Archive for June, 2012|Monthly archive page

Strategic cost reduction

In times of declining profitability or strategic inertia, many managers will hastily launch cost reduction programs. Unfortunately, many of these one-off efforts will fail to hit their financial targets while producing collateral damage to the firm’s morale and capabilities.  Companies who approach cost reduction strategically with an eye towards ensuring long term growth and competitiveness will improve the odds of achieving their objectives while minimizing long terms risks.

Cost savings initiatives are not pre-ordained to deliver sub-optimal results.  Failure shares many causes, ranging from timid managers and sloppy implementations to employee resistance and a poor understanding of the firm’s cost structure.  What they all have in common is a tactical, short term approach.  My firm has devised a better way to deliver real and long term cost reduction. Our Strategic Cost Reduction approach considers cost savings activities not as a one-time event but within the context of driving strategic priorities, capabilities and organizational alignment.  We have battle-tested this methodology in over a dozen enterprise-wide, cost reduction initiatives.  Below is a simplified overview of our 3-step approach:

1.         Align on priorities

Common sense dictates that you aim cost savings efforts against non-core, low priority corporate activities. However, in a complicated organization or in the absence of a comprehensive strategic plan these priorities will not always be apparent.  Asking 2 fundamental questions will help shed light on your true cost picture.  i) What are the major short to medium term product priorities and capabilities that guide your capital and resourcing decisions?  To be focused and ensure proper execution, managers should have a list of 4-6 product and capability priorities needed for profitable growth.  And, ii) do the majority of your costs and resources line up against these priorities and capabilities?   

Asking these questions can illuminate a harsh reality. In many companies – particularly large, matrixed and decentralized ones – there is a poor connection between key business building priorities and spending.  This leads to inefficiencies and waste as well as under-investment in vital parts of the enterprise. When capital and management attention are finite, leaders must effectively and efficiently allocate capital to their key priorities. 

2.         Focus your cuts

Once a spend-priority misalignment is identified, the key challenge becomes where, what and how to cut – and where to reinvest for growth.  We have witnessed hasty executives radically cut costs at the same time carelessly damaging key competencies and hurting morale.  On the other hand, we have seen hesitant managers aim only for easy, superficial cost savings, ignoring the considerable amount of fat lurking just below the surface.

This is where SCR comes into play:  managers need to cut spending in areas that do not support growth-focused product initiatives and differentiating capabilities.  At the same time they should reinvest some of the savings in high potential, business-building programs. To find the waste and inefficiency, managers should take the costs that were not directly tied to identified priorities in step 1 (e.g., cross business/functional costs and expenses associated with non-priority activities) and then reallocate them against the same priorities and core capabilities to get a true read on costs. This can be accomplished by classifying spending into one of 3 strategic buckets. Of course, each firm will bucket their costs differently depending on their competitive position and strategic choices

1) Differentiating products and capabilities that drive support their unique value proposition and growth. Priorities like product innovation, analytics and brand development could make up 50% of a firm’s total cost structure.  These will often require more, not less, capital and resources than is currently deployed;   

2) Table stakes operations and competencies. Examples of these market ‘cost of entry’ activities include logistics, customer service and manufacturing.  They can often yield savings of 3-10% by area through operational enhancements such as Lean or strategic procurement.

3)  ‘Keep the lights on’ spending that is used to maintain operations. These cost centers (e.g., HR, facilities management, professional services) frequently have the ability to deliver up to 25% reduction in savings through far-reaching cost reduction strategies like outsourcing or performance cutbacks. 

This analysis can yield telling results.  We have seen organizations allocate 50% of their available capital to ‘keep the lights on’ activities yet spend only spending 20% of their capital against strategic and growth-focused initiatives.  On the other hand, we have seen careless firms expend 55% of their capital on multiple growth priorities (still under spending on each of them!) yet spend only 15% on competitive matching functions that support client retention and basic marketing.

To cut strategically, managers should focus cost reduction efforts against Bucket 3 areas that do not directly support growth, ensure customer retention or build market-beating capabilities. If more pruning is needed, the emphasis would move to non customer-facing Bucket 2 activities.  Leaders should be cautious not to mortgage the future by crudely cutting (optimizing is fine) Bucket 1 expenditures.  

