to help customers green their supply chains.  When applied to a single sector of defense giant Northrop Grumman’s operations, the Calculator helped trim NG’s energy costs (-27%), climate emissions (-26%) and solid waste (-33%).

Getting Started

Every PLA exercise applies 3 fundamental steps to each product as it makes its supply chain journey from raw inputs to disposal:

  1. Lifecycle inventory — an audit of energy and raw material usage, air emissions, water pollution and solid waste generated;
  2. Lifecycle impact assessment — an analysis of the likely environmental and human health effects of the inventory; and
  3. Lifecycle improvement analysis — recommendations on opportunities to reduce or eliminate the environmental footprint across the product or service’s lifecycle.

PLA is not always a simple exercise.  There are no standardized protocols for undertaking this kind of analysis.  Additionally, the PLA process can be challenged by the heavy lifting needed to collect and synthesize reams of data, particularly where the product has a large and complex supply chain like those found in retail, automotive and IT sectors.  Not every supplier will be cooperative nor will the data always be accurate or current.  Finally, companies run the risk of a consumer and interest group backlash if they implement well-publicized but superficial and intellectually dishonest PLA initiatives.  

Notwithstanding the execution challenges, PLA is a valuable exercise for every firm in any sector both from an efficiency, profitability, brand image and sustainability perspective.

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

Financial Services: Using Lean to Fatten Up Profits

Due to the recession, changing consumer demographics and a growing regulatory burden, the Financial Services (FS) industry will need help reaching historical profit levels over the next couple of years.  New strategies are needed that can reduce cost, streamline processes and increase agility.  Lean-based programs have the potential to do this given their success in manufacturing and early traction in some FS firms.  Lean is a set of practices and tools that seek to eliminate seven causes of inefficiency in a process:  overproduction, waiting, poor transportation/logistics, over-processing, sub-optimal inventory control, rework, and unneeded movement. Lean practitioners are trained to identify and remove these wasteful practices through redesigning processes. At the same time, Lean is not just about cost reduction.  Another key principle focuses on abolishing all redundant activities which are not customer-relevant or part of value delivery.

Lean programs are ideal for process-oriented industries such as FS, manufacturing and health care.  These sectors typically have complex processes, a myriad of products & services and high error rates that result in higher than necessary costs, risks and service times. Yet, lower costs and fewer errors are just the beginning of Lean’s benefits.  According to The Wharton School, Banks that have implemented Lean programs have witnessed a 15% to 25% improvement in efficiency.  Cycle time improvement can be even more dramatic, with 30% to 60% gains possible.  Finally, Lean delivers a variety of intangible benefits including reduced operational risk, improved decision making and higher customer satisfaction.

Given this potential, why hasn’t Lean made more inroads in FS?  For one thing, many executives misdiagnose their operational challenges, and as a result, do not see the applicability of Lean to their process-intensive companies.  In actuality, Lean for manufacturing and Lean for finance are not all that different.  According to Deepak Goyal, a partner at the consultancy BCG, “Finance is just a different kind of factory. It is a processing factory, and there’s a lot of waste. The basic philosophy doesn’t really change.”

How do you overcome inertia around deploying Lean in FS?

Develop a convincing business case

The potential value of Lean in FS is such that a well-defined business case can create a “burning platform” to overcoming internal inertia.  However, managers will need to quantify the benefits and develop a compelling strategic narrative and a pragmatic roll out plan.  Although gathering operational data, process flows and customer behavior may entail considerable work, much of the information is usually accessible within the firm albeit spread out among different departments and locations.  Moreover, there are enough Lean case studies to help demonstrate financial value and illustrate best practices.

Change mind sets

Lean isn’t simply about cost cutting but about changing the way firms operate.  To accomplish this, companies need a dual approach that stresses long-term leadership and change management.  Recognizing that old habits are hard to break, leaders should embrace ambitious goals, bottom-up collaboration and executional fortitude to fully realize Lean’s potential.  Furthermore, companies should employ proven change management tools that are designed to overcome hidden psychological and cultural barriers to change.

Creatively tackle processes

Advances in IT automation combined with manufacturing-based Lean best practices can supercharge FS efforts to dramatically redesign systems and processes that radically cut waste and process time. For example, designing retail banking operations back from each customer interaction point (as opposed to from the distribution of the product or service) has the potential to improve delivered value, customer satisfaction and reduce cost.  Most often, the best way to develop internal Lean competencies and company-wide alignment is to identify and execute a Lean pilot project based on an existing low risk/high cost process.

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

Luxury Goods: Where is the Runway Headed?

