Your core business isn’t doing very well, but you’ve uncovered a great opportunity for a new complementary product with low overheads, great margins and - best of all - recurring revenues. Wonderful! You’ve saved the company. Actually, no, you haven’t; not if your main business is still broken. All you’ve done is find some marginal new income which, more often than not, you’re hoping will disguise your poor performance elsewhere, hoping that a miracle will occur, hoping that the market for your old business will rebound, and hoping that your competitors won’t still eat your lunch.
Time and time again, I see firms - IT services, energy supply, retailing, telecommunications, consulting, manufacturing, etc, etc - chasing shiny new marginal revenue while avoiding the hard decisions in the core. Don’t kid yourself. New revenue might buy you time but, one way or another, you’ve still got to fix the broken old business; fix it or get out of it.
Fletcher Building, one of New Zealand’s most prominent companies, marked its 100th anniversary this year. As part of the coverage, Hugh Fletcher, grandson of the founder and a prominent businessman in his own right, was interviewed by Radio New Zealand on Saturday morning. It’s become fashionable to disparage Hugh Fletcher in recent years, but he points out that, in his 20 years as deputy CEO or CEO, shareholders achieved an average 16% annual return; that beats most investments anywhere in the world. However, he freely admits he was “tired” at the end of his tenure. I’m not commenting on Fletcher’s career, but I will pick up an interesting distinction he made between mistakes and bad outcomes. A decision, a strategy may be the right one, but sometimes the outcome is bad. Maybe it was bad execution, maybe bad timing, maybe just bad luck. That doesn’t make the original decision a mistake. You might argue that this is equivocation, but Fletcher makes a valid point. Do you become risk averse and do nothing to avoid the possibility of mistakes? Clearly not. All business involves some degree of risk, and good businesses like Fletchers tend to boldness. However, in an era where many media commentators and shareholders are eager to demonstrate their superior 20/20 hindsight (from positions of much lower personal risk), I doubt many will take it on board.
The boards of Stanley Works (maker of the ubiquitous Stanley Knife which has expanded onto a full range of tools and building security products) and Black & Decker (power tools and work benches) have recommended a merger to their shareholders. Stanley shareholders will own 50.5% of the combined company and Black & Decker shareholders 49.5%. Synergistic opportunities are very clear. These two companies have the same mix of trade, manufacturing and DIY end-users and the same distribution channel partners (especially retail). They can merge accounting, IT, logistics and sales, and do some interesting new promotional bundles. Possible stumbling blocks? How similar are their corporate processes and cultures, their promotional style, the way they do things? However, both companies have previously acquired several complementary product operations without much grief, so I’m not expecting many issues at the operational level. If they focus on the merger rationale (ie. back office, front office and distribution channel synergies), then, off the cuff, this sounds like a very smart move.
Further to yesterday’s post on the difference between me-too brands and real alternatives, Michael Gregg reminded me of one campaign where being an alternative is an overt strategy. Rabobank arrived in NZ some years ago focused on rural banking, as a way into the wider NZ banking market. Most banks would simply do full-range banking offers and me-too campaigns. Rabobank entered the retail market with a cunning twist: Rabobank doesn’t want your daily banking; it wants your online savings account. The brand personality is “your significant other bank”, with witty ads suggesting an extramarital affair. The strategy worked brilliantly, enabling Rabobank to quickly capture a significant share of cash savings without the high cost of a branch network.
Every brand should be actively looking to put distance between itself and its competitors. And since true difference of offer is now one of the hardest things to achieve and maintain, the most effective and cost efficient way to do that is through difference of opinion… Difference of opinion is the fastest way to move from being an option to being an alternative.
You don’t want to be an option. Because options are like-minded decisions. An option is “I could do this, or this, or this, or this”… Alternatives are different headspace decisions. Alternative is “because I don’t want/like/agree with A (or what I’ve been led to believe A stands for), I’m choosing B”.