3.         Consider business enablers

In many cases, firms with complex organizational structures, processes and policies will be challenged to cut costs, even with SCR and proven cost savings methodologies.  In these environments, leaders should consider more sophisticated cost reduction strategies such as complexity reduction, supply chain re-engineering or in-sourcing expensive outsourced functions.  Not only can these methods produce compelling cost savings, but they also can help accelerate program execution and further develop core capabilities.

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


Cloud Computing disrupts software pricing

The delivery of software is not the only thing being impacted by the rise of Cloud Computing.   Moving to the Cloud is also disrupting the traditional software pricing model with the potential to dramatically change customer behavior and impact market dynamics. In the future, CC leadership will be as much about getting the pricing model right as it will be about technical excellence.

The ubiquitous cloud

With CC, software applications are delivered as a subscription-based service over the Web much like a utility delivers power over a grid.  This scheme allows a user to purchase only what they need, when they need it, for as long as they need it.  Not surprisingly, customers are embracing this powerful value proposition.  Forrester Research estimates that over 33% of companies now get some of their software delivered as a service.  The market for Cloud-based services is growing over 20% per year.

Next to provisioning, the biggest impact of CC is how software is priced. Fading fast are the days when general-purpose software packages were sold in boxes with a one-time, perpetual software license fee plus expensive maintenance and upgrade charges.   Instead, Cloud-based services are sold through a subscription-based model – customers buy only those applications they need for particular tasks. Not surprisingly, this new paradigm has repercussions on the profitability, revenue and competitive position of every firm that sells digital products. 

Watch your back

According to Saikat Chaudhuri, a Wharton School of Business professor, “The disruption comes when bundles such as Microsoft Office don’t make sense anymore. Instead of big suites, lightweight applications will become the norm.” Today, customers are wary of big software upgrades that carry expensive hardware and operating costs.  Furthermore, they want applications that could be more easily and cheaply ported over to new environments like mobile computing where their users are.

Cloud-based disruption is everywhere.  Google is taking aim at Microsoft’s Office franchise with web-based services.  Cloud providers like, NetSuite, and SuccessFactors are aiming to poach business customers from SAP and Oracle. Zynga, which publishes popular free games primarily on Facebook, is a threat to traditional game powerhouse Electronic Arts (EA). In this world, dedicated cloud companies with no legacy box revenues have the upper hand as they do not need to worry about cannibalizing their core business. 

If you can’t beat them…

Not surprisingly, traditional software providers are trying to maintain their market position and revenues by launching their own subscription pricing schemes and buying other cloud offerings.  It’s more preferable – though not easy – to cannibalize your own business in a controlled manner than let someone else do it to you.  Pragmatic vendors will also realize that it pays play offense as well as defense. For one thing, subscription-based offerings enable unique business-building opportunities such as the ability to run quick and cost effective product trial and cross sell programs. 

Growing CC penetration could also mean higher industry revenues for some markets.  A few years ago, we did a pricing study for an enterprise software vendor looking to deploy a cloud service in one of their largest product categories.  Management was concerned that total category revenues would fall after the new service was launched.  Our analysis found that adding subscription-based pricing did not lead to a fall in their business.  In fact, it led to modest revenue gains due to increases in lifetime customer value. More importantly, margins improved as a result of lower distribution and customer acquisition costs.

A brave new world

Industry experience suggests that market revenues and profitability will flourish in a CC-intensive world.  According to Wharton Professor Kevin Werbach, business is “…likely to grow, as recurring revenues and micro transactions replace big up-front payments. Look at the Apple App Store…. That represents billions of dollars in revenues for mobile software, which simply didn’t exist before.”  Professor Chaudhuri goes on to add that “As software is broken down into smaller parts, the [lower unit] pricing can stimulate demand.” As an example, the popularity of iTunes’ 99 cent song downloads may have hurt large music labels but not the plethora of independent artists who now enjoy more distribution than ever before.  For the software industry, market profitability will likely remain the same, but more players could share in the rewards.

A CC model also affords many opportunities to leverage pricing innovation.  Similar to an airline or utility, firms could institute variable pricing based on customer demand. For instance, a company could charge more for applications during demand spikes and less in off-peak hours. As in other industries, software vendors will use different models to generate the same profit, if not more, based on lower prices and a broader customer base.

