Archive for the ‘Consumer & Industrial Goods Industry’ Category

Going global the smart way

Canadian companies need to look to global markets to drive growth, or even survive, in today’s economic climate.

The impetus for companies to go global is driven by a number of trends. The country’s market is relatively small, fragmented and grows slowly. Many firms face threats from emerging markets and rebounding American competitors, all spurred on by globalization and falling trade barriers and tariffs. At the same time, it’s never been a better time to export thanks to a weaker dollar, extensive ties between new Canadians and their home countries and the world-shrinking impact of technology.

How can companies prudently go global without incurring undue risk and blowing the budget? Consider this 5C strategy framework:

1. Country acumen

Companies need to deepen their analysis of target markets beyond counting the number of potential customers or identifying competitors. Businesses need a granular understanding of customer habits, distribution channels, pricing and regulations.
2. Competitiveness

Business will never take off if it’s not able to design and deliver a competitively priced product tailored to local needs. Expect to go through multiple executions to find the winning product and an approach to marketing it.

3. Connections

In many markets success hinges on finding and working with politically connected, reliable and experienced business partners. They’re vital to establishing initial credibility, overcoming hurdles and helping secure early customer acceptance.

4. Capital

Companies need not break the bank when exporting, especially when they’ve done their homework and have the right partners. However, managers shouldn’t be too frugal either. Business risks can increase when you under-spend in critical areas like customer care, logistics and local professional services.

5. Commitment

As with other major investments, having unrealistic short-term goals can lead to disappointment. Patience and fortitude are needed, particularly in the less developed markets where things that could go wrong often do.

Learn from others

Plenty of Canadian companies have successfully gone global and offer what they learned to those considering the exporting plunge. CSR Cosmetic Solutions, a medium-size firm based in Barrie, Ontario, is one such example.

CSR is a contract manufacturer competing in the global cosmetics and personal care product industry. It was established in 1943. Almost 80 per cent of the business is exported to Costa Rica, France, Germany and the U.S. among other countries. Here are a couple of top tips that helped them.

1. Raise your game

CSR believes companies have to be competitive on a global basis over the long term, regardless of fleeting advantages like favorable exchange rates. Businesses should also deliver superior products to compete against incumbents in their home markets.

CSR also raised its game by doing the right things, right. For example, they regularly aim to improve competitiveness by stripping out unnecessary costs, training employees and prudently leveraging new, productivity-enhancing technology and equipment.

2. Pick the spots that play to your strengths

CSR is very strategic in terms of which markets they target and how they penetrate them. They only choose markets where their corporate strengths – product innovation, organizational agility and delivering tailored solutions – can deliver a winning value proposition.

Furthermore, CSR minimizes risk by deeply understanding their target market including cultural norms, regulations and customer buying behavior. Finally, CSR strives to eliminate the client’s impression they are dealing with a foreign supplier. For example, in the U.S. the company uses American consultants for business development and account management. Marketing is tailored to reflect regional needs. And CSR’s logistics strategy is designed to virtually eliminate any border issues.

Steve Blanchet, CSR’s president and chief executive officer, says he tries to make its global trade seamless for the company and its customers.

“We continually review and understand the changing market conditions and regulations in our export markets,” Blanchet says.

There is no silver bullet strategy to winning in foreign markets. Instead, success is about keeping an eye on the fundamentals: being bold, doing your homework, demonstrating agility and focusing on continuous improvement from a cost and product perspective.

Mitchell Osak is the Managing Director, Strategic Advisory Services at Grant Thornton LLP, a leading Canadian advisory, tax and assurance firm. He can be reached at Mitchell.osak@ca.gt.com and on Twitter @MitchellOsak

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Unbrand to stand out in the market

For organizations hoping to grow, the mantra is often: faster, better, cheaper. But is this an effective way to build and sustain a brand in an age of consumer skepticism, marketing noise, economic uncertainty and declining product differentiation?

Studies show that as consumers move online, buying decisions increasingly hinge on factors such as social proof, honesty and regular engagement. Firms that fail to pivot their marketing strategy to address these trends increasingly lack integrity and purpose in the eyes of consumers and put themselves at risk of becoming targets of fickle, social-media-enabled customers and activists (see: J.P. Morgan’s #AskJPM campaign).

That’s why some companies are embracing what I call “unbranding” to maximize brand equity and minimize risk. While traditional branding appeals to the left side of the brain — faster, better, cheaper — unbranding appeals to the right side: trust, aspiration, purpose.

  • Trust is is achieved by building credibility through transparency (see: Costco).
  • Aspiration is achieved by developing a brand that aligns with who the customer wants to be (see: Coach).
  • Purpose is achieved by articulating a clear set of values that permeates the entire customer experience (see: Apple).

