Archive for the ‘Mitchell Osak’ Tag

Innovate better

Much has been written about the challenges of generating and commercializing innovation.  It is a truism that any company that can translate more innovations into commercial success will be able to outflank competition, improve financial performance and better meet customer needs.  By leveraging new technologies and practices, firms can build new experimentation capabilities that will improve their odds of success.  However, these approaches would have to be baked into the innovation generation and commercialization process.

Most companies make fewer but larger innovations bets – often missing key data on customers, costs and competitors.  An experimentation-focused company, on the other hand, looks first to place more, smaller bets or experiments.  The role of these tests are to generate critical internal and external learning around consumer uptake, usage etc.  As such, they must be quickly designed, deployed and measured  Innovations that pass muster have fewer data gaps and will more quickly secure management attention and resources, thereby increasing its chances of success. Like any significant change, however, building an experimentation capability will often require a process and cultural shift within the organization.

Below are 3 ways firms can use experiments more to develop better ideas, faster and at lower cost.

Open up the innovation process

Managers can increase the intake and vetting of new ideas by opening up their innovation and R&D effort through ‘Open Innovation’ strategies that foster linkages with entrepreneurs, suppliers, universities and other firms.  Many companies have successfully deployed this approach including P&G, 3M and Eli Lilly. To successfully implement this practice, organizations need to adopt an ‘open innovation’ mindset as well as ensure there are supporting management systems.

A good first step for managers should be inward, by breaking down internal barriers like geographic, departmental or data silos that limit the cross-pollination of ideas and technologies.  Firms can also implement a variety of innovation-enabling strategies such as deploying gamification systems, fostering horizontal job mobility and creating collaboration platforms.

Exploit enabling technologies and processes

New tools now give managers the ability to perform quick and dirty, yet feedback rich, experiments in real-time.  For example, Amazon has the capability to quickly run and measure a number of different online marketing, design and functionality tests aimed at different customer groups.  In the consumer and industrial goods sectors, rapid advances and falling costs in 3D-printing technology gives managers the ability to quickly ‘print’ prototypes and test market small batches of customized goods.  This capability avoids the cost and time of developing tooling and sourcing bulk product orders.

The emergence of online virtual worlds such as Second Life, Eve Online and Habbo give enterprises a new channel to test new products and get intimate with their target consumers. These environments are ideal for measuring innovation interest, simulating retail conditions and exploring competitive reactions. By using Avatars to represent themselves online, consumers can provide rich feedback on their needs, especially in sensitive areas like healthcare.

Leverage the crowd

A number of new operating models are exploiting the power of the ‘crowd’ to deliver concept or product feedback, provide decision making support or raise capital.  Organizations like Netflix, IBM and the X Prize Foundation have used crowdsourcing to leverage a large number of people (often through online collaboration tools) to address specific tasks that can benefit from collective wisdom or effort. Crowdsourcing practices have proven to reduce the cost of software testing, spark creativity, raise fund for early stage ventures, and solve difficult technical challenges. Despite its value, crowdsourcing practices should be used prudently.

Predictive markets are another method to forecast the success of an innovation.  Predictive markets are based on the notion that the buying decisions of many individuals within a speculative market can produce an accurate prediction of a development or an event’s occurrence, success or failure.  The current market prices are interpreted as predictions of the probability of the event (e.g, product launch) or the expected value of the parameter (e.g., the likelihood of its success). These tools are considered sufficiently accurate for many businesses like Siemens, Pfizer, and GE to use them internally for product planning, innovation assessment and evaluating marketing ideas.

Building a core competency in experimentation does not happen overnight. Leaders may need to re-tweak their management systems, workflows and cultures to more willingly tolerate failure, share information better and leverage external input, partners and resources. However, those that can embed experimentation within their organization will gain a significant competitive advantage.

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

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Great service does not always lead to customer loyalty

Conventional wisdom says that consistently providing service excellence will deliver high levels of retention.  According to new research from the Harvard Business School, this is not always the case.  Companies that offer high levels of customer satisfaction may still experience loyalty problems if competition offers even better service.  In fact, the research suggests that the customers you think are your most loyal are likely to be the first to jump ship when a challenger to your service superiority enters the market.

