Feb 2, 2022 | Governance, Leadership, Management
The Reserve Bank released the latest inflation figures a week or so ago. The year-end number was 3.5%, significantly influenced by a few highly volatile items like petrol. Stripping those out, the underlaying rate was 2.6%. These numbers do not bode well for the RBA target rate of 2-3 percent average over time.
It would appear that despite the denials, the reserve will be forced into increasing the official rate well before their earlier undertaking not to do so until 2024.
From the graph in the header, should we sneak back to official rates above 6%, last seen in the late 80’s, we will have a cohort of managers making strategic decision in an environment they have never experienced.
That is not a good omen.
I well remember paying 17.5% rate on my first mortgage around 1983, an experience that will never be forgotten. The little equity I had built up in the previous 2 years since borrowing the money to buy that first house, was swallowed up while my very young family ate a lot of potatoes and sausage.
Managing a business in a period of inflation puts a lot of pressure on things the cohort of younger senior managers have not ever had to worry much about to still deliver acceptable returns. Now they will be faced with some nasty choices:
- Increase prices, annoying customers, and risking volume loss, and the associated relative increase in overheads.
- Annoying stakeholders by holding prices resulting in decreasing margins as inflation driven costs increase.
- Cutting costs which in a crisis normally means cutting ‘heads’, which rarely makes you popular in the lunchroom.
- Reducing investment in everything from advertising to R&D and new product introductions, which has the compounding impact of making tomorrow’s cash flow and profitability that much harder to generate.
The most usual course for the inexperienced is to generate lots of words, but take no or only ‘fence-sitting’ action until their options have closed in. They then stir into action with emphasis on the last two options, leaving it to the following leadership to pick up the pieces.
The much harder work of refining product portfolios, brand development, generating operational ‘flow’, ensuring strategic alignment, building resilient supply chains, process flow optimisation, business model innovation, and all the rest, should not be activities stimulated by some sort of crisis. They are the responsibility of managers always, but often lost, obscured in the better times when getting a bit fatter is the most common characteristic.
Header Image credit:. Source World bank.
Jan 31, 2022 | Change, Innovation, retail
Life in FMCG world is, almost unbelievably, becoming more competitive than it has ever been. However, the nature of competition has changed radically over the last 25 years.
Performance measures that we have relied on in the past no longer serve as well, we need a rethink.
The business model, while retaining the foundations that had delivered such success to supermarket chains in the past, has morphed.
No longer do big brands hold sway.
I suggest ‘Net Distribution Gain’ should be a standard measure in the FMCG marketer’s toolbox.
The previous business model used to be big add budgets splashed on TV, an OK product that appealed to the general average consumer, drove weight of distribution and shelf offtake.
That has all changed.
Most brands have disappeared, for those remaining, the name of the game is shelf space and position.
Where there used to be 5 or 6 brands competing in a decent sized category, there is now one, sometimes two, or at most three proprietary brands in big categories competing with house brands under various guises. These remaining brands have eroded their position by allowing retailers to convert their marketing budgets from brand building into price promotion, shelf position, and retailer margin enhancement.
Gaining distribution these days is a matter of buying it, and for a new product, if you are successful, there will be a copy house brand coming very quickly.
The outcome of all this is that innovation is at an all-time low, and the cycle just accelerates.
Retailers practise the one in one out method, it has become a standard procedure across supermarket retailers. It recognises their inelastic store sides and imposes minimum sales discipline on the suppliers.
For a supplier, having one of your competitors products deleted to make room for yours is a win, but for the retailer, it makes little difference which SKU is sold beyond any differences in the delivered margin. However, genuinely new products, ones that warrant net new space in a category, are where the real category gains and marketing success lie hidden.
NDG should be a standard measure to use by suppliers considering the planning and KPI of product launch strategies. There are several choices, which could become very complex with the addition of a weighting index based on shelf position:
One in one out of your range
Yours in, competitor SKU out
New space for the category.
Clearly in the last case the retailer is making choices elsewhere in the category mix, and the ripples widen, but for the category marketer, a NDG would be an indicator of a successful genuinely new product as distinct from a line extension of a successful competitive SKU.
Jan 26, 2022 | Change, Governance, Leadership
I am sitting here on January 26, 2022, contemplating another year gone, with the new one coming at us, wondering if anyone in power has ever heard Henry Ford’s quote: “If you always do what you have always done, you’ll get what you’ve always got’
Such was 2021, except we seem to have doubled down on the stuff that generated a negative outcome in the past, mistakenly betting on a better outcome this time. I looked back to the Australia Day post for 2021, and almost all of the issues aired remain valid.
