Four strategic tasks for the owner of a successful SME.

Four strategic tasks for the owner of a successful SME.

 

 

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 

 

 

What is the ‘right’ price for your product?

What is the ‘right’ price for your product?

 

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

 

 

Colesworth: Is it collaborative gouging or ruthless collaboration by oligopolies.

Colesworth: Is it collaborative gouging or ruthless collaboration by oligopolies.

 

 

Collaboration between competitors is illegal, but tough to prove. It is also the natural state of affairs in an oligopoly.

When a competitive market evolves over time into an oligopoly, the focus of management attention of the remaining oligopolists moves from the customer to the competitor. With the resources available to an oligopolist in any decent sized market, they will know in considerable detail the strategies, internal processes, pricing, and resource allocation choices made by their competitors almost as quickly as they happen.

Supermarket competition in Australia has evolved in this manner. It has turned from ruthless competition for customers 40 years ago, to ruthless collaboration between the two major players now.

Collaboration is illegal, and I am sure that the leaders of the two supermarket gorillas are not setting prices together, or collaborating in other ways that would be contrary to the competition laws in this country. However, given there are only two of them, and they have the resources to watch the other very carefully, there is a sort of quasi co-operation that emerges.

It is driven by the commonality of their activities: The need for shareholder returns, driven by market share acquisition costs, both fixed and variable. They work aggressively on both, and if they did not, the senior management would be fired. In addition, directors have legislated fiduciary responsibilities under the Corporations act in relation to shareholder interests and importantly, returns.

We must also remember that via our superannuation funds, we are all shareholders in Coles and Woolworths.

Once again, just like the ‘housing crisis’, we have short term populist press release driven band-aids being suggested. They are touted as the remedy for long term strategic choices made in the past that to some, have turned sour.

The time for institutional concern about the increasing power of supermarket chains was when they were assembling the scale they now have. All of the take-overs and mergers that have happened have been waved through by the ACCC. This is despite commentary at the time about the impact of the lessening of competition for the consumers dollar.

Now it is too late, other remedies must be found, which do not include a forced break-up. Apart from the immorality of retrospectively applying new rules to the conduct of business, there is no logical or practical way to break apart either of the supermarket chains.

We should stop bleating, and get on with life, while ensuring we do not make the same mistake again.

Header credit: Gapinvoid.com. The cartoon put a huge amount of meaning into a simple graphical form. Thanks Hugh!!

 

 

 

 

How much has marketing really changed?

How much has marketing really changed?

 

 

If you asked a room full of marketers if marketing had changed in the last decade, you would get most of them telling you it had changed radically.

On the surface it has, the digital revolution has taken marketing by the neck and given it a great big shake.

There has been an explosion of sales, media, connection, and payment channels, customers are more wary, and do their own research before a marketer knows they are in the market. So called ‘content’ has almost infinite reach, but the frequency is rubbish, as there is so much digital noise, and so much competition for attention, that most of it is the digital equivalent of yesterday’s fish wrapper from the newspaper obituary section. The investment in marketing technology to manage all this has also exploded.

There is a welter of research and opinion that confirms the notion marketing has changed, some by very credible organisations.

I asked myself the question again, after stumbling across this report by Adobe, one of those credible organisations that supports the ‘yes’ vote, and came to a partly different conclusion.

Marketing has changed, absolutely, at the tactical level. The means by which marketers create and deliver a value proposition, then turn it into a transaction is unrecognisable from just 5 years ago. However, tactical implementation is just a small part of the pie.

Organisationally, marketing has changed a bit. Generally, it is still a function in a group of functional silos that reports to a CEO. A range of new titles have emerged, Chief Marketing Officer, Chief Engagement Officer, and so on, but that does not change the essential reporting and accountability of those in senior marketing roles. The marketing organisation in large enterprises has also siloed, now there is digital, customer service, technology, and a range of other functional roles within marketing not present 5 years ago.