The researchers, Harvard Professors Dennis Campbell, Frances Frei and doctoral student Ryan Buell explored the link between service levels, customer loyalty, and competitive strategy in the U.S.banking sector. The 2002 to 2006 study analyzed data collected from a large U.S.domestic bank that competed in more than 20 states.

The study’s findings confirmed some earlier research on the impact of corporate and service strategy on retention.  In a nutshell, companies who generate high customer satisfaction scores remain at risk when competition raises the service stakes.  Conversely, the research indicates that firms rated low in service quality are relatively immune to premium competitive service offerings. 

The reasons for these counter-intuitive findings have a lot to do with the customer expectations established in part by the incumbent provider. The longer a firm has held a service advantage in a local market, the more sensitive are its customers to it service levels relative to those of competitors.  Given their higher expectations, service-driven customers are more willing to try other firms and products that trumpet and deliver service excellence.

Despite these conclusions, managers should be mindful of throwing out the service baby with the bath water when setting strategy.  The study found that even though high-end customers can be fickle, a company can still attract and retain customers in a variety of markets with a superior customer experience.  There are a number of ways to do this:

Avoid complacency

Firms can avoid resting on its service laurels by staying abreast of customer needs, focusing on continuous improvement initiatives and proactively investing to significantly enhance their customer experience.

Consider each product category separately

Customers will trade off price and service depending on the product they are seeking and the importance they attach to it.  In general, customers – in the long run – purchase the goods that represent their ideal combination of price and service. As such, delivering more service than is needed (or is willing to be paid for) would be sub-optimal.

Understand that service sensitivity varies by market…

According to the researchers, there are considerable differences in the type of customers you attract and retain between markets.  This variance suggests that managers should tailor their service and marketing strategies depending on local market conditions, competitive threats and customer needs.

…But be wary of too much customization

Local market service strategies come with considerable costs in terms of operational complexity and brand dilution.  Firms need to carefully weigh the pro and cons of service customization for each market.

Make it difficult to leave

If high service levels by itself won’t ensure loyalty maybe raising a customer’s switching cost or providing loyalty-based incentives would do the job.  For example, managers could offer discounts for long term contracts, extend warranty periods or launch high-value loyalty programs.

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

Do genes influence consumer choice?

Perhaps, according to a new study coming out of Stanford’s Graduate School of Business.  The research, the first of its kind, studied the link between genetics and consumer decision making.  Conventional marketing wisdom says that consumer choice is unpredictable and can be influenced through advertising, packaging etc. The new findings suggest that consumer choices are in fact very stable, if not genetically pre-determined. 

The authors, Itamar Simonson and Aner Sela, explored the impact of genetics on consumer decision making by studying the behavior of identical and fraternal twins. Each set of  twins were subjected to a number of questionnaires in order to analyze their choices and opinions on a variety of issues. Where they found a greater similarity in behavior or trait between identical rather than between fraternal twins the authors concluded that the phenomenon or choice in question was likely to be inherited and therefore predictable.

While the researchers found no iPad gene, they did note that people seem to be genetically predisposed to one of two alternatives when making choices.  For example, people either:  make compromises or take more “extreme” options; select sure gains or take gambles; prefer easy but non-rewarding tasks or pursue challenging but more rewarding ones; and chose utilitarian items or hedonistic ones.

Simonson and Sela also found that people’s preferences may be genetically hardwired towards liking specific products such as chocolate, mustard, and hybrid cars. As well, there is a genetic predisposition towards certain musical forms such as opera and jazz, and in the case of films, science fiction movies. Of note, the study was not able to determine genetic influence on a host of other behaviors including the tendency to choose attractive over unattractive items, and the preference for larger rewards later versus smaller rewards sooner.

Simonson himself issues a few cautions about his research. “People are not born with a Prius gene, a compromise gene, or a jazz gene,” he notes. “Instead, these tendencies probably reflect a yet unknown combination of genetics, and gene expression characteristics, which, in turn, are influenced by an interaction between nature (genes) and nurture (environment).”

This research has interesting implications for companies.  For one thing, genetic considerations could in the future inform firms which new products and technologies could have a better chance of being well-received by particular genetic segments. According to Simonson, “genetic research could potentially reveal that a video game that uses a motion-sensitive remote is likely to benefit from certain genetic predispositions, perhaps even suggesting the most promising target consumer segments.”