Few industries face more uncertainty over the next couple of years than the $225B luxury goods business.  This recession has pummeled luxury sectors – designer apparel, exotic cars, watches & jewelry etc – with some brands recording 30% revenue declines. Increasingly, consumers have become more fickle and demanding as they have become more globally fragmented.   With many pundits forecasting a slow and uneven economic recovery, and in some cases a permanent retreat in consumer demand (at least in North America and Europe), the industry faces some major challenges.  Over the next year, how can luxury firms rebuild revenues, profits and brand equity?

Remain true to your brand essence

Luxury franchises must stick to their knitting if they want to survive and prosper. Major global brands such as Louis Vuitton, Hermes and Mercedes have demonstrated that luxury brands can grow during recessions by maintaining an emphasis on core values like quality, exclusivity and image. Firms should be very careful before they reduce investment and focus on design, marketing and merchandising.  Companies should also resist the temptation of short-term, volume-driven revenue expansion by rashly shifting core brands laterally or down market.  For one thing, strong core brands can provide a powerful halo over secondary or mid-tier brands within the same corporate portfolio. Also, the decline of Pierre Cardin in the 1980s still serves as an example of how to ruin a premium brand by repositioning it downward through excessive licensing and over-distribution.

Tailor offering to key segments

New market realities require a two-pronged strategy tailored to the challenges of each major consumer segment.  Firstly, brands need to reengage with aspirational, middle-income buyers who during good times emerged as the major drivers (between 60-70%) of revenue. The recession saw a significant decline in demand from this group with many buyers likely never to return to the sector.  Reacquiring aspirationals will be difficult given a newfound caution rooted in employment anxiety and high levels of personal debt.  Firms will need to refine their marketing tactics and products mixes to improve perceived value, while avoiding marquee brand cannibalization and dangerous price discounting.   Additionally, there are significant opportunities for luxury brands to drive differentiation and value through enhanced Web capabilities, brand communities and integrated on & offline customer experiences.  Burberry, BMW and Calvin Klein serve as good models of how to target different segments with multi-brand strategies.

Secondly, companies can not afford to take their core wealthy consumer base for granted.  This segment is a major revenue pool and serves as a key influencer for aspirational buyers.  Should a product’s brand image wane in terms of cache, quality and exclusivity, wealthy consumers could quickly migrate to a competitive luxury brand, with aspirational consumers not far behind. To increase wealthy consumer loyalty, companies should reinforce their premium brands via strategic pricing management, limited supply and enhanced design & quality.

Optimize the supply chain

The emergence of web-enabled supply chain management combined with global shifts in customer demand have created a unique opportunity for luxury firms to reengineer their product supply chains in order to reduce cost, improve flexibility and minimize design times.  For example, luxury companies could consider following other manufacturers and locate some product design, merchandising and marketing operations in high growth markets like China and India.  As well, some brand portfolios like Armani and Gucci that compete in many categories (e.g., apparel, sunglasses and fragrances) could benefit from portfolio rationalization of duplicative or low volume products.

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

Bridging the Two Solitudes in a Channel Relationship

Shared values, mutual understanding and regular communication are critical ingredients in a successful relationship between a channel partner –wholesaler, agent, integrator etc – and their supplier. To managers who deal with channel issues on a regular basis, this is a self-evident truth.  However, most will lament how difficult it is to cultivate a fruitful and symbiotic business relationship based on shared goals, trust and transparency. 

Poor channel relationships exact a significant direct and indirect cost on both the channel partner and supplier, including:   missed revenue opportunities, higher than necessary operating costs, ongoing hassle and misplaced management attention.  Channel relationships can stumble for many business reasons including poor product and service quality, insufficient channel discounts or a misalignment between consumer needs and the channel structure.  While business issues are important, they are not in and of themselves fatal to a relationship in the short-term.  Based on my experience running a large wholesaler, the root of most failed relationships is a gap between the parties around Values, Assumptions, Beliefs and Expectations (VABEs). A lack of common VABEs is not surprising considering how different channel firms and suppliers are in terms of corporate structure & size, culture and strategic focus.  To build a successful relationship, both parties need to recognize the differences in their VABEs and proactively develop strategies and processes to bridge the gaps.  

Below are two of my ‘best practices’ to accomplish this. 

Acknowledge and Deal with Strategic Misalignments

By their nature, suppliers and channel companies typically have different corporate strategies, cultures and goals which can hinder alignment, trust and performance.  Suppliers typically want their products to have maximum market coverage, revenue and service at the lowest cost and fastest cycle times.  Channel firms, on the other hand, often seek to limit risk, engagement and investment in a new product until the firm/product proves itself in terms of revenue, quality and commitment (e.g., marketing, training etc). Moreover, because of the 80/20 sales rule, channel partners will often treat a new product as secondary (i.e. not core to their offering) thereby withholding full (and promised) support.  For a variety of individual and organizational reasons, strategic misalignments are often ignored, missed or buried by respective managers. This strategic denial prevents firms from: developing reasonable expectations, overcoming misperceptions and undertaking pragmatic steps to drive greater engagement levels.

