What’s Up with Retail: Invention easier than Transformation

 

170422153016-store-closing-signage-780x439The business headlines have been full of news about store closings.  Multiple chains are closing 100s of stores.  This once flourishing sector employed thousands, and now flounders. What strategic lessons can be learned from US retailers mistakes? The question and the learning opportunities for other sectors became the basis of the April 21, strategy roundtable’s diverse group of attendees.  A few articles  offered some summary context of the state of the sector, a little history about Macy’s and a series of growth related insights from disruptive innovation strategy firm , published in MIT Sloan Review offered by Fahrenheit212.

Surprisingly, after posting the articles in late March, a flood of store closings and their back stories continue to appear, leaving many to wonder what’s up for several of the biggest brand names in retail.  In the short horizon that  Macy’s lost $10billion in value, Amazon rose $300bil to reach its current six year low of $6bn, considerably off its peak of $24bn in 2006, Amazon’s current valuation just north of $370bn continues to accumulate market share.

The US Big Box Retailer’s current state isn’t just bad luck and it turns out to be less than easy to pinpoint. As Macy’s and other retailers struggle to maintain a fresh look, their poor performance ripples across the sector as one domino topples over another. No excuse for Management to become such terrible shop keepers, no matter how much online competitors divert their attention.  A poorly appealing store worsens its merchandise and thin staffing ratios erode service combine to turn off customers too.

Sears posted year on year decline over 9 percent, and 1.5x losses for its mobile application as it’ digital transformation efforts prove insufficient.

Cost cutting may help a business survive, but won’t deliver growth that makes it thrive. The creative fuel behind the early growth of Sears, Macy’s and the general merchandisers also expanded their market and showed their competitive capabilities. Amazon isn’t a new disruption and the blanket of doom seems to spread uniformly across the sector.

The Data vs. the Narrative

Did you know from 1990 to 2014, US retail employment grew by 2.3 million, of which the vast majority was among non-store retailers?  The total sector grew by 17 percent, while non-store employment grew 27 percent. In this same period, a combination of productivity gains and drops in labor compensation reduced the sector’s unit costs.

These reversals in historic trends pointed out by  Chicago Booth faculty Chad Syverson and Ali Hortaçsu in their recent review of US retail, should help large retailer’s right? More part-time workers, more automation and lower wages do improve operating margins, but doesn’t mean growth will follow.

The bigger strategic problem is timing and the ability to compete. The efficiency gains across the sector appear just as retail’s share of total US economic activity continues to shrink, and correspondingly its share of total US employment diminishes too.

Syverson and Hortacsu found ample research that relates technology, management, variety and productivity with shaping the success and survival of some retailers.  Surprise, greater productivity may or may not result from any one of these factors, and growth from greater productivity seems less causal too. Physical operations, however do prove important to both e-commerce and store based retailers. In other words, the formula for growth has grown more complex. Hold these thoughts.

Many explanations of changes in the sector, they say, “ …build on two, powerful and not fully consistent narratives, a prediction that retail sales will migrate online and physical retail will be virtually extinguished, and a prediction that future shoppers will almost all be heading to giant physical stores like warehouse clubs and supercenters.”

Their extensive data review also makes clear that the data does not support these narratives.  Online retail supremacy has not yet arrived, and likewise the scale and influence of the supercenter/Warehouse merchandisers continue to grow.

“Between 2000 and 2014, the fraction of all retail sales accounted for by e-commerce has risen steadily from 0.9 to 6.4 percent…The increasing share reflects an 11-fold increase in nominal annual e-commerce sales, in contrast to a 55 percent increase in nominal retail sales as a whole.”

The latest (4Q2016) US Census reports total retail sales of goods and services at $1,235.5Billion and estimates ecommerce at $102.7Billion (8.3 percent of total). Year over Year growth rates of 4.1 overall were considerably lower than ecommerce, which grew by 14.3 percent. Both grew only 1.9 percent over 3Q2016.

The analysis by category over time and projection of the trend lines summarized below makes the story more interesting.

Syverson and Hortacu’s                                                 Projected year that product’s 

 Table I: Product-specific E-commerce                        share expected (purple achieved):  as a Share of Product Total Sales

US census retail sales ecommerce table

The summary resembles an 80/20 analysis.  The categories with the biggest ecommerce sales represent the smallest category of total sales.

A Theory We tested

A recent edition of MIT Sloan Review published three “new” growth-related truths, and framed our discussion. The truths as you see, resonate with many of the common precepts around innovation focused strategy not just those of its authors from Fahrenheit212, part of Deloitte.

  1. Analysis won’t reveal your way to the future, you must invent it.
  2. Competition is not linear, it’s exponential and disruptive.
  3. Success depends on internal capabilities to catalyze an organization into action, and make something new happen.

First, analysis has broadened in many ways, but its purpose and practice still largely  determined by Leadership and its management priorities.

Limiting the scope of Analysis to tactical issues, confirms what works, or drives larger strategic projections as in what’s possible. Today, analysis and analysts review data in every function across the entire enterprise. Organization benefit from analysis when they also  commit to standards of consistency and integration, that also assure their results don’t confuse but reveal factors important to business growth.

Successful analysis also relies on the availability of data and analysts capable of its interpretation. Today’s connected world offers ever increasing opportunities to collect, store and process more data cheaply, and Enterprise Resource Planning Software systems greatly simplify and automate the reporting of standard views of activities in every function.

Planning and Process Improvements both suffer from a shortage of analysts capable of integration and interpretation of big data within a business context. The standards for business reporting reinforce old habits, rely on established metrics and existing interpretations, and thus miss cross-functional opportunities to share findings and develop new insights.

Is perspective and Interpretation hard to come by, or just hard to hear?

For example, to reach $150 million in annual sales, took Walmart 12 years and 78 stores. From its inception in 1994, Amazon took only three years. Further, Bezos reported 1998 net income remained close to zero as he his continuous focus on growth tirelessly plowed cash back into business development.  Not only did Amazon’s sales success patterns defy conventions of growth metrics, their unconventional use of data, analysis supports their creative capabilities and discoveries to understand what was contributing to their growth and working for their customers too.

In 1999, Forrester Research reported annual web retail sales as a whole jumped from $700 million to $20 billion, though it remained less than 1% of total retail sales. Growth was anything but linear—but the base too small to catch the eye of established, experienced retailers.

In 2001, Border’s CEO Greg Josefowicz was a very experienced and sophisticated retailer and no stranger to Ecommerce having come from Peapod. The fractional contribution of the chain’s online sales however led him to outsource the channel to Amazon. This was the same year, that Apple released the iPod. Unless you were closer to online data, and keenly understood its opportunity to track customer journeys and gain behavioral insights, chances are you too would have overlooked the value of further investment.

Image result for online vs in store customer journey

source: https://www.altocloud.com/blog/online-buyer-behavior.-what-we-can-learn-from-traditional-buyer-behavior

A 2016 interview with Michael Edwards, interim CEO Borders from January 2010 through its bankruptcy and liquidation in July 2011 revealed something else. Edwards buys into Fahrenheit212 philosophy that little can prepare you for wholesale disruption.  2010 was a period of widespread economic growth and US retailers sales were growing, but not uniformly; and not if you were in the book and electronics industry (aka ESMOH)—again hold that thought.

“The pivotal moment for me is when Apple launched the iPad,” Edwards said. “That foundationally changed the (book) industry forever.”Essentially, the iPad was a Borders in your hand. It had books, music and video. And people had access to millions of books.”

