Courage to Build a Customer-Focused Organization

Something’s eating at the heart of old-school western business, and it isn’t just a hangover from the tough economy or recent financial sector excesses. Not that long ago, iconic brands were faltering, commoditization was rampant, margins were plummeting, planning horizons got stuck quarter-to-quarter, suppliers and distribution partners were bickering, and opportunities for growth were increasingly being sought in greener pastures overseas. But like children swept up in a messy divorce, it’s the ultimate consumer’s buying experience that got caught in the middle.

You see, now that the dust has settling on the great 21^st Century economic malaise, the basic game is still be the same. Winners will still be those who delight end customers by breaking with the pack and offering them distinctly better experiences than others are. But in today’s hyper-connected world, providing better experience alternatives means making a difference in more than just your product’s features and its price.  It involves re-thinking every aspect of how your end customers learn about, find, evaluate, choose, buy, own, use, update, and share, maybe even talk about, your product, service, or solution. This is distribution.

More than ever, what customers say they crave most are better buying and ownership experiences in the distribution channels available to them, not lower prices or bigger selections. And this fundamental dynamic holds true whether your end customer is in a mature, western market or a growing emerging one. Good times or bad, customers choosing among options will always discriminate on a complex range of variables, and only a certain segment makes their decision on the single dimension of price (unless all the options are identical!). Even in tough economic times, consumers make careful trade-offs around dimensions like durability, safety, usability, personalization, returnability, installation and much more when comparing prices. This is as true in Iowa as it is in Beijing, Mumbai and Rio.

And dramatic advances in internet and mobility technology mean that new improvements to your end customers’ experiences are being pushed further and further downstream into your distribution activities and partners. The net result is that all these touch point experiences will come together to either reinforce or destroy your customer’s experience with, and therefore perceptions of, your brand. And your future.

What customers say they crave, then, are more authentic interactions at every touch point in the experience-creating channels for your offering. They  want to be treated as individuals, not abstract members of segmentation schemes. Future innovations in distribution channel experiences simply can’t be described in the arcane language of ‘customer satisfaction’ research and ‘buyer insight’ studies.

Creating competitive advantage through your distribution channels comes from looking harder and more creatively at white spaces in your industry. White spaces in distribution, once spotted, may seem hard to reach or dangerous to explore. Some members of your management team will want to turn away from such daunting prospects, calling their retreat a “return to fundamentals.” The familiar may indeed be more comfortable (i.e., “doable”), but treading on old ground will typically do little to help your company change the actual experiences your customers have downstream in your channels.

This is where Frans Johansson’s thinking becomes helpful. Johansson, author of the fascinating book The Medici Effect: What Elephants and Epidemics Can Teach Us About Innovation, synthesizes medical, mathematical, and business research into a fresh perspective on converting natural fears of white space unknowns into managerial terms. He views white space as opportunities that arise in the margins, or the unknown, where two or more industry players or marketplace activities intersect.

Using this perspective, you can start to see your supply chains and your distribution channels as simply a stapling together of one industry intersection or activity after another, all the way from components supplier to assembler to wholesaler to retailer, and with all sorts of other ancillary industries such as logistics added in at different points along the way. Often, managers in under-performing chains or channels experiencing intense cost reduction pressures, inadvertently start regarding these intersects as necessary evils - the inefficiencies and loss of control that a company must endure in order to avoid doing all the customer experience work itself. But more powerful and enduring gains in the marketplace can be made if instead you view every one of these intersects as a white space opportunity, and see that orchestrating all of them in fundamentally new ways is the biggest opportunity of all.

Classic prospect theory teaches us that, without even realizing it, managers often take bigger risks in relatively safe environments than they are willing to take in hazardous ones. It is not so much that managers cannot live with uncertainty; the real problem is that they and their organizations fear losing. In the relative comfort of one’s industry, it is easy to do badly but it is hard to lose entirely. There may be some off years, some bad quarters, and the odd product failures, but the chances of going out of business are fairly low in the medium term. The long term, as they say, is another story. And the day of reckoning may be here for many companies.

That’s why Johansson says it takes “intersectional courage” to work the white spaces between industries. Managers fear the unknown risks involved in tackling new space. Ironically, however, taking the plunge may be less risky for your company than continuing to operate in the old corporate confines of tried-and-true processes. Staying afloat in a tough competitive environment is not exactly risk-free. But for a variety of reasons, it can be hard for managers to make an accurate comparison between white space and normal business risks.

But here’s what you will likely find most frustrating on your journey: those whitespaces are more than likely hiding right out in the open. What makes such golden nuggets so hard to see is the dense fog of conventional wisdom and constraints-based thinking that the old generals in your business have long espoused, and which you are struggling to break free.  As new leaders, you must stop fighting their last war!

Of course, this is not a journey for the timid, the faint of heart, or the risk-averse. But as one senior leader recently said to me – “What’s our alternative? Follow the lemmings over the cliff?”. Maybe Woody Allen was right that ‘just showing up is half the game”. But what about the other half? And what about winning?

 

Richard E. Wilson is managing director of the advisory firm Chicago Strategy Associates, and a former clinical professor of marketing at the Kellogg School of Management and Director of the school’s Center for Global Marketing Practice. rick@chicagostrategy.com

Illusions of Control

Forward integrate or not? Indra Nooyi at Pepsi and Jeff Bezos at Amazon have said yes. They will very likely be proven misguided.

