Oct 282009

Welcome to OctoBlog, a great place to discuss business strategy.

Business Strategy can be lots of things. It can be innovative, adaptive, corrective, offensive, defensive, agressive or disruptive. Sometimes it’s geographic, national, local, regional, international or even global. It’s usually long term, often medium term, but in a pinch it can be short term. Lots of folks think it’s boring, but some really have fun with it. Sadly it’s often misunderstood and under appreciated.

Feel free to post or comment on any aspect of business strategy, planning or anything else in the general business arena that’s on your mind. Any comments and suggestions are welcome!

Nov 242009

Simply put, a Sustainable Competitive Advantage provides superior business results versus competition through greater efficiency and/or a valuable, differentiated, customer offer. It has to be durable, so it lasts over time, and it has to be difficult to imitate, so the competition can’t easily copy it. It often results from continuous innovation, so that by the time your competitors have figured out how you do it, you’ve moved on to something else or added a new twist.

When you get right down to it, achieving a Sustainable Competitive Advantage is about using and developing competencies – assets, knowledge and skills – to create unique and significant value for yourself and your customers in ways that your competition cannot easily match or copy. The key is focus – focus on customers and trends to understand how to use your competencies to create value. Focus involves the entire business – the products you offer, how you market and distribute them, communicate externally and internally, how you source raw materials and manufacture products, use technical and R&D support, and how you choose which customers, markets and geography to serve. Focus is also about choosing what you don’t do, which activities don’t add value, and which customers and markets you can’t efficiently serve.

Sustainable Competitive Advantage – Nordic Example

Here is a visual approach to defining and crafting your Sustainable Competitive Advantage. This example is based on a strategic evaluation I did a couple of years ago for an unattended retail gasoline network in one of the Nordic countries. Although it’s a little bit dated, I chose this example because it clearly demonstrates how focusing on customers, carefully choosing which competencies to develop and concentrate on and which activities to eliminate can create a competitive advantage with a pretty simple business model.

First we identified critical success factors, those few things you absolutely have to get right to succeed. In the Nordic case, the company had been extremely successful with the highest unit sales in the industry, so the focus was on understanding and meeting the demands of existing customers. It was clear from customer feedback and surveys that the company’s customers absolutely wanted a low price and fast efficient service. Makes sense, doesn’t it? Who wants to pay more for gasoline than you really have to? In fact nobody really wants to buy gasoline at all. The problem is you need it for your car to run. So it’s not surprising that in addition to a low price, customers wanted to spend as little time as possible doing what they didn’t want to be doing in the first place – buying gasoline.

With the Critical Success Factors established, we started to focus on the competencies and activities that delivered the value demanded by customers.
Slide3 First price – In this market all major fuel retailers had loyalty programs that offered various classes of customers rebates on their fuel purchases. Rebates were granted on the monthly bill as discounts off the price posted at the pump. So virtually none of their customers actually paid the price displayed at the site. Our unattended company took a different approach – no rebates. Every customer paid the same price, and that price was boldly displayed on the biggest price signs in the industry. The company had a clear pricing policy and vigilantly maintained the lowest posted price among major competition, even if their moves resulted in local price wars. In reality, the cash price charged by the unmanned company was often higher than the net price some of the competitors’ customers paid after rebates, but they would have needed a computer to figure that out.

Slide4 And to ensure that customers got in and out as quickly and efficiently as possible, all of the unattended company’s locations had the same simple layouts, with all fuel grades and payment options available at all filling locations. They didn’t offer diesel, which eliminated truck traffic and the associated congestion. By eliminating trucks, their sites needed a much smaller footprint, which made it easier and cheaper to select only prime sites on major roads with easy access and egress. The network was 100% owned and operated by the company, which gave them complete control of the operation and pricing – very important if your strategy is based on price. The competitors’ sites were a combination of company and dealer operated, and ranged from old fashioned service stations to large, modern convenience stores. Most of their sites offered a range of service options, from full service to self service and pay at the pump. But because of the range of layouts and service, customers often had to search through a maze of pumps to find the location that offered their grade and preferred payment option. Not very convenient at all. By focusing on consistency, simplicity and top quality locations, the unattended company not only offered superior convenience to customers, but had a much leaner organization and lower costs than their competitors, which is also important for a successful low price strategy.

