When Cost Reduction Is Profit Reduction

Evolving Excellence, 25 May 2011

Cutting costs by reducing the value of the product is a dangerous game. Cost reduction at the expense of customers has been their game for as long as there has been a GM. They just don't seem to be able to wrap their minds around the idea that their competitors are not eating GM's lunch by being cheaper, but by offering better value. It takes a very healthy disregard for customer value to eliminate spare tires in the name of the environment - gas mileage to be specific - and to the have the hubris to proclaim that it really isn't a big deal because customers can eliminate any worries about being stuck by the side of the road with a flat tire by simply paying for OnStar and having someone come out to fix the tire.

The reality is that a customer will pay a little less for a hotel room without clean towels, and for a car without a spare tire. Hyping the product with a tad less value - attempting to convince customers that the loss of value was somehow in their altruistic best interests - is a strategy for losers. Whether it is with assertions that the planet is somehow better off by having them pay the same price for less value, or the customer will benefit from sporting a prestigious brand even though the product is not as good, cannot succeed.

A few weeks ago I conducted a lean management seminar - value driven manufacturing, lean accounting, and aiming the organization squarely at clearly defining and eliminating true waste were the crux of my spiel. During a break I was talking to the two top financial folks from a particular manufacturer - the only two people in the company empowered to make customer credit decisions as it turned out. While we were talking the company's top operations manager came up and interrupted us with an emergency. It seems a potential new customer had called and wanted to buy something in a big hurry. The product the customer wanted was on the shelf and available for shipment, but there was no one who could approve the new customer's credit. The customer was willing to pay with a credit card, but the customer only had a VISA card, and the company only took American Express. It turned out that they used to accept multiple credit cards, but a kaizen event had led them to determine that accepting and processing credit cards was 'wasteful', so they eliminated all but AMEX in the name of becoming leaner. Bottom line - they lost the sale. The potential customer couldn't wait for anyone to get back to the plant to review the credit, and their purchasing folks didn't have a company AMEX card. Reducing accounting costs at the expense of sales and customer requirements was hardly an improvement.

If the organization does not have a clear understanding of value, and if improvement is defined as 'cost reduction' rather than enhancement of value relative to the total cost, it is not only easy but quite common to end up nicking the bone when people attempt to cut out the fat. Reducing waste and cutting costs are not one and the same, and only reducing the cost of actual waste will help the bottom line. Too many companies have seen their cost reduction strategies generate price reduction necessities, and market share losses, as their product quality, availability and value have deteriorated.

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Teaching a 'Lean Startup' Strategy

HBS Working Knowledge: April 11, 2011

Most startups fail because they waste too much time and money building the wrong product before realizing too late what the right product should have been, says HBS entrepreneurial management professor Thomas R. Eisenmann. In his new MBA course, Launching Technology Ventures, Eisenmann introduces students to the idea of the lean startup—a methodology that has proven successful for many young high-tech companies. Key concepts include:

For starters, it nixes the traditional idea of a company spending several months in stealth mode while perfecting a full-featured product and planning an expensive launch party at a Las Vegas trade show. Rather, the lean startup launches as quickly as possible with what Ries calls a "minimum viable product" (MVP), a product that includes just enough features to allow useful feedback from early adopters. This makes it easier for the company to speed to market with subsequent customer-driven versions of the product. And it mitigates the likelihood of a company wasting time on features that nobody wants.

"The MVP is a controversial idea because it can be perceived as something thrown together with shoestring and bubblegum," Eisenmann says. "But through a series of MVPs, a lean startup can validate a specific and comprehensive set of hypotheses about what the business is, where it's going, and what it has to do."

Lean startup executives do not invest in scaling the company until they have achieved product market fit (PMF); that is, the knowledge that they have developed a solution that matches the problem.

In lean startup lingo, "pivoting" refers to a major change in a company's direction based on user feedback. Eisenmann's students discuss how entrepreneurs can stay true to their vision while still maintaining the flexibility to pivot.

