Archive for November, 2010|Monthly archive page

Stress test your strategy

Thousands of managers have just completed or are in the process of delivering their yearly strategic plan.  Unfortunately, many of these plans will fail to meet management expectations resulting in missed opportunities, wasted capital and reduced competitiveness not to mention senior executive career risk.  The business plans will miss the mark for many good reasons such as unforeseen competitive actions or supply chain disruptions.  Yet many plans will also fail as a result of fundamental strategic errors due to flawed assumptions, management bias and poor analytics.   

To reduce their downside and maximize the upside, prudent CEOs and Boards would be well advised to “stress test” their plans by asking a variety of probing questions, three of which include:

Do we really know and target the right customers?

One important strategic consideration is the decision of who is the primary customer.  Many companies fail to identify and focus on the largest and most profitable customer segments for their value proposition and business model.  In reality, many firms resist choosing just one customer type either because their value could appeal to many segments (i.e. “Who doesn’t want lower prices?”) or because they just can not properly identify and segment their high potential customers.  Poor choices around customer selection typically results in strategic confusion and missed opportunities.  

As well, numerous companies assume their customer’s needs are relatively static on a yearly basis.  In reality, customer needs, perceptions and habits shift over time, due to changes in demography, fashion, social-economic profile and general economic conditiions. Recognizing and addressing these changes can make the difference between plan success and failure. 

Do key business drivers get enough attention?

Countless managers embrace metrics and scorecards, following the old adage that “you can’t manage what you can’t measure”. All too often, strategists utilize so many metrics (e.g., customer satisfaction, loyalty, trial, Net Promoter Score etc)  that they can not manage the forest through the trees.  The result is often conflicting priorities and strategic confusion.  Having too many metrics also compromises one of management’s scarcest resources, attention, and will stifle innovation by reinforcing incremental thinking.

In other cases, organizations will focus on metrics that are not linked directly to what drives the business. Poor metrics will also illuminate symptoms of a problem while masking the root causes.  As a result, managers will often adopt the wrong strategies and tactics.

Is scare capital and focus optimally allocated?

Devising the right business strategy does not guarantee plan success.  Organizations need to make sure that their scare capital, attention and capabilities are deployed in the most effective and efficient manner.  Too often, sufficient investment is not directed at the strategies that address the highest potential opportunities. Instead, managers are often unable to prioritize strategies or feel internal pressure to spread the investment around. To ensure congruence between goals and means, senior managers must ensure that key priorities cascade down and across the organization and that major initiatives and strategies have formalized capital commitments. 

No panacea that can minimize all the risks associated with a strategic plan.  However, firms can improve their odds of success by asking some important questions about the accuracy of the data, the practicality of the plans and the validity of the assumptions. 

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

Goals gone wild: pitfalls in target setting

Every year or quarter sees managers turn their attention to an important and time-consuming task:  setting goals for the next reporting period.  The organization’s objective is to align around SMART (specific, measurable, attainable, realistic and timely) targets.  Goal setting is important for many obvious reasons including setting financial expectations, allocating resources and motivating & measuring employee performance. Despite its significance, the process is often marred by negative analytical, political and organizational factors – many hidden – which lead to sub-optimal business results.

Below are the three biggest challenges I have witnessed in goal setting:

  1. Goals are vulnerable to unethical and risky practices like sandbagging and steamrolling. Sandbagging occurs when managers manipulate sales demand and product supply to guarantee the likelihood of hitting the target.  Some industries like consumer goods, IT and professional services are rife with this type of behavior.  Sandbagging can lead to unnecessary customer purchases, missed sales, and extreme discounting.  In other cases, overly aggressive managers can resort to steamrolling (i.e. the over zealous pursuit of the goal), resulting in risky business decisions and internal conflict.
  2. Flawed goals are used.  Goals that do not directly impact key business drivers like revenue, cash flow or profit can focus management efforts and resources in the wrong places. For example, customer satisfaction measures tell a firm how happy a customer is but not whether they will remain a customer or refer you to a prospect.  Moreover, imperfect goals can shift management attention away from more important but difficult to measure goals like boosting productivity. 
  3. The targets are seen as illegitimate by the organization.  Illegitimate goals can arise from weak intellectual, historical or market rationales as well as management hubris. In fact, I have witnessed leaders choose a goal solely because it sounds impressive – also known as the BHAG or big hairy audacious goal. Furthermore, goals can be too specific or too broad rendering them ineffective as targets.  These factors can easily retard employee motivation and performance as well as degrade organizational performance. 

Given the challenges, should goals be used in every situation?  No, according to new research recently published at Harvard Business School.  The study suggests that goal setting in every situation can be counter productive, significantly hindering business and individual performance.  The researchers contend that:  “…the beneficial effects of goal setting has been overstated and that systematic harm caused by goal setting has been largely ignored.” Many of the problems identified in the study are noted above.  The authors recommend 10 questions managers should ask themselves before engaging in the goal setting process.

Used wisely, goals can inspire employees and improve performance.  Executives should consider whether the harmful effects of goal setting outweigh the potential benefits.  If employed, goal setting must be used carefully and sparingly, not as a standard remedy to increase productivity and change behavior.

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

Catching Up in Sustainability

These days, virtually every company is being impacted by consumer, stakeholder and regulatory demands for green strategies and programs.  For a variety of reasons, most firms have adopted a “follower” sustainability strategy as opposed to that of a pacesetter.  A poignant article from the Harvard Business Review highlights the challenges of being a sustainability follower and suggests some strategies to catch up.

Enterprises face considerable financial, marketing and operational dangers when competition or external advocacy groups have defined what sustainability means for their products, company and industry.  Although green product definitions and standards will vary across industry, companies not engaged in shaping the rules risk being assessed against standards that they can’t easily satisfy. Worse, the firm may be out-flanked by a shrewd competitor that has strategically positioned itself as the sustainability gold standard.

