Mar 9, 2022 | Leadership, Strategy
Consider what has been called: ‘The dichotomy of control’.
Is this thing I am considering in my control, or not?
In the words of Epictetus, a slave who lived early in the first millennium in the time of Nero, and a key figure in the evolution of stoic philosophy: ‘Some things are in our control, and others are not. Things in our control are opinion, pursuit, desire, aversion, in a word, our own actions. Things that are not in our control are body, property, reputation, command and in a word, whatever are not our own actions’
These words recognise we are powerless over the conditions that affect us, but have absolute power over how we choose to respond.
We can and should very deliberately choose which strategies we deploy.
In a way, a slave 2,000 years ago was also laying the foundation for Daniel Kahneman to win a Nobel prize in 2002. His work identifying the ‘Fast and Slow’ nature of our behaviour and the impact those human processes have on the choices we make reflects the way we consider and respond to choice.
Given that ‘Strategy’ is at its core about choice, this distinction should be amongst the first we make in the evolution of a strategic plan. The choices then continue as we move from the macro of strategy down to the micro of tactical implementation.
Game theory is also a core strategic foundation. The question: if I do A, what response will that draw from competitors? Will it bring in new competitors? Will I succeed? Will my bosses approve? and so on. These are things that in commercial life need to be considered. They do influence the decision you take, but in the end, they are out of your control, and the best you can do is to anticipate, and accommodate the possible responses. However, it should not be a barrier to make that tough choice, as in the end, you cannot control, what others do. Trying to anticipate and calculate all possible competitive responses to a choice you might make is a great way to ensure you never make the choice, as most of us do not like to be wrong.
In commercial life, those that are successful are regularly making uncomfortable choices with less than all the information they might like. Nevertheless, they make the choice, take the action, while being sensitive to the feedback they are getting. When the choice made turns out to be good, double down, when it is not so good, back up. Either way, you have learnt from the experience.
Such a bias for action enables you to get inside the ‘competitive loop’ of your opposition, and even when you make a miscalculation, you can adjust faster than they can, and will turn out on top in the end. This is the basis of John Boyd’s not so famous but competitively essential idea of the ‘OODA loop’.
As an aside, I find it fascinating that the teachings of a Roman slave 2,000 years ago could have so much relevance to the competitive environment in which we need to survive today. It is a sure indication that while the tools and competitive environment will change, human nature and the way we think is evolutionary, over a very long period, and will not change at anything like the same rate.
I will finish this post with another quote from Epictetus that we should all take note of as we set about ‘aligning’ our activities across functional silos, and engaging others in a mission of change.
‘It is impossible for a man to learn what he thinks he already knows’
Think about that the next time you fail to convince someone of the need for change.
If you wanted to take a dive into this ‘Stoic’ philosophy, a good place to start would be with the writing of Ryan Holiday.
Mar 7, 2022 | Change, retail, Strategy
The supermarket business model, like most others, is evolving as we watch. It is slower in Australia than elsewhere given the challenge of distance and the stranglehold of Coles and Woolies. Nevertheless, it is evolving, and we can learn from elsewhere.
Four years ago, with great fanfare, Tesco in the UK launched a discount supermarket chain they called ‘Jack’s’. It was intended to compete with discounters Aldi and Lidl, to be the British hammer blow on the invading German discount retailers.
At the time, it seemed to me that the game was already up, that the position the discounters had carved in the market would be impervious to the exhortations of then Tesco MD David Lewis, calling Britain to arms.
Prior to the launch of Jacks, there was considerable shuffling of deck chairs as other retailers, Sainsbury and Asda particularly adjusted to the discounters by M&A. Since then of course we have had the fiasco of Brexit, still evolving amongst the shattered supply chains. This has been graphically illustrated by the carnage at the port of Dover, and inability of British farmers to farm in the absence of eastern European labour.
Now Jacks is closing, its promises of stores in every major town never eventuating. Jacks only ever opened thirteen stores, six of which will be converted to Tesco, the other seven just closed.
At the time in a post I reminisced on the demise of discounters in Australia, saying ‘I suspect history will reveal that Tesco has made a huge blue’. At least they recognised the mistake relatively early and reversed course under a new MD.
Given Australia tends to follow the evolution of the British supermarket sector by a year or two, what can we anticipate domestically, particularly from the two current retail gorillas, Woolies and Coles?
- I would not expect either to make the mistake Tesco made and open a discounter. In the past, both have dabbled with discount retail brands, none of which have survived. Besides, they have both watched as Aldi has carved out a place without launching a discount rival, it is unlikely they will change direction now.
- The doubling down on home delivery will continue, as will the logistic arrangements that support home delivery, and the technology that enables it.