Although these findings are a good first start, further research is needed to establish a direct link between specific genetic characteristics & clusters and preferences, traits and behaviors.

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

Is it time for professional boards?

Existing approaches to corporate governance are being questioned as a result of recent developments.  The 2008 financial meltdown plus some famous corporate implosions over the past decade – WorldCom, Tyco and Enron to name three – has focused government and academic attention on how shareholders and the public are being safeguarded.  Secondly, senior management is being challenged by growing business complexity arising from increasing globalization, the impact of new technologies and growing consumer activism.     

The Sarbanes-Oxley Act was supposed to improve governance by bringing greater financial transparency and management & director accountability to public corporations.  Despite its promise, SOX by itself was insufficient to prevent the financial crisis and loss of public confidence.  In reality, all of the troubled Banks were more than compliant with SOX’s stringent regulations.  Clearly, regulatory compliance is not a substitute for prudent financial, strategic and risk management.

One way to improve corporate governance is by professionalizing the Board of Directors, says Robert Pozen in a recent article published in the Harvard Business Review. Pozen,  a senior financial services insider and Harvard Business School lecturer, believes that governance failures arise from a lack of director expertise as well as the behavioural dynamics that influence their actions.

Pozen asserts that many Boards suffer from three basic weaknesses:

  1. Lack of expertise – Many Boards are populated with independent and “generalist” directors who do not possess the necessary skills and industry experience to effectively execute their role.  This skills gap can be especially problematic for Boards in complex, risk-laden sectors like energy, financial services and pharmaceuticals.
  2. Lack of time – Many Board members do not devote enough time to deal with the complex demands of their organizations. According to Pozen, a typical Board member in Financial Services might put in only 200 hours of part-time effort per year spread across Board meetings, telephone calls and prep time.  Moreover, generalist directors, especially those engaged in other pursuits, are often challenged to maintain the required knowledge of the business and industry.
  3. Lack of manageability – With an average size of 10-20 members, many Boards are too big and unwieldy to be effective decision making and oversight bodies. Within groups of this size, individuals often engage in what psychologists call “social loafing”: Members resist taking personal responsibility for the group’s actions and rely on others to take the lead. Furthermore, large groups are challenged with consensus building and open communication, both vital requirements for effective Board governance. In general, the more members there are, the harder it is to reach agreement.  As a result, fewer decisive actions are taken.

To address these challenges, Pozen recommends that Boards become “professionalized” through the following changes:

Reduce the size of the Board

Effective deliberation and decision making can be achieved by making Boards smaller or by creating a more focused sub-group within a larger Board, tasked with specific oversight or strategic responsibility. 

Research on group dynamics suggests that a team of six or seven individuals is the ideal size for effective decision making.  Smaller groups enable all members to take personal responsibility for the group’s actions.  Additionally, small groups can often reach a consensus in a reasonably short time.

Require higher levels of expertise

Boards could be required periodically to undergo an external talent assessment to identify key skills gaps and develop plans to fill them.  Firms have a number of options to augment Board expertise including recruiting more senior industry experts (versus Generalists) as independent directors or periodically educating existing directors on key facets of the Company or industry.  Part of this effort could involve a new director “boot camp” so that additions are quickly brought up to speed on key business and industry issues.

Demand greater time commitment

Directors should be required to invest more time than they currently do understanding the business, meeting key stakeholders and executing their responsibilities. For example, companies could stipulate that independent directors, who are now allowed to serve on the boards of four or five public companies, should be restricted to just two.

The above recommendations could go a long way in creating a dedicated and expert class of professional directors who would strengthen the current governance model and help rebuild the public’s confidence.

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

Improving joint venture performance

Over the past 20 years, Joint Ventures (JV) have become a popular form of business structure.   There are many types of JVs but each share a basic premise: separate businesses agree to develop, for a finite time, a new entity and new assets through the contribution of equity and resources. The partners exercise control over the enterprise and consequently share revenues, expenses and assets.

Although difficult to get an accurate tally, there are likely more than 8,000 JVs in existence worldwide representing hundreds of billions of dollars in combined revenues. JVs have been the preferred strategy for North American and European companies to enter the rapidly growing BRIC (Brazil, Russia, India, China) markets.

