Apr 8, 2024 | Change, Leadership
The only way to solve a problem, particularly a significant one is to understand the cause of the problem and eliminate that cause.
Rip the band-aid off.
Taking a short-term action to address a symptom of a problem is just kicking the can down the road. The problem will return unless the root cause is addressed.
In a previous life working in a regulated industry, I observed many problems that were never addressed. Simply, they were papered over with a short-term fix that looked good as action had been taken. However, they only served to compromise performance and leave the problem to someone else. The industry ended up with a huge pile of band-aids obscuring and complicating the identification of the root causes of the problems that continued to emerge.
Deja vu is upon us.
The current housing crisis is an outcome of decisions made progressively over the last 40 years. Some were made with the best of intentions, others for purely political reasons. However, the chickens are now crapping all over the hen house in the form of a housing crisis that will not be solved by sticking another band aid, or even a couple of boxes of them, over the symptoms of the problem.
The solution hides in addressing the cause.
Progressive governments have given investment in real estate significant tax advantages. This diverts that investment from alternative more productive uses, leaving us with the current shortage of housing, and stratospheric rents.
Ripping the band aid off now will be extremely painful for tax advantaged investors, but is essential.
There is a budget due in a few weeks, I expect more band-aids.
The current government when in opposition lost an election by proposing some sensible but relatively painless, to most, measures that started to address the root cause. The then government, now the opposition, was relentless in painting the sensible moves as robbery by the government.
It was as stupid and false as to claim that electric vehicles would kill the weekend.
Most of us would be better off with changes being made, our children and grandchildren most certainly would be.
Unfortunately, the battle for political power outweighs consideration of real debate, long term perspective, and benefit to the majority.
The longer we leave it, the greater will be the pain when the time comes that we have no option but to rip down the mountainous pile of band-aids.
Apr 5, 2024 | Governance, Strategy
Democratic governments have always spent time talking about creating regulations to control monopolies, or at least the profits that can accrue to the monopolist.
In Australia, it has only been talk, and choices to sell public natural monopoly assets to private industry for short term cash. The new monopolist then exercises monopoly pricing power, while the seller governments bleat about market power, as Sydney airport, and electricity distribution have clearly demonstrated.
Elsewhere the examples of action beyond the exercise of the Legislative power to break up monopolies are few and far between. In the US, powers under the Sherman Act were used to break up Standard Oil in 1911, and AT&T in 1984. There was a failed attempt to break up Microsoft in the late 90’s, and currently there is much bleating about the power of Tik Tok, yet to see concrete action.
Beyond those examples, and a few fines of digital platforms under European legislation, little progress has been made. We may see some action in the US to separate the ownership of TikTok from its Chinese parent at some point.
Dictatorships tend to go the other way, with the person at the top holding the whip hand and amassing the profits.
Monopolies are huge profit generators.
Governments feel compelled to control them (until they sell them). So, it seems like a pretty good idea to me to find a market niche, or product category where you can hold a monopoly, or dominate such that you have price setting power.
Be the only solution to a problem, control the best itch scratcher available, and the profits will flow.
I suspect this may be a bit politically incorrect, but think about it.
Creation of something that is so good, so far in front of the competition, so irreplaceable, that there is no viable alternative is surely the objective of all commercial enterprises.
Apr 2, 2024 | Branding, Change, retail
The retail landscape is changing, even as the two retail gorillas hunker down and set about extracting more from the current model.
Following are a few of the macro trends I see that will continue to erode the current model that has been so successful.
Declining customer loyalty.
I have no numbers, but anecdotally, where in the past you shopped at Coles or Woollies, now you have Aldi, Farmers markets, Costco, Harris Farm, and a range of specialty retailers all competing successfully for the consumers dollar. I no longer know why anyone sees any of the major retailers as ‘their’ store. Loyalty is something that is given in acknowledgement of great service, and the gorillas have failed in that space.
Changing customer habits.
Associated with loyalty, customers are looking for things other than just the lowest price. Increasingly they want product provenance, domestically produced product, they are increasingly sensitive to the ingredient lists, and spurious health claims. This is all happening as the gorillas remove the options from their shelves in the game of short-term margins.
The continued growth of home delivery by the gorillas since Covid gave it a turbo-boost seems here to stay. Interestingly, home delivery also seems to be a useful brand building tool for the gorillas. Anecdotally, consumers tend to stick with one or the other of Coles or Woolies for delivery in greater numbers than they exhibit loyalty when shopping for themselves.
Investment attraction.
Aldi has invested successfully, Costco while going more slowly than expected, appear here to stay, farmers markets have become ‘corporatized’ to some extent, Harris Farm continues to invest, and specialty stores continue to ‘pop up’ although few survive for the long term. It seems that the market is sufficiently big, that with only two major players there is risk capital going in at the fringes, and in the long term, the fringes tend to become mainstream. Looming over all this is the shadow of Amazon, and more generally the move away from the bricks and mortar business model. I was betting a few years ago that the Harris family would cash in and sell to Amazon, a transaction consistent with their strategy in the US. So far, I have been wrong.
More recently, the public and political attention focussed on the gorillas can only have a negative impact on the investment attraction of FMCG retail.
Business model proliferation at the fringes.
While the supermarket model absolutely dominates the current landscape, technology and changing consumer attitudes are enabling evolving business models to compete for the consumers dollar. Two of my neighbours combine to buy meat in bulk direct from a farmer in the Southern highlands. It started as all the meat from a single animal, which meant lots of mince. Recently much of that mince is being made into sausages, and they are experimenting with differing sausage flavours for variety. This proliferation seems to me to be another signpost that change is coming, like it or not.
Margin pressure.