Time and time again, businesses try to appease everyone (especially their own people) by fudging what their brand stands for. They try to offer something for everyone, their sales channels try to sell to everyone, and they wonder why they struggle to survive and make a profit. They’ve fallen into the trap of being an option rather than an alternative. Good brands make it clear what they offer, to whom, and why. Great brands also make it clear what they don’t offer, who they don’t want as customers, and why not.
When I was a kid, “Made in Japan” was a synonym for cheap shoddy knock-offs of Western products; but over time “Made in Japan” came to mean “lifetime quality” and “extras included“. So the sneering changed: “Japanese only copy; they can’t innovate.“ Yet many of today’s smart design and manufacturing processes are modelled on techniques the Japanese developed. Ah, those ideas already existed before the Japanese adopted them, I hear you say. In nascent form, maybe; but every new idea is built on what has gone before. Anyway, the sustained dominance of Japanese firms in manufactured products from consumer electronics to industrial machinery demonstrates a highly innovative environment, not just in processes and product refinement. Much innovation in cars today comes from technologies pioneered in Japan.
I hear similar dismissive language applied to China now. There’s even less basis for such myopia. Both nations had strong education systems and huge desire for economic change. China has a much deeper tradition of engineering and manufacturing. It’s a theme Eric Drexler has touched on in a guest article for McKinsey on innovation:
To become a world-class center of technological innovation, a society must have three basic elements:
• drive—a culture that supports change and hungers for it
• human capital—the personal abilities that make world-class technology possible
• a capacity for mobilization—a society’s ability to pursue ambitious new goals
These basic elements are more fundamental than any current performance metric or economic trend, and they are durable.
China has all these in abundance. I was particularly struck by Drexler’s comment on China’s mobilization capacity:
Drive and human capital are applied through organization, by both entrepreneurs and corporations, as well as national leaders and governments. India has been outstanding in its incapacity for reform and for interfering with entrepreneurship, though this is changing. China, however, has been outstanding in its capacity for learning from experience, radically transforming government policy, and unleashing a hyperentrepreneurial business culture.
As science and technology grow in importance, it becomes increasingly important for leaders to have a good understanding of these disciplines. Among US legislators, though, a background in science and engineering is exceedingly rare. In France, it is common. In Taiwan, many legislators have doctoral degrees in science or engineering. In China, of the nine members of the standing committee of the Politburo (the ruling body, which includes the president, the vice president, and the premier), one recently appointed member has an education in law. Previously, all nine had been trained as engineers.
… Perhaps the most robust indicator of change in the distribution of innovation potential is a change in the distribution of corporate research laboratories. Companies are opening new labs in China at an astounding rate. In software and electronics, NEC, Hitachi, Sony, IBM, and Microsoft all have established R&D centers in China; in pharmaceuticals, Roche, Pfizer, AstraZeneca, Novartis, and Eli Lilly have done so. This list is not exhaustive.
Despite this, many firms (and nations) are myopic about new competition from other countries. Do you think they’re more realistic about competitors in the same region or city as themselves? Sadly, no. Even with familiar competitors, firms kid themselves with smug self-affirming generalisations.
Don’t get freaked out by competitors, local or global; but don’t fool yourself with uninformed complacency. Otherwise, you’re just making your competitor’s job easier.
To reinvent yourself, you have to first understand yourself - as you are now, and as you want to be in future. Regular readers will know that one of my persistent strategic messages is having a clear market offer which drives everything you do.
Last December, Harvard Business Review published an article on business model reinvention by Professor Clay Christiansen et al (unfortunately behind a subscription wall). They produced this neat summary of a business model, which you can use as a guide in your thinking.
I’d add one additional area - Ethos, covering the softer issues of raison d’etre, brand (in the widest sense of the word), culture, organisational style and modus operandi. I know they’re implicitly covered, but I think they need to be highlighted - changing your ethos can be as business-transforming as changing your value proposition, processes, profit model or resources.
PS. You can watch a short video of Prof. Christiansen at the HBR website talking about established organisations changing their business models.
Paul Quickenden cautions aspiring entrants to the software-as-a-service industry against trying to match the functionally-rich features of their competitors (which include both on-premise software vendors and established SaaS players). It’s good advice for any innovator, no matter what industry. So I’m unashamedly stealing it for you.