When operating well, JVs deliver compelling benefits including simplifying entry into new markets, reducing business risk and conserving scarce capital. 

The operant phrase is, “when functioning well.”  JVs are not easy to form, operate and exit. A number of studies by KPMG, McKinsey and PWC have concluded that no more than 50% of all JVs were seen to be successful by their participants, with the average partnership lasting between 8 and 10 years. For those JVs that soldier on, they often suffer from strategic confusion, slow decision-making, and duplication of effort with the parents.

Two successful JVs provide some important lessons on creating and managing these unique relationships.  CIBC Mellon, a leader in the Canadian Asset Servicing industry, is a successful 14 year JV between the CIBC and Bank of New York Mellon.  Sony and Ericsson created a JV s in 2001 to manufacture mobile phones.  In 2009, Sony Ericsson was the 4th largest mobile phone manufacture in the World.

The following are some key lessons on creating and managing well-run JVs:

 Finding the right partner

  • Look for similar goal, and cultures – Not only must the firm’s culture and business practices be amenable to collaboration but it must have what Tom MacMillan, Chairman of CIBC Mellon, calls “the JV mindset…Some companies are good at working with others, some aren’t” 
  • Ensure a strategic fit – When prospective partners are identified, managers must evaluate the firm’s capabilities, management and financial health against the JV’s needs and their own gaps. In Sony Ericsson’s case, the JV combined Sony’s well-honed consumer electronics expertise with Ericsson’s leading technological knowledge in the communications sector.

 Reaching the right agreement

  • Get a strong business case – A winning JV combines a compelling business case with financially-strong partners.  “Two lousy businesses put together will not make one good business…they will give you one big lousy business.” Says Tom MacMillan.
  • Align around goals, commitments and mutual expectations – To avert conflict and ensure proper resource allocation, all parties must ensure their strategic and financial interests are in sync before commencing operations. To ensure strategic and financial alignment, both Sony and Ericsson agreed in the JV to stop making their own mobile phones.
  • Get the right equity and capital deal – Research says that a 50/50 equity split, with clear responsibilities and rights on both partners, has the greatest chance of success. 

Making the partnership flourish

  • Assign effective leaders – Senior management at both the parents and JV must be skilled at managing through differences in reward systems, cultures and organizational practices.   According to Tom MacMillan, strong Board-level leadership by the partners and day-to-day leadership in the JV may be the most critical factor in ensuring the JV’s success
  • Insist on mutual commitments –  Both partners must honour and maintain their financial and operational commitments even when results are less than ideal or the strategic circumstances of one party changes. This puts an onus on properly capitalizing the JV at the outset and dealing with future investment requirements.
  • Get the governance model right – The ideal governance structure provides sufficient controls to minimize risk without stifling operational flexibility and speed.
  • Anticipate and pre-empt conflict – According to a PWC study, the top 2 reasons why JVs fail are poor financial performance and a change in strategy.  To pre-empt surprises and illuminate important issues, JVs need regular strategic reviews and performance tracking.  Building in transparency and regular management communications will help foster trust and reinforce shared goals.

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

Will P&G clean up with two new businesses?

Having worked in P&G brand management on some of their biggest brands (Tide, Cascade, Ivory Snow), I must admit to being an admirer of almost everything the firm does. Well almost everything.  I was not a big fan of the Tide Basic introduction.  And, lending their reputation and strong brands to some consumer service industries may turn out to be another misstep. 

Over the past three years, P&G has been refining plans to enter two new markets – dry cleaning and car washes – by leveraging two of their strongest brands. In effect, P&G is applying the considerable technology and brand equity of Tide and Mr. Clean to launch two new franchised consumer services.  In particular, a pilot program of Tide Dry Cleaners is about to be introduced in selected markets across the United States.  Secondly, P&G is continuing to roll out Mr. Clean car washes in partnership with franchisers ready to fork over a $5 million initial investment. 