CC represents a seismic shift in the software industry.  While its implications will take a couple of years to fully play out, the impact on pricing strategy and marketing is already being felt today. Pricing leaders take note: the time for strategic thinking and experimentation is nigh.

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

Customer acquisition in a multi channel world

Most companies depend on some form of channel to target, sell and deliver products and services to end users.  A channel can be any intermediary such as a retailer or distributor, a sales team or a technology platform like the iPad. Recent developments are putting channel performance in executive crosshairs.  A low growth economy puts a premium on having high performance channels that drive customer acquisition and retention while maximizing efficiencies.  Secondly, the power of Web-based technologies can no longer be ignored.  Social media, e-commerce, and mobile computing already play a vital role in product purchase, research, referrals and support.

All too often, channel-focused acquisition strategies fail to achieve the desired results for the following reasons we’ll call the 5 Cs:    

Cannibalization – Customer acquisition programs in one channel end up cannibalizing another channel’s business.

Consistency – High channel complexity increases the chances that your value proposition, tactics and strategy will be inconsistently deployed.

Conflict – Misalignments in strategy and incentives triggers conflict between different channel players and the company.

Customers – Customer behavior and needs become out of sync with the channel design.

Change – Managers do not follow ‘best practices’ when making changes to strategies and structure.

Although channels are complex to manage, there is hope.  Our learnings from two industries – industrial automation and consumer insurance – highlight the fact that strategically agile firms who pay close attention to their customer and channel partner’s needs can build market share, reduce conflict and gain competitive advantage. Two examples illustrate the value of this bottom-up approach:

Industrial automation

An automation company approached us looking for help in penetrating an unexploited customer group. Management focused on 2 key questions: what was the best channel to target this new segment? How do you formulate a channel strategy that was a win-win-win for the customer, channel partner and company?

Our solution began with an exploration of the target customer’s behavior, needs etc. Secondly, we surveyed their likes/dislikes of the channel that traditionally targeted them.  Finally, we framed this research against major industry and technological trends to understand how the market was evolving. The recommended channel strategy would fall out of these purchase, market, technological and behavioral drivers. 

Our findings opened a few eyes.  Initially, the client assumed the segment could be targeted by the existing distributor and systems integrator channel, with only new and improved marketing programs.  However, we discovered that over half of these customers had a high level dissatisfaction with existing channels, both as individual firms and as a structure.  Instead, these people wanted a direct relationship with the manufacturer – if the firm could develop a functional and informative Web platform.  The research results triggered the deployment of a new e-business portal and direct marketing program.  This channel dramatically improved customer acquisition, minimized cannibalization, and increased overall customer satisfaction.

Consumer Insurance

Boston Consulting Group looked at how to win new business in a channel-reliant business –  the North American home and auto insurance industry,   BCG wanted to answer some questions essential to firms looking to profitably grow market share in a mature market.  For example, how do consumers really want to buy insurance? Do different demographic groups truly prefer different channels? Which channels will prevail in the future? And, which strategic steps should be taken to drive growth?

BCG’s research yielded some noteworthy findings, which we have validated through our Canadian insurer experience: 

  • Over 40% of consumers across all segments are channel indifferent. These consumers represent the battleground for customer acquisition.
  • One way to target these consumers is with a direct relationship using the Web.  Although insurer web channels are poised for the highest growth, current executions must become more customer-centric and functional.
  • All consumer segments value personalized advice and service delivered via agents. However, this agent channel, ideally positioned to provide advice, is not fully meeting consumer needs.
  • Strategically, managers should look to rejig their channel strategy to better drive acquisition.   They have 3 channel options:  agent-focused, direct-focused or a hybrid of the two.

In most channel-intensive markets, the key elements – consumers, technologies and channel partners – are evolving.  Companies that best understand the changes and are able to quickly and adroitly develop new channel models can outflank competition and win the battle for new customers at lower acquisition cost. 

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

What went wrong with the Facebook IPO?

What was supposed to be one of the most heralded IPOs ever is turning out to be a disaster for Facebook and the banks that backed it. So far, the IPO has been a dud with the stock trading at $US 28.19 as of May 30, down 26% versus the $38 issue price.