- Retail is fragmenting. Consumer behaviour is evolving rapidly, accelerated by Covid. There is an obvious trend towards on-line and specialist retail using multiple channels of distribution, attracting consumers from their large-scale competitors by offering other than ‘average’ products. Some retailers are designing their stores as an ‘experience’ as much as a place to shop. These stores are a brick in the brand building wall, and are in effect, another form of media as well as a retail outlet. Apple saw this first, opening stores progressively around the world. By the traditional retail measure of success of margin/sq foot, Apple is now the most successful retailer in the world. At the other end, we see small stores, even ‘pop-ups’ selling very specific and focussed ranges. In between, shopping malls have passed their peak, the massive floor space they occupy will need to be re-purposed, at least in part. The potential here is for locally focussed office and residential hubs with a mix of specialist stores and entertainment venues.
- Direct to consumer from the farm is increasingly possible and attractive. Farmers markets will continue to grow and nibble away at the supermarket share of produce, by delivering superior taste and quality. I love so called ‘summer fruit’, peaches, nectarines, and plums. Finding any in a supermarket that do not feel and taste like a cricket ball is impossible, as they are picked in bulk and green to survive the supermarket supply chain. They may look OK, but the taste is what really counts, and here they miss out badly to specialist stores.
- Harris Farm has considerable potential if they can resist the temptation to become more like a ‘chain’. Woolies had a go at high quality specialist food retailing with Thomas Dux, and at first got the recipe right. Sadly, success breeds intervention by the back office boys who never actually see a customers, which resulted in ‘Dux’ being sent to the naughty corner to die.
- Automation in big distribution centres will continue to drive costs out of the system. Ocado, the British online grocer is licencing their technology around the world. Coles did a deal with them back in 2019 to build two automated fulfilment centres, which will feed into their home delivery strategy and no doubt generate a lot of thinking for the standard supermarket Distribution Centre logistics chain.
- Aldi will continue to grow, more slowly than to date, as they expand store numbers in an already saturated market. Costco with currently thirteen locations around Australia have the potential to double in the next few years. Their differentiator is an entirely different business model, which is very hard to copy for any established retailer.
- The demise of proprietary brands in Australian FMCG has probably reached its lowest point. Coles and Woolies have ransacked the profitability of their supply base, who have responded with little or no investment in genuine innovation, ultimately the only source of real growth. I suspect that some smaller brands may start to reappear as Coles and Woolies seek to differentiate themselves from each other, Aldi, and the alternative distribution channels slowly emerging.
- The big retailers will, or should, start to experiment with some of the technology proving successful in the US and China. The obvious place for such an experiment is in some of the CBD locations they both have. Shoppers looking for a quick shop for dinner as they run for the train home, might value the sort of service offered by Amazon Go and others.
- Managing inventory for suppliers will become even more difficult. Retailers are continuing to reduce their order quantities while increasing the order frequency and placing rigid delivery times on suppliers. This volatility is making supplier demand planning progressively more challenging, while getting paid in a reasonable time means they are funding the retailers. I suspect there will be technical solutions to demand planning evolving that involve AI, interacting in real time with store traffic, weather, and events to deliver a demand number by location. It may be that the DC starts to pack retail shelves, which are delivered on a roll in roll out basis to stores, removing the in-store labour and reducing back store footprint size. At Dairy Farmers 30 years ago, we experimented with this idea for fresh milk, and while it was promising, it did not catch on. Just 30 years too early?
- The physical movement through the supply chains is an increasing problem for supermarkets. Traffic density, and fewer drivers available as the old guard retires, unreplaced by a new driver cohort willing to accept the rigors of driving semis in heavy traffic for 12 hours a day. Combined with the challenge of demand planning, this will increase the number of product out of stock at the retail face, encouraging consumers to alternatives.
No business model remains unchallenged, and can remain unchanged in the face of evolving competitive circumstances. The supermarket business model is no different, although proving to be more resilient than I had thought it would be a decade ago. The core assumption of the business model however remains unchanged. They control a choke point in the supply chain, and take a margin that reflects their power on both sides of that choke point.
Mar 2, 2022 | Change, Leadership
For a change effort to succeed, it must solve a problem people care about.
The first challenge I have seen in many years of looking, is to find the few who care enough to get off their arses, and then make sure those few care about the same things for the same reasons.
Start small and focussed.
The status quo is a powerful antagonist, one that resists change with a power that is almost always underrated by those advocating for the change. There is a very real difference between the apparent agreement to change, and taking the actions that will lead to the changes seemingly agreed becoming a new status quo.
Being misled is a common occurrence. ‘I thought we had agreed‘ a common cry, followed up by a litany of excuses why the agreed changes were not able to be executed at this time.
The most common mistake the change-makers make, is to try and leap from the grievance to the solution in one step. It seems so obvious to them. Instead, small steps work much better. It is like changing a habit in your own life, going ‘cold turkey’ is much harder than making a series of small changes, none of which are too difficult, moving progressively towards the objective of a changed habit.
Once the change has been achieved, there must be some sort of foundation to prevent what I call ‘change recidivation’. That tendency to declare success, only to find later that there was slippage back to the old ways.
The metaphor I use is of a stretched elastic band. Once the pressure comes off, the tendency is for the band to revert to its former shape. You must ensure that when you think the change is successful, that it really is embedded, absolutely nailed down, not just waiting for the chance to revert when you are not looking.