Nonetheless, for many CEOs and their corporate strategy chieftains, consolidation, forward distribution integration, and scale conversations are dominating the big corporate strategy debates of today. Yet if there is any truth in capitalist business environments, it must be this – no matter the strategy, you can’t hide from the market.

So let’s start our review of forward integration by taking a break from obfuscating economics-speak. When we use the term market, as in ‘let the market decide’, what we really are referring to is the sum of all the needs, desires, and resulting behaviors of final customers that sit at the end of any business system. Like it or not, these customers are both judge and jury.

This means that smart companies, as well as their strongest competitors and most astute regulators, will focus on a single dominant strategic question as they craft future direction and govern the allocation of scarce resources. What choices do end customers have as they evaluate alternatives, and who do they choose?

Yet designing and executing business systems to consistently and profitably win over these picky end customers is at once straight-forward and maddeningly complex. Even though strategists are as prone to confirmation bias as anyone (“the ‘don’t confuse me with facts’ problem), customers easily and willingly, and often quite forcefully, express the desired outcomes they seek as they make decisions about what to buy and how to buy it. That holds for both consumer and business buyers.

As a result, understanding what any company’s “ideal” growth strategy should be is the straight-forward part. It should be squarely focused on delivering the full range of what and how outcomes end customers seek, and delivering them profitably and better than any other alternatives available.

But the complex part comes barging in as companies intensely debate, across often warring internal functional factions, how to design, build, fund, and manage business system that will, at the end of the day, deliver better than any competitor those winning outcomes to customers. This brings us to the vertical integration question. And understanding it fully is as much a study of CEO psychology as it is of hard-edged financial and strategic analysis.

After years of unsuccessful efforts to stem erosion in market share and customer retention, frustrated CEOs of once-strong legacy brands often show signs of siege mentality, especially when tough questions are met with blank stares. Are we offering the right value proposition (outcome for customers)? Are we delivering it? What’s standing in our way? When answers prove elusive, either internally or from outside partners, these CEOs often make the fateful decision to “take control of their destiny” and vertically integrate.

The question is – what destiny? And is it one that leads to greater numbers of customers choosing their offerings at acceptable prices? Public rationales for most vertical integration moves are usually more about cost savings, efficiency, lower prices, and greater control. They typically make only vague allusions to the messy business of customers and new ways of winning them over. Let’s look at a recent example.

Larry Ellison, who at one time was the Red Bull of corporate IT systems, has abandoned his fierce loyalty to being a best-in-class and tightly-focused industry leader in favor of buying Sun Microsystems. Apparently as part of a drive to become a fully vertically integrated player. He seemed very tuned to the question on everyone’s mind – how will this help Oracle win over customers? - when he commented about Oracle’s decision this week that “we’re really brilliant, or we’re idiots”.

Indeed, Oracle would be wise to look at its own proud history for inspiration and strategic direction. IBM, once the world’s biggest and most powerful business system, was brought to its knees in the early-80s by a new generation of nimble, focused, best-in-class players. Players that were unencumbered by IBM’s high-cost, slow changing, vertically integrated old behemoth of a business model. A business model, as military strategists often despair, best prepared to fight yesterday’s war. In fact, Larry Ellison founded Oracle in 1977 as one of those new breed of competitor. One that offered end customers some fresh air in the form of open platform solutions. Ones that weren’t hand-cuffs like IBM’s all-or-nothing bundled alternative. So the question to Oracle is, Why this?

At the end of the day and no matter how difficult, the best business model innovations are those created in the spirit of fresh reinvention and influence over results delivered to end customers, not protection and control of the status quo. Practically, that raises tough questions about how to get best-in-class solution alliances and distribution partners to work collaboratively to create winning new end results for their common customers. While there may indeed be times when such collaboration is simply not possible, and when complete ownership and control is essential to success, they are generally few and far between. And Apple aside, they are rarely successful.

I suspect the rush to vertical integration we seem to be witnessing in today’s climate may have more to do with an overall lack of trust in market forces. And perhaps it’s also a desperate response to tough economic conditions and fast-changing industries. In fact, it might just be an ill-advised knee jerk effort to slow things down. But don’t be fooled. Customers will still have the final vote.

When it comes to vertical integration, Buyer Beware!

CSA Distribution Audits Fueling Growth

Comparing the distribution channel pressures of today with those of even ten years ago reveals a striking decline of distinctive marketplace differentiation. These changes represent a significant opportunity for companies that regularly re-assess whether they are doing everything they can to guide, manage and motivate their channel partners to achieve new levels of growth and profitability.

·   How are end-customer channel needs in your marketplace evolving and how do they create barriers to you and your distribution partners achieving your growth objectives?

·   What gaps exist between your channel partners’ current business models and the economics of emerging customer channel needs in your fast-changing industry?

·   How motivated and prepared are your channel partners to respond effectively and efficiently to industry and competitive performance pressures in their local markets?

·   Are your channel management and incentive programs as aligned as they need to be with the demands your channel partners are facing in today’s fast-changing markets?

