Archive for April, 2010|Monthly archive page

Best Practice Strategy Execution

Most executives would concur with the statement,  a great strategy on paper is worthless if you can’t execute it.  Given the business and personal stakes in developing a winning strategy, how do you improve the chances of operationalizing or implementing the strategy? Below are some of my observations, gleaned over the past 22 years of being a senior operator and strategy consultant. 

Align Capabilities & Resources to Intent

Time and again, I’ve seen many strategies flounder on the “champagne tastes, beer pocket money” syndrome.  While a bold management vision is important, it must be tempered with economic and competitive realities. All to often, problems such as skill gaps, limited capital, and timid management are ignored during strategy formulation.  As a result, execution risk increases as implementers must now cope with under-investment, poor resource allocation and an inability to direct corporate capabilities and attention towards new priorities. To maximize the chances of success, leaders must stay engaged through the nitty gritty of implementation by:  defining and “selling” corporate priorities across the organization; reallocating budgets to enable the strategy and; quickly securing external skills, partners and capital.

Execution is about people, process and change

A new corporate strategy inevitably requires a change in employee mindset, business practice and behavior to be properly executed.  In most companies, the search for a new strategy consumes significant effort and attention.  Often, little consideration is paid to change management activities (e.g., creating context/urgency, organizing for change and alignment building) needed to execute the strategy.  Savvy strategists understand that if people are the agents of change, then implementers need to be involved in the strategy development process and have their issues or concerns heard.

Furthermore, many leaders consider execution only within context of org chart and staffing changes. However, other factors are more important.  For example, getting decision rights and information flows optimized is crucial to ensuring that middle managers – who put strategy into practice – can execute with excellence.  Recent Booz & Co. research on thousands of firms found that decision rights and information flows (i.e. ensuring the right decision makers have the right information) had twice as much impact on the success of a strategy as did changes in structure or motivators like incentives.

Show me the data

Many accomplished chefs contend that a great dish begins with good ingredients.  The same is true with strategy and execution.   Many strategies fail because their business cases and tactics are based on faulty or incomplete data in areas like addressable market size, consumer needs and channel requirements.  Where information is available, it is often riddled with management bias (i.e. only one side of the story is presented) or not linked to the critical success drivers of the strategy.  For example, high product awareness tells you little about how to increase customer loyalty. Moreover, though some companies spend a great deal of time and money collecting data, they often spend little time synthesizing it so it could be acted on. As an example, reams of consumer data lose much of its value if it cannot be turned into clear segments that can be efficiently targeted.

Strategists, proceed with caution.  Despite the simplicity of these principles, they are not easy to get right in a large organization. And that is a topic for another day.   

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

Traditional Media Fights Back the Old Fashion Way

Given the explosive growth in digital distribution, online file sharing and other disruptive technologies, many pundits and consumers have written off the prospects of traditional content formats like the CD and magazine. There is plenty of evidence to back this up as sales of physical products and the channels that retail them are plummeting.  However, traditional media is not giving up without a fight, and for good reason.  For one thing, physical formats are still a big (albeit declining) business across all customer segments. Secondly, a significant number of consumers will purchase both digital and analog types of music and news, often for different reasons.  Thirdly, traditional media companies have (so far) been unable to develop their own digital distribution channels to compete with the likes iTunes. 

As reported in The Economist magazine, media companies are fighting back by enhancing the look and feel of the physical formats.  These changes include improved production values, more luxurious packaging, unique formats, and limited editions.   For example, Time Inc began printing Fortune magazine on thicker paper in March 2010. Hearst Corporation supersized Good Housekeeping earlier this year, and will do the same for Country Living in September.  Translating this improved product into higher unit pricing will be  key to maintaining magazine profitability.  Over the 2008-2009 period, the number of advertising pages in magazines dropped by 26% (according to the US Publishers Information Bureau).

In the battered music industry, it is not uncommon for a newly released album to be supported by multiple versions, from the basic CD-only package to a more elegantly designed “experience” edition with an accompanying DVD, online content and T-shirt.  Moving upscale and higher value is paying off for some music companies. Deluxe CDs for new and veteran acts accounted for 27% of Universal’s sales from its biggest new releases in 2009, up from 20% in the previous year. Universal believes that the proportion will keep growing.