Little has changed, apart from the date, and the conga line of politicians has evolved a bit. There have been a few political scalps have been taken, and a few resurrections in the national party that surely rival any spoken of in the good book!
New South Wales’s god-fearing Premier who took over in unusual circumstances in October 2021, said at the time: ‘I will take NSW to the next level‘ has been proved correct, at least in relation to Covid cases. He has put all our eggs in the almighty’s basket, and the almighty seems to be on holiday, or is perhaps isolated, as infection levels skyrocket.
Clearly the only way to reduce the reported cases is to reduce testing, while playing with the definitions of what constitutes a ‘contact’.
Monty Python would be proud!
In November, the report of the review into the parliamentary workplaces landed on the federal governments desk. This is in contrast to the yet to be seen report commissioned by the PM to be conducted by the head of his department on the specifics surrounding the alleged rape in the office of the defence minister in February. Clearly the stench coming from the big house is not what anyone should expect in the place that is supposed to be governing the rest of us, making laws about how we will behave, and the penalties for not doing so.
As we go into an election campaign, we will see a lot of the PM in high vis. being the daggy bloke from next door, telling outrageous porkies while looking everyone directly in the eye. Must be a learned skill, honed with extensive practice, as few are as good. Meanwhile, the opposition leader, despite a bit of cosmetic work with the glasses, hides from just about everyone. Probably a good strategy.
I can smell the baking pork from the coming election BBQ from here!
The trading relationship with China still resembles a pygmy kicking a giant in the foot trying to get his attention. The reality is that we have affronted the Chinese leadership, they have reacted, will not forget, and we can do nothing about it, beyond swallow the medicine and stop being stupid. A big ask, especially for some of the conservatives in the government who, perhaps rightly based on its sad history, believe there are votes in being belligerent. The narrative that Australia must ‘pick a side’ between the US and China assumes a binary world, when it is in fact way more nuanced and complex than that. It seems crazy to me that this is not obvious to those who find themselves in positions of political power.
I guess it is lucky we might have a few nuclear subs to use as a deterrent in about 30 years. Pity they require very deep oceans to operate effectively, and our area is surrounded by largely shallow ones. Sadly, they also require deep and practical nuclear engineering expertise to keep them operational, which we do not have, and are unlikely to ever develop to the level required. This is before we consider either the time before these mirages emerge from the deep, and there is any consideration of the anti-submarine technology that might emerge over those 30 years, making our subs very expensive coffins. Knowing a few very senior navy officers over the years, I am sure they pointed out these obvious facts to the politicians, who seemed not to be listening. Ah well, it must have seemed like a good press release at the time.
Climate change. What can you say about the triumph that was Glasgow?
Our dear leader speaking to a packed house at midnight, explained the ‘Australian way’ of tackling this global problem. It amounts to subsidising fossil fuel emissions and funding research into technology that has as much potential to capture meaningful CO2 emissions, as medieval alchemy had of turning copper into gold. Never mind: our supporters want, and are paying for the effort via party donations, just don’t let on to the taxpayers, which does not include the aforementioned political donors.
Some of this nonsense might be excised if there was a version of a federal ICAC. Clearly nobody in the big house wants such a body to examine the entrails of their shenanigans, it might be embarrassing. The first effort by the then Attorney general, later to be pushed towards the exit kicking and screaming after a nasty scandal involving, wait for it, a woman now deceased, was laughed out of the place. The simple fact that it was so obviously a piece of window dressing was made clear by the fact that the opposition was laughing at it as well. This is despite knowing they might have to live with the consequences of a beefed-up version, if they ever regained power.
The two-laned economy we are building where the benefits go to those in a position to charge economic rent, is continuing to significantly distort the choices made in the allocation of resources. As the gap continues to widen between the ‘Haves’ and ‘have nots’, as it will if nothing changes, it will at some point become toxic, as it did on January 6 last year in Washington.
As an illustration of our challenge as a competitive economy that will serve Australians more equally, we should consider the asymmetrical picture painted by the ASX top 10 in Australia compared to the S&P top 10 In the US. Our top 10 are all traditional hard asset companies, all from mining or financial services, with the single exception of CSL. By contrast, the US top 10 are all, with the single exception of Berkshire Hathaway, ‘soft’ asset, technology-based companies.