McDonald’s Corp. is perhaps the most successful unbrander to date. Spurred by customer research and in response to socio-cultural developments, they launched “Our Food. Your Questions.” — a digital hub where McDonald’s employees, suppliers and nutrition experts answer questions from curious consumers and dispel myths that have long plagued the global fast-food giant. Here is a sampling from the site:

Q Is your meat made of cardboard?
A “Cardboard is for moving boxes, meat is for eating.”

Q Did McDonald’s hold a competition to make an edible burger out of worms?
A “We’ve never held such a competition.”

Q Is your beef processed using ‘pink slime’ or ammonia?
A “No.”

Q Why is the food at McDonald’s so cheap?
A “Buying power.”

Q Is your food tasty?
A “Is the Earth round?”

This program is not about bragging, preaching or evading. Rather it’s about dialogue, humility and openness. For McDonald’s, this represents a paradigm shift in how the company builds its brand and reinforces its core message of quality.

“Today, brands need to get comfortable with being uncomfortable and challenge convention,” says Antoinette Benoit, senior vice president, national marketing, McDonald’s Canada. “It’s important for us to have an ongoing and transparent two-way conversation with our customers in order to make a meaningful and long-lasting connection with them. This not only enables us to tell our story but also to evolve our brand based on what’s important to our customers.”

This unbranding strategy has contributed to improving the overall perception of McDonald’s. The idea came out of the Canadian wing of the company, but benefited from further development by McDonald’s France and McDonald’s U.K., both of which were able to overcome business and public relations challenges and grow revenues. The campaign has now been adopted in Australia, New Zealand, the United States and parts of Latin America.

Behind the success of this unbranding strategy was an up-to-date understanding of consumer needs, a return to focusing on historical core values (“quality” in the case of McDonald’s) and courage on the part of management to follow though on the program’s requirement for honesty, transparency and directness. Moving forward, McDonald’s will build on the strategy’s success by incorporating these learnings across the entire customer and partner experience through new training, advertising and more.

How can you make unbranding work for your business?

  1. Understand who you are as company. This should be based on your institutional values, history and how you are perceived within the marketplace.
  2. Identify your customer’s needs. This should be accomplished through both traditional and new marketing-research techniques.
  3. Create a vision or ethos for your company. This should encapsulate who you want to be and how you want to be perceived as an organization.
  4. Select the appropriate communications methods. Understanding how to articulate your message is as important as knowing what your message is.
  5. Unify your message across all customer touch points. Consistency is key in articulating a message that will both resonate and change perception.

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

4 rules for running a business

Many companies in mature sectors have been known to embrace the latest management thinking (or fad) to help cope with low market growth, margin compression and lack of differentiation. Examples of these “big ideas” include lean management, outsourcing, business process re-engineering, offshoring and, lately, social business and cloud computing. Despite considerable effort and investment, most of these firms have been unable to outperform their peers over the long term, often due to weak strategic fit, poor planning or flawed execution.

In fact, only 344 of 25,000 public companies analyzed in the Harvard Business Review by Michael Raynor and Mumtaz Ahmed of Deloitte consistently produced above average return on assets from 1966 to 2010.

What made these firms special? Two rules identified in the study — noteworthy for their simplicity, reliability and practicality — helped drive the extraordinary business performance. Below them, I’ve included two other rules for achieving exceptional performance well worthy of consideration.

Better before cheaper

Companies need to focus first on service, quality, design or distribution — not on being the lowest-price competitor. Non-price differentiated brands tend to command richer margins, which can support further product and marketing investments, which, over time, further sustain the firm’s competitive position and profitability.

Revenue growth before costs

Leaders should prioritize top-line revenue by driving volume gains, competing in growing categories and taking advantage of every opportunity to maximize pricing. Volume increases also bring other benefits, including scale economies and channel optimization, which help drive down operating costs and block out competition.

Brands matter

“Brand equity might be the only asset that consistently generates differentiation, higher margins and long-term revenue streams,” says Jerry Mancini, president, Dole Packaged Foods Company. “Dole’s focus on value, quality and brand-building has helped deliver almost 100% brand awareness in close to 100 countries. This allows us, for example, to provide transient consumers around the world with the same quality and unique products they are familiar with, wherever they go.” This strong brand equity has enabled Dole to more easily tap new markets and categories — and drive higher volumes.

Maximize human capital

“Competition, technology and customers are never static,” says Paul Bruner, a partner with McCracken Executive Search. “The key to long-term success is attracting and developing leaders of exceptional character, with the brains, passion and resourcefulness to adapt to and lead through changing circumstances.” Organizations need to focus on recruiting and training the right employees and reinforcing positive behaviours through innovative training and compensation programs.