These hindsight claims made me wonder why Border’s didn’t feel any sales fallout from the iPod or Apple earlier, or when and why they misread Borders’ customers  change in shopping patterns?

Is your analysis reporting monitoring activity or action oriented?

What analysis and shared insights did Borders leadership encourage? Were traditional metrics misdirecting their strategic priorities and explain how their widespread physical presence was suddenly without value?

Remember the dominant narrative that Syerson and Horascu found?

Put that thought together with the analysts’ tunnel vision driven by elaborate ERP systems that accurately report established growth metrics. Monitoring Same Store Sales, Sales by channel or category breakdowns do reveal changes in shopping patterns, but are they actionable?  Even the Ecommerce reports from outsource vendor Amazon likely to include detail level data and helpful comparisons.

Different stories and trends emerge when analysis incorporates outside reference points. Benchmarking internal data to publicly available government statistics, for example, not just aggregate retail sales vs ecommerce but within their category might have raised alarm bells early.  Time pressures and priorities don’t have to stop anyone from creating a look similar to  Syerson and Horascu cumulative look.

What are you using to define your market and meet the needs of your customer?

Rethinking how to deal with consumers is more than a marketing plan it’s a strategic imperative.

At least that’s what Mike Edwards realized when he stepped up from the role of Chief Marketing Officer to help turnaround Border’s in 2010.

Conventional analysis techniques and formats don’t address deeper questions that test the validity of your strategy, or draw attention to important indicators affecting your results.

If you are a big retailer, and you moved online, you have big data. Macy’s and Sears both moved somewhat early to create an online presence before 2001. Maybe they saw online as an efficiency improvement to catalog sales, they still kept them independent of ongoing business activities.

Perhaps their experience relied too heavily on mass-market demographic information that large vendors like IRI made easy to digest.  Capabilities to analyze the flood of big data and the detail byte size moves of website visitors exceeded the capabilities of the most nimble and agile of digitally born players.

In 1998, the year Google was released, Wired reported the evolving capability of a website to gain intimate knowledge of their visitors. Excite, the leading search engine at the time, collected 40 Gigabytes of data daily in its log files based on 28 million daily Page Views. They only tracked directional patterns, though “for the first time, the continuously updated empirical evidence needed to assess relationships and deliver better experiences was available.”

A gap emerged between traditional marketing training and opportunities the web’s detail user journey tracking revealed. Do you appeal to demographic and assembled personas, OR are you responding directly to individual users’ needs?  This gap mirrored the unfolding of a larger competitive divide across all businesses and  further segregate online activities into separate operating units.

Bigger organizations’ centrally controlled decision making contrasted sharply with the emergent capabilities of online technologies and few recognized the important tasks required to rethink how to deal with evolving learning by their consumers and suppliers.  No problem for Excite, the leading search engine in 2001 and Amazon.   “Any active data we get, [Joe Kraus, VP of Excite explained] we put to instant use on the page…simulating personalization such as zip-code based weather forecasts.” Amazon without knowing any personal information, began to pass on simple recommendations based on the cookie data.

Cookies track specific behavioral data online, that was difficult to connect to purchase and profits, but still offered considerable strategic insights to anyone who took the time to look. Ironically, only a handful of advertisers possessed the technical and marketing experience with this growing data, which meant the playing field for ably using the information to optimize profits was wide open. Instead of investing and experimenting, many continued to apply the store sales success criteria to online sales.

Narrative Backstories: Perspective colors perception

I’m no retailer, but I did learn a few things from my father who created a handful of custom drapery stores that flourished in the 50s and 60s only to succumb to changing demographics in the 70s.

  • Purchasing frequency and customer loyalty aren’t accidental. Relationships build on more than serendipity.
  • Knowing your customer earns trust, most evident when your recommendations produce sales. Note, this approach doesn’t depend on markdowns or price drops to attract interest or make a sale.
  • Convenience is a perception not the reason passers-by cross the threshold (or click through).
  • Locations with heavy traffic create greater opportunity, sure, creative storefront displays (content) arouse interest or curiosity, and sales follow when entering visitors rewarded positively.
  • Invention matters but delivers greater value when balanced with conventional, basic goods and service options.

Drawing customers in, attractive presentation of merchandise has always helped successful merchants move what had to be moved. It’s been true for sellers regardless of their circumstance and environment.

Three longer term trends

Every trend has an origination point, successful analysts recognize the significance early because they often understand change as relative.  It’s easy to see the internet as a significant force today, but in the mid-1990s, analysis shown earlier documents  the case’s weaknesses and risks.

In 1995, Grace Mirabella, former editor of Vogue  broadens the context in her memoir In and Out of Vogue.  She describes dramatic shifts in the minds of consumers about department stores’ relevance compared to their hey day in the post-war period. 22 years later, her words don’t sound the least bit out of date.

“[B]efore malls and discount outlets and chain stores…[department stores] were the great halls of merchandise, and they provided an enormous variety of goods at much more varied prices than the present.  …each store aimed for a certain style, a certain specialty market, and a certain clientele, and you knew the minute that you walked into any one store, and smelled the perfume and saw the flowers and doormen or bargain tables, precisely where you were. “

Each family owned store’s attitudes and sensibilities she explains, accompanied the details that clued in customers, established unique contracts with manufacturers and made evident by the difference in merchandise they carried.  In the 1970s, Mirabella remarked on two major shifts:

  • Designers became all-powerful, cutting deals that promoted their name, and reducing retailers into commodity distributors who all carried the same things.
  • Consolidation by conglomerates followed.

“[The named department stores] started to take on the feel of the real estate ventures that they had become.  They lost their sense of purpose, of conviction.”[p. 45]

In 1994, Jeff Bezos, left his job as hedge fund manager for DE Shaw. Interviews reveal he spotted opportunity in the expanding internet, which led him to start the company he later names Amazon. His analysis skills suggest he was deeply familiar with another trend that began in the 1970s, one, that Mirabella in her backward look from her publishing perch misses–the evolution of Electronic Digital Interfaces (EDI) streamlining procurement.

In his first 1997 letter to shareholders, Bezos lays out his vision and writes:

“Today, online commerce saves customers money and precious time.  Tomorrow, through personalization, online commerce will accelerate the very process of discovery.  Amazon.com uses the Internet to create real value for its customers and, by doing so, hopes to create an enduring franchise, even in established and large markets.”

Personalization historically differentiated the high end of the market. Sales persons kept coveted black books that contained intimate notations about their customers ranging from size, color and style preferences to  special occasion dates and family details. Amazon wasn’t the first to collect user data, and was by no means able to mine it and yet they produced “personal recommendations” beginning in 1998 without investing in developing complex analysis capabilities. That came considerably later.

They took a shortcut that other websites  noticed satisfied customers. Chris Bayer writing about personalization for Wired in June 1998 explains it this way:

“The trick is to use technology to achieve the same economies that you have in a mass-marketing model, while delivering some personalized messages to the consumer,” says Rex Briggs of Millward Brown Interactive. A less visionary goal than one-to-one, surely, but far more realistic. It’s called mass customization, and if you can get past the oxymoronic bounce, you can see that its possibilities are not lost on the consumer-products retailers who have carved out a market for themselves on the World Wide Web.”