Classic strategic thinking (originally military, but also applicable to business) says that unless you have overwhelming force, you don’t attack your opponent where he or she is strongest. Instead you attack where they are weak or not paying enough attention. Or look for an unserved related market or unsolved related problem which the incumbent ignores or is spurned by.
Clayton Christensen wrote a deservedly acclaimed best-selling book, The Innovator’s Dilemma, to explain how weak new entrants overcome much stronger incumbents. It’s well worth reading. If you haven’t got the time, here’s Paul Quickenden’s synopsis:
There is an incumbent business model.
These incumbents enter into a cycle (arms race even) of continually adding features to their products in an attempt to keep adding value to the clients, and hence maintain their pricing.
The cycle continues until you get to a point where the products are over spec’d compared to client NEEDS or even requirements, and accordingly over priced.
Then someone finds or offers an alternate product or delivery method, which is much cheaper and actually more suited to the clients real needs.
The incumbents, talk to their clients (who have sunk investments and a political agenda to support their buying decisions) who say they aren’t interested in this new product approach etc. The incumbents completely miss the new trend, because hey…the customer base aren’t asking for it.
The disrupter gains a foothold in a niche part of the market, gets scale over time and eventually becomes acceptable to the mainstream. They then enter the arms race cycle (they are the new incumbents), while the old incumbents struggle belatedly to meet the market.
Many years ago, I met the CEO of a mid-size meat company to discuss how he could improve his business - it had always struggled to make much money. Having had the guided tour and talked to the CEO, I had seen a very smart operation. The farmers who supplied the animals were specially selected, as were their breeds, to provide very high quality animals. The killing process was designed to avoid any animal distress (stress toughens the meat). The cutting and packing processes produced excellently presented chef-ready portions. Higher input costs were heightened by small volume; however, their gourmet products should attract premium prices from restaurants, hotels and independent supermarkets in wealthier suburbs. But for some reason, their sales and delivery drivers struggled to sell their product for any premium above the bigger players, who competed primarily on price. They had a good story, so why couldn’t they achieve that higher price?
By pure luck, the small management team - all men - were having dinner together that night, with their wives. I was staying in the small country town overnight, and I was invited to join them. As we got to the pudding course, one of the executives asked me what thoughts I’d had after my short initial visit. This got the attention of everyone round the table. I did the classic consultant trick, and asked them what they thought the problem was.
There was much grumbling about competitors who’d sell at “unfair” prices, “unreasonable” customers not appreciating the value of the product, and “poor” sales skills among the driver reps. After a few minutes of this, one of the women, who’d not said much so far, said very tentatively “The delivery trucks are dirty”. This got blank looks, and the sales director asked incredulously “What’s that got to do with it?” She explained. “The trucks are always filthy outside. You never wash them. You look cheap. Why would anyone pay you any more?” This got some nods. Then another of the women asked “How many of the reps know how to cook?” After some jokes about men and barbecues, she asked rhetorically ” How can you sell a gourmet meat if you don’t know what to do with it?”
You can see where this is going. One the ball was rolling, everyone started suggesting ideas to not only fix the problem but also increase real value to customers. Within a year, the business was transformed. A successful restaurateur joined the board of directors. A consultant chef developed a driver rep training programme, which became compulsory for everyone who worked in the business (their spouses could attend as well). He also developed new cuts and recipes. Customer training days were very popular and earned extra income. Achieved prices went up, as did market share. And the driver reps’ last job every day was to wash their trucks.
They had simplistically accepted their customers’ comments about being “too expensive” without probing deeper. The business was obsessed with product and production, but hadn’t thought to ensure that their sales process was consistent with and enhanced their market offer.
I’ve lost count of how many times I’ve had to say this. A great idea, strategy, mission statement is useless unless you actually do something. You won’t change your business, brand, culture, quality, conversion rate, whatever, unless you do something. Intentions are worthless, unless you do something (to achieve them). Do things that will achieve your aims. Do what you said you’d do. Stop doing what you said you’d stop.
