April 5th, 2012
In our strategy work, we often help clients flush out potential future scenarios based on facts already in evidence today.
Consider health care (for example). Many of the president’s health care reform measures are already gaining steam, and will be hard to reverse. The health care community is moving towards electronic medical records, an idea whose time has come independent of other components of health care reform. The health care sector is in a bit of a funk, as it is hard for businesses to predict what the rules of the game will be in a year or two. But health care is the exception, not the rule.
Generally, futurists view the political landscape based on which party is in control of the executive and legislative branches. As a nation, we are gripped by the nightly reporting on poll numbers, debates and the latest sex scandal. It is the Tea Party vs. Protest Wall Street. The unfortunate truth is that the balance of power has become completely neutralized.
The U.S. populace is so displeased with both parties, neither can win a clear majority, and the result is stagnation. Congress passes legislation that is neutralized by executive order or by bureaucrats at the Federal Trade Commission, FDA, EEOC and other agencies where politics trump responsibility.
This neutrality was clearly evidenced by the “super committee” that was a super disappointment. Congress is too big and dysfunctional to agree on anything so the thinking was that a smaller group could find consensus. No compromises were forthcoming in a political climate so polarized that the two sides couldn’t even agree on minor details like saving the country and the world from economic doom. Details, details.
This principle is so simple it is obvious. In the absence of any clear evidence to the contrary, it could be argued that we should run our businesses under the assumption that there will be little regulatory change.
It is ironic that based on the absence of any new action, $1.2 Trillion in spending cuts and tax reductions expire in 2013 (as agreed to the last time the government was on the brink of collapse). [i] The only thing the two sides can agree on is that such cuts to defense; Social Security and Medicare are “draconian.”
It beats the alternative. We simply can’t believe that the situation in Europe is so bad, that “austerity measures” are being used, as nations cannot meet their debt obligations. I only got a B in macroeconomics but I am pretty sure Italy and Greece paying 7% interest on their debt is problematic[ii] The writing is on the wall, and the ramifications for both parties are extreme: much higher taxes on the wealthy and deep cuts to entitlement spending.
So what is there to be learned from all of this gridlock? First, if your business is reliant on government, you had better diversify into the private sector quickly (especially if you do business with the military). Second, we should expect the status quo from Washington. Our representatives are simply too inept, and too political to change.
Some political experts are even suggesting that an independent could emerge during the Presidential campaign, which would threaten our two party system (it may not happen this year but is almost certain to happen in future years). As an American, I find that troubling but perhaps it would do us some good.
[i] Superbad by Paul Barrett Bloomberg Businessweek November 28, 2011
[ii] Monti under pressure as Italy’s borrowing costs rise Reuters.com December 14,2011
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Posted by Marc Emmer - President - Optimize Inc.
March 20th, 2012
Everybody wants to develop the next iPad app. Inventing things is a great way to impress your friends. But sometimes crafting strategy is more tepid. One needs to balance their need to disrupt based on positioning, industry stage, resources and a myriad of other factors.
I have always viewed the exercise of strategic planning as a blend of revolution and evolution. It is important for companies to fully bake their last innovation before they can move on to the next. The inability to fully develop an idea can be futile. As the old saying goes, a man with two watches may not know what time it is.
Some companies have the chops to work on multiple disruptions at once, but they are usually the ones with an abundance of resources. For most, execution can require the attention of several executives and their underlings. Such work is both exhilarating and exhausting and it is not for the faint of heart.
One critical constraint is that the people who dream up such ideas are in the C-Suite, and they are the ones with the most limited bandwidth. It is for that very reason that the most senior people need to delegate operational responsibility so that they can keep their eye on the ball. It is extremely challenging for CEO’s to focus on revolution as they manage evolution. They may have the vision for evolution, but it is the job of the COO (or similar of a similar ilk) to see through incremental change.
That is not to say that incremental change is not valuable. It is more than valuable; it is the cost of admission in a business culture where customers expect Nordstrom quality and Wal-Mart pricing. Customers will not accept the status quo for very long, so continuous improvement is a required business practice.
Some companies are particularly adept at overcoming this resource dilemma. They create opportunities for innovation in their interactions with customers (by asking the right questions of the right people) and in the way that they manage their planning. Some environments are far more ripe for revolution than others, based on how their managers show up. Others execute vision by using outside resources (outsourcing) or task forces of employees who can focus on improvement. One way to develop mid-managers is to task them with tasks and initiatives that may expand their role and stretch their thinking.