Shaping the sustainability landscape is no mean feat.  There are a plethora of advocacy groups, regulations & standards (current and under debate) and consumer needs that need to be understood and evaluated.  For example, the coffee industry features more than a dozen standards and hundreds of individual criteria, affecting everything from pesticide use to workers’ housing to bird friendliness.  Each of the various standards has a constituency working to define the benchmarks for “sustainable coffee.”  Some are backed by nonprofits such as the Audubon Society and TransFair, others by companies such as Starbucks and Nestlé.

Fortunately, firms that lag in sustainability progress can still leapfrog competition by repositioning themselves as influential or even leading players in the green-standards battle.  There are 4 possible strategies to do this:

1.Adopt existing standards

Companies should pursue this strategy if their industry or major customers have well-established standards and their sustainability capabilities are modest.  Importantly, a determined catch-up effort can still enable firms to best competition and become a credible participant in future sustainability debates. As an example,  The Fishin’ Company became the largest sustainable seafood supplier to Wal Mart by outperforming its competition in meeting Wal Mart’s strict product sustainability standards.

2.Influence existing standards

Green advocacy groups often compete to see their own standards widely adopted.  To do this, they need to find corporate partners to champion and commercialize their standards.  This fact gives companies an important but limited window in which to influence the standards to their commercial benefit without compromising sustainability considerations. For example, Chiquita Banana was successful in helping define new standards that not only satisfied the Rainforest Alliance’s goals but also led to a 27% increase in farm productivity and a 12% reduction in costs.

3. Define new standards

Some industries do not yet have established standards or a green consensus.  Ambitious firms may be able to impose their sustainability standards – which happen to be a strong fit with their business model – on the sector in conjunction with external stakeholders.  To pull this off, these companies should possess significant industry clout, a credible brand image and strong internal capabilities.  Starbucks and Nestlé have successfully pursued this strategy in the coffee business. 

4. Break away from existing standards 

A few firms may consider going alone to create new sustainability standards when the existing standards do not play to its strengths, are inconsistent with its strategy, or actively undermine its competitiveness.  Apple is a case in point.  With its revolutionary iPad, Apple out-greened the greens by emphasizing a new and relevant sustainability dimension — power conservation — on which it can excel. The market-beating iPad is considered so energy-efficient that one T. Rowe Price analyst compared its battery life to “black magic.” A strategy like Apple’s will work only if the proposed new standards are measurable, relevant to customers, and demonstrably superior to the existing criteria.

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

Reduce product selection to increase sales

Many company’s under perform for a reason that appears counter-intuitive:  too much product selection.  Whether shopping in an online or physical environment, many well-intentioned consumers become befuddled from a plethora of products and configurations and end up purchasing less than was originally intended.  These missed buying opportunities can sink product plans, spoil capital investment decisions and hinder customer satisfaction scores.   Moreover, excessive product selection can spawn system complexity resulting in sub-optimal service and support, reduced scale economies and increased error rates.  Recent thought leadership by consulting firm, Booz & Co., explored this marketing challenge.

Consumers seem to want more choice but shop at their own peril.  In 1949 the typical US grocery store stocked 3,700 products.  Today, the average supermarket has 45,000 products with the typical Walmart stocking around  100,000 products.  For service businesses, the number of different product combinations can be mind-boggling.  Starbucks, not content to offer only 87,000 drink combinations, recently launched the However-You-Want-It Frappuccino, with “thousands of ways to customize your blended beverage.” Not to be out-done, Cold Stone Creamery provides customers with 11.5 million ways to customize their ice cream through a menu of mix-ins. 

Some psychological studies analyzed the negative impact of too much choice. One study looked at participation in defined pension plans.   When the plans offered only 2 funds, 75% of the relevant employees participated. When the plans offered 59 funds, the percentage of participants fell to 61%.  Similar finding around “choice overload” have been observed in other situations as varied as buying chocolate, applying for jobs, and making healthcare decisions. 

Why does a person’s behavior change when faced with an excessive number of options?  Cognitively, individuals find it very difficult to compare and contrast the features of more than about 7 different variables. There are neurological limits on a human’s ability to process information.  During choice overload, the task of having to choose will often generate frustration and suffering, not pleasure. Not surprisingly, buyers may skip the purchase altogether, reach for the most familiar item, or make a purchase decision that ultimately leaves them far less satisfied than what they had expected to be. 

In market research, consumers often say they want more selection.  Company’s willingly oblige by offering more products that target ever narrower needs and niches.  What marketers should do is give consumers what they really need: new ways of shopping and an optimized product mix that reduces the cognitive demands of choosing.

There are a number of ways to do improve the choosing experience:

  1. Cull the number of options. A combination of quantitative modeling, product rationalization and qualitative techniques such as ethnography can be used to design the right product mix.
  2. Foster confidence with expert or personalized recommendations.  In categories where variety matters like music, apparel and food, some companies such as Nordstrom and Amazon use recommendation engines  and product experts to help guide customers through the purchase cycle.
  3. Categorize the offering so that consumers better understand their options.  One useful approach is to group products according to certain characteristics or usage patterns.  This enables consumers to quickly eliminate unwanted options and get to a decision faster.
  4. Condition consumers by gradually introducing them to more-complex choices. Consumers will embrace more complex configurations after they have been warmed up on simpler offerings. Beginning with fewer options also helps consumers better understand their own preferences, which in turn, enhances their choosing experience.

Clever companies know that happy consumers purchase more and are more loyal when the product selection process is simple. When it comes to designing the product portfolio and process, less is usually more.

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