While all this is going on, margins through the supply chain are under increasing competitive pressure. This pressure impacts enormously on the decision making of incumbents, offering niche opportunities to newcomers and new business models to make a case with consumers.
It seems to me that the incumbent retailers are waiting to see what happens. History tells us that this is not an effective strategy. The better course is to shape your future in some way that suits your aspirations. It would be naive to say this was easy, it is excruciatingly hard, which is why so few are able to make the transformations necessary.
I keep on harping about the failure of Woolworths to leverage the start they made with Thomas Dux. To my mind it was a classic strategic mistake to back away.
My conclusion is that the current management culture at both the retail gorillas lacks the courage to explore, be curious, make investments that are separate from the main business, and stick to them in the face of short-term challenges. Instead, they have chosen to hunker down and optimise the current model.
Mar 28, 2024 | Leadership, Small business, Strategy
Success of an SME means they have crossed that shark filled river where most SME’s fall over.
They have sufficient scale to employ functional personnel to address the day to day running of the business, and are returning the cost of capital and a bit more to the owner.
For some this is a level of comfort that is satisfactory, but to most who have strived to get across that river, it will not be enough, they are of a personality type that will be looking for the next challenge.
So where should they look?
Do yourself out of a job.
When you can go away for 3 months and wonder why nobody missed you, the business has reached the point where you are no longer needed daily. Accept that and get a life, or knuckle down to scale the business. For many that might mean becoming a non-executive chairman, staying engaged, but well away for the week-to-week challenges. You have created a manager system and ‘bench’ that does that. Leverage it.
Identify the industry constraints.
Every industry has a set of constrains that are rarely even noticed, they are just the edges of the status quo. Every useful innovation that has evolved, has done so by addressing a constraint that few, if any had even seen. The outcome of this insight is to deliver the opportunity for significant value addition.
The exempla was Steve Jobs. He saw the constraints in personal PC’s when he saw the work being done at Xerox Park developing a Graphical User Interface. When deployed in the Mac, the GUI changed Apple from a hobbyist into a leading PC. He repeated the magic with the original iPod, then the iPhone, and the App store. Each of them operated in an existing environment, with existing technology that could be deployed in ways that removed the accepted industry constraint, changing the face of that industry. You do not need to be a huge organisation to do this. In my local area there is a plumber who guarantees his work, and guarantees the time he will turn up to do it. Failure to address either means the client does not pay. He charges a significant premium, and now has a number of vans on the road, simply because he redefined an existing constraint in this local area.
Identify and remove internal constraints.
As with an industry, every business has a range of internal constraints that together become the culture and status quo in that enterprise. There are always opportunities to do things better, but are often overlooked, by simply not being seen, or miscategorised.
A former client removed an internal constraint and added 10% to his gross margin overnight by doing so. The business, a medium size in his industry had kept three suppliers of the core item in his manufacturing operations holding roughly equal share of his business, for roughly equivalent products. There was little to no internal competition, each of the suppliers did so from their price list, while maintaining very friendly relations with the MD and purchasing manager. We instituted a competitive bid for a guaranteed 80% of the purchases, with the remaining 20% to go to the runner up as a consolation prize, and ‘backup’ to the major supplier. The cost reduction that came from that relatively simple exercise dropped straight to the bottom line.
Currently the evolution of AI is creating huge opportunities for enterprises to deploy tools that will optimise existing processes and enable scaling at little or no added cost. There is a learning curve, an investment required, but not engaging means you will quickly fall behind competitors, while ignoring the opportunity to go quickly past them.
Build performance consistency.
For those with a view to one day selling the business they have built, there is no substitute for being able to show consistency of performance over time.
Even when an exit is not even contemplated, seeking ways to build consistency has the result of simplifying an enterprise which almost automatically adds margin and cash.
To build performance consistency takes time and effort. It requires a combination of being ‘in the weeds’ implementing processes that recognise and address tactical and operational improvements daily, and taking a ‘helicopter’ view that enables strategic positioning. This combination is easy to say, hard to do.
A buyer is buying two things, both of which are extremely valuable, irrespective of the inclination to exit the business:
- Optimise the existing business processes and infrastructure,
- Map the path that best delivers future cash flow.
Demonstration of positive performance consistency on both these parameters will give you back time, and optimise the buying price if and when you exit.
Header credit: My thanks to Hugh McLeod at gapingvoid.com
Mar 26, 2024 | Governance, Sales
This is one of the most common questions asked, particularly when configuring a new product.
The ‘right ‘ price will be the pricing model that delivers superior value to customers while delivering optimal returns to the seller.
Developing a pricing model involves a series of strategic and market driven choices. Packaging, high Vs Low, the channels used, marketing collateral deployed, shape of your business model, identification of your ideal customer, and a host of other factors that make up the ‘marketing mix’.
However, despite most of us knowing these things, typically price is set on a cost-plus basis, mixed with what others are charging for the same or similar/substitute product.
For an entirely new product, it is a guessing game that has potentially serious consequences. At one end you kill the product, at the other, you leave money on the table.
Dutch economist Peter van Westendorp introduced a method that ended up being named for him in 1976. It has been used sparingly since, but not as widely as it should be.
It is a simple and reasonably reliable method to determine the ‘right’ price for a product or service.
There are four questions that will set your price ‘guidelines’:
- At what price would it be so cheap that you would question quality?
- At what price would you consider the product to be a bargain?
- At what price would you start to think the product is getting expensive, but you still might consider buying it?
- At what price would you consider the product to be too expensive, and you would not buy it?
Analysis of the responses will give you the point at which you are attracting the most customers who make the trade-off between buying intention, price, and quality perceptions. Putting this on a simple two-dimensional chart makes explanation easy.
Header courtesy Wikipedia