So pick your battles wisely. Find a way to manage both your disruption and continuous improvement in parallel.
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Posted by Marc Emmer - President - Optimize Inc.
March 12th, 2012
You would have to be living under a rock not to have heard about the grass roots effort to capture Joseph Kony of the Lord’s Resistance Army in Uganda. A video posted on You Tube this week went viral, with over 56 Million hits (as of this writing.) In my case, my 15 year old daughter pleaded with me to turn off 60 Minutes to watch it; providing a stunning commentary on our movement to new forms of media.
The video, shot by a little known videographer is being promoted by the advocacy group “Invisible Children” and tells the story of a Ugandan child and others like him, who have been the victims of horrific crimes against humanity.
While the story and cause is compelling, it is the story telling that should capture our attention. The 30-minute video is presented like a short, part documentary part sensationalism. The themes of children killing their own parents and mutilating others are shocking and captivating.
All marketers should become aware of this medium. The movie blurs the line between amateur videos on You Tube and professionally produced movies. Companies often attempt to tell their story through static documents that lack color and texture. Those of us who are on the wrong side of aging must recognize that those who we market to no longer process information in the form of static text. We have been conditioned to view our news, our sports and our marketing offers in multimedia form. The marketing of the future will include many dimensions, including video, sound, and info-graphics launched online, rated by others and spread through sites that have not even been built yet. Media will be in constant flux, with new views, tidbits and vignettes wetting our appetite for real time information.
The other thing unique about the video is its call to action; setting a very clear goal to capture Kony in 2012. If you think that this is just another cause being thumped by a set of leftist activists, think again. The U.S. military has dispatched 100 Special Forces “advisors” to Uganda in an attempt to find Kony, and senior U.S. officials are scrambling to harness the populism of the video.
As the video proclaims “Nothing is more powerful than an idea whose time has come.” View it here
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Posted by Marc Emmer - President - Optimize Inc.
March 8th, 2012
Organizations find a cadence for planning and execution. For some, planning their business is rhythmic and routine, and for others more ad-hoc and choppy.
The discipline required to be successful at strategic planning is not innate in the human condition. It requires creating methods, habits and norms that perpetuate a desired process, and that takes energy and patience only employed by the best CEO’s. Such habits will rarely occur without the complete buy-in of senior management.
The only way to establish such discipline is to have a repeatable process. Best-in-class organizations typically have multiple strategy events per year. For some, perhaps it is an annual retreat and quarterly follow-ups. For others, it is a semi-annual retreat followed by monthly check-ins that focus on execution. It is not as important what system you use for strategic thinking, as it is that you have a system you can commit to.
Once such a methodology is understood, certain norms begin to take form. Mid-management can rationalize their contribution to the greater good and develop their own methods for applying the strategy to their organizations. For many companies, strategic planning includes:
- Gathering research about the market and operating environment
- Gathering input from front line staff
- Gathering additional information about their current state
- Formulating the mission, values, vision, goals and strategic initiatives
- Conveying the mission, values, vision, goals and initiatives to their employees
- Establishing departmental goals and infrastructure requirements necessary to implement the strategy
- Creating a performance management system that is in alignment with the company’s core competencies
- Measuring the effectiveness of execution in real time
Many organizations have such a cascading routine for budgeting, and the same thinking applies to the formation and execution of strategy. Often the strategy discussion precedes the budgetary process and the timing of the two are linked. It is for this reason that one cannot think of planning as a single event (such as an “off-site”) but as a cycle. As such, your plan is never really complete—it is a working document that must continue to change as new market conditions present new threats and opportunities.
Organizations also need to change things up to foster new thinking. Some meetings can be structured and organized and others need to be free-flowing brainstorming sessions.
Whatever your process, provide an environment that will guarantee that your team continues to think about the broader picture and how you can maintain your strategic advantage.
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Posted by Marc Emmer - President - Optimize Inc.
February 27th, 2012
Globalization has enabled unprecedented hyper-competition, and all types of dynamic comparative pricing models. Yet pricing within many segments of our economy appear like something from the The Stone Age.