Approach. The CSA Channel Opportunity Audit is an independent and systematic diagnosis of your company’s distribution channel opportunities and threats, and is composed of four key elements of diagnosis:

Our Channel Opportunity Audit approach has been used successfully with hundreds of companies over the past twenty five years and focuses on one dominant goal:

Surface tangible ways to work with channel partners to differentiate your products and services with end-customers and accelerate market share growth.

Process. The CSA Channel Opportunity Audit is typically executed in four to five weeks of elapsed time in your marketplace, and proceeds systematically through a series of detailed assessment and analysis steps:

Step 1:  Internal Management Interviews. A highly-seasoned distribution channel expert from CSA will interview senior thought leaders and line managers within your organization to surface critical insights and beliefs about current distribution channel opportunities and threats.

Step 2:  External Market Discussions. CSA will conduct one-on-one working discussions with end-customers and distribution channels in your marketplace to surface their insights and observations about how changing industry and customer dynamics are affecting their current business models and economics.

Step 3:   Synthesis and Diagnosis. A Channel Opportunity Audit report will be provided to you that outlines how your company is positioned to address pressing channel threats and opportunities.

Step 4:     Private Facilitated Workshop. You and your senior leadership colleagues will receive an advance briefing packet and participate in an executive-level Channel Opportunity offsite facilitated by management advisor and educator Richard E. Wilson, a global expert on distribution channel strategy, execution and management.

Benefits. The CSA Channel Opportunity Audit is specifically designed to be a fast-paced and efficient way for you to build stronger readiness for action with your distribution system.

 

Richard E. Wilson is managing director of the advisory firm Chicago Strategy Associates, and a former clinical professor of marketing at the Kellogg School of Management and Director of the school’s Center for Global Marketing Practice. rick@chicagostrategy.com

Hyundai Understands Marketing 101

Even strong automakers’ sales flattened or dropped over the last two years. But not Hyundai’s.

Its August-to-August revenues were up nearly 50%. Granted this rise was off a relatively small base (although not that small; Hyundai sales are now about the same as Chrysler’s). But still, for a company that’s been selling in the States for over a decade, it was a whopping jump.

Why are consumers suddenly buying Hyundai’s? Tighter budgets certainly make low-price sedans more attractive than SUVs. But as I’m happy to see the Times reporting, that’s not the whole story. The big reason is better value, as value should be evaluated: 'benefits - price'. All too frequently today, brand players and pundits confuse "lowest price" with "best value". The assumption in this line of thinking is that consumers essentially incorporate no other criteria in their selection decision. Hyundai understands the distinction well.

Consumers and car mags think the product is improving. And Hyundai management was aggressive with improving the consumers total experience. For example, they were first to let consumers who lost their job return a car within 12 months of purchase, heretofore an unheard-of warrantee.

Hyundai is a classic market-entry success story. A renegade entrant comes in with an offering below the old market minimum, then gradually learns new ways to provide benefits and better value in more compelling ways than other low price  competitors.

What I like, though, is that Hyundai provides the textbook example for the case I’ve been making to manufacturers ever since the financial crisis took hold. Yes, you have to get your costs under control. But do it sensibly and with care not to negate long-term brand, distribution, and marketplace advantage. Indeed, this may be the best of all possible times to create new advantage.

For established competitors in 2009, that meant investing in differentiated customer experiences. Hyundai did. I haven’t seen any figures on lost-job car returns, but my hunch is they’re not high. People find they like the car. One man, the Times reports, says, “I used to drive Cadillacs all the time. I don’t need to drive a heavy car like that anymore. No disrespect to G.M. or anybody, but my next car will be a Hyundai, too.”

And Don't Forget The Channels Part

Manitowoc, the maker of huge cranes used in construction projects, had announced a (not surprising) big sales and earnings drop (Wall Street Journal, March 31), and their stock has sunk like a stone. We all know that new commercial construction was on the skids, but the Manitowoc news was still sad to hear. Especially since they’ve evidently had already done what you’re supposed to: squeeze out production efficiencies, stretch working capital, go back to the table with lenders. Keep the ship afloat.

Is there anything left that they could do to get sales growth under way again? I think there is. While I know nothing about what Manitowoc is actually trying on its marketing strategy front, there are a couple things they’d do well to explore, if they haven’t already. And we’re not talking bank-breaker stuff. Early stage exploration costs almost nothing.

First, since sales are way down in European markets, this is a good time for Manitowoc to revisit its foreign distribution partners and their business models. I don’t mean raise their prices, or insist they load up on inventory. I mean revisit and reinvent everybody’s activities down at a granular level, in search of new value-creating levers. What’s effective, what isn’t? What will help end customers most, what doesn’t add much value? Who’s good at what? How should we reapportion our division of labor?

When everybody’s desperate to reignite sales, they’re going to be more cooperative.

Second, look for ways that Manitowoc can reposition itself from a product manufacturer to a solutions provider. Cranes are a focal point in any large-scale construction process. Schedules get planned around them, very carefully. Manitowoc may be able to get more mileage out of that centrality than it has exploited thus far. Why not be sure there isn’t a way to sell the crane as the anchor to a larger solution that pulls together other equipment, other contractors, and makes portions of the entire construction process run more smoothly.

Even a cash-strapped company can afford to investigate new, innovative third-party distribution possibilities. And now isn’t a bad time. In fact, it’s an excellent time.