This approach has precedence.  When faced with the onset of  the low-cost DVD and ubiquitous TV coverage, the live entertainment and sports industries responded with a more upscale and experiential offering as well as tiered pricing and merchandise cross-selling. More recently, two technology giants have recognized that refining their traditional physical products is critical to improving their corporate brands, customer experience and revenues. Apple is considered best practice with its elegant combination of packaging, store design and merchandising.  Microsoft, with their new company stores, is not far behind.  These firms may have discovered that a physical representation on a shelf or newsstand may be a gateway to a brand that exists profitably in many different digital and analog formats, driving awareness-building, trial and repurchase. After all, while consumers may be flocking to digital downloads they also have not lessened their interest in visiting stores.

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

The Impact of Social Pressure on Financial Performance

Most executives across every industry will acknowledge that social pressure can negatively impact financial performance.  If you are doubter consider the cases of Nike and Walmart, who saw their corporate reputations tarnished and revenues impacted due to aggressive social pressure stemming from child labour practices within their Asian supplier networks.  As a result of these and other cases, many companies have implemented a series of strategies under the umbrella of Corporate Social Responsibility.  For most companies, CSR initiatives have been deployed to safeguard corporate reputations (and shareholder value) by pre-empting and mitigating the effects of anticipated and unexpected social and political pressures.  Examples of this pressure could include product boycotts, over-zealous regulatory enforcement, internet smear campaigns, public protests and statements to the press.

Despite the flurry of activity and funding, most executives do not understand how and why social pressures impact financial and brand performance.  A new, award-winning study published at the Stanford Graduate School of Business sheds some unique light on this topic.  The authors looked at how political and social forces impacted business performance and corporate strategy in 2,010 companies over the 1996 to 2004 period.   The research yielded some interesting conclusions:

First, there is no clear link between social pressure and social performance. Greater social pressure often leads to better social performance among companies.  On the other hand, the researchers also found the reverse is true — better social performance can lead to greater social pressure. Why?  Activists and NGOs often target firms precisely because they are responsive to social pressure.

Second, in the short-term, greater social pressure is associated with lower financial performance. Social pressure can hurt a company’s reputation, brand equity, revenue, cost structure (though higher compliance and PR spending) and morale. Initially, social pressure tends to boost corporate social performance while hurting financial performance.  Longer term and with strategic and consistent CSR initiatives, many firms can leverage superior social performance into share price increases and higher brand premiums as a result of greater demand from socially-responsible investors or differentiated market positioning. 

Third, financial and social performance are largely unrelated, except in certain industries. Within the consumer good sector, financial performance is positively associated with social performance, since consumers can directly reward a company’s socially positive behavior by purchasing its products or paying a brand premium. Among industrial companies, the opposite is true — financial performance is negatively associated with social performance. This traces to the fact that responsible behavior is often expensive, and there are no masses of consumers to directly reward an industrial company.

Fourth, “private politics” matter more than “public politics.”  The research showed that the negative financial impact of social pressure was due almost entirely to the actions of “private politics” — activists and non-governmental actors  — versus the actions of “public politics,”  those stemming from government actions 

This research is an important first step in drawing an explicit link between social pressure, CSR and financial performance.  However, more integrated research is needed to help companies understand CSR best practices that enhance shareholder value as well as determining the ROI of specific initiatives.

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

Putting Customers at the Center of Product Development

Fostering customer-centricity and product innovation is fundamental to maintaining competitiveness. In theory, these strategies are simple to understand and write into a strategic plan.  However, in practice this vision is tough to realize.  For most companies, challenges are rooted in structure, culture and implementation. For example, firms tend to be organized around product, regional or divisional silos not by customer.  These structural and process silos are not designed to easily and quickly access, synthesize and utilize customer insights. How can companies drive customer-centricity and unlock product innovation without turning their organizations inside out? 

According to the NY Times, one strategy is to situate product development, brand management and sales assets within new customer innovation centers.  These structures integrate customers and channel partners directly into the product development process, empowering and enabling customers to drive product innovation while reducing time to market, development costs and risks.

A number of firms are effectively using innovation centers:

3M

3M is a pioneer in the development of customer innovation centers.  So far, 22 centers are  in operation, typically situated near the company’s research facilities.  These places provide a forum for meeting and inputting key customers directly into the innovation process.  One of 3M’s innovation and product development strategies is to uncover new synergies between their platform technologies and their customer’s needs by vertical.  So far, 3M has leveraged its wide-ranging technical expertise to a portfolio of products including transportation systems, dental & medical devices and electronics.

Successful innovation centers are not just about making customers and senior internal managers feel good. This strategy has helped 3M establish productive, long-term customer relationships and generate valuable insights while improving product development and marketing effectiveness.   “Being customer-driven doesn’t mean asking customers what they want and then giving it to them,” says Ranjay Gulati, a professor at the Harvard Business School. “It’s about building a deep awareness of how the customer uses your product.”