The rate of capital growth of soft assets is far greater than those of hard assets. Will 2022 be the year that it hits home that Australian industry is dominated by yesterday’s businesses, and we start to adjust? Fortescue (number 10 on the list) has just started to make those adjustments into areas that rely more on intellectual rather than financial capital.
Making any effort to bridge that gap between ‘New’ and ‘Old’ industries enormously more challenging, is the simple fact that Australian public spending on R&D has over an extended period been dropping. The total spend is being propped up by spending by business in specific areas of digital engineering, almost compensating for the drop in public spending. The total spending amounts to 1.8% of GDP, a number way below some of our international competitors. The OECD average is 3.4% of GDP. Our spending on education, the economy’s investment in the future, in the 2019/20 fiscal was 114 billion, around 1.8% of GDP, before the positive impact of $20 billion of ‘export’ sales to now excluded overseas students is removed. At the same time, the ‘quality’ of education has been dropping consistently. From the gutting of trade and technical education over the last 30 years, to the removal of teaching resources from universities as they are mandated to turn a short-term profit. The latest nonsense is to penalise the humanities, and favour STEM. While we do desperately need greater STEM education resources, it is insane to fund them by reducing our creative and behavioural education that enables the STEM output to be leveraged. While it is not just the amount of money we spend that is important, quality does count, when both are going in the wrong direction, there is unlikely to be a soft landing.
I cannot finish without acknowledging the continuing impact of the Covid pandemic. 2022 will no more be the end of it than was December 2021, and worse, we seem to have given up. Omicron is of less mortal concern than Delta, so we seem to assume that the next variant, emerging from the unvaccinated half of the world’s population will be less virulent again. Let’s hope it is so. However, if we look at very recent history, Aids, Ebola, Mers, Sars, none of them evolved to be less severe at each outbreak, they evolved to avoid the barriers we built.
Covid has been a catalyst for many other seemingly unconnected things happening.
For example, the disruption of our supply chains, firstly the international ones, and more recently the domestic ones. A month ago, a shortage of AdBlue looked like it was going to be a game stopper, and it still may be. However, more of a long-term threat is the closing of a number of (that I know of) significant regional transport companies. These companies, long established in places like Bathurst, Dubbo, and Tamworth, employ hundreds of people in support roles as well as their drivers, and service providers. They contribute significantly to local economies. The drivers are mostly blokes older than 50, who have never done anything else, but now will be lost to the industry. Difficult jobs like moving cattle, machinery, smaller multi-stop loads, will not be taken by the giants in the industry, who are just interested in moving pallets in bulk from point A to point B. In NSW the RMS has a lot to answer for. Dyslectic drivers who have difficulty filling in a totally unnecessary logbook, as trucks now all have GPS locators, without spelling mistakes cop a fine of $400 a time. This stupidity is just driving them out of the industry. In terms of supply chain disruption, we ain’t seen nothing yet!
In order to address the challenges of Covid and Climate change, politics has privatised the development and distribution of vaccines, and kicked responsibility for acting on climate change down the road. Stick the means to fight the problems in the hands of a few billionaires, and magically, the problem will be resolved. Meanwhile, half the worlds population remains unvaccinated, so the new variants have plenty of opportunity to find the weaknesses in our defences. The polarisation of the populations continues. Politics encourages this polarisation as it suits the coming election in this country, as it has in other developed countries. Politicians tell bigger and bigger porkies, each trying to outdo the other. Sadly, it seems the bigger the lie, the more likely there will be a vocal minority that believes and goes on to proselytise it, compounding the divisions, and compounding the erosion of trust and the concept of mutual benefit and accountability. Two weeks ago, a big bloke in a supermarket shopping centre lift very aggressively abused me for being stupid, brainwashed, and ignorant of facts because I was wearing a mask. Had I been a 70-year-old woman instead of a relatively large and fit 70-year-old man, it would have been terrifying.
I really need to finish and get the Barbie lit.
However, before I go, have you seen the photos of the former, as of today, Australian of the year Grace Tame giving the eye to the PM yesterday? I sense that she does not think highly of our dear leader. I suspect that photo, along with the one in which the PM displayed a lump of coal in the parliament, will get a lot of coverage over the next couple of months.
Have a great Australia Day, however you choose to see and celebrate it.
Jan 24, 2022 | Leadership, Management, Strategy
As I observe the better performing manufacturing businesses around, I see some components not spoken about in any of the verbiage that comes from the various interest and political groups.
