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.

=======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

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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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

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.

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