In 1999, Academics Joe Pine and James Gilmore publish The Experience Economy continues to shape many retailers strategic perceptions.  Their thesis builds on the retailer narrative and emotions Mirabella evokes, and connects to my own Dad’s experiences as a lifelong retailer.  Experience, they explain is now the metaphor of choice.  What else summarizes the combination of factors that attract and convert a visitor into a loyal, frequent customer and/or influencer?  Keeping  experiences relevant and meaningful amidst the backdrop of rapidly changing forces that impact every aspect of your business model demands rethinking of the employee not just the customer experience.

Direct learning

Unlike the leading CEO retailers failing, Bezos shares more in common with the great merchandisers of the past.  His digitally born and situated store front owes its business growth to continuous, bold experimentation as well as deep analysis. I don’t know what metrics are commonplace at Amazon, but their investments in data analysis capabilities and machine learning are self-evident by the efficiency and sideline cloud business they produced.

The speed in which consumers change their behaviors prove challenging for every retailer, non-store or store.  The online e-tailers’ unique environment, fully equipped to capture detailed user journey references and history can use the same mechanics to deliver immediate responses ranging from mass personalization to levels of deeper customization.

Amazon’s strategy embraces the principles of continuous learning at its core to control every aspect of the buyer’s experience. Similarly Apple, another company with astronomical market valuations entered the retail market in order to control and enhance the buyer’s experience.  Today, both have physical presence that emphasizes service and consumer education.

Retailers who miss the ability to construct a holistic strategy, increasingly are dying in the evolution of  responses or deeper customized, delivering valuable feedback enabling the business to continually improve its offerings and willingly take risks associated with invention. Amazon learned quickly how to draw customers online, present the merchandise attractively and yes move what had to be moved.  He didn’t have to balance the demands of managing existing outlets, nor accept established practices associated with large scale distribution networks, instead he invented his future.

In 20 years of online commerce, only a few companies strategy match Chris Bayer’s  observation that “”serious” companies are rethinking the ways they deal with consumers, and the idea of  mass customization ….using the trick of technology to deliver a personalized message that isn’t really personal at all.”

ARTICLES

Reframing Growth Strategy, Sloan MIT Review

http://sloanreview.mit.edu/article/reframing-growth-strategy-in-a-digital-economy/


Contrast in transition: Sears and Macy’s

https://centricdigital.com/blog/digital-strategy/how-sears-and-macys-are-transitioning-into-an-improved-digital-strategy/
Macy’s relationship trouble with Luxury brands

https://www.bloomberg.com/gadfly/articles/2016-08-11/macy-s-earnings-relationship-trouble-with-luxury-brands


Five Trends driving traditional retail towards extinction

https://www.forbes.com/sites/jjcolao/2012/12/13/five-trends-driving-traditional-retail-towards-extinction/#11487bd51efd

 

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Possibility, are you asking how or what?

Polarity, the idea of opposites, turns thoughts and possibilities around like  a pendulum  always moving from one extreme to the other. That is until the thought runs out of energy or momentum and stops. It rests until some force displaces it.

Recently, a client asked for help explaining the difference between planning for a transition and planning a transformation. Since Transformation seems to be one of the buzz words of the moment, I began to wonder what made the two thinking processes different, and what did they really mean. My polarity thinking friend suggested that transitions plan for certainty, or near certainty and transformation plan for uncertainty.  I disagreed.

I think of a transition as the pause between takes, what happens between two clearly defined states.  It’s when we assess, evaluate or figure out our position, how close or far. Transformation, that’s the feeling we have on arrival, we made it so now what.

In other words, if the client has a clear objective as in to take a specific distant hill, then transition plans incorporate the certainty that elevations will be changing on route and insures the team’s prepared for the journey. When it knows  what changes to expect along the way, then it’s transition ready. Transformation focuses on arrival, different conditions and challenges it doesn’t know, but can imagine arrival makes possible.  After all, isn’t that why the objective was to take the hill?  Wasn’t it about the advantage that being on top offers?

Put another way, imagine what you want to do is known, like traveling to another location.  Transitions focus on the journey, how long will it take, buying tickets or planning the route. Transformation planning asks how the change in location affects your current activities.  Transitions are more whole body time shifts, where as transformation puts your head in the future while the rest of your physical body remains grounded in the present.

November’s topic for the monthly strategy discussion focused on Transformation Readiness. Before I managed to summarize the conversation and post notes,news about the sale of Mariano’s to Kroger caught my eye. and then I also spotted  an interview with CEO, Bob Mariano on the Chicago Booth website.

If you are not familiar with Chicago, then let me explain that Mariano’s was a new entry into the grocery store business. By coincident, just as they had opened a few stores one of Chicago’s main competitors –Safeway decided to close all of its Dominick’s stores. This meant Mariano’s acquired 10 of the closed stores and their debt fueled expansion took off.  That’s when Kroger came calling.

Since I had already been thinking about  transformation questions , as in how do you get transformation ready, I thought it worth sharing these responses.  Take a peek, and let me know what you think, are the example transitions or evidence of transformation readiness?

Scenario A: I think that Mariano’s namesake, CEO and founder, Bob nailed it when he said:

“At Mariano’s, we tried to push further. We continue to push.  What I mean by push is to expose the customer to different and unique things and allow them the opportunity to tell you, ‘No, I don’t like that,’ or ‘Yes, I like that.’”

Scenario B: Or maybe you prefer the spin by CEO of Shazam when asked about the increasing gap between growth in the amount of information and its utilization. ” …How do you improve data intelligence?”

“That’s definitely the case [that there is a data knowledge gap] and for years we have been talking about data warehousing, or capturing that data, but turning information into data intelligence is a new journey for many companies…”

Or, how about the Gambling industry insiders view who characterizes difference between digitizing or converting your industry to the reality post conversion this way:

Advancements in technology has brought about a rapid digitization of gambling and almost every other industry. Some have managed to exploit these developments more than others and I think that the gambling industry is at the forefront of how well technology can be applied to a domain.

As an industry we must be open to change and pro-actively look at how we can exploit such technologies to provide a better and more entertaining experience to our customers. For example, the progress in Touch ID has enabled us to allow LeoVegas iPhone app customers to log in to the casino using only their fingerprint.

Are you wondering why distinguishing between transitions and transformations matter? Or, even better, how your business can take greater advantage of the widespread availability, access and flexibility that a fully digitized world creates?

Great, now you are thinking strategically.

What strategy will help Coca Cola and McDonald’s continue to Grow?

Publié le 25/03/2010 à 23:33 par papillondereveMcDonald’s and Coca-Cola, two of America’s most iconic brands were the focus of the January 2015 discussion.  Why pick on them?

  1. The market has been digesting repeated disappointments over quarterly earnings and fueling speculations about their future.
  2. The availability of ample data and a broad set of analyses serve up a perfect opportunity to further our own understanding of the strategic challenges related to sustaining growth.

Typically, most organizations begin a strategic assessment with a simple SWOT analysis.  Instead,  we followed the Chicago Booth tradition and began with a look at available data.  We reviewed a  series of articles before discussing these two companies’ prospects for future growth. (Click here for the links and discussion preview.)

Both companies offer evidence demonstrating how their history and initial value proposition continues to dictate their forward strategic paths. Or as Michael Porter would say,

“Strategy 101 is about choices, you can’t be all things to all people.”

Once you decide whether your organization will be a cost or benefit leader, aligning your resources and messaging becomes simpler. Price doesn’t fully substitute for quality, and consumer preferences are not always consistent. An organization’s successful growth demonstrates it’s priorities and reflects its consistency to deliver on its commitments to customers and their preferences centered around price or quality.