These common themes are:
They are close to customers.
This means they are less price sensitive than competitors and are focussed on building a bigger pie in collaboration with their customers. As a result, they always outperform those trying to grab a bigger part of an existing pie using price as the primary driver.
They have high level trade skills.
They have a higher rate of apprentices and tradesmen in their ranks. In the absence of publicly available vocational training, they find ways to deliver it to employees internally. This determination often extends to their key suppliers, adding glue to the supply relationships and enabling innovation through their supply chains. Skilled tradesmen are valued not only for the skills they have, but as people who have combined trade skills with experience, and are therefore tertiary qualified by an alternative route to a university degree. They are often better able to get stuff done as a result. Their deep respect for trade skills results in less turnover of personnel, delivering a substantial competitive advantage.
They seek tertiary educated employees.
The education does not have to be specific to the businesses, they are seeking people who have demonstrated a capacity to apply themselves, learn, and who are curious about what is going on around them. This looks expensive on the surface, but it gives them an ‘intellectual edge’ in the competitive game.
There is a continuity of leadership, and leadership style.
While the individual leaders might change over time, the style remains consistently participative and flexible. This leadership culture comes with a very clear set of performance expectations for individuals and the operations, which evolve in parallel with the strategic and competitive demands of the market.
Optimised and messy live together.
While there is a very strong focus on optimising operations, there is also a recognition that innovation, which is expensive, risky and messy, is fundamental to future competitiveness. They find ways to live with the ambiguity that comes from focussing on optimisation for the existing major part of the business, and exploration at the ‘sharp end’ where they are building the base for tomorrow’s cash flow.
They have big ambitions.
Their strategic planning sessions are not just extrapolations of the current in a nice location with a few beers for bonding. They deeply question the assumptions that shape the business, and allow many voices to be heard, and they reach for the ‘big’ outcome.
This is all effectively anecdotal, coming from observation rather than published data, so it may be a bit flimsy, but it does pass my ‘pub test’.
Header cartoon Credit: Hugh McLeod at www.gapingvoid.com
Jan 21, 2022 | Change, Leadership, Strategy
Momentum as we all learnt in high School physics is Mass X Velocity.
Decisions made have no mass, but they do seem to have the characteristic of building momentum.
Those businesses in my experience that have an overt bias for action make more decisions, get more done, succeed more often than those less willing to decide and act. They also make more mistakes, as they make choices with less than complete data, but are also willing to recognise mistakes earlier and back out, avoiding the ‘sunk cost’ syndrome.
Opportunity cost is hard, if not impossible to quantify, but it is clear to me that those who have the bias to action, make decisions and act on them, will suffer from opportunity cost less than those that wait for perfect, or just more information, by which time the opportunity had gone.
Dad joke:
Knock knock…..… Who’s there? ..….. Opportunity…………Opportunity who? ………….Silence………..
Opportunity does not knock twice!
There is a balance however.
Moving quickly in itself should not be the objective. The challenge is to quickly understand the balance of risk and reward that enables a decision and subsequent action that is important. It makes sense to spend more time considering a ‘bet the farm’ decision than one that is less likely to be catastrophic should it go pear-shaped. Some decisions can be reversed quickly in the event of new data emerging. The mistake is taken as a learning opportunity and embedded in the ‘wisdom’ of the enterprise, to ensure the same mistake is not repeated.
Amazon Prime has been the mother of all marketing tools, delivering Amazon a competitive advantage that has overwhelmed all comers. However, Prime was not born in its current form. It went through a number of iterations over an extended period as Amazon experimented, learnt and doubled down on what worked, while removing the pieces that did not.
Prime started as a ‘2 day shipping’ promotion in a narrow geography, under a promotional name. It evolved to 2 day shipping in the US as the standard, to expedited shipping for a fee, to free shipping with a Prime subscription membership. Over a decade, Amazon has progressively squeezed the time between order receipt and customer delivery at an astonishing rate, that competitors have failed to match. This progressive compression of their decision making and implementation cycle is a key to their competitive advantage.
This bias for action, transparent accountability and learning does build momentum, and once going, is very hard to stop, and almost impossible to compete with successfully.
Nobody ever claimed the prize from Colonel ’40 second’ John Boyd. He was never beaten in a dogfight simulation because he grabbed the initiative and held it, operating inside what he called the oppositions decision making cycle time.
This is decision making momentum, which he codified as the OODA loop.
To me it is one of the decisive competitive tools of the information age.