To be clear, the above four rules suggest a direction, not specific strategies and tactics; it is up to management to make the tough strategic choices and back them up with good plans and sufficient investment. Leaders still need to understand where they should compete (i.e., which markets with which value proposition) and what they are especially good at (i.e., organizational and asset fit). They’ll also need to support their mission by assembling the right capabilities and cultivating them through a culture of continuous improvement and adaptability. Finally, the company and shareholders must recognize they are playing the long game — they will need patience and resilience as well as management systems that reinforce long-term thinking.

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

The dangers of outsourcing

Conventional wisdom says companies should outsource manufacturing and operations to take advantage of lower wages and faster operational scalability. Aside from the question of whether this strategy (particularly when it involves offshoring) always delivers the promised benefits, you may also wonder whether outsourcing makes long-term strategic sense. The demise of Kodak, the iconic U.S. photography company, suggests organizations need to be wary of outsourcing strategic business activities. Outsourcing has been occurring for decades, based on the idea that moving labour-intensive work offshore would significantly reduce cost, without jeopardizing a firm’s competitiveness.

Kodak’s fall shows this is a dangerous assumption. Companies can unknowingly reduce their competitiveness when strategic work such as manufacturing and product design is outsourced. In other words, they stand a good chance of loosing the secret sauce that drives meaningful differentiation. Moreover, outsourcing accelerates the diffusion of knowledge and talent to outsiders thereby lowering barriers to entry. The result is higher levels of competition and a lower return on invested capital.In addition, many operations that were once performed more economically offshore can now be in-sourced at a similar cost and much lower risk.

Founded in 1893, Kodak was the dominant player in the camera, film and processing business with a strong reputation for product and manufacturing innovation. Ironically, Kodak developed the world’s first digital camera in 1975, yet was never able to leverage that early success to take advantage of the market shift to digital photography. Instead, the way Kodak expanded its digital business sowed the seeds of its demise. In 2013 the firm declared bankruptcy.

Harvard Business School Professor Willy Shih had a front row seat, having served as president of Kodak’s Digital & Applied Imaging business through the turn of the 21st century. “Much of the camera technology was invented in the United States, but U.S. companies gave it all up,” Shih said. He contends that when Kodak moved pieces of their operations overseas many years before, they lost technical expertise, product innovation and manufacturing skills. When digital cameras became the rage, Kodak had lost the ability to put together a compelling digital camera solution. As a result, they were unable to compete in this rapidly growing market. Coincidentally or not, other companies such as Dell, Blackberry/RIM and HP saw their fortunes decline during the same time they aggressively offshored major parts of their value chain.

From a strategic perspective, manufacturing a product can trigger new ideas that lead to improved operational efficiencies and product innovation, especially when there is close contact between users and designers at the production level. Maintaining key operations also allows companies to retain vital research and development, support and manufacturing knowledge, which are key to producing next-generation products. These long-term spillover effects can explain why successful consumer technology companies such as Apple and Google limit outsourcing to manufacturing, and keep product design, branding and customer support in-house.

Outsourcing need not be a risky strategy. The following are three things leaders should consider in deciding which activities are performed internally and which can be left to others:

Focus on what’s important

Many of the managers we speak with do not know what makes their organizations tick. Leaders need to know the key capabilities (e.g., assets, brands, people, knowledge, and resources) that deliver their unique value proposition so they can safeguard them.

They also need to understand what new capabilities (e.g., digital competencies) are required to generate growth three to five years out.

Double down on the core

Continue or increase investment in your differentiating, core capabilities that drive your market position and return on assets. These areas would include innovation, brand building, customer service or employee training.

Take steps to in-source strategic activities (those that are needed for growth) from external vendors.

Optimize existing relationships

For the foreseeable future, outsourcing is here to stay. It is unrealistic for companies to do everything in-house. In other cases, it is essential to unwind outsourcing arrangements or build up internal capabilities.

For these ‘sticky’ deals, managers should review and optimize their existing relationships to: Insist on and enable providers to deliver continuous improvement in terms of innovation, service levels or cost savings; ensure the company has mechanisms to capture the same learnings in areas such as product manufacturability and process efficiencies as their outsourcer; consider a dual outsourcing and in-house strategy for some activities to maintain flexibility and knowledge accumulation.

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

3 ways to maximize sponsorship ROI

If you followed the World Cup, you would have noticed the many corporate sponsors of the event, the teams and players (i.e. the properties). Sponsoring the right property can give a brand a major boost in awareness and appeal. However, having the wrong approach or property could waste the investment and compromise the firm’s brand image. Fortunately, there are some best practices to follow to maximize a sponsorship’s potential.