… gardens are not made
By singing: “Oh, how beautiful!” and sitting in the shade.
An interesting little battle is brewing (!) between venerable UK beer-maker Adnams and “activist” Kiwi investor GPG. This developing scenario has several ingredients that appeal to me - Suffolk, real ale, UK, NZ, strategy, governance, ownership and activist investors.
Adnams, based in the small coastal town of Southwold in Suffolk, has one of those quaint share structures whereby the Adnams family’s shares carry double the weight of other shareholders - all well and good, as long as everyone knows that’s the deal.
According to The Times, Adnams’ 2008 operating profit fell by two-thirds, and GPG (which controls 5% of Adnams but only 2.5% of the votes) has written to all shareholders (.pdf) prior to the upcoming AGM. GPG describes Adnams’ results as “so poor as to suggest that the substantial expansionary investment projects sanctioned by the board since 2000 have actually weakened rather than strengthened Adnams’s traditional brewing and pub businesses in East Anglia”. GPG is particularly scathing of the brewer’s launch of Cellar&Kitchen, a chain of shops selling kitchenware and wine. It describes that venture as “far removed from the company’s core competencies as a regional brewer and owner of pubs”.
GPG blames the company’s recent disappointing performance on poor corporate governance and calls for the dismantling of the “anachronistic dual share structure” that gives the Adnams family effective control. Blake Nixon, GPG’s UK executive director, also led an ultimately successful campaign to dismantle a similar dual share structure at Youngs, another brewing firm. Adnams’ chairman has, unsurprisingly, rejected GPG’s criticism (pdf).
Adnams makes Broadside ale (a very suppable beverage, I can personally attest) - “brewed to celebrate the Battle of Sole Bay in 1672″, That sea-battle, between the English and the Dutch, ended inconclusively, with both sides claiming victory. I expect a similar outcome from Monday’s AGM (UK time); although, come to think of it, in the Glorious Revolution some years after the battle, William of Orange became king of England with the support of the English Parliament. Maybe Adnams should hold off brewing another commemorative ale?
People (and organisations) talk a lot about innovation, but often do so in very narrow terms such as product innovation. This is very limiting. In reality there are many dimensions for innovation, eg:
Product
Service
Market
Promotion
Process
Information
People
Business
Most innovative thinking only explores one or two dimensions, while assuming the others are fixed. There are enormous opportunities when you start innovating in multiple dimensions at once. Unfortunately, responsibility for innovation in these separate dimensions is usually fragmented between functional silos, with little joined-up thinking. What new opportunities could open up for you, if you brought these dimensions together?
There’s a terrible, yet powerful saying in business: “Kill your babies fast“. Usually applied to new product ideas, it’s also applicable to other areas of business innovation and expansion. As you develop those new ideas, they suck in resources - people, money and the most precious commodity of all, time. While strong determination , persistence and even sheer bloody-mindedness are important characteristics of successful innovators and entrepreneurs, the best also kill projects as soon as it’s clear that they are unlikely to succeed, both in absolute terms and by comparison to other projects in the portfolio. That means you can concentrate your resources where they’ll have most effect; classic strategic thinking.
Killing projects is hard. Once started, they seem to get a life independent of you. which gets stronger with every month and milestone passed. The later the stage of development, the harder it is to cancel them. “We’ve invested too much to stop now” and “It’s starting to show some promise” are phrases you’ll hear a lot, from the project team, the project sponsors, the CEO or the board. No-one wants to admit to what others will think of as failure, and so the project continues in the vain hope that it might still pay off, ignoring the benefits of switching resources to more promising opportunities. You end up with numerous projects on the go, all inadequately resourced, often getting in each other’s way, and probably too late for the market opportunities originally targeted. Or you’ll have made one big bet on Day One, which is even harder to kill.
Sometimes there’s an alternative to infanticide. At the risk of taking the analogy too far, you might consider adoption - selling the project to someone else with a better fit for what the project offers. It might be another business, or the project team itself. You might get paid handsomely for the effort to date; you might retain an investment in the new owner. Indeed, being a “baby factory” is a legitimate business model for some innovators. But be wary of investing too much time and resources on securing a new parent - that’s as bad as spending them on the project itself.