I am skeptical as to whether these initiatives will succeed: 

One would assume that years of testing and refinement were behind the concept development and delivery model.  Was this effort of value?  Thorough thinking and ample investment can not make up for a weak consumer proposition or bad timing.  During my tenure in the late 1980s, P&G Canada launched a family of Enviro-Paks – cleaning, detergent and dishwashing liquids – packaged in large Tetra Pak containers – based on European learnings.  The roll out flopped, not necessarily because of poor execution but because the timing was about 15 years too early (environmental awareness was very low at the time) and there was no compelling consumer benefit in switching to the new format.

My concerns with P&G’s new franchising strategy centers on the following areas:

The attainable market may be too small

The dry cleaning and car wash markets are fragmented, often driven by price and location considerations.  On the other hand, P&G has traditionally focused on share leadership in large and defined market segments with premium-performing products.  I am not sure the dry cleaning and car wash sectors contain segments large enough to support P&G’s premium business model and generate sufficient financial returns.  Furthermore, at $5 million per store, a Mr. Clean franchise will not appeal to any but the deepest pocket franchisers.

Challenges with the customer experience

Financial returns will depend heavily on the quality of the customer experience delivered every day.  Service businesses rise and fall on front line staff interactions with customers and delivering consistent quality.  Ensuring a fruitful and consistent customer experience is a challenge in consumer services given the heterogeneous nature of employees who are often unskilled and transient.  While having a bullet-proof set of policies and procedures will help, P&G will lack the control and immediacy to ensure day-to-day execution excellence on a national scale.

Franchising cheapens P&G brands

Given the above challenges, P&G runs a significant risk that an unsuccessful franchise strategy could hurt Mr. Clean and Tide’s strong brand equity and subsequently damage their market shares.  Together, these brands represent over a billion dollars in profit in the US alone.

Without analyzing the business case, its hard to really know whether the above issues are problematic.  However, one must wonder why P&G chose to expand to new markets with completely new business models that are well beyond their core consumer and customer franchise.  Time will tell.

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

Chinese takeovers: A primer

The Chinese are coming to an industry near you. Flush with cash, confidence and heft Chinese firms are aggressively pursing takeover opportunities across the globe.  In 2010, Chinese firms accounted for about 10% of all global deals by value.  Given a strong growth trajectory and need for raw materials & technology, the Chinese are expected to increase their pace of foreign acquisitions in the coming years.  If your company is considering, a strategic transaction with a Chinese firm, you would be wise to consider the learnings of your Western peers.

A terrific article in The Economist magazine outlines the trials and tribulations of executives from 11 Western companies who have been acquired by or are in the process of selling to Chinese buyers.  Some of their key insights include:

  • Overall, the executives were impressed with the ambition and technical skill of their Chinese peers.  At the same time, there are doubts as to their ability to improve the acquisition’s performance and to operate an international business. 
  • Emotion and trust matter a lot to the Chinese and they will go to extremes to gage their counterpart’s integrity and intentions.  To break down barriers and attempt to secure a negotiating advantage, the Chinese will often embark on marathon negotiating sessions and ply their Western counterparts with copious amounts of liquor.
  • As most Chinese firms are state-controlled, there is a lingering suspicion that the Chinese engage in dirty-tricks tactics including bugging hotel rooms for information and supplying interpreters who are in fact corporate spies.
  • The Chinese favor large negotiating teams with opaque and fluid roles & structures.  It is often unclear who has authority and how decisions are arrived at.   Those interviewed felt that the ultimate arbiter was the government and not necessarily the people who were part of the negotiating team.
  • Given China’s size and complexity, there will probably be more than one government  voice in the transaction.  When competitive Chinese companies are interested in the same target, it is likely that the firm with the most political support will end up as the preferred bidder.  These dynamics are often hidden from the Western company until the last moment before an offer is submitted.
  • Once the “preferred bidder” has been anointed, it is not surprising for them to shower wads of cash on the deal, reflecting their very strong balance sheets and the amount of political capital committed to the transaction.  Again, it is common for a high-ranking government (or People’s Liberation Army) minister to directly change the terms of the transaction.

Integrating the acquisition is where most Chinese deals (and Western ones I may add) drop the ball. 