Corporate sponsorship is big business. Annual global investment exceeds $25-billion, growing at almost 10% each year. Sports — teams, events and athletes — make up the majority of spend. Growth is being driven by an increase in the number of new properties like rock bands, festivals and charities, the rising value of some properties as well as the growing practice of tiering sponsorship support (think platinum, gold, silver levels).

Sponsorships are an important way for many companies to get their brands in front of elusive, skeptical and mobile consumers who are regularly bombarded by numerous marketing messages. Opportunities can range from naming rights on a stadium and client relationship events to limited edition products and custom advertising programs. Sponsorships can significantly build a business (think Michael Jordan and Nike) or hurt a brand image, as was the case when Kate Moss’ personal issues led to major problems for Chanel and H&M. How do you ensure you get the most value from this powerful but risky marketing tool?

The best programs get three things right:

1.  Align the opportunity to business objectives

Given the range of properties, you need to use a thorough process to filter and analyze the sponsorships to find strategic congruence between the property, brand and target audience. When affinities are lacking, the opportunity and investment could be wasted. In a high-profile program we studied, a mismatch between the firm’s customer base (women, 18-49) and the properties’ core audience (men 18-24) led to a lower than expected ROI.

2.  Promote the sponsorship

Companies often spend a lot of money acquiring sponsorship rights but very little on the promotional support that would magnify its impact. Various studies suggest that underperforming programs spend less than $1 on promotion for every $1 spent on sponsorship rights. The lack of marketing support may trace back to management neglect or the need to limit spending after paying for the rights. In one case, a client of ours believed that becoming a concert sponsor alone would drive their business. Though the sponsorship was deemed a success, management acknowledged that a lack of promotional support resulted in the firm missing out on millions of dollars in merchandise sales. Conversely, higher performing companies spend more than $1.50 in promotion for every $1 in sponsorship. Not only do these firms magnify their sponsorship investment but they also integrate their properties within their marketing mix.

3.  Evaluate performance

Despite the importance of sponsorships, many firms do not effectively quantify the impact of their expenditures. This is not surprising given the difficulty of linking sales directly to sponsorships. Successful companies use a variety of approaches. The simplest way is to survey customers, partners and employees on program impact and lessons learned. Firms can also tie total program spending to key metrics such as unaided awareness or purchase intent, and then link them to sales using regression analysis. The most sophisticated approach uses econometrics to ascertain links between programs, awareness and sales, and then isolate the impact of sponsorships from other marketing and sales activities.

Maximizing sponsorship value can be a challenge, especially when firms have multiple properties, customer segments and marketing tactics. BMO Financial Group is a major sponsor that has figured this out. The bank successfully operates a North American-wide program with dozens of properties and partners including: NBA Basketball (Toronto, Chicago), NHL Hockey (St. Louis, Chicago) Major League Soccer (Toronto, Montreal), amateur sports and the Calgary Stampede.

The Bank looks at sponsorships strategically, with a proven approach to identifying, evaluating and managing sponsorship deals. Each property — whether it is in sports, arts or regional events — aims to reach diverse customer segments within local communities as well as appeal to broader national audiences. The bank magnifies the impact of its sponsorships by integrating its elements with other marketing activities. For example, BMO was able to quickly maximize its sponsorship of the Toronto Raptors during their 2014 playoff run by increasing media advertising and launching a new Twitter campaign.

Finally, BMO sees a deal signing as the beginning of an iterative win-win relationship between the parties and not an end in itself. Justine Fedak, senior vice-president and head of brand, advertising and sponsorships for BMO, emphasizes the importance of long-term partnership. “Similar to marriage, a sponsorship begins with a mutual understanding of shared values and then evolves over time. Gone are the days when you slap a logo on something and walk away.”

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

Consumer Good’s dilemma

Consumer Packaged Goods (CPG) has always been considered a solid, recession-proof business. After all, people always need to eat, wash and look after their households. However, steady demand does not mean firms can afford to be complacent. A number of developments are producing significant headwinds – and opening up new opportunities for growth. How CPG leaders navigate these waters can make the difference between building or losing market share.

The CPG industry is facing many challenges, including:

  • Weak growth

Times are tough. Unemployment remains high, incomes are flat and a recessionary mindset continues to influence consumer behavior in terms of higher coupon usage, increasing market share of deep discounters and the growing popularity of lower cost private label brands.

  • Margin pressure

Margins are under siege tracing to rising input costs and limited pricing power due to retailer consolidation and pricing pressure from discounters. Emerging market growth was supposed to offset this funk. However, emerging markets have become more competitive due to slowing growth rates and the rise of viable, more competitive local brands. Profit risk comes at the same time as managers need to boost their capital and marketing spend to drive product & manufacturing innovation and next generation IT capabilities.

