Archive for August, 2011|Monthly archive page

Innovating with services

In this difficult economic climate, most executives are looking to improve competitiveness and profitability by becoming more innovative.  In most cases, their attention has been focused towards the product and operational areas of the business.  However, successful product and operational innovation may still not be a long term panacea.   Mega trends like rapid technology diffusion, globalization and falling industry barriers to entry will continue to drive product commoditization and shrinking margins. 

One way to outflank competition, meet increasing customer demands and improve revenues is to target innovation efforts against the services side of the business.  In essence, product suppliers would reinvent themselves as service companies, offering complementary services, support and tools that satisfy a wider range of customer needs and differentiate their firms.  Granted this is not a new idea.  Whats really interesting is how the approach is being implemented.  

One powerful strategy borrowed from cutting-edge R&D firms is to move to an open services model, whereby a company offers complementary services, delivered internally or via external providers, through an open and collaborative framework.  In particular, outside firms are encouraged to proffer their services through access to product technology, integration into the product firm’s operational infrastructure and through joint marketing and channel management programs.  Many industry leaders have successfully operationalized this model including Apple, Xerox, IBM, 3M and Amazon.

There is now a critical mass of best practices around making an innovation in services strategy work.   Open  innovation pioneer, Henry Chesbrough, recently summarized some of these in an interview in strategy+business magazine.

Focus on platforms

A powerful way of catalyzing innovation in services is by leveraging a powerful yet open platform. A platform is a foundational product (or products) which can support an ecosystem of complementary services, support and process methodologies.   One of the most successful examples of a platform is the iPhone.  The iPhone owes much of its success to the services that accompany the product, whether these are delivered internally (e.g., iTunes) or externally through thousands of externally developed applications, crowdsourced technical support and functional add-ons. 

Be open…to a point

Many successful platforms such as GE (infrastructure financing), General  Motors (OnStar information services) and Xerox (Managed Print Solutions) mix internal and external services, products and partners within one ecosystem.  A hybrid approach is the ideal strategy for most firms as it leads to economies of specialization i.e. leveraging the optimal mix of services, expertise and resources. Despite apparent successes, we have seen some companies struggle with implementing and managing this strategy.  For example, organizations need to be collaborative by nature and must be willing to expose  their product roadmap, delivery model and their brand.

Understand the full gamut of needs

In our experience, launching innovative services requires that firms possess a deep understanding of customer purchase habits, supply chain dynamics as well as their core competencies.  Amazon is a good example of a firm that uses consumer data to catalyze innovation in services.  The company has leveraged a deep understanding of consumer  needs across the full shopping, purchase and delivery spectrum to deploy innovative services like customer reviews, 3rd party book selling and referral tools.  These combine to enrich the shopping experience, differentiate the offering and generate incremental revenue. 

Every industry can be “opened”

Many “big iron” manufacturers, not traditionally viewed as service businesses, can benefit from a service innovation strategy.  Case in point, the Taiwan Semiconductor Manufacturing Company.  In the mid 1980s, TSMC began to decouple the design of chips from the manufacturing of chips creating an entirely new services business model called a foundry. TSMC’s foundry leverages  an open services model.  The company can manufacture chip designs from fab-less chip designers, provide design tools, testing and process technologies or co-create chips with partners. As a result of this innovation model, TSMC is now one of the World’s leading semiconductor firms.

Fast forward 3-5 years, it is likely most leading product companies – save the lowest cost, highest volume players – will have a robust open services offering.  Their challenge will remain making it all work.

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

The danger of common sense

A recently published book by sociologist Duncan Watts, ambitiously titled:  Everything is Obvious Once You Know the Answer:  How Common Sense Fails Us may turn more than a few executive heads.  This thought-provoking book challenges the universal belief that management decisions based on common sense – rooted in best practices, hunches and experiences – often lead to the best outcomes.  According to the book, the reality ends up being quite different.  Relying too much on common sense often leads well-intentioned and intelligent people to make poor strategic and tactical decisions in areas such as capital investments, product introductions, new market entry and advertising decisions.