McDonald’s and Coca-Cola sensibilities and capabilities embody the management principles of post war industrialization. The hallmarks of efficiency embodied by these two brands commanding distribution networks reflect their unwavering commitment to quality, consistency and convenience. Each however has defined value differently in the eyes of their customer which further enabled their brand’s rapid, organic growth.

McDonald’s initial automation and efficiency enabled it to deliver meals affordably, conveniently,consistently in an atmosphere that maintained a high standard of cleanliness equal or better than its competition. In 1953, these standards proved themselves effective differentiators.

Coca-Cola chose to deliver on the benefit side, historically limiting its physical assets and focusing on relationships, advertising and consistency around quality.

Operating within the boundaries of these original value proposition, both brands performance over time demonstrates how their responsiveness and sensitivity to regional differences and changing customer sensibilities allowed them to continuously add value and grow. Each brand’s commitment to experimentation and innovation proved central to fueling organic growth. Further,  their individual strengths allowed them to leverage new ideas, even when introduced by competitors.

TaB adIn 1963, Coke’s introduction of TaB followed the success of Diet Rite Cola, a first entrant in the sugarless soda category. In 1962, McDonald’s introduced the Filet-o-Fish as a meatless alternative for observant Catholics following the suggestion of an Ohio Franchisee responding to local competition

Eww Arch Deluxe ad For each, their share of successes also included colossal failures. Who can forget New Coke, or McDonald’s Arch Deluxe? Per Daily Finance.com these two were the #1 and #4 biggest product flops of all time. Both however learned from these experiences and were quick to renew the good faith of their customers and keep growing.

That is until now.

The value defined by their strengths, brand status advantages and considerable market dominance delivered significant success, but now cloud their vision and impede their path to future growth. After all, what’s really left for them to tweak? What haven’t they tried and learned?

Beyond Strength

Both companies continue to demonstrate long term value for their shareholders.  Each provide great capital returns and margins.

  • Coca-Cola has paid a rising dividend since 1963 and has a current yield of 2.88%.
  • McDonald’s has paid a dividend since 1976 and has a current yield of 3.72%.

Each holds the leadership position in their category, continue to show signs of forward thinking and planning at levels of coordination and integration that few companies achieve. Their initiatives, irrespective of success rates are also lessons and templates offering competitors a looking glass into the future.

According to data from the National Restaurant Association, fast food accounted for about 28% of the $683.4 billion in overall U.S. restaurant sales in 2014. The Palo Alto Medical Foundation reports that 25% of Americans eat at fast food restaurants every day.  . Quick Service Restaurant (QSR) magazine identified McDonald’s as the world’s biggest restaurant chain by revenue-$36B in US sales in 2014.  This equates to an estimated 18.6 percent market share of the entire fast-food industry. (Per IBISWorld market research 2014 as reported by franchise chatter.)

“McDonald’s stands for value, consistency and convenience,” says Darren Tristano at Technomic,”and it needs to stay true to this. Most diners want a Big Mac or a Quarter Pounder at a good price, served quickly. And, as company executives now acknowledge, its strategy of reeling in diners with a “Dollar Menu” then trying to tempt them with pricier dishes is not working.”

Just as McDonald’s typifies the fast food industry, Coke is the soda industry, or as Mike Weinstein, a former president of A&W Brands told Business Week,

  “Whatever Coke does, it’s seen as what the soda industry does. What happens to Coke eventually happens to everyone.”

And So?

The strengths of these two brands and value propositions sound good for McDonald’s and Coca-Cola. Their future growth however depends on just how they renew their efforts and focus and capitalize on their key strengths. The forward position challenges you to see and respond to changes  in your business environment faster. Their sheer size and market share visibility also make both more vulnerable to wider market pressures.  Especially in the U.S., where both companies current experiences and declining sales volume indicate they somehow misread the significance of changing American attitudes  around nutrition and choice.  For example,  the 3% decline  in 2013 of the entire carbonated drink market in the U.S. hurt both companies’ sales.

For Coca-Cola, the emergent energy drink category displacing their sales creates challenges for which they  have not had an effective response.Similarly, the alternative fast growing Fast Casual category represents McDonald’s biggest threat. Further growth in this category limits further expansion in the corresponding Fast Food category, and McDonald’s too has yet to effectively compete.

In addition, both new categories prove highly appealing to millennials whose behavior and preferences some analysts contend prove influential to other segments. No wonder both brands chose to leverage their considerable resources around what they know. Each reportedly are investing $1bilion in advertising in efforts to re-establish awareness among this key market segment.

Holding the value of your brand

Interbrand’s 2014 Best Global Brands
2014 RANK 2013 RANK BRAND SECTOR 2014 BRAND VALUE (USD $billion) % CHANGE IN BRAND VALUE
1 1 Apple Technology 118.863 21%
2 2 Google Technology 107.439 15%
3 3 Coca-Cola Beverages 81.563 3%
 ….   ….
24 22 Pepsi Beverages 19.119 7%
38 37 Nescafe Beverages 11.406 7%
72 69 Sprite Beverages 5.646 -3%
….   ….
9 7 McDonald’s Restaurants 42.254 1%
68 66 KFC Restaurants 6.059 -2%
76 91 Starbucks Restaurants 5.382 22%

Source: Business Wire, Oct, 9, 2014

As shown above, in 2014 Coca-Cola’s increased its estimated brand value of $81.56 billion 3% from 2013 permitting it to hold it’s #3 position a second year in a row. This is after losing the #1 spot it held in 2012 and a decade long decline of American soda sales. Their continued brand dominance reflects the impact of their recent marketing, acquisition and diversification strategies.  Business Week explains it this way:

“In 2007, Coke found that 20 percent of the sales and 50 percent of the growth in the $120 billion beverage industry came from small, independently owned brands, a third of which hadn’t existed five years before. That year, Coke launched its Venturing & Emerging Brands (VEB) division to cultivate relationships with and ultimately purchase some smaller startups.”

In Contrast, McDonalds estimated brand value of  $42.2 billion increased only 1% over 2013 reflected its slowing growth and dropped it to #9,  down from #7 position it held in both 2013 and 2012. (Note the distance between these icons and their nearest category competitors shown for comparison).

The marketplace loves a good story of failed leadership. When the mighty fall the press and public are quick to pounce and in some ways, fresh eyes and alternative experiences and optimism may prove more than beneficial. Will activist investors get their way?

Then again, in taking a close look at the fundamentals of size and respective asset valuations our disccusants were reminded of the difficulties around sustaining organic growth.

Below you’ll find the participants takeaways following our most recent discussion. Read the articles, see if you agree. After our usual wrap-up, you will also find a series of simple questions we plan to raise with a few folks with deeper knowledge and a more intimate understanding of McDonald’s.  We will post their responses when they arrive.