  • Growing role of regulators and activists

Governments are getting more involved in what goes into our bodies and households. Increased oversight has important implications in terms of regulatory compliance, product development and marketing tactics. Some regulators are trying to levy higher taxes on products that are considered unhealthy, introducing measures to improve product safety, scrutinizing product claims and labels, and discouraging marketing to children. Moreover, there is increasing consumer demands for transparency on how companies perform when it comes to sustainability and corporate social responsibility as well as where products are made.

These are not easy challenges but the future need not be grim. Leaders should consider the following strategies to cope with this ‘new normal’:

  1. Embrace digital transformation

New digital technologies and devices have fundamentally changed consumer behavior in many categories. Winning companies will skillfully embrace digital transformation to more tightly connect their brands to consumers, and demand to their supply chains.

Yet, most firms we have researched have been cautious in embracing digital business. They do so at their own peril. Many companies need to quickly become proficient at digital marketing; adapt to new information gathering & mobile buying practices; leverage Big Data insights and; recognize the role of social networking in driving word of mouth referrals, awareness and community-building.

CPG firms have a variety of emerging technologies at their disposal. They can use location-based services to deliver personalized promotions or content based on their physical location. Companies can also leverage a smartphones or tablet’s camera functionality to directly enhance the customer experience. By scanning QR codes on a product, consumers can get more information, such as advice on how best to use a product or which complementary products to buy.

On the operational side, cloud services plus “agile” development practices give companies the ability to shorten the product innovation cycle, reduce infrastructure costs and rapidly scale functional capabilities.   Mining Big Data insights can help organizations better identify consumer preferences and trends, improve marketing ROI, refine pricing and deepen relationships with retailers.

  1. Refine brand strategies and portfolios

The difficult economic climate requires brand managers to refine their targeting and value propositions while holding down cost. In particular, companies will need to have distinct strategies to address an increasingly stratified market of affluent and lower-income consumers as well as seniors and ethnic groups. Multi-category firms should think about pursuing complexity reduction initiatives to cull poorly performing and costly sizes, variations and brands as well as streamlining operations and maximizing scale economies.

  1. Optimize channels

According to a 2013 Deloitte study, U.S. consumers consider 2.5 channels for their CPG purchases across 28 food, beverage and household goods categories. Consumer migration to both on and offline channels for selling and support creates operational, IT and marketing headaches around integration, alignment and efficiency. To profitably serve consumers with a consistent experience, firms need to balance their reliance on traditional channels like retailers and wholesalers with the need to follow consumers into emerging channels (e.g., mobile computing) and deliver them more personalized service, products and information. In 2014, the ‘holy grail’ of brand strategy has become delivering the omni-channel customer experience.

  1. Tweak supply chains

Many companies can do more to squeeze more flexibility, predictability and efficiency from their supply chains. For example, Big Data and Predictive Analytics combined with advanced IT systems can better match supply and demand in real-time, minimizing inventory levels, improving service performance, and reducing stock-outs.

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

Blockbuster innovation

Companies could learn much about innovation from the Spanish general, Hernan Cortes.  In 1518, Cortes was instructed to sail to Mexico and overthrow the Aztec empire. According to the story, he proceeded to scuttle his boats after putting down a mutiny of some of his staff. This sent a powerful message to his soldiers that there was no retreat. They would conquer Mexico or die in their efforts. History judged his decision successful (if not immoral). His small army of 500 soldiers conquered the country in a mere two years.  What management lessons can be gleaned from this historical episode?

An “all or nothing” strategy seems counter-intuitive when looking at the best way to commercialize risky innovations.  Conventional wisdom says that launching small, measurable experiments or pilots is the best, lowest risk approach to introducing new products or technologies. Though this seems like a prudent tack, it has not necessarily produced market wins. Numerous studies show that the success rate for new products has stubbornly hovered around 10-20%. Fortunately, there may be a better way to commercialize innovation.

A professor at Harvard Business School, Anita Elberse, has studied creativity-driven industries like music, sports, movies and publishing.  In her book Blockbusters, Elberse found that the companies with superior financial returns had strategically focused their efforts and capital on producing movie blockbusters, recruiting superstar athletes or signing popular authors. To use a baseball metaphor, these firms always swing for the fences instead of playing it safe trying for singles and doubles. According to her data, these industries exhibit a ‘winner take all’ dynamic; less than 10% of projects, teams or entertainers produced more than 90% of industry revenue and profit.