The corollary of course is that in an environment where constant change is necessary just to keep up with what is happening around you, a stop/start approach will not be enough to stay competitive. The leadership challenge is to enable change to be the status quo, always happening on autopilot, rather than being that stop/start exercise undertaken as a separate project.
Feb 28, 2022 | Leadership, Management, Strategy
History is littered with examples that convincingly make the case that a battle on two fronts can never be won.
Our business literature is similarly littered with examples of business failure brought on by the competing demands of too many markets calling on a common set of resources. The metaphor of war is routinely used in business literature, I have used it myself many times. Phrases like ‘the high ground’, ‘resource mobilisation and concentration’, ‘overwhelming force” and so on.
How odd then to find myself saying that success absolutely relies on being effective on two fronts at the same time.
Those fronts are not different enemies, or geographic locations, distribution channels, customer groups, or any of the other regularly used differentiators, but they can be all of them.
The two fronts are ‘attack’ and ‘defence’.
The disciplines used to assemble and deploy scarce resources to take advantage of opportunities, look for new products, and outflank the opposition whilst defending your home ground are common to all situations.
Resources are limited, opportunities to use them are not.
How many successful football teams have you seen that cannot both attack and defend? The really good ones swing from one to the other, and back again seamlessly, without a loss of position or momentum. Each player knowing their role in any given situation, understanding how that role contributes to the overall outcome of the play in progress, and ultimately to the score at the end of the game.
The best I have seen at this in recent times is the Melbourne Storm rugby league team. Irrespective of personnel on the field, every player knows his role in both attack and defence, and swings seamlessly between them in concert with every other player on the field.
It is the same in commercial life.
The imperative to grow also means that the home base, the source of the cash today, is effectively defended even as it evolves to deliver cash tomorrow.
I am constantly reminded of Charles Darwin’s observation that ‘it is not the strongest of the species that survives, nor the most intelligent, it is the one most adaptable to change’
How good is your organisation in this tug of war operating on two fronts?
Feb 25, 2022 | Analytics, Operations
To improve performance, the key challenge is to identify the drivers of outcomes in real time, and enable the changes to be made that will improve the performance.
The ‘Box score’ is a term that has been hijacked from the recording of individual sporting performances in team sports by a few accountants seeking to capture real time operational data. The term originated with Baseball, but all team sports have a system that in some way records individual performances which when taken together are the source of team performance.
In a commercial operational context, the collection of metrics plays the same role, capturing the real performance of a part of a process, adding through to the totals for the whole ‘team’. It is a more accurate and responsive way of tracking the costs incurred in an operational situation, specifically a manufacturing process, than the favoured standard costing system.
Typically, standard cost systems while better than nothing, fail to reflect the actual costs incurred by a process. They are ‘lazy’, displaying the averages of past calculations, and as we know, averages hide all sorts of misdemeanours, errors, and potentially valuable outliers.
Sometimes these systems also have a component added to the cost of each unit of production that is noted as: ‘overhead absorption’. This just makes the inaccuracy and inflexibility of the standard costing system even more inaccurate and misleading, resulting in poor data upon which to make decisions.
Accounting has only two functions: the first is reporting to outside stakeholders. That has become a formulaic process with a template and rules about how things will be treated, this is to ensure that you are always able to compare apples with apples across industries.
The second function is to provide the information necessary to improve the quality of management decisions. The two are not connected except at the base level, the originating data.
This is where the ‘box score’ approach adds huge value: it captures the actual cost of a process.
A well thought out standard cost of goods sold (COGS) calculation typically includes calculations for the cost of packaging, materials used in manufacturing, and the labour cost consumed by the process. The calculation assumes standards for all three, and then throws out variances from the standard to be investigated. Standards would typically be updated regularly to accommodate variances that appear intractable. Changes such as labour rates, machine throughput, and price changes in materials, should be included in updated standards, but often they are not, and when they are, it is after the fact, and as averages.
A ‘box score’ by contrast captures the actual cost in real time, or close to it, so that more informed management decisions can be made.
30 years ago, I did an experiment in a factory I was running, the objective of which was to identify the exact cost of the products running through a line. To collect the data, a host of people needed to stand around with clipboards, stopwatches, and calculators. At the time it was called Activity Based Costing, ABC. The result was good, but the improvements resulting from the information gathered did not generate a return on the investment necessary.
These days with the digital tools available to collect data, there is little excuse not to invest the small amount required to measure the real throughput and resources allocated to get the better information for informed decisions. The options to collect real time data are numerous and cheap, and in modern machinery, just part of the control mechanisms. These devices can collect data and dump it into anything from Excel to advanced SCADA systems, which enable the data to be analysed, investigated and the outcomes recorded and leveraged for improvement.
Managing operations using the actual costs captured and reflected in a ‘Box Score’ manner enables more accurate and immediate decisions to be taken at the point of causation. It is no different to a cricket captain taking a bowler off because the batsman is belting him out of the park. When you can see what is happening in real time, you can do something about it.
Header: courtesy Wikipedia. The scorecard in the header is the scorecard of day 1 of the 1994 ashes test in Brisbane. It progressively captures the days play as it happened: a ‘Box score’