Why Verizon is Down 30%

Verizon’s FiOS strategy of taking super-fast fiber optic internet access to consumers' homes held great promise when it was unveiled. Internally at the company it was held up as the path to renewed marketplace dominance. It was going to be the platform Verizon would use to fight back AT&T and T-Mobile (remember them?) on the old carrier war front, and Apple, Nokia, Samsung, Dell, HP, Microsoft, and others on the new mobility solutions front. The company’s top-most executives, including its CEO, unabashedly trumpeted the super-fast, broadband service as savior of the old guard's future.

Things don’t seem to be playing out, and the question on the minds of next-gen Leaders at Verizon, as well as interested on-lookers, is why and what can be done about it. They might want to start by digging in with a more critical eye to that distant image, their end consumers.

Only a few short years ago I sat amazed as the head of corporate strategy at a top wireless player wagged a finger and exclaimed: “I sense you have a handset bias, but our data shows conclusively that consumers care first and foremost about their choice of telecommunications service provider, and only then about different hardware options”. As quaint and nostalgic as that view may sound, It illustrates well a pandemic problem in many of today’s long-established businesses.

It is extremely hard for died-in-the-wool veterans in any industry to give up out-dated notions of how their customers think and how well-suited their companies’ old business models are to today’s world. Certainly AT&T’s near total dependence on Apple’s innovative products must rub salt on the wound, even as it generates the core fear that drives such resistance to hearing important new truth.

In a world where customers are influenced most by exciting, innovative, often expensive, downstream hardware, applications, and retail channels, won’t the telecommunications carriers become more and more commoditized back-end providers? For Verizon, can they really build a sustainable, margin-rich growth platform by simply wiring consumers' homes with faster and faster broadband? What really sits behind Apple's, and AT&T's through coat tails, success? [Hint: think about how the iphone creates - relative to other companies' offerings in the field - actual, tangible, demonstrable shifts in end consumers' lives and mobility experiences. What used to be called "value" added before value became equated with lowest price].

At the end of the day, lost legacy players will always encounter forks on the road to reinvention, growth, differentiation, and profitability. But unless they have the luxury of monopoly, taking the path that refuses to acknowledge the voice of the customer is never the best decision.

Nobel Award Recognizes Distribution Theory

The reputation and status of the Nobel awards has been weighted down under controversy for the past week because of the Committee's decision to award the Peace prize to U.S. President Barack Obama after being in his position for what many refer to as 'only nine months'. That controversy is a shame, because awardees in other categories are less controversially accepted for the brilliance of their work and accomplishments. One of them is someone near and dear to my own narrow field of business management study - Distribution Strategy.

Oliver Williamson, a retired Berkeley professor, has just been awarded the Nobel Prize for Economics, for his study of commercial border lines. When does it make sense for a company to do activities itself and when is it preferable to contract with supply or distribution partners to do the job? In the real world, Williamson observed, figuring out the answer can be difficult. Getting a handle on your own costs is hard enough, but to understand another company’s you either have to make educated guesses or trust the other guy to be honest and accurate.

In the broad area of corporate strategy, Oliver Williamson was a contributor of great significance, and the issues he looked at (when distribution was much less fashionable than it is today) had a profound impact on the evolution of modern theory in the subject area. His work on understanding transaction costs, as well as his coining of the idea of "information impactedness", pushed the envelope on how to think about Distribution Strategy, but was work that received little recognition outside a small circle of devotees.

From what little I’ve read, however, the Nobel Committee is unambiguously spotlighting the challenges of Distribution Strategy. Many strategists are tempted to limit distribution to ideas about 'getting material products from point A to point B' (or 'physical distribution'). And for much of modern business history, that has not always been easy to do (think of getting petroleum from the North Slope to the Lower 48 or reliably getting a package from one of thousands of small producers to a specific consumer over night).

But moving stuff is often the easiest strategy element of distribution in its totality. The hardest part is typically in the design of the total end-to-end value chain of activities from upstream suppliers to assemblers to retail channels to final customer/consumer, then hammering out the relationships needed to make that value chain work both cost-efficiently and consumer satisfaction-effective.

Mentally, most employees, even most executives, live inside their own company. But as the Nobel people and Oliver Williamson know, it’s how well a company manages at its borders – its work in conjunction with other companies – that will increasingly make it or break it. For that, the Nobel Committee rightly recognized a genuine pioneer for his fantastic work!

Microsoft Escalates Vertical Integration Wars

The WSJ reported today that Microsoft has decided to enter the rapidly escalating battle over how the consumer electronics market space is being fundamentally restructured (Microsoft Seeks to Take a Bite Out of Apple With New Stores).

Unlike Gateway's anemic efforts at forward integration into retail (1997-2004), I anticipate Microsoft's moves, along with those of other leading players, will dramatically reshape the landscape. Those moves include Best Buy's backward integration in private label (see: In Hard Times, Is Best Buy’s Best Good Enough? ), Wal-Mart's and wireless service reseller Tracfone's entry into mass market electronics (see: Wal-Mart Wireless Expands), Samsung's designs on the content and apps end of digital retail (see: Samsung Seeks Some iPhone Magic ) and Amazon's rabid appetite to dominate the conventional 'click and buy' internet merchant space (see: Can Amazon Be the Wal-Mart of the Web?).