In “winner take all” markets, the best strategy is to singlehandedly aim for blockbuster products.  The best way to do this is to focus investment and management attention on proven entities, assets or projects, like a movie sequel, a superstar free agent athlete or a popular book franchise.  Funding a limited number of major innovations is not enough. You also need to front-load your sales and marketing effort to boost initial channel distribution and trigger word-of-mouth effects. Elberse considers a blockbuster strategy a lower risk approach because it improves the odds of success early on and enables firms to cut their losses if results do not pan out.

Applicability to other markets

While Elberse studied the creative and sporting industries, other information-driven sectors may experience similar blockbuster dynamics. Industries with high fixed costs, a low marginal cost (when producing more) and a high marginal profit (on each additional sale) can quickly evolve into “winner take all” markets, particularly when digital technologies reduce customer search costs and eliminate the need for physical proximity between the buyer and seller. There are many reasons for all CEOs to consider this approach for their business:

Rallying the troops

Big innovation bets focus employee and supplier attention, create positive urgency and prevent individual or departmental agendas from stealing resources. 

Reduces complexity

Many R&D projects, particularly small ones, can develop institutional momentum making them difficult to cancel.  Managing this portfolio can generate significant complexity, increasing organizational cost and diffusing effort.  A blockbuster strategy eliminates these wasteful costs plus allows managers to best leverage scale economies in areas like media buying and raw material purchases.

Satisfy real customer needs

Movie studios concentrate investment and time on stories, actors and directors with proven consumer appeal (e.g., a sequel).  The discipline of only targeting key customer needs in profitable segments with real innovation improves the chances of market success.

Elberse’s learnings are relevant to many other industries including education, training, professional services and software. However, not every firm is a good fit. We believe enterprises should have three characteristics:

1.  Self-awareness

Companies that are good at placing the right innovation bets tend to have a good sense of what their core competencies are and where they need to partner or bypass.

2.  Decisiveness

Though having a good innovation evaluation process is important, management still needs to make tough calls quickly in periods of uncertainty.  Moreover, following a blockbuster strategy requires firms to have a culture and performance measurement system that is tolerant of failure.

3.  Nimbleness

Rigid plans lead to risky, binary decisions. Even in the movie industry, extensive consumer research still takes place.  Producers don’t hesitate to make edits or change endings based on focus group research.

Utilizing a blockbuster approach goes against conventional wisdom.  However, there are many examples of hurting companies like AppleIBM and Xerox that followed this strategy and have re-emerged as winners.  Managers should understand their operational dynamics, consider the strong financial business case, and analyze the impact of digital tools like search bots or recommendation engines that create “winner take all” effects.

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

Strategic planning with game theory

If they haven’t done so already, many companies will soon head into their 2014 strategy and capital planning season. Whether driven top-down or bottom up, a planning process can be difficult and contentious due to conflicting strategic goals, a lack of data, as well as insufficient resources and time.  Furthermore, managers naturally manoeuver to get their projects funded and existing budgets protected.  Inevitably, there will be winners and losers.  This zero-sum environment can easily lead to strife, and quite often, poor investment decisions.   Fortunately, there is a better way to make these vital decisions.

Planning challenges

Strategic planning in large enterprises is rife with obvious and hidden problems.  Organizational dynamics create inherent punishments and incentives that can lead to spending distortions like ‘empire building’ (asking for more resources than are currently required) or ‘under counting’ (purposely underestimating the true cost or resources needed to get a project started).

There are also issues at the people level.  In 20+ years of executive facilitation, I have regularly seen leaders exhibit stubbornness,  uncooperative behaviour and parochialism. These negative behaviours can make it very difficult to reach a supportive consensus, let alone make the right decisions.  Even if agreement is reached, individuals may consciously or unconsciously undermine the implementation of the plan because they never really bought into the choices in the first place.

Enter game theory

A little while ago, we were engaged by the CEO of a products company to help provide analytical and planning support for his firm’s annual strategy development exercise.  He felt their traditional process was not effectively allocating scare capital to the highest revenue/lowest risk initiatives and getting sufficient buy-in during and coming out of the process.  Moreover, the CEO wanted to avoid win-lose outcomes that inevitably trigger management in-fighting and reduce execution speed.

Early in the engagement, we saw many similarities between the company’s challenges and game theory principles.  Game theory is the use of mathematical modelling of conflict and cooperation between decision-makers. At its core, issues with strategic planning resemble one game, the prisoner’s dilemma.  A prisoner’s dilemma is a situation in which multiple players have options whose outcome depends on the simultaneous choice made by the other; this scenario is often expressed in terms of two prisoners separately deciding whether to confess to a crime based on possible punishments.  In an organizational context, various managers or business groups compete for the same finite pie (read: capital, resources) through different initiatives that have various payoffs and risks. This competitive situation breeds mistrust and a misunderstanding of future cash flows/challenges, often resulting in poor strategic choices and inefficiencies, rather than cooperation and rational decision-making — which maximizes the outcomes for all.