I mentioned recently that I’d been interviewed by a PhD researcher on business blogs. I was particularly struck by two questions (paraphrased):
Does a corporate blog make your business more open and transparent?
A blog is just another communication channel; it does not of itself make you more open and transparent unless you choose to reveal more. It depends on your topics, how you write about them, your audience (eg. customers or staff), whether you allow comments (I don’t subscribe to the view that allowing comments is essential), what are the house rules regarding comments, how you moderate (filter) them and how you respond to them. A blog is a valid tool even for a “closed” organisation, if it restricts itself to those matters that it wants to communicate. However, there have been several attempts to gain credibility with audiences by starting blogs to appear more open, but usually this don’t last long if the underlying new openness isn’t real and permanent.
Does a corporate blog make your business more trustworthy?
As with my earlier reply, you might try to gain greater trustworthiness by producing a blog, but if it isn’t deserved (as demonstrated by your actions and behaviour in the real world as well as the blog), then a blog can be just as bogus as any other communication channel. Spin is usually exposed for what it is - deceptive communication - which implies that the truth is unsavoury.
I like to think I’m open and trustworthy in what I write my blog, but I don’t write about everything people might want to know. I can’t say whether a blog is a valid tool for your organisation; but if you do decide to use one, you need to be clear about who you’re trying to reach, why, and how. Blogs seem to work best when they are personalised and not overly formal. Nevertheless, a blog, like any business communication channel, should be consistent over time and consistent with your market offer, brand, style and corporate ethos.
‘We do not take Isambard Kingdom Brunel for either a rogue or a fool but an enthusiast, blinded by the light of his own genius, an engineering knight-errant, always on the lookout for magic caves to be penetrated and enchanted rivers to be crossed, never so happy as when engaged … in conquering some, to ordinary mortals, impossibility.’
–The Railway Times
It is Isambard Kingdom Brunel’s 203rd birthday, and to mark it, I thought I’d look at one of my hero’s failures. Oh yes, he had them. Contrary to what commentators with perfect hindsight might have you believe, you need to take risks to be a successful entrepreneur and innovator, and sometimes those risks go wrong.
By 1844, Brunel was highly respected and admired for his Great Western Railway, his steamships Great Western and Great Britain, and his wonderful bridges and tunnels. He began work on his next project, a new railway in South Devon, England. Because of the rugged terrain - always challenging for railway route design and motive power - he decided to adopt a radical technology developed by Clegg and Samuda. Instead of self-propelled steam-engines to move rail wagons, they used air pressure from a pipe laid along the track. A fixed air pumping station at either end of a short railway track in Ireland created a vacuum in the pipe ahead of the train. One wagon was attached to a piston inside the pipe, and the air pressure difference moved the piston and the train forward. The system was very powerful, meaning steeper gradients could be climbed, and the trains were very quiet and clean.
Unfortunately, Victorian materials were not up to the task. The connection between the piston and the train passed through a slot which ran the length of the pipe. To maintain vacuum, the slot was covered by a greased leather flap which the connector pushed put of the way as it moved forward. Unlike in Ireland, the flap quickly deteriorated in Devon’s warm coastal air, needing frequent repair and disrupting train schedules. Also unlike the short Irish track, the much longer South Devon railway needed multiple pumping stations. Because of vacuum loss through the flap and not knowing when the next train would enter its section of track (a telegraph was not initially installed), each pumping station ran far longer than planned, consuming more fuel and requiring more maintenance. Instead of being competitive with conventional rail operations, Brunel’s Atmospheric Railway cost 3 times as much to run, and switched to conventional self-propelled steam-engine traction. Of course, the newspapers of the time lambasted Brunel for this failure. Brunel shrugged, and moved on to his next venture.
Air-powered public transport is an idea whose time may yet still come. MDI in France has developed a range of vehicles driven by compressed air, including a road train. Ahead of your time as usual, Isambard. Happy 203rd birthday.
