Archive for February, 2014|Monthly archive page

Preempting strategic decline

For the last five years, companies have been struggling to cope with stagnant growth, shrinking margins and reduced product differentiation. The next five may be downright dangerous, especially given today’s powerful headwinds. For some organizations like Volvo, Canada Post, Barnes & Noble and Olympus, their very reason for being is increasingly in doubt. To prosper, all companies need to soberly assess whether its time for a strategic reset — before it’s too late.

A strategic reset is a deliberate (but not rash) pivot away from a stagnant market towards new growth market(s), often driven with a revitalized business model and management practices. Resets are often needed for mature brands, divisions and even entire companies. Many firms like IBM, Cisco, Apple and Xerox have adroitly managed these pivots while others like Blackberry, The Wall Street Journal, and Live Nation are currently struggling to pull them off.

Symptoms of decline usually include deteriorating financial returns, limited pricing and channel power and high levels of customer dissatisfaction. According to our experience and research, firms should start worrying if they find themselves facing:

Falling market attractiveness: The size of the market by revenue and volume is flat or declining. At the same time, your costs continue to grow leading to shrinking margins.

Minimal brand differentiation: Customers perceive little, meaningful difference between products and tend to switch often.

Looming external threats: Large markets are appealing for disruptors when barriers to entry are falling and incumbents appear complacent.  New players (think Apple’s iTunes circa 2003) unencumbered by legacy assets or culture can exploit new technologies and channels to leapfrog incumbents and reorder markets to their advantage.

An underperforming business model: In many cases, your business model is not delivering a sustainable competitive advantage. For example, your patents have expired or have been bypassed; it is difficult to maintain cost competitiveness or deliver meaningful product innovation; and, finally, the way you create value has become obsolete due to industry developments like the emergence of open-source software.

The strategic danger is further magnified by the economic realities of the day such as globalized competition, increasing regulation and the rapid dissemination of new ideas. Declining internal performance combined with this dynamic environment can create a perilous situation where adverse changes in a firm’s competitive position can come quickly and out of the blue.

Yet, decline is not inevitable and management is not powerless. The saying “adversity brings opportunity” holds much truth. Many firms — even those on life support — will still retain key competencies and assets such as intellectual property, customer relationships, cash reserves, trusted brands and institutional knowledge that can be leveraged into other products and markets. Moreover, a fear of decline can be a powerful wake up call for organizational transformation.

To strategically reset their business, we recommend CEOs follow these six steps:

Acknowledge the strategic challenge: All executives need the facts and courage to face reality, as well as the alignment and perseverance of the organization to move forward.

Know your core competencies: Pivots are easier and faster to execute when you leverage your core capabilities. It is vital to understand what these are in terms of skills, assets and market relationships.

Find a winning value proposition for an appealing market: Recognizing your future is not an easy process and should be undertaken as an iterative strategic and innovation process, not a static exercise. Not surprisingly, successful pivots will target your existing customers in existing or new segments.  You will need to deeply understand their current and unmet needs to fashion a powerful, new value proposition.

Redesign your model: Winning in your target market will often require a re-tuned business model to profitably deliver your new value proposition. To move forward smoothly, it may be necessary to cast aside traditional management practices such as how you determine ROI, organize your staff and measure results.

Move boldly but prudently: A reset involves a balancing act between safeguarding current revenue and investing and re-organizing around a new business. Furthermore, it will not always be clear where the next home run will be. Savvy managers will test a lot of promising innovations before making any big bets. Given the risks and urgency, firms will need to foster world-class execution efforts.

Nothing breeds complacency like success. The CEO and board cannot let this happen. It is better to manage your destiny than wait for events to overtake you. A strategic reset, however, will take guts and guile. Most managers will find it easier to ignore realities and resist change than to embrace it. A healthy first step is to recognize that renewal is about building a bridge to the future without burning the bridges from the past.