  • The interviewees reported that the Chinese usually did their integration homework and did not barge arrogantly into the acquisition – although they did gain control quickly.  Senior management was usually retained if only in well-paid honorific roles.  Firm names and legal status did not change – at the outset.
  • Not surprisingly, one area where the Chinese fall short in integration is their low supply of English-speaking managers who are experienced in international business. This tends to slow integration activities, push decision making back to China, and alienate existing management.  In the companies canvassed, most senior managers have or are considering leaving.
  • Over time, the business plans did change albeit slowly and indirectly as is the case of a natural resource company that switched its selling from the open market to a single  Chinese firm.  In another example, an acquired firm abruptly shifted its strategy from profit maximization to production maximization once the Chinese took over.
  • From a cultural and management perspective, Chinese and Western firms could not be more different. Core Chinese values include deference, opacity and consensus, which are often at odds with more individual-focused Western companies who prize frank discussion, rapid action and employee empowerment.  This tends to create misunderstanding, inertia and frustration on both sides.
  • Finally, most of the interviewees felt that the next generation of Chinese business leaders – those in their 30s and 40s with more business and language skills – would be more effective than the current cadre [sic].

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

Goals gone wild: pitfalls in target setting

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

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

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

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

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

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

Reduce product selection to increase sales

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

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

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

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

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

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

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

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

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

The Intelligent Enterprise takes shape

Business leaders are beginning to see the transformative power of data analytics to increase competitiveness, drive differentiation, reduce cost and foster business agility.  According to a recent MIT Sloan School of Business survey, many senior executives are now actively looking at how their collected data is being synthesized and used to dramatically redesign the way their organization’s go to market, get closer to their customers, and enable new business models.

In 2010, the Sloan School of Business surveyed almost 3,000 global executives on their goals, lessons and results around using data analytics.  Below are some of the highlights of the research:

Increased use of analytics correlates with higher performance

The results were striking:  There is a strong correlation between the degree of data analytics in an organization and their business performance.  Top performing firms were three times more likely to employ sophisticated data analytics than lower performing firms.  As an example, thought leaders referenced in the survey reported that higher levels of IT and analytics capabilities correspond to disproportionate increases in productivity gains. Moreover, top analytics performers reported greater ease and skill in handling the copious amounts of collected data than less advanced organizations.

Innovation is the number one business priority

 “Innovation to achieve competitive differentiation” was seen as the most prominent business priority (> 60% of respondents) as opposed to growing revenues, reducing costs and getting closer to customers.  Top performing companies were two times more likely to see analytics as a means of enabling innovation.  Examples of this innovation include new ways for companies to collect, synthesize and utilize data as well as the organizational structures and processes to support them.

Powerful analytics is more than just CRM

Building analytics excellence goes beyond ubiquitous data collection and data mining.  Intelligent Enterprises employ other powerful capabilities to help turn raw data into usable information that improves customer segmentation & targeting, fosters 1:1 relationships and enables supply chain efficiencies. These other components include data visualization, choice modeling & mathematical optimization and simulation & scenario building. 

Limited analytics knowledge is the major short-term adoption barrier

According to the survey, two out of the top three adoption barriers centered on a lack of specialized knowledge, resources and management vision.  Furthermore, this knowledge gap extended beyond employees directly responsible for analytics.  Most knowledge workers in areas like marketing, sales and operations need to be more comfortable and proficient in the new data-driven workplace.

Culture is critical to making analytics stick in the organization

Wishful thinking will not bring about the Intelligent Enterprise.  New technologies and methodologies must be accompanied by a shift in culture and organizational design.  In particular, management must be amenable to data-driven insights becoming core to decision-making (as opposed to hunches, history or best practice); information rights and communication flows must be expanded across the organizational and; traditional roles and structure must be tweaked to best exploit the use of the insights.  At the same time, responsibility for analytics must be centralized to ensure data integrity, clear ownership, easy access and operational efficiency.

Experimentation is the most practical implementation strategy

Most respondents emphasized the importance of conducting multiple experiments – as opposed to detailed planning – in order to best determine where and how the Intelligent Enterprise can take root.  Moreover, a ‘testing and learning’ approach was seen as a lower risk strategy for gauging organizational and cultural fit as well as setting priorities and generating early wins.  The respondents also reported that IT is not the driving force in the Intelligent Enterprise – although they are integral to its success.  Other departments (e.g., marketing, operations) as well as autonomous business units that have their own P&Ls are typically leading the charge.

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