Hershey

Hershey opened its first retailer-focused customer innovation center in 2006. The center features a tasting room, where corporate scientists discuss trends and retailers can sample products under development and offer feedback. Another part of the center includes a mock store where Hershey tests new merchandising ideas. One of the germinated concepts is to organize the candy aisle by how the products are used (candy dish, gift-giving or family movie night) instead of by product line.  By walking retailers through the sample merchandising set-up, Hershey can better communicate the concept, solicit feedback and secure earlyinterest as opposed to traditional research and presentation tools.

Pitney Bowes

PB uses its innovation center in many unique ways, one of which is to expand their application footprint in mail management.  For example, the company allows customers to integrate their applications into PB’s new IntelliJet color printing system. Customers are encouraged to load their applications onto the system and to experiment with different tasks.  “We’re hoping to get at things they wouldn’t have thought about,” says Leslie Abi-Karam, an executive vice president with the Company. “In the long run, we expect that working with customers in our innovation center will alter our development trajectory.”

Innovation centers are growing in popularity and (so far) seem to be an effective method of closing the innovation strategy-execution gap.  Likely, there are multiple ways to deploy and leverage these new structures, depending on organizational circumstance and strategies.

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

Neuromarketing: Orwell’s 1984 or Breakthrough Marketing?

Can marketers develop better products, advertising and messages by analyzing people’s cognitive, sensorimotor and affective responses to marketing stimuli? Proponents of Neuromarketing, an emerging field that mixes cognitive science and marketing, thinks so. In Neuromarketing, researchers use a variety of measurement tools such as MRIs and EEGs to  measure changes in a person’s brain activity and physiological state based on different external stimuli.  These changes may trigger different emotional states (e.g., anger, pleasure) or impressions thereby influencing consumer behavior and attitude. 

Typically, marketers are keen to understand how consumers respond to certain stimuli (e.g., a TV ad) and why they make the decisions they do (e.g., not purchase something).  Traditional measurement tools like verbal feedback is often not reliable as people commonly act differently than what they say or intend to do.  This intent-action gap occurs because powerful yet hidden behavioral drivers – such as cognitive and social bias as well as the presence of sub-conscious needs – overrule conscious and rational intent. A classic example of this gap was the Pepsi vs Coke taste challenge.  While most people taking the challenge consciously chose the taste of Pepsi, and those watching the ads believed that Pepsi did taste better Coke, actual consumer behavior (and market share) continued to favor Coke’s dominance. 

Supporters of Neuromarketing believe they can bridge this gap and improve marketing effectiveness by understanding sub-conscious behavioral triggers and then crafting images and messages that can stimulate the relevant parts of the brain and incite the right behaviors.   This makes Neuromarketing and its applied results potentially subliminal in purpose and result.

Some early applications of this science have included:  analyzing the responses of viewers to television commercials and other forms of advertising; exploring the effects of looking at happy or sad facial expressions;  studying the mental states of motorists driving against a deadline and; examining how people react to an unexpected ‘freebie’. Outside of marketing, political strategists and film producers are beginning to use the techniques to craft political imagery and slogans as well as choose the most compelling movie endings and trailers.

On the other hand, some are skeptical of Neuromarketing’s scientific value and potential to influence consumer behavior.  For example, the journal  Nature Neuroscience, said “…neuromarketing is little more than a new fad, exploited by scientists and marketing consultants to blind corporate clients with science.”  Moreover, others have voiced ethical concerns around using science to seed subliminal messages in people’s brains in order to leverage sub-conscious triggers to buy certain products or adopt certain political positions. 

Contrary to the hype, Neuromarketing research will never discover a so-called ‘buy button’ – some mythical region of the brain which need only be stimulated to compel consumers to purchase a product regardless of whether they actually want to do so.  More realistically, Neuromarketing can deliver commercial value by improving the identification and power of certain messages and visuals within advertisements, packaging or product design.  Furthermore, a better understanding of how the brain works is still of  value to cognitive scientists as well as marketers.

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

Two More Industries under the Gun: Packaged Goods & Engineered Products

A short time ago, we reviewed the prospects of two North American industries, IT and Retail Banking.  These sectors have had their share of challenges but can look to the future with some optimism.  Today, we look at the fortunes of two more global businesses with input from Booz & Co.