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

 

Banking goes digital

The banking industry is changing, whether it likes it or not. In the past, the business was driven by capital-deployed, risk-management competencies and branch coverage. The financial meltdown of 2008, however, changed much of that. The sector now features low growth, increased regulations and leverage limits. To make matters more complex the emergence of digital technologies is transforming the way customers want to deal with banks and opening up market opportunities for aggressive and focused competitors. Increasingly, banks will need to address this “new normal“ by enabling their customers with “any time, any place” digital capabilities and capitalizing on Big Data insights that come from mining the reams of daily customer and operational interactions.

Despite the rise of transformational technologies, bankers in 2014 run their businesses pretty much as they did in 2008. Most of the executives we speak with continue to hope that traditional profit drivers — high fees, exchange-rate volatility and a growing economy — reassert themselves. However, hope is not a strategy especially when consumer behaviour has fundamentally changed.

The arrival of mobile computing, social media, digital payments, and web-based, face-to-face communications like Skype have radically changed the way people buy products and interact with organizations. Not surprisingly, these technologies have created opportunities for disrupters to enter the sector with low-cost, focused offerings unencumbered by legacy business models. In the United States, for example, Walmart has introduced reloadable pre-paid offerings that act like checking accounts. PayPal and Bitcoin are now enabling payments outside the banking system. Covestor links individual investors with portfolio managers who meet their investment needs.

It is bewildering how slow many financial institutions have been in adopting digital technologies and exploiting Big Data, compared to other industries. For example, while music stores, electronics stores, and other retailers have reduced or even eliminated physical distribution, large banks have expanded it. Many blue-chip firms like Cisco, Walmart and IBM already employ Big Data and mobile strategies to deliver new services, streamline their operations and reduce cost. If banks want to compete better and protect their franchise, they need to act more like mobile and digitally driven competitors like Apple, Google and Facebook — who not incidentally command much higher market capitalizations.

TD recently identified digital transformation as a corporate priority, and built capabilities back from the customer’s needs and desired online experience. “When we’re working on new online or mobile banking features, we put ourselves in the customer’s shoes to see things from their perspective, says Rizwan Khalfan, senior vice-president, digital channels, TD Bank Group. “We know customers are quick to adopt new ways to bank that make managing their finances simpler. It’s not just about paying a bill on your mobile, it’s about creating a great customer experience across all our distribution channels.”

Prudent bankers are starting small, testing extensively and then boldly scaling. Khalfan says, “When we launched the ability to deposit cheques using your mobile phone in the U.S., we spent time perfecting the little features that will make it an overall better experience. We know it’s hard to hold your phone and take a photo by pressing a small button, so on our app, customers can press any part of the screen to take a photo of the cheque and the photo won’t be taken until the camera has focused properly. We’ll be leveraging those learnings when we roll out that capability in Canada later on this year.”

Across the pond, British bank Barclays is taking a bold approach to digital transformation. Its strategy is to use technology to get closer to customers and simplify their lives. In order to become the “Go-To Bank” for consumers, the firm rapidly launched some breakthrough services like Pingit (Euorpe’s first mobile payment app) and CloudIT (a cloud-based service that allows consumers to store documents and photos online). When launching Pingit, Barclay’s dispensed with their traditional multi-year business case. Mike Walters, head of UK Corporate Payments, was recently quoted in The Economist as saying: “The rate of change in mobile app technology is so fast that the best thing for us is to be aware of our customer trends, and then be fast to execute.”

Without a sustained top-down commitment, change won’t come easy or quickly. Traditional business and IT models, low digital literacy among many executives and a risk-averse culture will slow down digital adoption in some areas. Yet, bankers don’t have a choice if they want to protect their franchise and find new avenues of growth. They would be would be wise to heed the words of well-known British philosopher Allan Watts: “The only way to make sense out of change is to plunge into it, move with it, and join the dance.”