Strategic incongruence can be mitigated by acknowledging the 800 lb gorilla early on, namely setting realistic and achievable performance milestones, activity levels and investment requirements.  To foster greater understanding, both suppliers and channel partners should do their homework in order to better understand the other party’s history, financial context and competitive drivers.

Engage Senior Leadership

There is often a major difference in the kinds of management representing suppliers and channel companies.  This disparity has a big impact on how hot button issues like channel compensation, inventory levels and sales requirements are dealth with.  In many suppliers, middle managers without P&L responsibility manage channel relationships.  Unfortunately, they often lack the authority, strategic perspective and internal information to develop a win-win channel relationship or troubleshoot important issues.  This frequently will create angst, distrust and frustration within the channel partner who wonders why they don’t receive the attention and support they deserve. On the other hand, channel partners are often led by entrepreneurs who wreak havoc on channel relationships by personally being involved in negotiations, relationship management and sales & delivery execution.  ‘Leading from the front’  can also be problematic as it reduces strategic perspective and leads to issue ‘personalization.’ 

Suppliers can plug the leadership gap by bringing in senior management early on in the process as well as better empower middle managers to input into channel design and have the authority to make partner-specific decisions. Channel partner owners can minimize role overlap by either focusing on deal structure and relationship troubleshooting or service delivery.

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

Getting More Out of Digital Marketing

Companies don’t lack choices when it comes to following their customers online.  Most firms are rapidly introducing Web 2.0 programs including social media, sponsored content and online promotions. Unfortunately, in their haste many marketers are not paying enough attention to the bigger strategic picture or spending efficiencies.  For example, how does the new investment fit their consumer’s actual on and offline purchase behavior. Or, how do digital programs align to their brand and corporate strategies?

Before jumping on the next technological bandwagon, marketers would be prudent to revisit the efficiency and effectiveness of their existing digital programs. I have found that the most successful digital marketers consider three core principles before they increase digital’s percentage of total marketing spending: 

Integrate on and offline programs through a digital customer experience

Customers these days, whether by receiving direct mail, searching for products online, or using mobile devices to find retail coupons, use a combination of analog and digital vehicles to interact with brands throughout the purchase continuum. However, in most companies completely different parts of the organization manage each interaction, thereby reducing overall marketing coordination and brand integration while creating duplication and missed sales opportunities.

Digital channels have the ability to unify these disparate connections into one seamless and synergistic customer experience, as well as increase program efficiency and minimize revenue leakage. For example, TV advertising should feature the same words used in keyword programs.  To be sure, it is not easy to coordinate content and activities across the entire on and offline marketing experience. And, while a single customer experience is desirable, many managers must be careful not to invest in any one activity out of proportion to its actual role in revenue generation.   Despite the challenges, pursuing a single, digitally-driven customer experience is a worthy stretch goal. 

Maximize the potential of user-generated content

For many brands, active digital consumers generate, consume and distribute considerable amounts of unique and relevant content through channels such as user-forums, YouTube and social media.  By using powerful user-generated content, smart marketers can (with the right technology investments) accelerate and optimize their own branding efforts in two important ways.  First, combining user-generated content with your own messages can create a multiplier effect, substantially enhancing the brand’s impact. Conversely, utilizing user-generated content may enable firms to spend significantly less on marketing as a percentage of sales, with little or no performance deterioration. 

Allowing consumers to shape your brand inevitably raises concerns among companies that are fearful of losing control over brands. The key is to strike a balance between retaining control and creating opportunities for consumers to embrace and extend your content.

Turn data-driven insights into business results 

Savvy digital marketers deploy intelligence-gathering tools and processes that analyze what customers are seeing, doing and saying within their digital journey.  Significant value can be created when these digital insights are turned into actions that improve business performance, increase revenues, and drive efficiencies.   To accomplish this, marketers need a proactive data management strategy and system that links data collected to marketing activities, target segments and corporate priorities.  Part of this strategy would involve regularly deploying active and passive analytical tools & skills that assess and distil important consumer intelligence in real-time.  Marketers would develop action items from the data ensuring that they are consistent with key priorities and metrics. A cross-functional group could then review the actions for operational & marketing applicability and suggest course corrections that could be quickly deployed.  Overall, the key would be to create a tight feedback loop between data-driven consumer insights, enhanced programs and improved results.

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