If you go into a white tablecloth restaurant and order the sea bass on a Wednesday, you might pay $30. If you return to the same restaurant on a Saturday the price would be the same, even though demand in the restaurant is likely to be very different. Eateries price on the cost plus model built in the industrial age; the price is based on some multiple of raw materials (or labor).
Our economy doesn’t work this way anymore. Consider the market for sports tickets. Sports franchises (the Lakers for example) set the initial price for a ticket. But the market resets the price in real time based on supply and demand. If it is a Tuesday night game against the Raptors, a seat may command a few dollars more than the face value. A Sunday game against the Celtics could command double that within a market being energized by the likes of Stubhub and other online exchanges.
Variable pricing based on nuanced supply and demand is the future, and it is the present. Marriott has historically been the most profitable hospitality company, as its revenue per available room (the industry benchmark) often exceeds that of rivals. In the case of hotel rooms (or airfares), business-to-consumer pricing models can shift daily based on numerous variables such as weather, events, or the calendar. Like it or not, exchanges that provide comparative prices are proliferating, in both B2C and B2B.
I am not advocating the companies participate in such portals: they the fastest way to commoditize an industry. What I am saying is that the acceptance of such tools points out a broader problem (or opportunity), that markets re-price based on real demand, not arbitrary prices set by the seller.
Businesses, including those that market products and services business-to-business will need to be more analytical about which products and services could and should command higher prices and which will command less. To set up a fixed pricing schedule seems overly convenient in a world where buyers have far more sensitivity over some purchases than others. A software developer may need to sell a project at a low cost to win the business, but could charge far more (on an hourly basis) for change orders that are not foreseen by the client.
Most small and mid-market companies have not done enough research to understand the relationships between the products and services they sell. If an accounting practice sells tax work and audit services, how should they price one against the other and what is the likelihood that clients will gravitate to them as a result of their pricing model or other variables? I think few really know.
Companies should test various pricing strategies to see what works best, and be more purposeful about tweaking pricing to reflect current demand.
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Posted by Marc Emmer - President - Optimize Inc.
February 10th, 2012
I have been accused of being the eternal optimist. Guilty as charged. Our economy seems to have turned a corner; employment is gaining steam and the stock market is surging. Yet housing seems to be stuck in quicksand.
I am not here to dispense any investment advice, but instead want to pass on some observations on the plight of the U.S. housing market. While much is being made of the insolvency of European banks, we should be equally troubled by the assets held by the largest U.S. banks.
Consider the prospects of Bank of America. The bellwether financial institution required a government bail out, and an infusion by Warren Buffet after its prepackaged acquisition of Countrywide’s toxic assets. The bank holds a staggering $400 Billion+ in U.S. mortgage debt, a third of it in home equity lines of credit – the true villain in the U.S. real estate collapse.
According to B of A, 5% of its mortgage portfolio assets are “non-performing” or are in default. Some have accused the bank of uneven accounting on its balance sheet.[i] Some estimates forecast as much as 39% of its portfolio having a combined loan to value rate below 100% (upside-down). It is expected that about a third of those mortgages could default, and that the banks losses for the average loan are far higher than 50%. Unlike past swings in the market, foreclosed homes have little retained value for the lender, and are boarded up or even torn down. JP Morgan, Citibank and Wells Fargo do not fair much better in terms of performing assets[ii].
Perhaps even more perplexing is weakness in the underlying real estate market. Economist Paul Dales of Capital Economics suggests there is an excess inventory of more than 1 Million residential properties. Housing supply is somewhat stagnant. In Los Angeles for example inventory has gone down 1.65% through September but prices showed 0% change for the year[iii]. As a result, housing starts are projected at a tepid 620,000 for 2012 (according to Federal estimates)[iv]
Even though money is very cheap, many borrowers can’t qualify for a mortgage under the exacting standards being employed by banks. Under tight scrutiny by regulators, we are seeing the familiar rubber band effect as lenders have gone from one extreme to the other – lending to everybody with a pulse to rejecting buyers with cash and good credit scores.
Consumer behavior has also shifted. While lower than 2010, a whopping 17% of defaults are “strategic defaults” where borrowers can afford their monthly payment, but simply walk away.[v]
What is hurtful is not only the affect that the real estate market has on realtors, title companies and mortgage lenders; but the shadow economy it supports. Construction and subprime manufacturers of everything from lighting fixtures to lumber are suffering at the hands of weak U.S. housing demand. The reality is that much of our economy’s GDP growth over the last two decades is a reflection of a false premise, that Americans can just pull money out of their homes on demand.