Packaged Goods – Retool Supply Chains

This industry faces a challenging future due to a confluence of factors.  On the delivery side, many firms will face increased cost and product pressures due to their supply chain’s inflexibility and uncertainty.  Simply put, current supply chains were built on yesterday’s blueprints.  They did not have to cope with high energy & transportation costs, expensive labor and raw materials, volatile exchange rates (which impact production economies) and uncertainty around environmental regulations. Environmental pressures may increase even further as governments around the world put a price on carbon emissions and establish new regulations on waste by-products.   Additionally, cross-market shifts in consumer behavior are making it harder to satisfy an increasingly fragmented customer base without reengineering the supply chain.  On the demand side, continued slow growth is forecasted due to shifting consumer needs brought about by demography and the appeal of lower cost value and private label brands. 

Going forward, firms will need to reengineer their supply chains to make them leaner, greener, and more adaptable to managing increasing fragmentation and complexity.  Production flexibility will need to improve in order to respond to sudden changes in demand and more efficiently deliver low volume brands. Moreover, firms will need to be ahead of the demographics and environment curve in order to quickly capitalize on rapid changes in consumer tastes and to deliver on the needs of an ageing population.  Finally, companies will seek to drive growth by:  increasing penetration of emerging markets; improving their product’s value proposition versus ‘good enough’ private label brands and;  continuing investments in brand-building activities.

Engineered Products – Globalization bites back

The recent recession has battered every company in engineering-focused industries such as aerospace, defense, automobiles and transportation.  A rapid, cyclical rebound may not be in the cards this time.  To deal with demand contractions, North Americans firms followed a survival strategy i.e. maintaining liquidity, structural cost reduction and portfolio pruning at the expense of sustained product and technology investment.  At the same time, recessionary effects were more modest in emerging markets.  For the first time, a significant amount of investment and household spending was directed towards lower cost, homegrown providers. As a result, these firms were able to build market share while continuing to invest in R&D, product development and supply chain capabilities.

Until now, many domestically focused NA engineered products companies did not have to compete hard for global business.  Now, NA firms will begin facing serious competition from EM companies.  For example, three of the world’s top five automobile-producing countries are in Asia (Japan, China, and South Korea). The Commercial Aircraft Corporation of China is developing an airliner to rival planes from Boeing and Airbus.

As slimmer and more focused NA firms emerge from their slumber, they will quickly need to figure out how to protect their home market against hungry, lower cost and increasingly more capable EM competitors.  No longer can NA companies claim superiority in areas like management expertise, manufacturing excellence or engineering skills.  In any event, these areas will not be sufficient by themelves to differentiate any firm in today’s global marketplace. As well, NA companies will need to improve their ability to penetrate growing yet unique foreign markets that now feature significant local competitors.  In these markets, decisions to outsource, partner or share technology will becomes much more more complicated.

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

Doing Business in China: Fish or Cut Bait?

Of course, you need to ‘fish’ in what is quickly becoming (trends permitting) the largest market in the World for most products and services.  However, companies need to be mindful that doing business in China in 2010 is still fraught with many challenges. The treatment of two industry leaders underscores the problems and risks. 

After facing government pressure and censorship in a dispute over its core values of freedom of information, Google decided to shut down its Chinese search engine and divert traffic to an offshore location. As well, many observers believe that State-sponsored hackers were behind attempts to penetrate Google’s webmail service. The mining giant Rio Tinto saw four of its employees charged with corruption and sentenced to lengthy prison terms, at the same time that the firm was in heated negotiations with the government over the price of iron ore and their participation in a deal with another Chinese company. 

These incidents are merely the latest chapter in a long history of Chinese government machinations. Over the years, many other  firms like Coca Cola and Unilever have complained about arbitrary government harassment, shifting legalities and unseemly business practices by partners.  According to a study commissioned by the American Chamber of Commerce in China, a large proportion of US companies claim to be victims of discrimination.  And, American firms are not the only victims.  The latest Corruption Perceptions Index, published by Transparency International, places China in 79th place out of 180 countries.   

China has been ‘open for business’ for over 25 years.  Luckily, there are now lessons for companies thinking of entering or expanding operations in this important market. For example:

 Lesson 1 – Success takes patience and deep pockets. 

Even large companies need a long runway before they start making money from their Chinese investments.  Getting to the point where you have boots and machinery on the ground often can take years of arduous effort and relationship building. After the doors open, firms need lots of time to get the business model right.  For example, P&G took 3 years to turn a profit, KFC 10 years.  Although labour and physical plant is relatively inexpensive, developing key local capabilities like marketing, service and distribution is not. Finally, China is experiencing significant wage and price inflation, particularly in major industrial zones, which can easily extend investment pay outs.