As this economic downturn continues, we’re going to see more news like this - a well-run company like Infratil divesting business units to free up cash and pay down debt. Even though the strategic concept for integrated mass transit (bus, ferry, etc) in NZ’s largest city might still be valid, I assume that Infratil’s bankers have been squeezing hard to get some of their money back. It’s a bitter irony that they would have endorsed the strategy in the first place, and been falling over each other to lend Infratil the money to implement it.
Still, every cloud has a silver lining for someone, and no doubt Brian Soutar will have bought the Fullers ferry business for a nicely discounted price. $40 million is a little out of my league, but if anyone else wants to sell an interesting subsidiary, please contact me. I’m in the market for a bargain.
Disclosure: my family trust holds Infratil securities.
How many companies employ less than 10 people, less than 20, 50, 100, 200, 500, 1000, 5000, etc? Look at most countries’ industry statistics and you’ll see a common pattern. There’s a pyramid - lots of micro-businesses, tapering up through mid-sized businesses to a few large businesses.
Putting aside companies used for administrative purposes and the myriad of small businesses which won’t ever grow, why don’t more companies with good market offers grow larger?
Some market offers have limited appeal.
Some business models simply won’t scale.
Sometimes the business is too risky or unpredictable, so funding growth is difficult (especially now that we’ve seen the downside of risky investment!)
Some owners and managers reach a point where they have achieved what they want - a good income and a solid business. I can’t criticise them for wanting an easier life enjoying the fruits of their earlier risk-taking and hard-work.
But assuming none of those are a factor, what holds growing companies back? In two words - executive skills. Many small and mid-size companies can’t grow because their owners/managers don’t have the skills to build and operate a bigger business. There’s a naiveté in business thinking and an unfortunate tendency to under- or over-bureaucratize. I’ve seen many promising businesses plateau for those reasons, plus one other factor. I have a pet theory - the biggest problem is that many previously-successful small and mid-size business leaders simply don’t know how to manage managers.
10 people = 1 layer of management = you. You call the shots, you know everything, you direct everything.
10-50 people = 2 layers of management = you plus team leaders (say development, sales, fulfilment, business support). You still drive the ship and your team leaders take care of operational detail within your control. The first plateau point - can you manage through team leaders?
50-100 = 3 layers of management = you plus a team of specialist and regional managers plus their team leaders. You’re still the hands-on leader, but you’re likely to be constrained by the skills of your managers and the unsophistication of your business processes.
100 -200 people = still 3 layers of management, but with more highly skilled managers and more complex processes. This is often an inescapable plateau point, maybe with several stops as you re-design your business and your team to handle growth. And you have to achieve unity of purpose and action through intermediaries who have initiative, brains and minds of their own (that’s why they’re in the role).
200-500 people = 4 layers of management, with your executive team capable of developing and driving their divisions strategically and operationally, and indeed of doing your job. Yout businesses model is working, but the business is much more complex and the challenge of achieving unity of purpose and action has gone up another order of magnitude,
After that it starts to get easier - the issues are the same, but you’ve learnt how to deal with them. You’ll continue to be challenged by competitive and economic pressures, multiple lines of business, multinational operations and so on, but you’ll know how to manage managers.
That 200 person barrier seems to be especially challenging. Many companies do well until they reach that scale, but then seem to bounce around at 150-250, never quite breaking out, falling back in tough times, then growing again only to repeat the cycle. Given all the complexity, risk and frustrations of running a bigger business, it’s no wonder many businesses owners decide to stay where they are.
I was going to write an April Fool story today about a new venture bringing together several threads from various apparently unconnected developments. The trouble is that, after Googling people, facts and technologies to give the spoof some credibility, I’ve learnt that the building blocks may actually exist. The idea isn’t so foolish after all. In fact, it’s good enough to investigate further. So there’s no witty April Fool story today, and I’m not giving away my good idea either, at least not yet.
What I will share with you is that simply brainstorming how to combine concepts from several unrelated topics is a useful creative tool. Try it sometime. Who knows what crazy ideas you might come up with?
An interesting little battle is brewing (!) between venerable UK beer-maker 