Adhering to a lean startup strategy is especially challenging for companies that require a great deal of time to launch a workable product, such as clean-tech or biotech companies.

Lean startup methodology is easier to apply in the field of web-based startups than in the clean tech and biotech fields, both of which often require a great deal of time and capital to create any workable product. The same is true of the transportation industry—inventor Dean Kamen's Segway, for example, or startup Terrafugia's flying car. "It's the nature of some products that you have to spend a whole lot of money before you know if the product is going to work," he says.

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Summaries from global top 100 business & management magazines, newspapers, websites & reports are published monthly in Business Leaders Digest which can be subscribed at a modest annual subscription of Rs1500 for corporates and Rs.900 for individuals in India or US$50 overseas. To subscribe or receive a sample issue, email at busleadersdigest@gmail.com

How to Battle Bigger Brands and Win

Advertising Age, 8 Sep 2011

Brad Angevine Reviews "Killing Giants: 10 Strategies to Topple the Goliath in Your Industry"

I work for a medium-sized company that is always battling bigger brands with more resources, so it's not often that I find a business book addressing the unique challenges I face on a daily basis. That's why I jumped at the opportunity to read "Killing Giants: 10 Strategies to Topple the Goliath in Your Industry," and why I am glad to report Stephen Denny not only knows what it's like to be the small guy up against monster-sized competitors, but has valuable insights for us all.

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The objective of BLD is to offer strategic insights, how-to articles, thought leadership pieces and other information to help you become more effective at the workplace.
Summaries from global top 100 business & management magazines, newspapers, websites & reports are published monthly in Business Leaders Digest which can be subscribed at a modest annual subscription of Rs1500 for corporates and Rs.900 for individuals in India or US$50 overseas. To subscribe or receive a sample issue, email at busleadersdigest@gmail.com

His first insight: there are no easy answers. Instead, Mr. Denny provides a better understanding of how many different ways there are to challenge bigger competitors and how to thrive while doing so. The key is to identify specific places where you can beat your category's giants. Then, stay focused on making the most of those chinks in the armor.

The ten core chapters provide an easy-to-read strategic framework for small to mid-sized companies, outlining 10 strategies that are logical and well-founded. Some strategies are immediately clear, while others are a bit nuanced. And Mr. Denny sometimes wraps a strategy up in a catchy phrase, when it might be better to be more direct. Case in point: the strategy dubbed "Inconvenient Truths" highlights the importance of knowing category economics and how to turn them to your advantage. That said, his strategies are solidly grounded and provide helpful insights for category underdogs.

The case studies are, for the most part, well researched and compelling. My favorites, such as the Samuel Adams beer brand case and the Method household cleaning products case, thoroughly explained the category dynamics, rationale and consumer behavior that led to breakthrough success. But while there is an appealingly wide array of case studies, providing plenty of fodder for readers to dig their teeth into no matter what field they hail from, "Killing Giants" would have benefited from some pruning. A few of the 33 case studies are shallow, even a bit off-topic, which needlessly distracts from the key points Mr. Denny is making.

Still, "Killing Giants" is a surprisingly welcome business book on a topic that is often overlooked. What's not surprising, however, is that the secret is often about turning the giants' strengths into weaknesses and then having the passion and commitment to keep at it. That's not particularly revelatory, but worth being reminded of and seeing in action -- whatever size company you're running.

There will always be competitors who are bigger and who have more resources at their disposal. What Mr. Denny's insights help us understand is that it is still possible to succeed and thrive. It may be more challenging and require us to be smarter and work harder than the massive category leaders, but it's also a lot more fun.