Lesson 2 – Think local, act local. 

China is a very unique market of markets, unlike from any place in the world.   China differs across every measure including political system, level of corruption, language, business philosophy and beliefs.  Most North Amercian companies can leverage little from their previous international experiences so they need to fully embrace local operations, needs and customs. The ideal market entry strategy is to: do your homework on the market, consumers, competitors etc; invest in deep relationships with key door-opening politicians & regulators and; show an exaggerated deference for Chinese business habits, pride and beliefs.

Lesson 3 – Joint ventures work best but carry longer term risks

In most cases where you need to manufacture locally, partnering with a Chinese firm (particularly one with senior government or army connections) has proven to be the best and lowest risk market entry model.  The Chinese government has tacitly and overtly encouraged this in order to: maintain some control over foreign enterprises; facilitate critical knowledge and skills transfer; support cronies in state-controlled partner firms and; buttress local companies from more efficient foreigners.  However, for foreigners JVs carry significant medium term business risks such as politically-motivated takeover, capricious government behavior, stolen IP and the germination of emerging Chinese competitors.

Despite the pain and suffering, many companies have finally turned the corner and are now reaping strong investment returns. The key question remains how long can this continue for.

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

Two Industries Under the Gun: Retail Banking & IT

Each year, Booz & Co. publishes an assessment of twelve major industries, reviewing recent developments and looking out a few years.  Not surprisingly, the past year has been a time of trauma for each industry.  And, none of them look to the future with giddy optimism, particularly retail banking and IT.

Retail Banking

For the foreseeable future, retail banks face a cloudy future. Fortunately, some nimble players will be able to exploit emerging opportunities to increase revenues and maintain margins. 

Banks face lower consumer demand driven by higher personal savings rates, weakness in the commercial real estate and capital markets, and tighter regulations around high margin products like credit cards and overdraft protection. At the same time, retail banks will be challenged to keep operating costs under control tracing to higher regulatory costs, steadily increasing  distribution (e.g., branch) expenses and the need to maintain a secure and reliable IT infrastructure.  Record levels of consumer debt will also require banks to remain vigilant on risk and maintain substantial reserves against defaults.  

On the revenue side, savvy banks will shift from customer acquisition to building deeper client relationships and leveraging them through cross-selling and up-selling.  Appealing customer segments look to be: the growing retired/affluent cohort, rebounding small businesses and the emerging Generation Y bulge.  To drive these opportunities, banks should:  improve new segmentation understanding and targetability;  elevate product and service appeal as well as; enhance the bank’s client experience (i.e. service, support, appeal).

To reduce operating costs, retail bank will need to continue tactical initiativess (e.g., pruning unprofitable branches) as well as further leveraging breakthrough strategies like expanded back office outsourcing; offloading IT services to a Cloud Computing model and; streamlining operations through complexity reduction initiatives.

Information Technologies

This sector – semiconductors, consumer electronics, software, computing, and network infrastructure & services – faces serious revenue and margins threats on all fronts. It is time to batten down the hatches.

Developed markets will maintain sluggish IT growth rates as many of its largest buyers – Financial Services, Consumers and Manufacturing – will continue to be constrained by reduced demand.  Only one major industry buyer, healthcare, is expected to post solid growth.   The IT industry will continue to be battered by pricing pressure due to high penetration of open source software, the aggressiveness of low cost offshore service and hardware providers as well as the challenge of getting buyers to pay for increasingly undifferentiated (and over-engineered) products and services.  

IT companies will succeed by going with the customer flow and running a tighter operational ship.  That means aggressively pursuing growth opportunities in emerging markets and products (e.g., mobile computing), optimizing their channel structures and sales & marketing spend to improve efficiencies and distribution; continuing to “productize” their hardware/software/services solution offerings and; pursuing selected high potential/low risk M&A transactions that extend market penetration and continue to drive scale economies. 

However, future IT prospects may well be decided by how IT firms respond to the challenges posed by rapidly growing IT firms like Acer, Wipro and Huawei found in the emerging BRIC (Brazil, Russia, India, China) markets.  As the BRIC firms move up the IT food chain, they will soon rival many of their Western competitors in terms of product commercialization, R&D and marketing capabilities. Given their significantly lower cost structure (today), their rise will also put pressure on margins.

Coming soon will be our review of two more industries under the gun, packaged goods and engineered products.

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

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