So as the housing market goes, so goes our economy. Forecasts of 2 and 3% growth rates are a direct result of consumer affluence being minimized by zero wage growth and declining property values.
While economists are cautiously optimistic about America’s future (as am I), we need to be cognizant that a further depression of the housing market could lead to the failure or bail out of U.S. banks which undoubtedly would reverse recent market gains and economic momentum.
[i] Here’s the Bomb that Might Blow a Hole in Bank of America by Henry Blodget – Yahoo Finance
[iv] U.S. Housing starts as published by Forecasts.org/house
[v] Overall strategic defaults on the decline-Housing Wire June 2011
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Posted by Marc Emmer - President - Optimize Inc.
January 9th, 2012
For most entrepreneurs, it has actually been a pretty good year. One wouldn’t know it based on reading the papers.
Housing and construction remain depressed. But an objective view reveals a surging Dow, low interest rates, stable energy prices and inflation that is in check. While GNP growth is modest, most businesses grew last year, and should grow again this year.
Many entrepreneurs I talk to want someone with a silver bullet to tell them which direction the economy is headed. Are we up or are we down? The constant analysis of minuscule shifts in U.S. demand is dizzying. My view is that the directional momentum of the economy is irrelevant for most businesses. It is a variable beyond our control. With no evidence to the contrary, one could assume that 2012 will be much of the same.
Entrepreneurs should be focused on revenue growth and where it will come from. Will revenue gains be with new clients, new products or services, new customers, or new geographies? What are the strategic priorities of your customers? What new service bundles will your competitors present? Every entrepreneur should remember, that the ROI within one’s existing core business typically yields a return of several times that earned in any new market.
Here are some things to look for in 2012:
Capital Investment: Of 781 companies surveyed by the National Federation of Independent Business, 24% planned capital outlays in the next 6 months (the highest proportion in the last 40 months).[i] While still relatively sluggish, expansion of U.S. manufacturing capacity should continue as entire industries (such as automobiles) shift production back to the U.S. as a result of the strengthening of the U.S. dollar.
Retail: The convergence of mobile devices and real time data has completely changed the face of retailing. Retailers will be moving towards solutions that morph the in-store and online retail experience. Consumer spending this Christmas season was high (up 6% through Q3 and with similar strength in Q4) even though joblessness remains relatively high (9.1%) and there is virtually no rise in household incomes.[ii]
Hiring: U.S. companies who have cut staff for 3 years are starting to hire again. Economist Carl Riccadonna said “We’re getting to the stage where employers can’t squeeze more water from the stone”. Remarkably, the talent war persists as many employers can not find skilled workers.
The worst is over with bankruptcies: Over one million consumers filed for personal bankruptcy in 2011, down sharply from 2010.
Credit Markets: If there is a cog in the wheel we should be worried about it is the state of major U.S. banks. Those with significant mortgage holdings (especially in home equity line of credits) of troubled assets on their books (some have even suggested at least one major U.S. bank is insolvent). 29% of homes in the U.S. are currently under water. The difference between 2012 and past cycles is that foreclosed property has virtually no value in depressed communities such as Buffalo and Cleveland. A major U.S. bank failure could reverse a year of positive projection in our confidence.
Construction: If there is an industry that has been beaten down it is construction (especially general contractors). Every project is won or lost by RFQ (request for quote). The few who are still profitable are niche players or those with a unique selling proposition or penetration in unique markets (such as those that do environmental work or projects for municipalities and state governments). While housing starts are seeing a very modest turn around, pricing will remain brutal for the foreseeable future.
Government: Presidential politics will dominate the debate, with entitlement spending and Obama care in the balance. In 2012, 30% of Medicare’s burden will shift to states[iii]. “Draconian” cuts in government spending at the Federal, State and Local level (with more than 200,000 expected lay offs in local government) will impact businesses reliant on government spending. It’s time to diversify if that is you. Outsourcing for government is an opportunity.