Strategically, marketing has changed little if at all. The role of marketing is to tell the future and adjust the value proposition to customers ahead of the changing preferences and behaviour. That has always been the case, and remains so.

The only strategic change I can see is one of leadership.

In the past, marketing has generally been a passive corporate player, relegated to the role of managing one of the largest expenses in the P&L. Now the value of enterprises is so much more in the hands of intangibles, that marketing is increasingly demanding a seat at the big table. This requires that marketers are able to lead their peers and boss. Unless they can achieve this position of leadership, they will remain the simple gatekeepers to one line in the P&L, rather than being responsible for the future health of the enterprise.

Look at it from the top down.
Marketing has changed little strategically, but strategy is by far the most important component.

It has changed organisationally, and while it is important, in most areas, it is not a game changer.

Tactically, marketing is unrecognisable, but who really cares. Tactics are short term, able to be changed in real time as the situation evolves. Marketers need the organisational capability to be able to change in real time, but the impact of failing to do so is limited.

The marketing groups that will be successful into the future are the ones that are successful leaders of their organisation. To achieve this role of leadership, they must be able to identify the priority areas for investment and activity, as well as being able to remove the organisational constraints that operate in every enterprise, that are not directly accountable to marketing.

Well, they are not accountable until marketers are in the corner office, which should be happening more and more as they are the future tellers. Those who currently occupy that office are usually the engineers, lawyers, and accountants who are good at reading the past in the data, and hoping the future looks similar.

Who is next in your corner office?

 

 

4 hurdles to successful ‘digitisation’

4 hurdles to successful ‘digitisation’

Often, I hear the term ‘Digital Strategy’ used as if it were an end result, some discrete set of activities to be completed.

To my mind, this is a misuse of the term.

As it is usually used, ‘Digital’ is all about the devices, the technology, whereas the value in digital is elsewhere. It is in the ability to get things done, differently, more quickly, efficiently, and in a distributed manner by those best able to complete the activity with the minimum of organisational friction.

It is about the business models enabled, the understanding of customers, ability to visualise the unseen, and communicate it clearly. It is not about the RFID tags, VR, and all the other enablers of digital, it is the outcomes that count.

Your strategy may be enabled by digital, but you do not need a digital strategy any more than you need a telephone strategy. They are both just tools to be leveraged.

Management of these changes is confronting, there is not a lot of precedent to go by. This is particularly the case now following the explosion of AI onto the scene. There is a lot of advice around, often delivered by those with a stake in selling you another product or service. However, it seems to me that there are a few simple parameters worth considering.

Functional Silo thinking is poison. The communication enabled by digital is inherently cross functional, better reflecting the way customers and suppliers see us and want to interact. Functional silos have little to do with optimised outcomes anymore. They have outlived their purpose and value.

One step at a time. While the pace of change is getting faster, and the pressure to keep up increasing, we all know what happens when we try and run down a hill really fast, we end up arse over tit. Matching the speed of change to the pace that your enterprise can absorb the change is pretty sensible. Of course, if you are the slowest in the competing pack, it may be better to get out while you can.

Digital is a team game. Hand balling digital responsibility to the IT people is a mistake. You will end up getting what they think you need, which is rarely what you really need. The real challenge is engagement of people not really focussed on digital. The primary example is in the space of marketing automation. Suddenly it exploded, way beyond the capabilities and experience of most marketing people, who are nevertheless now investing more in tech than the IT people. It is essential that the right capabilities are built in the right places. Finally, everyone affected, which is everyone, needs to be in on the secret, with all the options, challenges, and opportunities transparent. The unknown is the father of all sorts of ugly children.

Think long term. Digital transformations are not just about which software you will install to automate a process. Is more about what the business may look like in 5, 10 years, and what steps do you need to take over that time to reman relevant. Technology, much of which may not yet be available, will play a vital role in that evolution, but they remain tools of the evolution, rather than the main game.

Header credit: My thanks to Tom Gauld in New Scientist.