But back to Microsoft's forward integration into consumer electronics retailing: here's the bottom line perspective from the company:

"Our customers have told us they want more choice, more value and better service, and that's what we'll deliver through our Microsoft Stores" David Porter, corporate vice president . Microsoft retail stores, WSJ, 10/15/09

This is only the latest entry of another major player in what is shaping up to be a battle of the titans. Noisy dithering by wall street analysts, journalists, and other pundits over who's making the most aggressive price reductions, who's sourcing smartest, who's ramping up their M&A engines for greater scale and efficiency, and who's "getting the value message from consumer" is simply obscuring a more fundamental and ultimately dramatic business model restructuting hidden in plain sight.

So, buckle up - it's going to become a (much) bumpier ride competing in the consumer electronics space! (due credit to Bette)

Where the (Retail) World is Going?

In his column Consumed for the New York Times Sunday Magazine, Rob Walker offers us a glimpse of our business future as seen by private-equity. It is a rather unsettling world of The Pure Brand. No assets, no employees. Just a website, a handful of trademarks, and hopefully millions of loyal shoppers.

Of course, as Walker’s article indirectly points out, private equity is uninterested in actually building such a brand. Their preference is to ride the brand down post-bankruptcy. Walker focuses on Linens ‘n Things, which has been “reopened” on the Web by its new PE co-owners, Gordon Brothers and Hilco Consumer Capital, who picked up just the name and site for $1 million. Prior to that, of course, LNT had built its brands by spending $ billions on stores, advertising, infrastructure, and staff over several decades. The residual of that considerable effort is a brand people continue to recognize, visions of domestic goods-laden store floors still stuck in their heads. Over time, those memories will fade however, and the question is whether Web-based brand-building can noticeably slow this inevitable deterioration.

Walker sums up with a quote from Gordon Brothers’ Paul Venezia:

“The economy is cleansing business right now.” The new Linens ’n Things, Venezia argues, is a model of efficiency, offering competitive prices and freeing business from the cumbersome liabilities that come with big-box leases, pricey brand-building campaigns — or a work force. “It really reflects,” he says, “where the world is going.”

Meantime, Smith & Hawken is also liquidating its stores and inventory. But S&H has already taken its site off the Internet and, as far as we know, has no plans to reopen as an asset-less venue. Maybe someone will try to resuscitate it as a sleeper brand someday.

Virtual/online or oblivion. Are those really the only two paths left to struggling retailers?

Healthcare Distribution - A Must-Read

In my twenty-five years of work on distribution strategy, I have never read a more fascinating analysis of distribution system challenges and opportunities as the one recently published by Dr.Atul Gawande, a surgeon, writer, and a staff member of Brigham and Women's Hospital, the Dana Farber Cancer Institute, and the New Yorker magazine.

If you have not yet read his piece in The New Yorker, I strongly encourage you to take the time. It's an absolute must-read analysis for anyone interested in designing and managing higher-performing, lower-cost complex distribution systems.

Enjoy!

Poloroid Redux - Gaming Industry Lock-In?

For some time, Polaroid's tragic response to arguably its most important growth and sustainability challenges has endured as a popular and fascinating case study of how a company and its leaders can let outdated beliefs ambush their future.

Polaroid was founded in 1937 by Edwin Land who went on to introduce the first instant camera in 1948. From that point forward the company's dominance of instant photography technology remained unsurpassed, and it was not surprising that the company moved aggressively into digital imaging long before its competitors. In 1991 its prototype of a high-resolution megapixel camera had a performance/price ratio far superior to most other products on the market. Yet in one of the most stunning illustrations of framing lock-in, Polaroid’s digital market entry was an utter failure, and the company exited the business within five years.

Four critical management beliefs created the framing lock-in that drove the company’s demise in digital imaging. First, Polaroid’s culture did not value market research as an input to product development; instead, it was believed with a passion that Polaroid’s technology and products would create markets. Second, there was a firmly held belief that customers valued physical instant prints. As a result, products such as video camcorders were not seen as competition. Third, there was an obsession with matching the quality of traditional 35 mm prints, driven by a belief that customers required ‘photographic’ quality.

Finally, and most importantly, there was a strong belief in the razor/blade business model pursued to-date. While Polaroid had initially made money on both camera hardware and film, a decision was eventually made to adopt a razor/blade pricing strategy. The firm dropped prices on cameras to stimulate adoption and demand for film. Film prices and margins were increased, and the strategy was extremely successful. Over time a fundamental belief developed: Polaroid could not make money on hardware, only software (i.e., film).

These deeply held management biases also meant that important areas were not invested in. To compete successfully in hardware using a business model different from the traditional razor/blade approach, Polaroid would have to have developed low-cost electronics manufacturing capability and rapid product development capability—two areas that remained weak. And the firm never invested in developing any sales or marketing capability specific to digital imaging or new distribution channels.

Polaroid’s fatal management decision-making limitations can be felt acutely when a then new Polaroid Digital Imaging hire from outside the company described top management’s struggles:

“The catch [to our product concept] was that you had to be in the hardware business to make money. ‘How could you say that? Where’s the film? There’s no film?’ So what we had was a constant fight with the senior executive management in Polaroid for five years … We constantly challenged the notion of the current business model, the core business, as being old, antiquated and unable to go forward … What was fascinating to me was that these guys used to turn their noses up at 38 percent margins … But that was their big argument, ‘Why 38 percent? I can get 70 percent on film. Why do I want to do this?’...”

