Mar 18, 2022 | Change, Leadership, Strategy
Like it or not, official figures or not, inflation is back with us.
Inflation consumes cash like a ravening beast, but often goes unremarked until the 11th hour, by which time it is often too late.
Official figures always lag reality, and forecast models are only as good as the input data. My models are based on conversations with the owners and managers of SME manufacturers, very sensitive to rising input prices, and the ways they are responding.
Every input to manufacturing is in the beginning of an aggressive price surge that may see many go to the wall. Many SME manufacturers, those with whom I interact most frequently will see that wall close up for a number of obvious reasons, sadly mostly obvious only with hindsight.
- They use a standard cost model. Whether this be in a fancy enterprise tool, or excel, the product costs spat out are a function of the input costs. Typically, a standard cost system is reviewed and updated on a schedule, most often half yearly. When input costs are increasing rapidly, you quickly fall behind, and play catch up not only too ,late, but to the point where the input costs stood when the review started.
- Variances are insufficiently recorded and understood. A good standard cost model will throw variances from the standard. These may be reviewed monthly, but are they sufficiently well understood, and more importantly, does anyone take action to address the negative variances in input costs?
- Too few have visibility both forward and backwards into their own supply chains to understand the impact of rising inflation on both the supplier and customer side. In the absence of this insight, the forecasting tends to be both slow, and understate the impact.
- There is a strong resistance to increasing prices, not just from the sales force, generally over sensitive, but from senior management who do not get rewarded for rocking the boat. This results in price increases being too low, and too late. Do the maths and calculate the relative impact of losing a few sales by increasing prices, to keeping them low to retain sales at a lower margin. It almost always pays to increase the price.
Apart from addressing the 4 points above, what else should you be doing?
Act faster.
When you act faster than your competitors in a volatile environment, it leads to competitive advantage. The OODA loop at work. The enabler of speed has become digitisation, which requires investment in capability and takes time, but can deliver real time information, vital in a volatile environment.
Direct communication.
Direct and concise communication with others in the supply chain, and your own procurement people, dealing with supplier invoices every day, is essential. Being close to the action enables you to move quickly in response to changes and opportunities that emerge.
Reconsider your pricing model.
Most businesses have a price list that for ease is general, being the base from which various discounts and promotional opportunities flow. Being general means that you are probably leaving money on the table, as different customers will have unique needs and levels of price elasticity. Understanding these differences and pricing accordingly is both challenging and profitable. You might even take the opportunity to change completely your pricing model, usually extremely hard to change when things are predictable.
Change prices more frequently.
Find a way of enforcing some sort of dynamic pricing process. Developing the processes that will enable dynamic pricing will become a necessary competitive tool, impossible until recently, simply because the degree of data granularity was not available. Now it is, so there should be no excuse to at least embarking on the journey.
Understand the whole supply chain.
Develop a whole of supply chain understanding, knowing where the profit pools and points of stress hide to be able to anticipate and adjust to them, as the impact of inflation rolls through.
Operational Flow.
Removing choke points in all your processes releases capacity you have already paid for. This observation is as valid in the support and revenue generation processes as it is in manufacturing.
Apply Pareto
We all accept that 80% of your profit comes from 20% of your customers. In times of inflation, the need is for real growth of revenue and margin, not the inflated numbers, while holding costs. The most effective way to do this is to prune activities that fall in the tail of the Pareto. Double down on where the real margins are. The same logic applies to the products you supply. Weeding out those legacy products that no longer play a valuable role in the value proposition of the business will release capacity that can be used more productively.
The aggressive application of the Pareto principal always removes transaction costs that are hidden simply because they are hard to quantify. The choke points removed to enhance flow, will also remove transaction costs.
Strategic priorities
Focussing on strategic priories while managing a crisis is a very challenging double act. When time is not on your side, acting decisively is all that is left. Capex is one of the first things to be delayed when times get tough, along with advertising. While it is an understandable reaction, it is also the wrong one. History tells us that those that double down when others are pulling back benefit in the medium term. Do not let the organisation lose sight of the long term, this coming crisis will be over at some point, replaced by the next one.