TAKEAWAYS

  • The one size fits all notions that produced cookie cutter efficiency and passed on volume savings to maintain quality suited the growing quick service restaurant category, when there were few comparable alternatives. Today, the US market especially its urban centers, reflects far greater diversity in the category. The growing variation along the price value continuum illustrates the market’s response to changing attitudes, palates and preferences of consumers as well as differentiating  perceptions. Use your strengths to build alternative restaurants, maybe tailoring them  to regional preferences and further diversify your portfolio holdings.
  • Separate the brand from the occasional value meal inspiration.  Sure everyone appreciates getting the best value for the lowest price, but it’s difficult if not impossible to deliver differential value messages within the same location as in the value meal combination vs. purchasing off the dollar menu. Turn your attention to differentiate your value relative to your competitors at similar price points.
  • The strengths that prove appealing to shareholders don’t indicate your understanding of individual customers.  Declining customer counts along with infrequency of return visits suggests the absence of resonating experiences necessary to meet the demands of the increasing segmentation within your broader competitive category. How can you continue to benefit from your existing strengths? Pare down your menu further to deliver the essentials of what your core customers want, assuming you really understand who that is.  Once you do, use a loyalty program to reward them and keep closer tabs on their responses as you continue to test.
  • If increasing customer price points is key to your growth equation then you also need to offer higher value for the price in order to avoid losing the core brand identity.  Obviously in rural areas where the choices are fewer, you retain a firm grip on the market and can delay changes. Unless the $1 menu, or $1 menu plus offers acceptable margins you may need to find alternatives to pass your volume discounts on to consumers.
  • Separate supply and demand functions as you manage the business going forward.  The benefits from your superb asset management capabilities on real estate, currency risk and supply chain have been impeccable and thus puzzling to watch your miss on the demand side. Are there lessons in creativity and management that could prove helpful?
  • The proliferation of segmentation in the marketplace let alone in your customer base requires a more innovative approach than mere brand building activities offer. In focusing on the customer experience you may miss aligning around your core identity. Another reason it may pay to try an alternative diversification strategy through new restaurants, concepts that don’t compromise but complement the existing franchise.
  • One of the problems of being so big and maintaining a healthy distance from your nearest competitor means you were insulated from the small ripples of changing sentiment that others were quicker to seize upon.  Your crumbs became their meal and growth ticket.  In order to get out front again, you may need to get much closer to your customers, and surprise them, delight them or even choose to get cozier with your competitors again to find a way to grow the category together.

Concluding remarks:  We know we didn’t discuss Big Data or social media or even mobile so there’s plenty of things we missed in 90 minutes. Please, share your suggestions or comments on what you find to be effective growth strategies for market leaders who seem to have hit the end of their runway.  We’d love to hear from you.

Mobile Strategy–an imperative for your future

Note to readers: The graphic to the left was found After the  October 18, 2013 discussion, inspired by articles listed at the bottom of this post.   

Does your near term performance hinge on your understanding of mobile  technology, and if so, how critical a role does it play?

Infographic-2013-Mobile-Growth-Statistics-MediumToday mobile platform adoption rates outpace the technology’s downward pricing.  The dual benefits of convenience and constant connectivity offer irresistible value and overwhelm the initial cost bumps associated with implementation.  It’s not merely the anytime anywhere connectivity with your social network that makes mobile valuable. Mobile technologies offers direct access to increasing varieties of information at the tip of your finger anytime and every where (if there’s wifi).

Questions that used to leave us uncertain, can be easily answered.  For example:  How soon until the next bus arrives?  What’s the best route to any intended destination?  What can I make for dinner? Who has the best price? What’s the name of this song playing right now?

Short message services–SMS, Geo Positioning software – GPS, Google search, untold numbers of product and service applications and internet browser capability are now built into multiple mobile devices.  They allow everyone to travel lighter and access the information needed at the right time.

For business, if you don’t have a mobile strategy yet,  best make it a priority.  At least that’s what the discussion participants concluded.  Skeptical of consumers ability to fully integrate many of these technology opportunities into their daily routine or modify their existing habits and behavior,  companies who have yet to play in this space will find it harder and harder to catch up.

The strategic opportunities continue to evolve in tandem with the spreading  uses for assistive mobile technologies.  For example, a prudent strategy  in consumer marketing might be to incorporate  the technologies to enhance the user experience—especially as no clear killer sales application that deploys these technologies exist.

·         Amazon with all its technology savvy and leadership in the online sales market leveraging its platform hasn’t found a way to fully leverage mobile capabilities to increase sales.  Mobile assistive technologies, like Google maps represent a hybrid.

·         Twitter, hot off its successful IPO has yet to grow actual sales for any business.

·         Facebook’s use of GPS allows business to learn more identifiable information about the consumers as they become proximate to their store,  but have yet to prove predictable in driving retail sales.

Advantage

What advantage then can mobile technologies really deliver?

There seems no limit to the additional utility Search Engines provide.  Mobile technologies allow roving users access to  public, private or personal sources that the engines verify and validate boost both their value and help build loyalty incentive programs.  Increasing numbers of gamification applications also exemplify how mobile technologies drive growth opportunities  by enabling repeat sales through mutual identification of merchants and existing customers.

More interesting,  mobile technologies helping to optimize each stage in the sales cycle sequence.  Applications that make use of two way transmission—driving traffic both by or to customers is just the beginning.  Efforts that allow discovery and exploit more stages in the cycle help determine when, where and how the transmission proves itself  more efficient and effective.  Should your business deploy mobile to simplify checkout? Or simplify merchandise location and availability?

In the ongoing evolution of technology, strategy that focuses on deploying tools for competitive advantage or advancement isn’t enough.  Strategy needs to consider how the new technology influences your revenue flow.

Possessing mobile technology isn’t merely a lower cost play. Strategic opportunities increase when it’s used intentionally to offer stakeholders learning opportunities.  Can you give your sales people the most up to date information on the customer’s past purchases, or your customers’ suggestions for product use, installation or enrichment?   Present technology capabilities and big data offer business opportunity to accumulate metadata and create richer customer profiles.  Mobile brings them together by putting the specific customer into the present transaction equation.

15 years ago, business wondered how, what and when E-Commerce would change their reality.  Today, forward planning organizations recognize mobile technologies as a similar force of permanent change.  Advantage will flow to those organizations who get out to test and experience for themselves the many features mobile technologies offer them directly.  These options offer unique understandings and help them translate mobile technologies’ anytime, anywhere access options into business value.

Strategy that activates customer and supplier value goes beyond capturing attention and offering incentives to drive traffic.  The strategy must consider the fuller customer experience and increase the odds of success by investing in developing future capabilities such as cross training staff and directing resources that  effect cross-promotion , understanding  both crowdsourcing and influence peddling opportunities.

Walmart’s recent experience demonstrates the shifting control customers now possess.  A computer glitch with  the Federal WIC program’s system communications prevented enforcement of  purchase limits at Walmart’s Point of Sale.  A customer tweet  flooded Walmart with these customers who exploited the system failure to their advantage and  Walmart received the short term benefits.

Summary of take aways

  1.  Confirmation that organizations must be actively trying to understand the technology, otherwise they may never get the benefits.  For now, obvious value is limited to facilitating adaptions to  marketing .  Eventually both seller and buyer will reach the same understanding but the advantage will continue to flow to those who worked hard out front and made it easier for their customers to both benefit and settle in as they who to trust and where to be.  Switching costs are always serious and so it pays to be out front.
  2.  Best to think through how you deploy these technologies carefully.  What opportunities will make things easier for you consumers, and then work to simplify the individual steps and actual transactions.  For example, Millenials view mobile as an essential service and continue to need and expect universal Wifi and battery charging wherever they go.  Are you helping them?  If not, your access to this key demographic will be limited.
  3. Balance the cost/benefit of information and investment.  Mobile is a work in progress like any technology, don’t put all your eggs in one basket.
  4. Opening up of information transmission in more places and with more transactions suggests that additional paths to capitalize on this phenomenon.  Your strategy should seek to know and learn, as in where you can produce added convenience, respond and simplify steps in your own or your customers’ process, find out more about customer behavior and your ability to learn with  them  in order to  gain strategic advantage.
  5.  Continue to seek out pockets of advantage—customer  loyalty is easy, instant access, centralize connections for your customer to one place is another.
  6. Transparency too is key. Mobile comes with real time imperatives and be sure your back up plans work.  Open Table app for example failed to deliver real time answers or reservations, which diminished its value and its opportunity to build customer loyalty.