Fast forward to mid-2009, and we're seeing signs of a potential shift in the gaming market as the products evolve from mostly "serious gamers" with sophisticated and expensive gaming hardware and software (and lots of time to play!), to a more mass-market opportunity with "casual gamers" who pursue spurts of gaming for 5-10 minutes on the iPhones, and to a lesser extent other smartphone devices.

So how are the leading game device and software players responding? Here are how executives at Nintendo and Sony indicate they are viewing the situation:

"At the end of the day you buy an iPhone to make calls, and the (Sony) PSP to play games" (June 29, 2009)

"No one can match (Nintendo's) years of experience in the hand held (gaming) market" (June 29, 2009)

How might the ghosts of the old management team at Polaroid counsel these firms?

Is Private Label Taking on Water?

RetailWire reports that according to numbers from The Nielsen Company, sales of private label goods in food, drug and mass lost share year-over-year for the period ending April 18, 2009.

For retailers who were simply sourcing for higher gross margin, the picture is bleaker as they factor in all the costs of taking responsibility for a category, including innovation, quality and safety control, inventory, promotion, and logistics to name only a few. And what about the loss of vendor support funds? And national brands have been fighting fire with fire, " introducing value lines or lowering the cost of existing items to cut into the price advantage held by retailer brands".

Unless the retailer is as dedicated to private label as, say, a Trader Joe's, the strategy will often backfire. Of course, this begs the question: instead of getting revenge, wouldn't smart independent brand players use this opening as a chance to structure new relationships built on trust, system wide improvement, and win-win results?

New-Style Marketing Efficiency

In an interview Sunday with the New York Times, Steve Balmer registered his impatience with management presentations that “take the winding road” instead of declaring their message upfront and letting the group debate it.

Mr. Balmer is well known to be a no-wastage guy when it comes to time. And now that the economy is threatening Microsoft’s  thirty straight years of growth, he wants to push that spirit of compression deeper. Microsoft has to shift to a culture of efficiency. “Organizations need to do more with less.”

I have a suggestion for increasing efficiency and effectiveness together. Possibly Microsoft does it already, but not if it functions like most large companies.

In my area, marketing and distribution channels, it’s customary to precede initiatives by testing the waters with large, comprehensive quantitative market research and strategy initiatives. It’s an expensive and slow way to start. Worse, though, it almost always kills momentum, as people question methodological purity, insist on greater accuracy, and quibble about segment definitions.  A penchant for exactitude often snuffs out action.

Companies get off the dime faster and cheaper with small-scale actionable efforts done internally. The nimble ones use facilitator content expertise to pull insights out of a handful of conversations they hold with well-placed managers around their company and representing its partners. In business-to-business settings, they use the same extended discussion format to understand key customers’ chief business issues and opportunities. In consumer businesses, they may conduct a few customer focus groups. Usually they find that ninety percent of what they need to know – and almost always the critical ninety percent – can be pulled out of what people simply talk about when you listen and respond intelligently.

I don’t mean, these companies just do what customers tell them to do or fix what customers are dissatisfied with. Instead, smart listeners pick up on clues in their subjects’ remarks. What are their aspirations? What’s getting in their way? Help them imagine the unimaginable.  Surveys aren’t good at detecting what would, in the now over-used term, delight customers. And delight is the basis of exciting new businesses, which may require wholly different strategies, operations, and distribution.

Quantitative research has its place. But it isn’t first place. The new efficiency in marketing will increasingly rely on strategy beginnings that are deeply insightful and open to adventure and unanticipated discoveries. They really will do more with less.

 

 

Untapped Innovation Opportunity

Business Week recently published its annual survey of  top executives’ ratings of the world’s “25 Most Innovative Companies.” About 80% are manufacturers. In every case but one, the spotlighted innovations have to do with the manufacturer’s product-service bundle: Nokia’s high-end devices, Samsung’s ever-better memory chips, Toyota’s “green” car interiors, Coca-Cola’s 2800 products (versus a few hundred ten years ago).

So, you may say, What else did you expect?

I expected – or rather, hoped also to see – some innovations in distribution. I was looking for creativity, success, and growing differentiation in the way companies design their channel systems, relate to their partners, create distinctive ways for customers to shop for their products, protect their retailers from competition, surprise their end-customers with whole new ownership experiences. There are a thousand possibilities that have nothing directly to do with a manufacturer’s basic product/service offering and everything to do with the way customers get that offering.

Admittedly, distribution is not always as sexy as creating an iPhone or Tata Industries’ $2,000 car. And that’s exactly my point. Don’t smart businesses seek whitespace where the competition isn’t? Don’t they try to win over the customer on a dimension where copying and fast-following is inherently difficult? If all the action is in new products, add another destination to the mix.

I monitor over a hundred industries for my work and teaching. And if there’s one generality I can safely assert, it’s this: Distribution is not yet the hotbed of innovation it will be soon.

That should tell you something about where the opportunities are today.

 

Low Price - Low Equity?