Innovation.
Innovation is an investment in future cash flow. While it is usually expensed through the P&L, which is in my view a misleading treatment of an investment, it often suffers the same fate as marketing activity and capex. I break it out separately as it is even more often dismissed than either of the others, and is arguably at least as important.
Cash management.
All of the above are about the management of activities as they all impact on cash flow. This is critical at any time, but never more so than when there is a spurt of inflation coming at you. Managing by the P&L as many do, can be very misleading. Set aggressive targets for working capital, and aggressively apply them. Your suppliers and customers will be feeling the same pain. The risk of blowing out debtor days is real, as your customers will be looking to extend their payment terms, as you try and extend yours.
The risks associated with inflation are huge if you are too slow, or ignore it completely and hope it goes away. On the other hand, many opportunities will open up for the agile amongst us.
Header cartoon credit: Scott Adams and Dilbert. Again.
Mar 14, 2022 | Governance, Leadership
Integrity is something we all say we strive for. Most statements of company values plastered on the reception wall seem to have it included.
The dictionary definition is something like: ‘the quality of being honest, having strong and unchanging principles‘
Trust and integrity seem to me to be a continuum? At one end, is integrity, the personal determination to do the right things. At the other is trust, the belief of others that you will do the right thing.
Trust is something that must be continually renewed by performance to be retained. In most cases, there will be an automatic quotient of ‘trust’ given at a first meeting. The more similar two parties are, the greater will be that ‘auto-allocation’ of trust.
After that, it is retained and earned by the behaviour displayed over an extended period. Trust is easy to lose, very hard to earn back.
You build trust by always meeting commitments, or, when there is a commitment that will not or cannot be met, there is a clear acknowledgement of that outcome, and responsibility is taken.
What is to be done, by whom, and by when is clear, unambiguous, and fair.
When you meet all your commitments, by the due date, or alternatively when they are unable to be met, that fact is clearly communicated beforehand, and responsibility accepted, integrity will be built.
This is a vital component of leadership, and of the ‘Cultural glue’ that makes up a successful institution. Others need to be able to trust that to be cliched, ‘your word is your bond’.
It also has significant implications for those that are being led. The casual relatively thoughtless acceptance of some sort of task and/or deadline that you know you cannot or are unwilling to meet is no longer acceptable.
When you accept a task and deadline, you must meet that acceptance with completion.
Many times, I have seen people in a meeting accept tasks that everyone knows will not be adequately addressed by the deadline. This is both bowing to authority and making your short-term life in the meeting better at the expanse of the longer term, and your own integrity.
The same process applies to institutions. We tend to want to trust them, and the people running them. However, when the people fail the integrity test, we tend to lose faith not only in the people, but in the institution as well.
I wonder, do those in Canberra who seek to lead us, understand the idea and its foundations?
Header cartoon credit: Scott Adams and Dilbert, again, have my thanks for a cartoon that makes my point.
PS. to the cartoon. Integrity may not buy you a boat today, but it certainly will tomorrow.
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 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 14, 2022 | Change, Leadership
When you do something over and over, you get better at it, the actions become automatic.
Remember the first time you drove to that new job? You looked up the route, probably put the address into the GPS (if you are under 30) and concentrated all the way, ensuring you were in the right lane to turn, and did not arrive at that annoying one way street the wrong way. After a short time, the drive became almost automatic, and you were sufficiently familiar with it to experiment with alternatives at divergent times to avoid bottlenecks and difficult spots.
Rather than contempt, familiarity builds competence.
Processes in a business are the same.
Do them over and over, and they tend to become automatic. This means you can spend the cognitive energy thinking about other things. It is the way we evolved, to preserve cognitive energy to be available when it was really needed, rather than being wasted on the routine.
However, the downside is that once something has become routine, carried out time after time in a relatively automatic manner, it becomes very hard to change.