What went wrong is indicative of the challenges valuing and executing IPOs in the technology space. Four main problems stand out:

Bad valuation
Facebook and its lead investment bank Morgan Stanley committed a major faux pas aggressively valuing the company at $104 billion.  Originally, Facebook set its share price conservatively at between $28-35 a share.  Strangely, right before the IPO, the company upped the price to $38 per share or what the brokers considered “priced for perfection.”  After the negative disclosures and insider selling, it became evident that the shares were not perfectly priced and fell to more realistic levels.

According to Ken Marlin, Managing Partner of Marlin & Associates, a leading technology-focused investment bank, “Pricing high-growth tech stocks is an art – mixed with some science. [The underwriters] got the “price” right, but got the ‘value’ wrong.  For perspective, Facebook’s valuation was close to 100 times last year’s profits, significantly higher than tech giants Apple and Google that make far more money.

Realistically, no one really knows how to value millions of users, let alone Facebook’s 901 million users. Although user data – status updates, photos, likes and videos – has value, marketers have yet to figure out how to monetize it beyond simple display ads.  The fact is “Facebook has not yet been able to find an ad model to generate revenues commensurate with its valuation,” says Saikat Chaudhuri, a management professor at Wharton.

Bad Timing
Just prior to the IPO, Morgan Stanley and other analysts lowered Facebook’s earnings expectations.  Facebook had repeatedly warned in its IPO filing about the challenges it was facing in mobile advertising: As consumers increasingly use mobile applications to access sites like Facebook, the firm will need to figure out how to shift its ad sales to mobile platforms, a place the company admitted it does “not currently directly generate any meaningful revenue.”   It also cited growing competition from Google and social networking upstarts such as Pinterest, noting that its users could simply jump to another site if unsatisfied. This news likely contributed to the shares tumbling.

Of course, timing is everything and hindsight is always 20/20.  However, if Facebook had executed its IPO last year behind tailwinds of rapid growth and significant buzz and only a distant mobile hiccup, they may have been able to support a higher valuation – at least until this quarter.

Bad execution
Poor execution of the IPO played a part in the share decline. As an example, Facebook increased the number of shares by 25% just prior to the IPO, an unwise strategy when the shares are actually over-valued.  Those investors who received more shares than they wanted effectively became forced sellers when the quick profits failed to materialize a couple of days after the IPO.

Secondly, the timing of key activities makes you wonder what signals the company was sending out. In the banks handling the IPO, analysts – legally obliged to act independently – cut their forecasts for the firm after the IPO filing update.  At the same time their investment banking colleagues and Facebook leaders were pushing for a sale at the very top end of their price range.

Bad karma
Confidence in the IPO fled after it became public that many of Facebook’s early backers were increasing the size of their selloffs. For example, Peter Thiel, one of Silicon Valley’s smartest investors and a Facebook board member announced he would be selling 16.8 million shares, up from 7.7 million shares. Though he likely knew nothing more than what was in the public filing, this decision could not have helped the sentiments around the IPO.

Thiel was not alone.  Some 57% of the shares sold came from Facebook insiders. Typically the percentage of insider sales is under 10%. In other recent tech IPOs including Groupon, Zynga and Yelp the percentage was less than 1%.

More worryingly, investors could have been spooked by the actions of a major advertiser.  Just prior to the IPO, General Motors decided to pull $10 million in advertising from the site, saying that the ads had proven to be ineffective.  GM’s assessment is consistent with our firm’s social networking research which has found that Facebook users are less tolerant of being marketed to as compared to more business-focused sites like LinkedIn.

Going forward…
Can Facebook bounce back and justify its lofty $104 billion valuation? Maybe.  It all comes down to whether it can quickly develop a mobile-enabled, profitable and defensible business model that does not alienate users. Moreover, there remains plenty of ways (e.g., as a payments platform, via media content sales, or through subscriber revenues) to profitably grow revenue.

In the short term, however, the company may have to continue splashing its site with advertising to generate more revenue. This raises the specter of Facebook becoming another MySpace, a failing social network site littered with ads.  If this happens, users may then defect to another, less cluttered social network, triggering further share prices declines.

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

Samsung: supply chain-driven leadership

Founded in 1938, South Korean conglomerate Samsung has seen its revenue explode in recent years, with profits hitting record levels of more than $4 billion in the first quarter of 2012 on the strength of the company’s smartphone products.

The electronics giant spent most of 2011 in a neck-and-neck race with Apple for the top prize in smartphone sales before ending the year on top.

