Oct 22, 2021 | Uncategorized
Having a vision, mission, purpose, all of them has become top of the consultant pile of ‘must do’s’ for success.
What a misleading crock of old cobblers!
A vision in the absence of the resources, capabilities, and determination to get down in the weeds and do the hard work necessary, to make the tough strategic and tactical choices required to implement, will remain a dream.
Which comes first, the vision or the tough stuff?
Many businesses have grown and thrived without the vision; none have done so in the absence of doing the work. The challenge is to focus the work for the greatest tactical and strategic return, and having a shared destination is a crucial ingredient, but only one of several.
Lou Gerstner was hired from RJR Nabisco in 1993 where he had restructured the business after a highly leverage buyout, to run IBM. The former giant of the computing business had fallen on hard times and seemed likely to be broken up and sold off. In response to a reporter’s question which assumed he was hired because he had some unique vision for the revival of the fortunes of IBM, he famously said: ‘The last thing IBM needs right now is a vision‘.
The revival of IBM started from there.
Alan Mullaly became the saviour of Ford after being hired from Boeing in 2006. There was no grand vision, no set of fluffy words describing some sort of mission, just a steely determination to save what he saw as an American manufacturing icon, and the tough choices and hard work necessary to achieve that end. The choices made delivered a strategy: reduce the stable of brands by selling off all but Ford, thereby freeing up cash and simplifying the business. Make people accountable for identifying and solving problems in their workspace, investing in R&D to modernise the technology in Fords, and manage the cash weekly.
Both Gerstner and Mullaly were outsiders, neither came with the mental models that then dominated the computer or automotive industries. They remained uninfluenced by those peddling quick fix, silver bullet solutions. Both came with fresh eyes and a history of success through challenging times and recognition of the demands of true leadership through tough times.
We tend to look for the silver bullets when we look at successful people who run successful businesses. What did they do that we can copy?
While there are always lessons for the curious, there are no silver bullets, no universal solution to the unique challenges posed by different businesses.
Create a vision and a mission, perhaps a purpose, all will help give people a reason to get up in the morning, but will not replace the tough stuff at the coal face. Interacting with people, generating ideas, giving and receiving feedback, putting in place the operational foundations necessary for commercial success, and making really tough choices.
This is not an easy recipe, but it is the only one that works.
The PR friendly articulation of a vision is extraordinarily useful as a catalyst for the hard work, but is never a replacement.
Oct 20, 2021 | Governance, Leadership
Effective managers are sensitive to the differences between working capital and investment capital.
The former is the money it takes to keep the business running, to generate the transactions, fill the gap between the sales registered in the P&L, and the cash coming into the bank this month. The latter is the money that needs to be invested to keep the business competitive, renewed, and more likely to have a long and successful life delivering competitive returns to stakeholders.
Peter Drucker observed that: ‘The purpose of a business is to create and keep a customer’ which is often used as a quote.
The full quote was: “Because the purpose of business is to create a customer, the business enterprise has two, and only two basic functions: marketing and innovation. Marketing and innovation produce results; all the rest are costs. Marketing is the distinguishing, unique function of the business.”
He was right, as usual.
Without customers, you do not have a business.
Marketing activity of any sort is an investment in future sales.
The creation and long-term engagement with customers, is just as much an investment as one in a piece of capital equipment. Marketing consumes funds over time that are necessary to generate the cash coming into the bank consistently and predictably.
Marketing investments are in effect, the working capital of revenue generation. However, they are treated as expenses in the profit and Loss statement, which leads to them being regarded as a variable expense, rather than an investment.
You could mount an argument that a major proportion of the marketing budget should be capitalised, as an asset, not depreciated as you would with capital equipment, but offset by a deferred revenue liability.
In a past life, in charge of significant marketing budgets, I have been on the losing end of the argument that cutting marketing expenditure in tough times is absolutely the wrong thing to be doing. The net result has been to erode brand position, revenue, and margins over time, as well as not being able to take advantage of competitors similarly dumb decisions to reduce marketing investment.
The research evidence to avoid such cuts is overwhelming. However, while the marketing budget resides in the P&L, it will continue to be a balancing item for annual EBIT, rather than playing the long-term role of building commercial sustainability.
Oct 18, 2021 | Branding, Marketing, Sales
In competitive markets, price is a bit like a game, typified by the ‘prisoners dilemma’ of game theory, where two players acting in their own self-interest will result in a suboptimal outcome for both.
In the classic scenario, you have two people, suspects of a crime held in separate rooms with no means to communicate.
The copper tells each of them that if they confess and testify and the other does not, you will go free.
If you do not confess and the other does, you will get the maximum sentence of 3 years.
If both confess you will both be sentenced to 2 years.
If neither confesses, there is enough evidence to have you both serve 1 year.
The result is that if the prisoners act out of self-interest, the result is worse than if they had cooperated.
When you consider this in a competitive duopoly market, to keep it simple: what happens if one party cuts its price?