==

No Shortcuts: The Road Map to Smarter Marketing

BCG Perspectives, Sep 2010

Companies invest staggering sums of money in marketing with surprisingly little rigor. Because it is notoriously difficult to measure and optimize the return on marketing investments (ROMI), marketing executives often rely on rules of thumb—such as spending as a percentage of revenues—to guide their decision-making. Our research and experience suggest that these shortcuts can be imprecise, unreliable, and just plain wrong. We recommend another approach—one that goes beyond marketing to encompass all commercial investments. It integrates a top-down strategic perspective and a rigorous bottom-up analysis.

More than $1 trillion a year is spent on marketing.

The figure is even higher if you include related commercial investments, such as trade spending, price promotion, and sales force incentives.

Many companies spend as much—or more—on advertising alone as they invest in capital expenditures.

As marketing budgets continue to escalate, managers are coming under increasing pressure to prove the value of their marketing investments over time.

At the same time, marketing is becoming much more complex as digital and viral marketing vehicles proliferate and market segments fragment.

Another complicating factor is that marketing performance depends heavily on elements that either are difficult to measure precisely—such as the content of an ad and its creative execution—or emerge over many months and years, such as the impact of marketing on brand perception.

In the face of such complexity, managers turn to rules of thumb, such as spending as a percentage of revenues, to guide their budget allocations for marketing.

To test some of the common rules of thumb used to set spending on marketing, The Boston Consulting Group and Marketing Analytics, a leader in market-response modeling, reviewed a data set of comparable marketing-mix models for 75 consumer brands.

In our joint research and analysis, we found a wide variance in marketing impact, efficiency, and return on investment—even across a relatively similar collection of brands.

We also found that five of the most commonly used rules of thumb for marketing investments had no clear, consistent relationship to marketing performance in the sample we reviewed.

Managers who rely on such rules, therefore, could be using the wrong approaches to allocate their marketing budgets across business portfolios and the marketing mix.

Rather than look for shortcuts, managers should embrace the complexity of optimizing returns on marketing. We recommend that they integrate a top-down strategic perspective on commercial investments with a rigorous bottom-up analysis.

Such a comprehensive approach would incorporate all the tactics that managers generally consider when they are optimizing ROMI, as well as those that fall under the broader banner of return on commercial investments (ROCI).

Managers could use this approach to evaluate commercial investments dispassionately, on the basis of their ability to drive incremental sales, influence consumers at every point in the purchase decision, and build brand equity for the long term. Consequently, companies would spend on the right things, spend in the right ways, and be able to measure and optimize that spending continuously.

To achieve these goals, corporate leadership must establish a sustainable capability to measure and optimize commercial investments. Only then will they begin to reclaim the 15 to 30 percent of spending that typically is wasted today.=======Business Leaders Digest======

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This summary is taken from Business Leaders Digest monthly(www.busleadersdigest.com)

The objective of BLD is to offer strategic insights, how-to articles, thought leadership pieces and other information to help you become more effective at the workplace.

Summaries from global top 100 business & management magazines, newspapers, websites & reports are published monthly in Business Leaders Digest which can be subscribed at a modest annual subscription of Rs1500 for corporates and Rs.900 for individuals in India or US$50 overseas. To subscribe or receive a sample issue, email at busleadersdigest@gmail.com

Axa’s rebranding

Case study: Axa’s rebranding

Financial Times, 9 Mar 2011

In 2005, Axa, the France-based insurance provider, had just celebrated 20 years of growth and become a world market leader. Henri de Castries, chief executive, decided to launch an initiative aimed at becoming the first choice – for customers, commercial partners or employees – in its fields of insurance and asset management.

The challenge.

Axa had to differentiate itself from rivals. But the Axa brand attributes – including the brand slogan “Be Life Confident” – no longer seemed appropriate.

Opinions of executives, customers and employees were analysed in depth by a multidisciplinary Axa Brand Spirit taskforce, which was also responsible for proposing action. In early 2008, it concluded that Axa must win customers’ trust through the core attributes of being “available”, “attentive” and “reliable”.

Ramifications.