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

Fixing strategic procurement

The current approach to strategic procurement (or sourcing) might be outliving its usefulness in many companies. The original idea was to bring disciplined buying policies and formalized supplier management to the procurement function in order to improve operational and financial results. Like many well-meaning initiatives, however, its implementation has been a mixed blessing. To achieve its potential, managers should rethink and enhance how strategic procurement is executed.

Penny wise, pound foolish

The promise behind strategic procurement was to reduce input and administrative costs, minimize risk and increase supplier collaboration by employing a variety of practices, including: reducing the number of vendors to maximize negotiating leverage and cut the cost of procurement; insisting that suppliers pitch their services through formal request for proposal (RFP); and centralizing buying authority to prevent ad hoc purchases. For numerous firms, the reality has not met expectations, for many reasons:

1.  Barriers to cost reduction

Many private and public sector organizations have not realized long-term cost savings and, in fact, are seeing higher costs. Cost stickiness traces to numerous factors, many of which were unanticipated: using a small number of approved vendors can incite them to engage in oligopolistic pricing behaviour; suppliers end up passing along their higher administrative and pitching costs, and; excluding lower cost providers from an approved vendor list limits price competitiveness.

2.  Reduced innovation & choice

The initial approach to strategic procurement was developed for a relatively stable business world. Yet, today’s economy is anything but that. Yesterday’s approved vendors (chosen because of their size, pedigree etc.) may not be the highest value suppliers today if they have not kept pace with new technological and business model developments. As a result, the client may not be exposed to cutting edge insights and technology. Moreover, incumbent vendors have a vested interest in restricting the amount of innovation that drives down pricing (read: their profits) or is outside their core competence. One of our packaged goods clients revamped their entire strategic procurement strategy after they got tired of watching their competition get to market first with new technologies and a steadily improving cost structure, all generated within their supplier network.

3.  Hamstringing operational performance

Forcing suppliers to engage through a poorly crafted statement of work or bidding process can inadvertently increase the risk of bad operational performance. In one high-profile example, many of the problems with the launch of the Healthcare.gov portal were blamed on the U.S. government’s procurement processes as well as requirements definitions. This is not solely a public sector concern. We have seen many expensive initiatives go off the rails because the original RFPs were focused more on satisfying the requirements of the procurement team than with meeting critical business needs like quickly getting to market or maximizing quality.

Gaps in implementation

According to our experience and research, procurement problems trace to missteps in program execution rather than business model design. The issues vary and could include: focusing on purchase price rather than total, long-term cost; relying on negotiations and supplier leverage strategies rather than broader ‘win-win’ collaboration opportunities; under-investing in procurement capabilities, and; over-involving purchasing in every supplier interaction.

Reinvigorating the model

Strategic procurement needs to evolve into a more bespoke capability. “Historically, strategic purchasing has been used to drive costs down by leveraging economy of scale along with the hope that being a significant customer carries clout,” says Mitchell Lipton, operations manager at auto parts supplier CTS. “In today’s economy there is still a place for strategic purchasing but it is no longer a one-size-fits-all solution.”

Senior leaders should realign their procurement organization to business needs and look for opportunities to add value across the entire design-sourcing-manufacturing continuum. They can do this by asking four important questions:

  1. Where can procurement work more effectively with other key functions — without getting in the way — to ensure strategic alignment?
  2. How can buyers expand beyond a short-term cost-savings mindset to include an emphasis on long-term value such as greater collaboration, continuous learning and innovation creation?
  3. What is the right mix of local and specialized versus national and generalist suppliers?
  4. What tools, processes and skills are needed by the buying organization to improve its performance?

Twenty-first century procurement is no longer just focused on cost or guaranteed delivery. According to Lipton, “In business today the key is speed and staying ahead of the value curve. When dealing with suppliers the most important attribute is flexibility and a philosophy of continuous improvement. You need a supplier that can respond to your changing needs plus has a culture of finding how to do it better.”

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