No surprise, but department stores and other medium- to upscale emporiums are throwing their big name labels overboard in an attempt to keep their own ships afloat. The Times has given its story today an amusing, or terrifying depending on which end of the chain you sit, title: “Never Mind What It Costs. Can I Get It 70% Off?” 

For manufacturers, one big implication is pretty depressing: Never mind creating ‘manufacturer’s recommended prices’ at retail. All it’s good for is as a denominator for the store’s bid for more floor traffic and clearance sales.

A store can, I suppose, be excused for thinking that price cuts are the only game in town these days. But they’re not. Products and services can still sell; on trust, quality and long-term payback. And manufacturer/retailer distribution systems can still outdraw rival channel systems by offering superior customer experiences. Even in a very down market, may the best value win.

Best value isn’t the same as lowest cost. Jim Anderson, my colleague at Northwestern’s Kellogg School, underlines that Value = Benefit – Cost. Benefits – the good stuff, what people actually want – are half the equation. Heck, they’re at least half the equation, aren’t they?

Manufacturers are potentially giving retailers too much room to destroy their equity with consumers. They don’t have to. They should insist on a “no lower than” for their goods – not necessarily their initially recommended price but something that doesn’t debase the brand either. In 2007 the Supreme Court gave manufacturers new latitude to write contracts specifying resale price minimums. The litmus test of RPR legality? Genuine benefit to end customers must be demonstrable (get legal advice!).

I would only add, no manufacturer wants to alienate its downstream partners by strong-arming them or depriving them of room to maneuver against their competitors. The spirit of partnership has to be there. I think it can be. Resale price maintenance agreements” can be an instrument to promote rather than destroy that spirit.

 

Into the (Discount) Looking Glass

You have to admire Eileen Fisher, who designs luxury women’s apparel and sells it through department stores. She’s exasperated with her retailers (not uncommon among manufacturers).  They’re deep-discounting her entire line, along with others, almost as soon as her garments touch the racks. And she’s doing something about it (not common at all).

 The Wall Street Journal reports Ms. Fisher has suggested retailers use “scalpel markdowns” to prune only the weak SKUs while preserving margins on the vast majority of her items. She’s also preparing to rent space in host retailers herself. Store-in-store, as this technique is known, will allow her to control merchandising and impose needed discipline on pricing. 

She  might want to consider another alternative.

A couple years ago the Supreme Court showed new-found openness to certain types of price discipline.  In ruling on Leegin vs. PSKS, the Court basically reversed a sweeping precedent created almost a century ago, a time when manufacturers were the only ones that were big and strong,  and retailers were almost all small and relatively weaker in setting market policies. Today’s situation is nearly the reverse; it’s now the manufacturer who often stands in need of legal recourse.

If a producer can demonstrate, the Court has now decided, that it's distribution system is doing extra things to create more choice for consumers, then it should be permitted to require its retailers to uphold the price minimums needed to fund those extra costs. Not in all cases, and only under certain circumstances, but a watershed new channel strategy opportunity nonetheless.

I think Ms. Fisher should look into some new contracts. Establishing legally structured price management tools to ensure adequate activity in the retail system would likely be a lot easier than forward integrating into company-owned retail. If she approaches her partners adroitly, and it looks like she’s good at this, I predict the stronger influence she seeks over consumers' experiences will actually lead to stronger working relationships with retailers. 

Of course, she should work closely with her lawyers to do all this in a legally defensible way. They always want a piece of the action!

 

 

 

Imported Beer Going Flat?

Sales of mature imported premium beers Corona Extra and Heineken’s have fallen far faster than lower-priced domestic brews, according to the Wall Street Journal. Could uninspired and commoditized marketing and value-added downstream in the retail system play a part? It seems so easy these days to simply blame global consumers’ “new frugality” as largely responsible.

In any event, the premium brands are reported to be raising ad budgets and lowering case prices to hang on to business. Sounds like an expensive rear-guard defense. Why don’t the imports go on the attack instead, by doing more with their retailers.

For instance, inventory is a big issue for off-shore brands. How can they reduce retailers’ inventory-carrying costs? Given the length of import pipelines, there have to be postponement strategies these brands haven’t fully exploited yet, like tightening data exchange so that cases show up at the back door just in time. Done right, postponement helps both the upstream and the downstream partner.

Or helping the retailers provide chilled product to consumers as Diageo is doing (see my earlier post). While these distribution-intensive types of growth investments are sizable, so are old-school, me-too ad budgets. Whatever they do, it should be something of real value to the beverage server or store. But Heiniken knows all this, as public comments they have made make clear.

‘‘Now more than ever, you need to give consumers a reason why you’re worth paying more for,’’ said Christian McMahan, chief marketing officer at Heineken USA (Jan 2, 2009)

With smart help and new experiences from the brewer, retailers might just push these brands harder. And focusing downstream, especially on the consumer, might just earn both brewer and retailer the right to maintain prices in hard times as well as good.

But beware old school generals and their management advisors, who are always fighting the last war. They will make the case for comoditized actions like discounting, promotion pricing, and private label products. Yawn! RIP!