ARTICLES:

Mobile Now—Strategy +Business June 2013

http://www.strategy-business.com/media/file/00196_Mobile_Now.pdf

The 6 Biggest Mistakes Made on Enterprise Mobile Strategy

Posted by Adam Bookman in Wired on August 5, 2013 at 10:30am

 http://insights.wired.com/profiles/blogs/6-biggest-mistakes-mobile-strategy#ixzz2glZMCXXu

 Global mobile statistics 2013 Home

http://mobithinking.com/mobile-marketing-tools/latest-mobile-stats

And, an Optional  case Illustration.

A look At Quiri- Retail Intelligence using mobile crowd workers

http://techcrunch.com/2013/10/02/quri-a-retail-intelligence-platform-using-mobile-crowdworkers-scores-10-million-from-matrix-others/

For JC Penney and Ron Johnson experience counts, but which one will deliver growth?

JCPenney in Frisco, TX
JCPenney in Frisco, TX (Photo credit: Wikipedia)

When I noticed the battering Ron Johnson received for attempting to reposition and re-brandthe  stalwart American department store JC Penney, I recognized a great case for peer learning among strategy as well as design thinking innovation professionals.  Johnson seems to have had the best experience for the job and  an attitude that placed the customer experience at the forefront of his proposed changes.  Falling stock price and fleeing customers tell a different story. Chart forJ. C. Penney Company, Inc. (JCP)

The Stock price when he took over as CEO on November 1, 2011 was $31.71.  Less than 14 months later, the day the discussion group met, the stock closed at $18.87.  In the last few days, the stock appears to be improving, most likely with the announcement that Johnson has backtracked on his strategy.  But I’m getting ahead of myself.

Two weeks ago, after reading a few background articles ( links and titles follow this posting), the discussion group met to review  JCP and Ron Johnson’s strategy.  Several questions raised in the course of the discussion prompted me to dig up additional history about this company and the changing conditions heating up the competition in this market sector.

Increased information, increased complexity

The days in which stores stood between buyers and consumer good manufacturers are dwindling. Location or proximity to the consumer may still have an edge but your competition’s ability  to insert themselves into the face to face transaction has dramatically altered the sales dynamic. Mobile communication devices  make it easy for sellers to find buyers anywhere anytime; and yet, the playbook  for many stores , from department stores to specialty retailers,  fail to keep pace with the change in buyer behavior, perception and thus fail to live up to  increased expectations.

Multi-channel interaction technologies perform double if not triple duty. Enabling information access by consumers for product details can direct attention to sales opportunities and enrich transaction data adding details and insights on behavior related to choice, in-store placement and preference. Investments  to enhance the customer experience easily generate additional sales but can also generate greater operating efficiency. In store sensors  make it possible to track consumer behavior similar to online consumer data collection software.  Once connected to specific consumer transactions the algorithms to generate value based pricing logically follow.  That is, if  pricing leverages the multiple data sources  which is typically the domain of  merchandisers and not a strategic function. RFID technologies and bar codes now  increase  supply chain efficiency all the way up to the checkout counter. (Note, JC Penney benefited from the tenure of VanessaCastagne ,a former SVP from Walmart, and  led online platform development efforts and integrated supply chain controls from 1999-2004. )  This data is just as valuable to suppliers, many experiment with QR codes  that allow them to forge direct relationships to customers via social media channels that can compete or play compatible with the store by directing consumers to specific purchase outlets either online or in store.

The arrival of direct consumer access, anywhere and anytime raises the stakes for all store owners. Setting priorities and synchronizing these technology introductions challenges  management in every sector.  For department stores and retailers alike, they have little time to adapt old school merchandising skills that support the  brand image and staff to client interactions while maintaining the cashflow necessary  to make it all work.  Oh, and figuring out the pricing thing in real time…that too!

Well that’s a tall order for any leader, let alone one who also needs to placate a trigger happy board and investors with high expectations.  It’s not a surprise that within one year of assuming the CEO spot at JC Penney, Ron Johnson  has backtracked on his strategy.  Year over year sales declines of 26%  are bitter pills for any business and the verdict on Johnson’s leadership choices are premature at best.

Additional context specific to JC Penney

A little more background may help. Just as the 2011 holiday sales season  commenced, Ron Johnson took the reigns and immediately set to the task of engineering a massive strategic overhaul of the JC Penney business.  Johnson in his first few months had opportunity to learn  the level of in-house capabilities and competencies of his team  from operating reports generated throughout retail’s peak sales cycle, but did he?

On February 1, 2012, four months into his arrival, he launched plans to update the store designs to a town square model and simplify pricing that would put an end to sales coupons.   The ideas were bold, but not as daring as many armchair critics suggest.

Success required implementation excellence, akin to the level of APPLE retail but at the scale of Target and the execution precision of McDonald’s.  Was that the department store JC Penney?

FYI, Apple had spent a year developing ideas before hiring Johnson in 2000, and built a prototype store near Apple headquarters where they tested their concept.  In May 2001, they opened their first two stores in May 2001, in Virginia’s high-end Tysons’ Corner shopping mall and in Glendale Galleria in Glendale, Calif.  A little over two years later,Apple had opened over 70 stores in locations such as Chicago, Honolulu and Tokyo. (See the full WSJ reported story).  By contrast, Johnson when he arrived at JC Penney threw together a strategy and placed huge bets based on a short-lived prototype experience.

Where was the evidence that the chain’s mix of  products and  brands when pigeonholed into  the three-tier pricing strategy change would match customer assessments of their value?  Note, he  replaced the pattern of ongoing price adjustments and coupon offers with:  every day pricing  40% off list, with the suggested retail price removed;  distinct monthly special offers; and best  prices-clearance items.  All prices would end in $.00, not $.99 .

Casual observations

The 50% failure rate of new product launches Gartner and other studies explain as ” poor knowledge of what price the market will bear for a new product. ”  Greg Petro writing for Forbes 1/22/2013 shared these and other findings, which someone on Johnson’s team must have read and studied.  Price signals to consumers the relative market value of a product or service, but the market dynamics are challenging to manage.  Interestingly,  in 2011 several department stores began to play with intraday  pricing by connecting their awareness of external competitors prices and match or best them at the point of sale. The unique price advantage Apple holds also made Johnson recognize the operating efficiencies gained from static and more constant price communication to customers.  In seeing the efficiency he may have overlooked the market dynamics.

In 2007, Macy’s had its head turned around by customers after it attempted to cut by half the frequency of its coupons and sales.  Of course this move engineered by Federated, the new parent,  followed their large purchase streak  and coordinated efforts to re-brand under the Macy’s name a series of regional based retailers (i.e. the May company, Marshall Field’s etc). The idea was to help regionally loyal customers recognize the opportunities for price the bigger national Macy’s offered.  Consumers were unwilling to adjust and found local alternatives preferable.   There’s something different about what a retailer can do and a department store, Greg Petro learned and reported in a Pricing series for Forbes.