The other has the choice of cutting theirs to match, which inevitably results in less profit for both if competitor two cuts their price in response. However, if the reaction of the second mover is to keep their prices up, they might sell less, but very probably make more profit. The price cutter will be relying on selling more at the lesser price to increase profit, or grabbing market share which is usually the driver, because of the added volumes.
Given most organisations have KPI’s around sales volumes, the temptation to cut prices in the face of competitive activity is almost irresistible, despite the profit impact which is often ignored.
The Fountain Tomato sauce story: I joined Cerebos back in 1981. Fountain Tomato sauce had a share in NSW of about 40% of volume and 50% of value. Fountain sold for .72 cents for the 600ml bottle, I remember the numbers well. A short time after I joined, discounter Franklins brought out No Frills tomato sauce, on shelf for .69 cents,
The sales force was in a panic, as Fountain was a big part of their sales and they insisted that we had to drop the price to match No Frills or lose huge volumes.
I did the numbers, and convinced the marketing manager, and MD to overrule the sales manager, and we put the price of Fountain up, so it was on shelf at .81 cents, and we started advertising: ‘Rich Red Fountain Tomato Sauce’
The logic was that Fountain at .72 and No Frills at .69, were very close, so the consumer found it sensible and easy to save a few cents, as after all, they must be pretty much the same if the price was so similar.
However, at a price difference of .12 cents, very substantial in percentage terms, but not particularly significant in the mix of a weekly shop, consumers figured that they had to be very different. Fountain had to be the far better product, and the advertising we did confirmed that view. More tomatoes, no filler, ‘Rich Red Fountain tomato sauce’. Our volumes did drop marginally, and our profits went up.
This outcome was not just instinct, it was based on research and experience.
‘No Frills’ margarine was the very first cheap housebrand on the Australian market. It was proposed and supplied by the business that at the time owned Meadow Lea margarine, my employer. I had done quite a bit of research after the launch of No Frills margarine to understand the consequences, and so was lucky to be in a position where I had some understanding of the dynamics that were at play, without at that time having any solid idea of the psychology that drove them.
Later, both Fountain and Meadow Lea allowed the retailers to dictate their strategies, so redirected advertising funds into price promotions, boosting the retailers margins and destroying their brands. Both Fountain and Meadow Lea are now just ‘also-rans’ in their markets, (judging by shelf presence) and neither would be anywhere near as profitable as they were in their heyday.
The lesson is that the intense pressure to reduce price as a competitive reaction is almost always a very bad choice. Resist the pressure and protect profit, without which you will be out of business.
Oct 15, 2021 | Leadership, Management, Small business
One percent is a tiny fraction. A question I have asked many times of clients, and management in my former corporate life is ‘who could not……… by one percent?
The blank is filled in by a variety of items:
Raise prices, reduce trading costs, reduce overheads, increase volumes, and so on. Nobody ever says ‘No’ to the proposition.
When you look at the impact, particularly cumulative of those one-percenters, they supercharge profits.
We are all in business to make profit, without profit, we are not in business. While there is an extremely important place for calls to be good corporate citizen, provide all stakeholders with a mission and vision to which they can relate, and to build for the long term, none are possible without commercially sustainable profits.
Many SME’s I talk to fail most basic understanding of the make-up of their P&L, and how the one percenters impact on profitability. Usually it is simply because their accountants have failed to break their costs up into fixed and variable, and they have no idea of the impact of the one percenters as they have never done the exercise on a spreadsheet which makes it incredibly obvious.
Profit is not a bad word, it is the gold standard.
It also not a useful objective, which is a role played way too often. Profit is an outcome of a whole range of other, often very small things, done successfully.
Cartoon credit: Dilbert. Anyway, who would want to do business with an unprofitable business?
Oct 13, 2021 | Innovation, Leadership
Machines do not, at least do not yet, have ideas.
Ideas come from people, they are social things, emerging from social situations.
We often find technical solutions to problems, but are they ideas?
It seems to me that they are more the progressive peeling of the onion, until you get to the core when a solution presents. By contrast, ideas do not come from the onion, rather, they come from seeing the onion in some sort of new context that delivers a new and unexpected outcome, not connected to the original.
Research demonstrates that men are more likely to show up on the autism spectrum than women, the ratio being about 4:1.
On the other hand, women are more social than men, their brains are more likely to ‘see’ things from the perspective of others. Empathy in the jargon.
This is consistent with my observation over the years that women are better marketers than men, in terms of the idea generation, but less likely to implement to a plan without deviation. A gross generality, proven often in my experience by the numerous exceptions.
It is just more likely that women will come up with something from ‘left field’, a connection of seemingly unconnected items, than men.
However, the lesson is that ideas have a genesis in social interaction, curiosity about others, and emotive understanding of a different perspective. The more interaction there is, the more fertile the ground from which ideas emerge.
Idea farming is not dissimilar to any other sort of farming. Both require prepared and fertile ground, a willingness to take on some risk, local knowledge, technical expertise, lots of feedback, and appropriate catalysts.
Then comes the more mechanical process of implementation.
None of this is easy. If it was, everybody would be doing it. When you need to add a bit of experience and ‘idea farming;’ expertise, let me know, I just may be the catalyst you need.