Axa had to prove it had the attributes identified by the taskforce. This was the thinking behind a new slogan “redefining / standards”, which was launched internally through an online forum in which 55,000 employees participated worldwide.

Further challenges.

In 2007, the Axa brand was perceived as cold and did not inspire trust among customers. Similarly, it had failed to resonate with employees, who did not know how to help customers be “life confident”.

The response.

The Brand Spirit taskforce was more than a marketing team. Importantly, for instance, it successfully encouraged the heads of different divisions – including senior human resources, marketing and communications executives – to collaborate with each other.

Such cross-fertilisation helped them move quickly from concepts to practical solutions. For instance, core attitudes were soon translated into customer-facing behaviours backed up by action plans and monitoring schemes. Employees were told what being available, attentive and reliable would actually mean in practice when dealing both with each other and with customers.

In addition, the Brand Spirit team suggested making the new brand flexible in order to make it adaptable to multiple business needs. For example, the “redefining / standards” motto could be tweaked easily into “redefining / healthcare”, “redefining / pensions” or “redefining / car insurance”, while having an overall theme.

What happened.

Axa Group’s own customer satisfaction index has improved each year since the rebranding was performed.

Although “redefining / standards” did not change Axa immediately into the “preferred company” it wants to become, Interbrand, the market research firm, for the first time ranked the brand first worldwide in insurance in both 2009 and 2010.

Key lessons.

First, rebranding is also about change management. It must create the right momentum among employees and include them.

Second, rebranding requires leadership. The attitudes Axa employees must adopt towards customers are the very ones they expect from their managers.

Third, a successful brand launch combines cognitive and emotional elements – the Axa brand must address the heart and the mind. While the research was very analytic, the final internal online forum of May 2008 was a highly energetic and sensitive experience for Axa. Employees were not only allowed but invited to share concerns and to provide new ideas and solutions.

Ultimately, a brand is less about a new design of marketing brochure than a mindset that is evident every time an employee deals with a customer.

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This summary is taken from Business Leaders Digest monthly(www.busleadersdigest.com)

The objective of BLD is to offer strategic insights, how-to articles, thought leadership pieces and other information to help you become more effective at the workplace.

Summaries from global top 100 business & management magazines, newspapers, websites & reports are published monthly in Business Leaders Digest which can be subscribed at a modest annual subscription of Rs1500 for corporates and Rs.900 for individuals in India or US$50 overseas. To subscribe or receive a sample issue, email at busleadersdigest@gmail.com

The ABCs of Pricing

The ABCs of Pricing

Inc,Feb 2011

Buyers are irrational. Predictably so. Here are three of the frameworks–anchors, bumps, and charms–they use to decide what they’ll pay for your product or services.

Pricing strategies and methodologies are a good bit of science coupled with an equal amount art. To make sure your price is right, you have to continually balance your own cost structure and profitability with customer perceptions of value and your competitors' tactics. The good thing when it comes to pricing is that a lot of the work is done for you if you know what to look for. When searching, however, you have to understand that the buying process isn't as rational as our old econ professors or common sense would have us believe. It's irrational—predictably so.

If you try to look at the market from a strictly rational point of view, you'll end up setting prices that make sense to you but not to your prospects. The far easier path is to have a pricing strategy that plays to your prospects' own irrational behaviors. I'll give three frameworks—anchors, bumps, and charms—that'll help you do so.

Anchors

Let's take a look at the world of personal electronics since it's something very familiar to most of us.

Apple recently developed an iPod Shuffle that sells for under $50 and AppleTV, which sells for under $100. Those price points aren't arbitrary. Many of us have the $50 and $100 price points anchored in our minds. In general, we are conditioned to accept them as reasonable for certain types of products and services. Were they to sell either product for $10 more, they'd get dramatically fewer sales, even though the relative cost hasn't changed much.

Every established industry already has anchors in play. The art of pricing, though, is determining how you'll use those anchors. Significant value-adds allow you to use those anchors as baselines rather than straightjackets. But you still need to recognize that established anchors have a very, very strong effect on your prospects' first reactions to the pricing of your product.