“Compared to Department Stores and Brands, Specialty (and Vertically Integrated) Retailers have the most control when it comes to pricing. Vertically Integrated Retailers control the entire process.  The best ones design product from the beginning to target specific price and margin points. They also control the in-store experience, which can’t be ignored when understanding the value of the brand and how it affects pricing.”

Refreshing retail experiences that  appeal to the millienials as they begin to raise families and need the value that Jc Penney was historically famous for delivering  has all the marks of a sound strategy on paper.  Johnson clearly has the bench strength in delivering both; but,  does he have the stamina and correspondingly the capital for the task.   (http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aU2MttAfdFYU&refer=news)

The bigger the change, the more steps to implementation and the greater the chance to fail.  Shaking up JCP takes capital and cash, especially since sales growth depends on the successful integration of online and in store sales.  Until recently, no links existed between online and in store experiences. The onset of omni-channel  increases the ease with which customers can experience more integrated,  consistent connections.  The closer my online shopping experience finding merchandise, and having it in my hands as well as sharing the social experience of shopping with friends matches the experiences in store creates both great challenges and enormous opportunity for retailers to manage.  To avoid customer confusion, in store sales staff need to have access and awareness of online sales promotions, merchandise and pricing.  Historically, a gifted sales person who knew their customer and purchase history offered assurance of their choice and saving  the customer time. The results  increased their overall satisfaction with the purchase  which by association carried over to the store. Now, online tools offer what the sales associate did  and offering more control to customers who research at home and may venture into a store to get a complete feel but won’t necessarily complete the purchase on the spot.  It may not be reasonable, but the expectations of consistency of offer, price and service between in store and online keeps growing.

JC Penney’s margins, like many of its competitors were shrinking. Getting the experience for customers right  without changing pricing must have seemed ludicrous to Johnson, but from an implementation point of view,  it may have had more immediate impact on the top  line.  As customers adapt to omni-channel opportunities and sales people adjust their relationships with savvier customers, new segments and behaviors may emerge.

Perhaps, Johnson felt that there was no point in putting his team through a drawn out change process and felt it better to catch up all at once.  Being first, may have its advantages but it also comes at great cost which Johnson has begun to experience.

ARTICLES We Reviewed

1. Business model innovations looks at JC Penney

http://www.innovationlabs.com/2012/05/changing-your-business-model-maybe-its-not-so-easy-to-do/?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+InnovationAndHighPerformance+%28Innovation+and+High+Performance%29&utm_content=Google+Feedfetcher

2. New York Times Nov. 12, 2012:  A dose of Realism for JC Penney

http://dealbook.nytimes.com/2012/11/12/a-dose-of-realism-for-the-chief-of-j-c-penney/

 3. MIT Sloan Business Review, summer 2012–Is it time to rethink your pricing strategy

http://sloanreview.mit.edu/the-magazine/2012-summer/53413/is-it-time-to-rethink-your-pricing-strategy/

AND as a  Bonus option,   the fitrade blog   5/26/2012

Why clothing retailers suck at posting amazing profits-year-over-year

http://www.fitrade.com/2012/05/26/why-clothing-retailers-suck-at-posting-amazing-profits-year-over-year/

Behavior Economics teams up with Big Data nudging Obama’s Re-election

Text message from Barack Obama campaign announ...
Text message from Barack Obama campaign announcing that Joe Biden would be Barack Obama’s choice for VP. (Photo credit: Wikipedia)

No surprise that this past election, campaigns took advantage of big data AND they also took advantage of the growing awareness of persuasion techniques and incentives that fall under the umbrella of Behavioral Economics…both topics we discussed in the past few months.

English: Nate Silver in Washington, D.C.
English: Nate Silver in Washington, D.C. (Photo credit: Wikipedia)

Nate Silver, and his 538 blog seems to have become an even greater rock star recently.  By applying his deeper understanding of probability and statistics , he successfully predicted the election outcome well in advance of poll openings.

Today’s New York Times carried an interesting story about the unofficial influence of Academics with expertise on Influence.  I urge you to read the behind the scenes story  Academic dream Team that Helped Obama’s effort.

Not to be undone, TIME magazine got to the real team working inside the Obama campaign to get the details.  After the election they were free to publish the following story:

Inside the world of the DataCrunchers who helped Obama win Re-election

If business needs further evidence that real time analysis of integrated data delivers value, the lessons learned during the election offers some great insights. The precedents set by  this new database and the quants analyzing it, suggests additional opportunities to make change that goes down more smoothly, like Mary Poppins advised using her spoonful of sugar.  Good or bad, the reality is that big data made a big difference in this election and on the persuasive front appears to have been effective in delivering the most relevant messages to individuals.  Hard to believe that general broad-based appeals such as bill boards and television advertisements will continue to call for  high level resource investments. Then again, that’s another story I’m sure.

I haven’t seen all the articles out there but more are bound to follow.  We will do our best to revisit these topics again  in 2013.

How can strategy help companies prepare or be more resilient in the face of inevitable disruptions?

The looming anniversary of 9/11, reminds us all that unthinkable actions and events do happen. This past Labor day, on the anniversary  of hurricane Katrina , a reminder arrived in the form of  Hurricane Isaac to test the city, residents and officials learning in the aftermath  widespread devastation resulting from inadequate or incomplete planning. After several days of pelting rain, Isaac quieted into a storm system and moved north and New Orleans welcomed back tourists and a convention. New Orleans Mayor Mitch Landrieu reflected on his City’s Post-Isaac response and  how quickly the region was able to bounce back, crediting the many lessons put into action and systems working according to design.   (see http://www.huffingtonpost.com/karen-daltonbeninato/exclusive-new-orleans-may_b_1861685.html)

After several years of a lingering recession and the rapid loss of faith by investors in companies once considered darlings, what prevents once successful growth  companies from staying on their A game? The monthly discussion tackled these questions and a lively conversation ensued.

The ever approaching Cliff

In part, NOLA’s  success combined responses to feedback and prior experience as well as awareness and attention to changing weather.  Hurricane Katrina was a category 5. Experience with  less powerful hurricanes may have lulled many  into complacency, resulting in  a series of  failures, crippling recovery efforts while zapping the resiliency of the wider network.  As the first of three referenced articles* suggests, many companies suffer from  similar competency failures.

Warning treatises of the ever approaching threat complete with  foresight and clear predictions,similar to  the increasing accuracy of  hurricane tracking and timely issuance of early warnings  from NOAA systems, failed to align corporate resources  to respond adequately and in time once the prediction became a reality. Today, the mounting buzz around Business Intelligence, Big Data Analytics  likewise offers more organizations the promise of foresight similar to these early warning systems. Yet,  in spite of their popularity, planning and internal resiliency appears  uncommon a  practice.

 

Like Howard Dresner, I too was surprised by findings from his wisdom of the crowds BI status survey  this Spring.

“[BI ] penetration remains relatively low. We’ve seen improvement over the last years, but it’s not happening as quickly as we expected. Only 20 percent or fewer users within most organizations have access to BI tools.”

Information and trend tracking opportunities may be growing; but data’s impact extends only as far as  its availability to those who need it.  Is it the organization or the individuals that fail to act?  Is the information inadequate or the failure of priorities that pit short-term performance against long-term planning and development?