Watt’s supposition is that people give too much credence to their prior and accumulated experiences, history in general and what they perceive as best practices when making decisions.  According to the research, a person’s common sense is faulty for a number of reasons:  it contains intrinsic bias; it is based on unproven or wrong assumptions and; it is too difficult to deduce clear-cut conclusions and action steps from an environment that is overly complex or unclear. 

Most people are hard-wired to depend on common sense on a daily basis. Once they recognize the outcome of a decision, all humans are biologically and psychologically programmed to rationalize why it has occurred.  This rationalization causes the individual to begin constructing their own paradigm of common sense which in turn is used to make decisions. 

Relying on common sense for decisions or to make predictions has dangerous implications.  For one thing, reality is usually very different from what was first imagined.  The future is quite complex and rarely reflects the same conditions that earlier decisions were based on.  As a result, it is highly unlikely positive outcomes will repeat themselves if the individual relies solely on history.  In my consulting experience,  the higher degree of uncertainty around a decision or potential outcome, the more likely senior executives will rely on subjective criteria like common sense or best practices as a basis for decision making.

If managers can not rely on common sense to guide them, how are they to make important decisions? 

Encourage contrariness

Organizations need to actively seek out contrary opinions and analysis, whether from internal or external sources, when facing key business choices.  To minimize bias and address informational blind spots, external experts should report directly to the management team or CEO.  Famously, the CIA undertook an external “Team B” analysis of the Soviet Union in the 1970s in order to better understand the nuclear threats facing the U.S.   

Shorten the action-reaction loop

Faster and more extensive customer and partner feedback reduces the need for companies to rely on subjective rationalizations like common sense.  Importantly, new technologies and tools such as CRM and social media can help by limiting uncertainty and delivering critical information to the decision makers.

Experiment

Dynamic companies like Google and Capital One often run quick and dirty pilot programs in order to gain concrete market data, gage the environment & competition and challenge internally held assumptions.

Put common sense in context

Experience and other intuitive factors can play an important role in making routine and mundane decisions where the likelihood and risks of failure are low.  Where the decision is strategic or involves sizable capital outlays, a more objective, fact-based approach would be best.

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

 

Resetting private equity in 2011

The private equity industry is in a funk, and for good reason.  Investment returns have not rebounded to pre-2007 levels and look to remain stagnant in the near term as cheap and plentiful debt remains scare, valuations continue to be subdued and global economic jitters plague confidence everywhere.  Importantly, these conditions are negatively impacting the sector’s ability to raise capital and successfully exit investments with good multiples.  At the same time, the industry is plagued by a host of other challenges including rising costs, bad press and market maturity – many of the large institutional investors have already maxed out their PE investments within their asset allocation mix.

The times they are a changin’

If PE is going to regain yearly historical returns of 20% or more, the traditional model built around financial engineering  (piling on debt, waiting on rising valuations etc) and one-time cost reduction (headcount and capacity cuts etc) will have to evolve. For one thing, few firms can continue to stand out from their peers based on their  corporate finance capabilities.  Furthermore, valuations remain stubbornly low (post write downs) despite fat trimming within the portfolio companies.     

Reigniting historical returns is possible. One way is for PE managers to begin focusing on organic revenue growth in their portfolio. This is not a novel strategy.  Some firms like Bain Capital have been doing this for years generating industry-leading returns. This formula moves beyond slash and burn cost cutting and swapping management;  it is about working with existing managers to tap new markets, foster product innovation, and leverage existing technology and operations into new revenue-generation activities.  This new PE value creation model is also about them developing internal sales, marketing and product management skills, leveraging their Rolodexes and rolling up their sleeves as interim hands-on managers and consultants.  

Examples of this new approach include:   

Adding and deploying expert bench strength

Some firms like TPG, KKR and Bain Capital have internal consulting groups whose mandate is to drive portfolio growth by improving revenue generation and operational performance in key areas such as sales force effectiveness, “lean” management and pricing optimization.  In some cases, this support is in the form of advisory services; in other cases, it is about embedding expert PE management at the portfolio company.  PE firms are well suited to add value, fast.  They can: bring a bias-free approach; implement cross-industry best practices and; deploy expert management quickly. Those PE firms lacking TPG’s scale or Bain’s pedigree can form strategic alliances with industry leaders and consultants.