History and the Bollywood Distribution Wars

For a little perspective on the Hollywood version of the nascent developments in India (see my earlier post here), look at what was happening in the movie industry-pay TV distribution wars in 1982 as the Reagan era antitrust transformation was building steam (a parallel battle was well underway in the movie industry-theatre chain front as well):

The studios also complain bitterly about HBO's move to bankroll independent producers. The firm already has reportedly invested as much as $4 million in such promising properties as "Sophie's Choice," starring Meryl Streep and Kevin Kline. "If we don't stop them, they will control all aspects of moviemaking," says Paramount's Diller. "There would be no reason for studios to exist." Most of all, Hollywood resents what it perceives as HBO's arrogance. One insider says that an HBO film buyer told a studio executive bluntly: "I know your movie is worth $2 million, but I'm going to offer you $1 million. We know you'll take it because you're all whores." "Their arrogant attitude and way of doing business has needlessly angered almost everyone they have dealt with," Diller says. Moguls: In response, HBO executive vice president Michael Fuchs points out that no one is forcing the studios to give away their pictures. "They need our revenue, and we need their movies," he notes. "If we're unfair, then let's not do business. If the deal was unsatisfactory, then I don't know why agreement was reached." As for the charge that HBO is arrogant, Fuchs says that given the way many Hollywood moguls have conducted business over the years, "we sort of consider that a compliment. I can remember the early days of HBO when we were almost petrified to go into the studios for fear we would be eaten alive." (Newsweek, 11/15/82)

You can see clearly how distribution issues, when much is on the line, are up close and personal.

Those involved in India’s struggleds might want to remember the old adage:

"Generals are always most prepared to fight the last war”

Bollywouldn’t

The world’s biggest film market, India, is now embroiled in a classic distribution channels battle.

Just as the battle played out in U.S. markets decades ago (with Supreme Court anti-trust implications!) Bollywood movie makers want to slice the box-office pie one way, the big theater chains want to cut it another. Film producers are demanding a straight percentage split, exactly the same for every movie. Chain owners say that when the film is a dud they should only fork over a smaller share of its receipts.
Both sides are right.

As The New York Times story describes, the problem isn’t that one side is trying to be fundamentally unfair to the other. It’s that even though both are in the movie business, a producer’s commercial realities have only one thing in common with those of a theater owner: ticket sales.

Otherwise, they’re looking in opposite directions. Movie producers have to raise money, then create and manage giant short-term businesses. Theater-owners’ eyes are riveted on the fixed costs tied to their real assets: debt, rent, maintenance, wage labor. The movie becomes just a medium of exchange.

When two ends of a distribution channel don’t understand each other’s business – and these two clearly don’t – we see channel conflict. Bollywood movie makers are withholding films, theater owners are bad-mouthing the producers in public. Much of their combined energy, time and money is being dissipated as waste heat.

Channel relationships very often become dysfunctional like this. Therefore, a big part of my teaching and advisory work aims to turn distribution system antagonists into more collaborative partners.

The first step is always the same: Help each side appreciate the economics and operating constraints that govern the other side. Help a supermarket chain understand what it’s like for a consumer packaged goods to worry about new product development and supply chain quality control. Help the manufacturer see why the retailer isn’t paying much attention to the manufacturer’s products but is obsessing about store sales per square foot.

It’s not easy to develop a language that bridges between these mindsets. When you manage it, however, you have the makings of a bigger system. More efficient, more intelligent, more competitive.

Postponed – And That’s a Good Thing!

Why would a Chinese fabric supplier buy a downstream furniture manufacturing customer in the U.S.? As a fascinating look at the furniture business in today’s Journal points out, labor costs in China are under $1 an hour whereas they’re closer to $15 in North Carolina. Doesn’t that mean more expense for the furniture supply system, not less? Labor costs do turn out to be part of the answer, but to get at the real answer, you have to read between the lines.

In a word, the answer is what distribution and supply chain academics call “postponement.” Component value added and final assembly activity is delayed longer in the system - typically closer to end consumption points, to reduce the risk (and costs!) of big inventory and availability bets placed long in advance.

In fact, in a under-appreciated shift emerging in global industries and their supply chains, once passive overseas component manufacturers (read: China) are making bolder moves downstream in local market distribution. To get closer to their ultimate end customers.

For good reason in the furniture example: 90% of exported fabric ends up in U.S. homes. Forward-integrating into local market assembly gives the Chinese a much more complete and timely picture of their prize market, reduced inventory carrying costs, improved end product availability, reduced supply chain disruption costs, and smoother production levels and scheduling back in Asia. And that's just a start.

The Chinese benefit from ownership in several other postponement-related ways as well. They shift some of the assembly costs from North Carolina to China, lowering final product costs and raising competitiveness, by shipping to what is now a US "assembler", pre-cut, pre-sewn Chinese fabric “kits” designed to the State-side assembler’s requirements. And a tighter materials/assembler supply chain gooses U.S. demand by helping the assembler assure on-time, to-spec delivery. The local market "assembler" wins new business by impressing retail furniture chains with its ability to develop living room “settings” unexpectedly fast and better than the retailer hoped.

Meanwhile, competing manufacturers in the US, with their arms-length fabric supplier relationships (and tensions) suffer miserably, even as they brag of "lower overseas manufacturing and sourcing costs".

Side note: one unstated moral of the Journal’s story seems to be that if a supplier wants postponement benefits it has to buy its customers, maybe even their customers too. While I don’t think ownership is always required, it certainly helps. It has other risks I'll discuss another time.

You can get postponement other ways. But that’s also another story.