By now, every company should have revisited their strategic plan, set 3-5 year goals and set their budget for calendar 2012. Here is a useful New Years Proposition for you: invest your energy on building the infrastructure to support future growth, and focus on only those markets where you can dominate and remain profitable. For most businesses, this is a time to expect steady modest growth, and not to be making wild bets.
[i] A Brighter Future – Maybe by Angus Loten WSJ December 29, 2011
[ii] Oliver Wyman Market Intelligence Report by Experian
[iii] The Kiplinger Letter December 9th, 2011
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Posted by Marc Emmer - President - Optimize Inc.
December 14th, 2011
About 4 years ago, our firm began to implement an enterprise system. Several months into the project, I had to hit the abort key. The software did not gel with my team’s habits, processes, preferences and collaboration techniques. We just weren’t ready.
I, like many entrepreneurs, fell into a trap. I was romanced by a technology. Those of us committed to improvement often see tools that are sexy, and interesting and we feel like we have to have them. Technology and gadgets can be like crack.
This is why many information technology professionals are cynical about new tools, especially trendy ones that don’t fit within narrowly defined parameters. They see the potential flaws, and often act to mitigate the risks. We should listen to them, and avoid the tendency to chase shiny objects.
What I see in entrepreneurial firms is that having the right solutions is very important, and implementing them at the right time is equally important. I have seen clients wait too long to implement enterprise tools and that has hurt them (creating a competitive disadvantage). But the opposite is also true-attempting to execute technology projects based on arbitrary target dates is a slippery slope.
Successful technology implementations require a complete organizational commitment, from top to bottom. In order to affect successful projects, companies must vet a software’s capabilities, and carefully plan its implementation. The cost of failure is very high. Rushing to judgment, skipping steps and trying to cut out expenses such as scoping and training can cause dire consequences.
In most implementations, there is a single point of failure; users and contributors rely solely on IT to manage the project. A very consistent problem is that nearing completion, users realize their new toy doesn’t fulfill the company’s needs, or offer features of the software it is to replace. If users are not required to be accountable for scoping a project from the onset, they are almost always disappointed.
I once read that over 90% of ERP implementations are late, not to mention over budget. In such instances, people are quick to blame IT or their vendors, when it is often organizational inertia that blows up the project in the first place. Unfortunately, there are very few technologists that are savvy enough to write business requirements that capture everything software must do to satisfy its users. That is why the users themselves have to take a more active role in understanding how their systems will work.
As you consider upgrades to your system, whether they are minor or significant, select your system carefully, plan the steps rigorously, and implement at a point in time when your team has the bandwidth to manage the project effectively.
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Posted by Marc Emmer - President - Optimize Inc.
November 30th, 2011
Whenever they call a day “black”, you know something bad is going to happen. On the Friday after Thanksgiving, I wanted to vomit. Not because I ate too much, but because of the destruction done to the U.S. economy. As a purveyor of value creation, I find Black Friday repugnant. Even if you are not a retailer, there are lessons here for all of those fighting off commoditization.
U.S. retailing used to be the Pareto Principle in action, with as much as 75%-80% of profits being realized in the 4th quarter. The holiday season has turned into a race of who can open the earliest, and sell the cheapest flat screen TV (you could have bought a 42 inch flat screen at Best Buy for $199).
Last year I was talking to a corporate Vice President who was quite happy with herself after doing all of her Christmas shopping on a single day (I believe 4 AM is still the middle of the night if you want to get technical). I asked her, “how many items did you buy”, “17” she said. “How many were on sale” I asked- “17” she replied. The defense rests.
Retailers work on “blended margin”, the ability to attract customers with lower priced goods, only to flip them to higher margin products. In grocery stores, staples such as milk which are very low margin are at the back of the store, and higher margin produce and deli at the front in the “traffic pattern”. Black Friday represents the destruction of 100 years of merchandising evolution, and creates a frenzy of deep discounts (one shopper in Porter Ranch, CA used pepper spray on another over an Xbox).
Some may argue that the “strategy” is to win shoppers for future trips and control market share. That may work for the low price leader (WalMart), but it doesn’t work for other retailers and boutiques. Those are the retailers trying to train their customers to realize the value of their service, knowledge, and unique offerings, and may only have one or two shots at the buying crazed mother with three kids.
Here is the single most important and basic business principle one could ever communicate in a business blog: prices should be high when demand is high, and prices low when demand is low. The destruction of the industry is inevitable if retailers continue to discount the deepest when demand is high. The shame, the shame!