Now Samsung is shifting its focus from consumer electronics to solar panels, light-emitting-diode (LED) lighting, biotech drugs and medical devices. The company has announced plans to supply medical equipment and drugs to poor countries, while moving industrialized nations toward power created without carbon emissions.

Firms worldwide will be gauging Samsung’s shift and likely will keep a close eye on the company’s supply chain component, widely reported to be one of its biggest competitive advantages.

Samsung’s Supply Chain Philosophy

Samsung initiated a collaborative plan to foster growth and stability among its key suppliers. According to Samsung’s corporate sustainability report, the company is shifting its “Mutual Growth” program to smaller firms lower on its green supply chain. The CEO is directly responsible for implementing seven key collaborative programs:

  1. Win-win fund for partner companies
  2. Timely reflection of raw material price changes in parts purchasing prices
  3. Temporary registration scheme to promote e-transactions
  4. Support for indirect suppliers
  5. Joint technology development center
  6. Fostering “global best companies”
  7. Support for recruiting activities of small and medium enterprises

In addition, Samsung offers support to its partner companies in human resources, innovation, communication and corporate social responsibility. This approach to supply chain management has resulted in a strong and loyal network of partners. Samsung also has implemented a number of other methods to ensure sustainability in its supply chain 

Successful Supply Chain Management

For Samsung, successful supply chain management (SCM) means tapping into the power of its global footprint. The company’s SCM utilizes suppliers in the developing world and highly industrialized areas. This diversity helps buffer Samsung from economic, natural or political disruptions in the supply chain and also creates a wider customer base.

Another idea Samsung has leveraged is that of being a “fast follower.” The company watches the market for new business ventures, purchasing small, leading-edge companies. Samsung becomes familiar with new technologies through these acquisitions, which deliver expertise, talent and customers. Once it finds an area primed for growth, it pours in cash, ramps up production and becomes a key customer for its suppliers, fostering positive relationships that give it a competitive advantage.

CPFR Method: How Samsung Implemented It

Collaborative Planning, Forecasting and Replenishment (CPFR) focuses on improving supply chain management by combining the intelligence of a variety of partners in satisfying customer demand. CPFR uses a set of template-based standards for supply chain management and partner collaboration. Among the corporations to have used CPFR are Wal-Mart, Procter & Gamble and Samsung. 

In 2004, Samsung signed a CPFR agreement with electronics retailer Best Buy for the North American market. The initiative improved efficiency by cutting costs for merchandising, inventory, logistics and transportation. In 2009, the two firms expanded the agreement to the Chinese market, agreeing to enhance each other’s supply chains by supporting and assisting in joint practices, including:

  • Monitoring market demands
  • Sharing customer feedback
  • Working together to reduce operating costs

Six Sigma at Samsung

With a global supply chain as complex as Samsung’s, advanced approaches to planning, scheduling and operations are necessary for stability and success. Since 2004, an innovative program combining supply chain management and Six Sigma has been a key driver of both.

Samsung first researched how Six Sigma was being used at companies like General Electric, Honeywell and DuPont. Methods of matching customer requirements to products and services, while applying lean methodologies to manufacturing, were seen as particularly valuable.

In the end, Samsung determined about 75% of its Six Sigma projects would involve redesigning processes and 25% would focus on process improvement. It then tailored Six Sigma’s methodology to better support Samsung’s supply chain management projects.

In addition, Samsung’s team also created design principles to guide the SCM Six Sigma projects throughout each stage:

  • Global Optimum – speaks to a global, rather than local alignment of improvement ideas
  • Process KPI Mapping – defines objectives and monitors the process towards management improvement plan goals
  • Systemization – a critical component of SCM Six Sigma at Samsung
  • Five Design Parameters – used to characterize the changes that need to be managed.

Samsung’s Success Based on Sound SCM

By beginning with a collaborative philosophy and adopting smart supply chain management processes, such as “fast follower,” CPFR and specialized Six Sigma, Samsung has maintained its position as a world leader in consumer electronics.

As the company moves into a diversified business model, it is expected to continue utilizing those methods to remain competitive and profitable, while fostering similar benefits for its suppliers, retailers and other supply chain partners.

This guest post was provided by Dean Vella who writes about supply chain managementand sustainability for University Alliance and submitted on behalf of University of San Francisco.