Bumps

If anchors set the baseline, bumps let people know what grade of product they're getting. Imagine that you're looking at a car in the $25,000 price range. Would you check to see if it had power locks, windows, and steering? Now, what if we were talking about a $15,000 car?

There's a pretty clear demarcation between entry-level cars and mid-grade cars. When a car crosses that $20,000 threshold, we start expecting the features and luxuries of a mid-grade car.

The thing to remember about bumps is that we're primed to make certain assumptions about the quality of the offer. When we go from that $25,000 car to one costing $35,000, we have even higher unconscious expectations.

What often gets people to buy a higher grade of product or services isn't the benefit or features, but rather, the way the prospects view themselves. Many people who buy Audis know there's mechanically little difference between them and Volkswagens, but they're buying the premium version because they view themselves as premium customers.

The other dynamic that increases purchases of higher-grade products is the fear of under-buying and having to buy either the higher grade or the same grade sooner. We see this play out in electronics and computers quite often—we know that the mid-grade desktop computer is going to be obsolete in a few years, but surmise that the high-end configuration may live long enough to be worth it. Many people will pay more to overbuy rather than have to replace something all over again in the near future.

When you're setting your prices, you have to make sure you haven't unintentionally set a bump that either blurs or mistakenly mismatches the grade of product or services. For instance, a $19.99 and $22.99 pricing methodology isn't nearly as clear as a $19.99 and $29.99 framework. In the latter example, it's pretty clear that there's a bump in grade rather than something relatively minor like a difference in the type of oil used.

At the same time, if your competitors have anchored the price of the basic oil change at $19.99 and yours costs $29.99, you can bet that you're going to have to position or bill that service as premium. That's what your prospects are going to expect.

Charms

A price that's a little less than the round number is called a charm price. I've already used one in this piece when I used $19.99 rather than $20. As annoying as we might find charm pricing, it's a market dynamic that affects buying decisions.

The rationale behind charm pricing is that it somehow gets us to perceive the value of the offer at the right amount while we at the same time view the cost as lower. When we see $19.99, we assess the value at $20 but the cost as the same as something that's in the $10 to $19 range.

Many people think that using charm pricing is somehow demeaning or tricky to prospects—or that playing such games diminishes the seller's credibility. Still others think that charm pricing doesn't work on savvy, smart buyers. While there may be grounds for some of the concern about manipulation, we have to return to our premise that the buying process is irrational, even for savvy, smart buyers. Rolex, Mercedes, Apple, and Louis Vuitton—all premium, sophisticated brands—use charm pricing and yet we don't feel tricked or that their offers are anything but premium. What makes your business better?

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This summary is taken from Business Leaders Digest monthly(www.busleadersdigest.com)

The objective of BLD is to offer strategic insights, how-to articles, thought leadership pieces and other information to help you become more effective at the workplace.

Summaries from global top 100 business & management magazines, newspapers, websites & reports are published monthly in Business Leaders Digest which can be subscribed at a modest annual subscription of Rs1500 for corporates and Rs.900 for individuals in India or US$50 overseas. To subscribe or receive a sample issue, email at busleadersdigest@gmail.com

G.E. Goes With What It Knows

NY Times, 4 Dec 2010

Good leadership is in part knowing when to pull rank, says General Electric CEO Jeffrey Immelt. About four or five times a year it's important to exert your authority and force everyone back on track, he says. "If you do it 10 times, nobody wants to work for you. If you do it zero times, you have anarchy," Immelt says.

TO train its future leaders, General Electric has rising young stars study and visit an array of different organizations, from Google to West Point.

What can managers at the 132-year-old industrial giant learn from Google? A corporate mind-set that prizes “constant entrepreneurship,” says Jeffrey R. Immelt, G.E.’s chairman and chief executive, during an interview at his corporate headquarters in Fairfield, Conn.