Here is a prime illustration of how deeply this perverse thinking has infiltrated the industry. Recently I was shopping at Macy’s, selected a garment and brought it to the register, clearly marked with the price I was willing to pay. The cashier pulls out a coupon and says, I can give you another 25% off. The defense moves for an immediate verdict your honor.
Defenders will say that the competition made me do it. What competition? China, WalMart, Best Buy? The true answer is Amazon and other online retailers who have changed the game forever, and this year kicked in free shipping to make their offer more compelling (online purchases are predicted to rise another 17% this year). So the real problem is not some evil empire. We have seen the enemy and it is us.
In order to fend off deep discounting:
- Find products that can co-exist with online purchases. How can your products compliment the deeply discounted products? An iPad offers very little margin to the retailer, but accessories such as head phones and adapters are very high margin and offer the opportunity for repeat business.
- Reinvent your model so that you are purposeful in selling complimentary goods. If you are going to sell them a gun at cost, you had better have the staff, expertise, merchandising and inventory to sell them some bullets as well.
- Teach your employees the profit formula. Most of your employees think you are making a ton of margin on those handguns, so you need to teach and incent based on your objective of selling more ammo (I would have picked a more pleasant example but I am feeling like a curmudgeon after all of this discounting).
- Provide the ultimate in-store experience that rivals or beats the online experience. Perhaps customers can see, touch and feel products that are shipped to them later, or to their loved ones.
- Select targets (product, location, etc.) that are less vulnerable to price attacks from discounters and online retailers.
Let the treasure hunters go to the competition; they are the least loyal of shoppers and you can’t make any money selling to them anyway.
With the sluggish selling season will be plenty of opportunities for deep discounts. Deep discounting marginalizes a business (unless you are the low cost leader). Retailers may need to offer products at cost, but should do so with a clear pricing strategy built on balancing market share and profit.
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Posted by Marc Emmer - President - Optimize Inc.
November 14th, 2011
Businesses constantly struggle with capacity issues. Manufacturers seek access to the ideal manufacturing capacity, and service providers look to employ the optimum number of employees. Both understand their labor spend is a key component of a company’s profit formula. So how is the entrepreneur to scale in an uncertain economy?
Those who had not experienced rapid market erosion previous to the liquidity crisis learned an important lesson; high fixed costs can be truly catastrophic when demand contracts quickly. Employers must marry labor costs with demand. There are several steps one can take to mitigate labor capacity risk:
Optimize Labor Efficiently- Most entrepreneurs intuitively understand that they should push low value activities down through (or out) of the organization. Senior managers should aim for “zero administration”, where virtually all of their time is spent improving service or profitability, and not loading paper in the copier. A good administrative assistant is worth their weight in gold. Similar thinking should apply to all; all work should be allocated to the appropriate staff based on their skill level, experience and cost.
Outsource Low Value Activities Based on Demand- The zeal for outsourcing is far from over. Organizations are not only seeking lower costs, they are looking to move resources outside their organization so that they can scale their bandwidth quickly. Look for outsourcing partners who have infrastructure that can move, (in real time) with your business. Such organizations typically have an existing core competency in the services provided, including technology and human capital geared towards executing such work.
Increase Weighting of Incentives to Total Cash Compensation-Those who only provide subjective bonuses are actually doing themselves a disservice. Practically the entire Fortune 500 have moved to some type of performance based pay. Part of the rationale is to only pay out incentives when an organization reaches certain performance thresholds. Failure to have a significant portion of cash compensation in incentives (20% or more) creates fixed costs and puts stress on a business and on employees. Fluctuations in demand require drastic action such as lay offs or furloughs.
Measure Labor Meticulously- Labor KPI’s are amongst the easiest predictive indicators to measure, and directly affect the bottom line. Examples include overtime, labor dollars per unit, direct labor, indirect labor and labor as a percentage of revenue.
Beware of External Demand Indicators- Within virtually every business segment there are external measures that provide context on future demand. Add external indicators to your scorecard/dashboarding system so that you can stay in tune to the market place. Government websites, trade associations, and private research organizations offer a litany of statistics. Plot such data against company revenue to find which numbers correlate with business growth.
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Posted by Marc Emmer - President - Optimize Inc.