Making it work

To break this behavioural and analytical logjam, we took leaders from across the organization through our Game Theory tool kit.  This process is designed to facilitate better strategic and financial decisions by bringing organizational and business issues into the open; fostering math-driven, rational decision-making and securing alignment around final decisions.  We define alignment as a condition where each leader or division is maximizing his or her own corporate and personal interests while having no unilateral incentive to deviate (or sabotage) the plan, since his or her strategy is the best they can do given what others are doing.

Through a series of workshops, we led management through the following (simplified) approach:

  • Establish the goals of the exercise, choose the internal players and align around the current internal and market state
  • Clarify the strategic options, with estimated payoffs and risks
  • Select the appropriate game(s) to run
  • Model a number of strategic and investment options i.e. have the leaders/ teams play the game with the consultant acting as a neutral facilitator.
  • Align around the “best” decisions

Overlaying game theory methods into the planning process worked well for this client.  Our systematic, logic-based analysis helped the leaders come to rational funding decisions that met long-term corporate and managerial needs.  Using game theory minimized the impact of negative individual and cultural factors, especially in ‘give and take’  situations where management bias and hubris can skew decisions. Finally, the use of computer modelling was essential to performing a thorough analysis of multiple strategic options, easily keeping track of hundreds of different internal and external variables.

Yes, but…

Utilizing game theory is not a slam-dunk.  When poorly understood or executed, game theory can be distracting  and lead to flawed analytical results. Furthermore, these tools require a resource that is comfortable with advanced math, facilitation and modelling.  However, these issues are not deal-breakers.  Our game theory experience with multiple clients proves that there is no better way to tackle complicated strategic decisions, increase “issue” visibility and secure executive alignment.

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

Customer fees spark a backlash

Millions have enjoyed Seinfeld’s “The Library Book” episode, in which an aging library official zealously pursues Jerry for an overdue book from 1971.  Though a parody, the plot’s sub text – the perversity and unfairness of an organization’s penalties – clearly resonates. Managers that heed this message can reduce business risk and improve customer satisfaction.

Understandably, firms look to cover extra costs and encourage certain behaviors by imposing supplemental fees.  Many consumers, however, resent the use and fairness of these practices and will quickly desert (and bad mouth via social media) a brand when they believe they have been treated unfairly.  New research published in Business Horizons, a journal of the Kelley School of Business at Indiana University, discusses how companies can prudently employ extra fees to cover reasonable costs without inciting a popular backlash.

A tough habit to kick

Today, many companies especially in the Telecom, Airline, Retail, Banking and Credit Card sectors, rely on extra fees – for late returns, cancellations and service changes – for a significant portion of their revenue and profits.  For perspective, penalties for late payments in the U.S. credit card industry almost tripled from 1997 to 2007, generating approximately 10% of profits over that period. In 2009 alone, airlines in the U.S. reaped about US$2.4B (or roughly 3% of their overall revenue) from fees assessed for changing or canceling flights.  For some enterprises like Blockbuster Video, these revenues represented the difference between profit and loss.

Fee-addicts are not irresponsible or stupid; they understand they will lose customers and suffer from a reputational hit. However, they believe the short-term benefits outweigh the long-term pain.  What many companies do not realize is that the era of consumer passivity may be coming to an end and the risks have increased, particularly given the power of social media and activist groups.

The survey says…

The study’s authors surveyed a representative sample of 200 U.S. consumers who had been charged a penalty of some sort over the past six months from a variety of industries.  Not surprisingly, almost 75% of the respondents who previously had a positive impression of a company reported being upset with the way they were treated.  More importantly, 18% of those surveyed reported bad-mouthing the firm to their on and offline friends and co-workers.

There are many reasons for this anger.  Firstly, 64% of the respondents thought the charges were unfair.  Almost 50% claimed they were unaware that they would be penalized, either because the penalty notice was buried in the fine print or because it was never communicated.  Secondly, 74% of those surveyed considered the penalties excessive, especially when they resulted from an unforeseen emergency or because they felt the penalties were applied punitively.   Finally, only 27% of the consumers reported that the company waived the charge out of courtesy or to appear fair.  Given these findings,  organizations run a major risk of treating (or appearing to treat) consumers poorly.

Prudently avoiding risk

A number of steps can be taken to soften the blow of applying extra fees:

Get your data

Policy changes should not be made in a vacuum.  Managers need to understand the true revenue and profitability contribution of extra fees.  On the cost side, they need to know the revenue loss from customer churn and the negative impact of a decline in brand image. If costs exceeds revenues, then the policies should be reconsidered.