Prediction vs. Action

Peter Schwartz, the author of not only books but numerous scenario planning models advises organizations in resiliency and suggests, that many surprises are predictable.  More models can be used in concert to help uncover missing information or create the likelihood of a wider range of events.  Consistently,  few organizations do anything to prepare or adequately incorporate this information into their planning.

It’s not the inability to predict  a disruption that trips them up.  Kodak, for example, created the original digital camera technology and  RIM cornered the market on business cellular phones but neither found it possible to shift their culture, and temper expectations and performance permitted them to redirect resources.

At any level within an organization, the consistent imperative demands performance improvements.  Faced with a choice of trying something new,  using untested abilities to enter an unproven market and pursuing the path in which you excel and know really works, naturally we choose the latter and minimize  risk.  By insuring the organization higher performance near term, we sacrifice the opportunity to develop the next thing and ensure performance in the long-term.   Scenario planning activities might cue leadership into the inevitable performance peak, but only the accuracy of its estimation of impact and arrival window lends the necessary credibility and urgency to impact planning or resource redistribution.   Do you have to be small?  If your existence began as a disruptor once you make the shift to deliver at scale, do you lose your ability to adapt?

Leadership and Vision

Apple,  GE  and  IBM , all of whom operate at incredible scale,  manage to avert this problem and seem to consistently reinvent themselves, how?

Failures to adapt occur for many reasons, from incomplete or missing information to a situation missing clear visionary leaders and visions. Few organizations capably  invent and manage  simultaneously, each require different skills and sensibilities that often need a skunk works separating  innovation functions from business as usual.

Making the decision and committing to a course of ongoing development or innovation doesn’t happen without leadership capable of inspiring, communicating and insuring the flow of external rewards to incent the behaviors necessary to make the shift.  Pharma and Aerospace industries famous for devouring cash at a rapid rate, historically funded r&d separately .  The central business role differs fundamentally, and picks up the  innovation created offsite and then works to make it profitable, and efficient.

A culture focused on production also capable of innovation culture may co-exist but rarely, are they coincident, as both 3M and Google demonstrate.  Managing the two can be very challenging and attaining flawless, profitable execution can energize the entire company.  Consultants often used to help bubble out the great ideas and then bubble back in the means to realize the innovation effectively, integration based on critical mass.

In spite of an innovation culture, management and intention, the decision to find/see the value in the innovation may still remain elusive.  Few leaders combine visionary skills  and  the proper balance to identify the point between risk and reward that works.  Steve Jobs clearly did.

Without this combination, strong, capable leaders may not easily articulate their vision.  They may however  be good at pivoting or adapting the organization’s direction based on understanding the future interests of your customers or the values of your future customers.

Process vs opportunity

How  many disruptive innovators don’t make it up from the floor? Is their vision in sync with the market?  choosing between keeping your existing customers requires that you talk to the wider market as well.

General Electric’s internal growth targets depended on 5% being organic and 3% from acquisition.  The idea that if you build it and they will come is not a winning strategy.  Looking for opportunities to be helpful to your customers will take you farther.  Did Steve Jobs when creating the ipod, ipad and  iPhone from the perspective of championing his vision, or more honestly creating products that consistently are appealing because they prove helpful, easy to use, reliable and enjoyable.

The bigger challenge for business is  finding out who is their customer, not merely looking to who they think they know.  Again, a strategy that pivots the firm toward the future, help the customer explore can serve this purpose.

Internal disruptions, create  distance from the norm, the routine and can also create new space.  To succeed at this, the organization must dedicate sacred space (white space) and establish new rules of  play.

Emotion/experience and analytics  all filter information present in the environment.  When mixed signals arrive or separate information conflicts, our emotion/past experience become the default and  explain why too few companies take notice of the shifting sands beneath their feet.  Thanks to Bill Hass for sharing this reference and corresponding link on how to heed warning signals.

NOAA Betty Morrow summarizes some of these findings in a paper that should prove interesting and relevant —Risk Behavior and Risk Communication: Synthesis and Expert Interviews by Betty Morrow.  includes a series of  Best Practices in WARNING!

 People do not respond to warnings for a number of reasons:

– personal risk preferences

– other priorities

– contradictory signals

– aversion to authority or outside experts

– lack of a physical or mental capability to respond…

LESSONS LEARNED–the Takeaways.

Most prudent to outsource innovation as few organizations capably  manage both business as usual and maintain freedoms of space and spirit that make it possible for organic innovation to bubble up and coordinate resources necessary to its success.

Looking at things differently is essential, the management team needs to keep asking at every turn how can this work differently.

Few companies seem to know their customers as well as they believe they do, or as well as successful disruptors actually do.

Given dedicated space and time, encourages people to find the market that suits their company and furthers its growth.

Organizations need to find ways to create space and time for innovation, maybe best to do it beyond the 9-5 or discipline of the normal routine.  To succeed the space and time needs to take people to different mindset a different place emotionally if not physically.

True disruptors are rare,  as is a combination of vision and innovation committed to creating things that delight customers  by exceeding their needs.

Outsider perspectives can validate internal evaluation more objectively and thus help an organization and its leadership avert insular thinking.

Don’t ask where your customers will be, focus on where your company will be in the future to assure your plans and choices make sense .

Disruptors are good at putting the horse before the cart, charge away at the hard problems; however large organizations the challenge is getting the disruption IN, finding a way to integrate the new thinking, innovation etc into the 9-5 routine.  In other words, the bubbling out or successfully disseminating and gaining acceptance for the change internally  harder than the origination and prototype of the disruptive idea.

If you can see the emergent needs, successive small bets may be a wise strategy to help an organization make the proper shifts and survive.

There is a natural aversion to follow disruptors who lack authority and  so organizations internally fail to create the mental and physical response capabilities.  Even when warned, organizations’ risk averse nature stops them from adequately responding especially when the early signs are rarely perfectly clear or direction determined to impact them.

Organizations who lack agility and ability to meet the challenges as they arise externally,  and a sense of urgency can help them  build in more adaptability.  No urgency, little or no adaptation.

Risk Reward, resiliency is often a balancing game, with strategic imperatives.  Maybe  boards of directors should press  harder for this capability.

  The problem of bubbling innovation IN, requires organizations to keep an open mind, even if the organizational readiness for disruption may be missing.  Maybe embedded in any undertaking is the rule for a profitable sunset?

Defining a vision not equal to managing it, refining or carrying it over time.

Clearly a focus on the future matters more than ever, especially when it appears that the average lifespan of organizations keeps shrinking.

 

I’m sure there are some points I missed.  In 75 minutes it’s hard to cover such an important set of questions and come up with some clear suggestions.  Obviously there’s no such thing as a silver bullet and one size will never fit all but I hope you will still add in your own thoughts or reactions,  Perhaps you have an anecdote or lesson you’d like to share?    We’d love for you to post them below.

Note, if you are local and free on Thursday 9/13 we will be reprising the conversation over cocktails –check the Chicagoboothalumniclub.org calendar for details….we are NOT going to be at Pegasus as earlier announced.

*Articles reviewed in advance of the discussion

 

a)      Help! We’re being disrupted!

http://www.technologyreview.com/business/39221/#.TvN-bxiB4FE.email

b) VRM–   Let’s fix the car rental business, a case in vendor relationship management

http://blogs.law.harvard.edu/vrm/2012/04/15/lets-fix-the-car-rental-business/

c)      Capability maturity and organizational effectiveness

http://www.drmika.com/download/Aho_-_A_Capability_Maturity_Model_for_Corporate_Performance_Management.pdf