And what wisdom is on tap at the United States Military Academy? “Adaptability” and “resiliency” amid uncertainty, says Mr. Immelt — skills as vital to surviving in business as they are on the battlefield.

Strategies are useful, he says, but only if they can quickly adjust to nasty real-world surprises. “In the words of the great philosopher Mike Tyson,” Mr. Immelt says, smiling, “everybody has a plan till they get punched in the mouth.”

“The underlying DNA of G.E., going back a century, has been to invest for growth in its technology base,” says Noel Tichy, a professor at the University of Michigan business school who once ran G.E.’s management school in Crotonville, N.Y. “So by increasing R.& D. spending and with investments in manufacturing, Jeff Immelt is going ‘back to the future’ at G.E.”

ABOUT 1,000 miles from corporate headquarters, inside a gleaming new plant that is the result of a $100 million, three-year investment, G.E.’s back-to-basics strategy is on display.

For each job at the factory, there are about 30 applicants. The payroll has more than doubled this year, to 220, and is on its way to 450 by 2012. Everyone dresses in blue short-sleeve shirts with a G.E. logo and dark pants. Production is organized around the concept of “high-performance work teams,” typically six to 12 workers.

It’s a bottom-up approach that shuns hierarchy, and places most of the responsibility for continuous improvement on the teams. An egalitarian ethos is reflected in the job titles. The boss, Jeanne Edwards, is the “plant leader.” Line workers are called “production associates.” There are no supervisors here, only “leaders” and “coaches.” There aren’t many of those anyway — all but 29 workers are hourly employees, and production associates start at about $35,000 a year.

The team approach seems to be working. Workers and coaches steadily look for ways to tweak the production process for greater efficiency. Since production began last year, the manufacturing “cycle time” — from cutting carbon-fiber fabric to shipping a finished part — has been reduced by 80 percent, says Antroine Townes, 27, an engineer who guides process-improvement efforts.

Immelt says his broadest responsibility at G.E. is to “drive change and develop people.” Any executive who wants to change things, he says, should be guided by “a point of view about what’s going on in the world, and you invest around that point of view.”

Mr. Immelt also sees himself as the champion of what he calls “large-scale entrepreneurship” at G.E. By that, he means identifying long-term market shifts — “what’s next,” he says — and then marshaling the company’s research, manufacturing and marketing resources to capitalize on the opportunity. He firmly believes that corporate size, when focused, can be a crucial advantage in the high-tech industrial markets where G.E. competes.

“It’s about using the scale of G.E., the majesty of the company, to drive growth and change,” he says.

Mr. Immelt’s leadership style, according to colleagues and advisers, is a blend of analysis, encouragement, cajoling and sometimes orders by decree.

Relaxed and affable, he is routinely described as “comfortable in his own skin.” In his autobiography, Mr. Welch wrote that he selected Mr. Immelt as his successor because “I felt Jeff had the perfect blend of intelligence and edge and epitomized the trait that’s so important to me — he was really comfortable in his own skin.”

To find new ideas, Mr. Immelt spends much of his time traveling and talking to customers, industry partners, government officials and analysts.

Leadership by fiat when done in moderation, Mr. Immelt says, can drive change and set a course. “I think that if you run a big company, you’ve got to four or five times a year, just say, ‘Hey team, look, here’s where we’re going,’ ” he says. “If you do it 10 times, nobody wants to work for you. If you do it zero times, you have anarchy.”

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The objective of BLD is to offer strategic insights, how-to articles, thought leadership pieces and other information to help you become more effective at the workplace.

Summaries from global top 100 business & management magazines, newspapers, websites & reports are published monthly in Business Leaders Digest which can be subscribed at a modest annual subscription of Rs1500 for corporates and Rs.900 for individuals in India or US$50 overseas. To subscribe or receive a sample issue, email at busleadersdigest@gmail.com