Reframing earnings generation

Focusing more on growth will require PE firms to adopt a different paradigm when looking at market potential.  One proven approach for mature markets is to focus on the available market “headroom” – the market share a firm does not have minus the share it will never get. Headroom-focused PE firms concentrate their efforts and capital solely on how many potential customer switchers are available, what their needs are and what is missing in the existing product offering. Adopting a headroom-based organic growth strategy will increase marketing effectiveness and efficiency, thereby boosting earnings faster, improving resource allocation and conserving scare capital – in many cases generating self-financed growth. 

A win-win…

Having demonstrable growth competencies will also help PE firms in their two core missions.  Fund raising efforts will be aided by improving a firm’s industry differentiation through offering an alternative value creation model.  Additionally, PE managers can improve deal making win rates by leveraging enhanced risk management and analytical capabilities.

…if you can execute

Unfortunately for many firms, becoming an organic growth multiplier won’t be easy.  Today, most PE firms lack internal expertise & experience as well as an operational mindset.  Moreover, PE managers will inevitably discover what their investee managers learned eons ago:  execution is not easy.

Going forward, every PE firm will have to adapt to new market and business realities.  Focusing on organically growing their portfolio companies will be an attractive option for many firms.

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

Social media is dead…long live social media

Over the past year, a number of much-heralded social media campaigns have floundered failing to deliver the desired results.  To wit:

  • Despite a variety of Facebook and viral marketing campaigns that generated considerable buzz, Burger King sales witnessed 6 consecutive quarters of declining sales;
  • Pepsi’s very public shift away from Super Bowl ads to Refresh Project, a social charity program, was unable to prevent the brand’s drop to the number three market share position.

In addressing these setbacks, SM boosters will argue that these initiatives surpassed their customer response and engagement goals.  As well, they contend that some failures are to be expected given the nascent state of the SM space.  Finally, apologists will blame other culprits such as the economy, pricing, and distribution that can sabotage campaign success.

In reality, these arguments are a little specious.  If a SM campaign can not directly trace to higher sales then what is the use of measuring esoteric values like a conversation and tweets in the first place? Interestingly, some SM programs have been in market for over 6 years belying the claim that the “media” is relatively new.  Finally, if other marketing or product elements mattered more than SM they should have been the focus of the program investments in the first place.

Should these poor experiences cause marketers to reconsider their ambitious SM plans?  Maybe, but not so fast.  Concurrently with the failures, there have been a many SM successes across a variety of industries including retail banking, automobiles and insurance. The aforementioned problems may have more to do with the end of SM as a fad and the emergence of SM as a serious marketing discipline.  Within many companies, there is a growing realization that SM is just one marketing tool and cannot kill traditional advertising & promotion in the same way that the arrival of the microwave didn’t kill the oven.

Some important lessons can be gleaned from these high profile failures as well as the successes:

SM has not changed people’s buying behaviour – Most people still evaluate and purchase products today the same way they did 10 or even 50 years ago. As long as the vast majority of sales occur in stores or through sales people, driving traffic to these areas should be the focus of SM programs.

Marketing integration is essential – Without the support of value-based pricing, optimal channel management and solid product quality, all SM efforts will fail to generate meaningful results.

The brand promise remains paramount – If it doesn’t reinforce a brand’s winning value proposition and character, a SM program will be nothing more than a cool (and often expensive) marketing activity.

The key metrics haven’t changed – Today, SM metrics and analytics are not ideal, being inherently qualitative and relational.  Until metrics can be linked to revenues by becoming quantitative and absolute, then there will be a challenge justifying program ROI.

Competitive matching is the last reason to deploy SM –  As the negative examples of Domino Pizza, Amazon and KFC demonstrate, SM can be a high risk activity and should not be pursued without a compelling strategic and revenue-generating rationale.

You still need to execute with excellence – Like other marketing or product initiatives, SM activities need to move beyond the creative, “cool” factor and focus on delivering marketing and operational effectiveness and efficiency.

Most pundits would agree SM’s future is bright.  It’s the short term that marketers should now focus on getting right.

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