Moreover, every customer is not the same and should not be handled with a blanket policy.  For example, some people are habitual late payers while others through their loyalty have earned the right to make an honest mistake. Managers should segment their consumers through qualitative research and gauging call center interactions.

Provide flexibility to staff

Prudent managers know when to cut their losses in certain situations. To a point, they should properly train and empower front line staff to waive fees for emergencies, one-off cases or when dealing with a valuable customer.

Be transparent and explicit

The majority of people do not read terms and conditions, particularly if they are confusing or tough to find.  Companies should simplify and make more transparent their messages around fee changes and penalties.

Revisit some policies

For every possible penalty clause, ask yourself a simple question:  Would the policy really upset you, if you were the client?  For the clauses that carry a ‘yes’ answer, it is likely they do not pass a fairness test and would not be suitable.  Companies should also consider fixing touch points in their customer experience that are needlessly frustrating such as long phone queues and multiple customer representative hand offs.

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

Organize around capabilities not functions

Can a 21st century business excel with a 20th century organizational structure?  Unfortunately for a lot of companies, the answer is no. To cope with today’s challenges, companies need to be agile, adaptive and tech-savvy.  This is extremely difficult when the traditional organizational structure consisting of multiple, siloed functional groups like marketing or finance are incapable of delivering the capabilities needed to drive competitiveness while minimizing risks. Instead, CEOs should consider redesigning their structures around strategic capabilities in order to maximize organizational performance at the lowest cost.

Dysfunctional groups

The functional model has become so ingrained in management philosophies that few question its usefulness. They should.  By their nature, functional groups are specialized, good for a few narrow tasks but challenged to operate in difficult business environments characterized by competing priorities, limited resources or featuring cross-organizational problems like low employee engagement. Anyone who has worked in a large enterprise knows that many functional groups can be divorced from the needs of the customer or business units, rigid in their approach and often lacking in the latest skill sets.

These drawbacks make it tough for functionally driven organizations to develop world-class capabilities and support strategic priorities.  Attempts to address these shortcomings by adding matrix-based teams and shared services usually come up short. Functional groups will often retain their original veto power, limiting the power of collaboration.  Furthermore, using fluid, matrix teams can increase complexity, add confusion and slow down decision-making.  These measures may ultimately fail because they don’t get to the root of the problem: the functional model is no longer relevant for today’s competitive challenges and environment.

Capabilities win

One of our client projects demonstrated that some firms are better off with a new organizational structure, one built around capabilities and not functions.

A manufacturer’s procurement department had significant performance issues that were affecting their competitiveness. In this sector, a well-tuned procurement capability is critical to managing an extensive parts list that feeds into a just-in-time production model.  The department’s narrow cost minimization focus worked initially but then the wheels fell off. The procurement group became siloed,  no longer responsive to the divisions that were trying to become more customer-centric. Moreover, the firm was no longer receiving new innovations from its chastened vendors. Our solution was to create an internal Procurement Centre of Excellence.  We worked with the lines of business and other functional groups to develop a new and unique Procurement structure that could align their activities to corporate strategies, attract new talent and better address all stakeholder needs. The formation of this new capabilities-based group led to improved vendor relations, reduced internal politicking and lower purchasing costs.

Implementing a capabilities-driven structure

The first step is for each company to identify those capabilities, which are needed to outflank competition, and those they just need to ‘keep the lights on’.  For strategic capabilities, the firm would identify which internal and external ingredients are needed to build a world-class capability. Once many of these people, tools and IT assets are assembled, the leadership will want to integrate them into the enterprise through the following steps:

Establish new senior roles. Capabilities-based teams should have C-level sponsors, similar to a Chief Risk Officer or Innovation Officer to ensure accountability, align plans to corporate strategies and to garner the necessary authority and resources.  These unique leaders need to be politically savvy and have cross-functional knowledge so that they can reconcile the disparate needs and assets of various groups.

Create permanent cross-functional teams. Capabilities-based teams should combine multiple skill sets and functional specialists within formal structures (i.e. part of the organizational chart) and with clear mandates and resources.

Tweak the systems. Management and IT systems should always support strategy.  Firms will need to redesign some of the policies and practices to incorporate the new structures.  Some areas to consider include recruiting, performance measurement and budget allocations.

Cultivate generalists. To be successful, these new structures must staff beyond narrow functional skills to include people with strong generalist skills and habits (representing key internal groups) and traits such as problem solving and collaboration.

Measure performance. As these groups are strategic, they need to be measured and managed through charters and metrics that directly link to key corporate goals.

Organizational change is never easy. In the above client example, management had to overcome cultural, reporting and vendor-management challenges.  However, the results are well worth it. Companies that do their homework and move boldly to a capabilities-based organizational structure can reignite corporate performance and competitiveness.

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