Slide5Of course the most important element in any business is execution. The unattended company had a clear, simple strategy that was well understood by everyone in the organization from the CEO to the receptionist. The workforce was empowered and highly motivated. They developed automated systems using cell phone text messages to enter data remotely and allow rapid implementation of price changes, even remotely updating price signs. They were highly focused on keeping sites clean, well maintained and operating 24/7.

The Big Picture

By putting everything together you get a pretty good picture of how this company was able to consistently maintain the highest unit fuel sales in the industry and enjoy superior financial results while most of their competitors were losing money.

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Of course, the success of the unattended company was readily apparent to the competition, and many attempted to copy the unattended concept. How difficult could it be? But none of those attempts gained traction with customers, because in every case the imitator missed major elements important for success but not obvious to outsiders. Some of the major competitors set up unattended networks under a secondary brand, but kept their rebate systems. Some converted failed full service sites to failed unattended sites. Location does matter! Some independents tried unattended sites with even lower prices, but chose poor locations and failed to keep sites clean, open and well maintained.

One last point – Looking at the business this way can highlight gaps or potential for improvement. In this case the company identified the opportunity to use payment data from customers to promote improved customer interaction and feedback.

I have used this approach with many different businesses, and it almost always generates discussion, argument, insights and ideas that you don’t normally get with traditional strategic analysis. Often you end up with more green bubbles (gaps and opportunities for improvement) than blue ones. The green bubbles then become your short and long term strategic focus to strengthen your competitive position and create that elusive Sustainable Competitive Advantage.

If there’s interest, I’ll post some other examples of this type of analysis in different businesses and industries.

Tell me what you think!!

Nov 112009

Business schools teach that the best measure of the value of a business is the cash that’s generated by the business. This is usually defined as the net present value (NPV), or the current value of the cash flow the business will generate in the future. So according to the textbooks, selecting between strategic options is easy. You simply pick the one that generates the highest NPV, because that’s the one that maximizes the value of the business. But here’s the problem – We don’t know for sure the cash flow the business will generate in the future, because we don’t know for sure what the future will look like.

Which way

That’s why it’s important to understand risk and uncertainty, and to test strategies against alternative views of the future.

A detailed, robust financial model based in Excel or some other spreadsheet or financial software is a valuable tool for evaluating strategic options and monitoring business performance. A well constructed model can allow you to isolate key business drivers and use statistical techniques to assess the relative risk of strategic options.

Let’s say you want to expand your plant, but there are too many factors you can’t predict to make you comfortable with the decision. The cost of steel and other materials has skyrocketed, and you’re worried about cost over-runs. You’re concerned about how your competition will respond, and worried that you may have to reduce prices to expand sales. You’re also concerned about rising fuel costs, because your key competitor is located in an oil producing country that regulates energy prices to support local industry, and you have to pay market prices. A plant expansion would improve fuel efficiency, but will it save enough to offset investment costs and potentially lower margins? You’ve had an analysis done based on your “best guess”, and both the expansion and non expansion options yield the same NPV.

The chart below is an example of a statistical tool that can help you make the decision.

Which way is the future

This is a “Cumulative Probability” chart that shows NPV calculations for each option based on a range of possible outcomes for major future uncertainties. In this case, the major uncertainties could include investment costs, energy costs, and margins. For each uncertainty the project team selects high, low and medium probability values, so that they are 90% confident that the actual outcome will fall within the selected range. So instead of making the strategic decision of whether or not to expand based on the best guess of one value for each key uncertainty, you can make your decision based on a range of possible outcomes that factor in the risk associated with all identified uncertainties. In this case, the red line shows that the “Expand” option has a 50% probability of yielding a better outcome than the “Don’t Expand” option. However, it has a 20% chance of yielding a negative NPV, or actually reducing the value of the business. The blue line shows that the “Don’t Expand” option yields a top end NPV about $50 MM below the “Expand” option. But it also has a 50% probability of yielding a better outcome than the “Expand” option. More importantly, it has a zero probability of yielding a negative NPV and destroying value. Which option would you choose?

To find out how we can help you with your strategic decision making give us a call at 832 748 1900.

Nov 052009

In the previous post I probably left out the obvious, which is that the best source of information about your customer is your customer. Collaborating with customers to optimize your respective supply chains or manufacturing processes can allow you to build stronger customer relationships and loyalty based on more than just price. But customer collaboration can be complex and costly, so before you get too involved you have to be pretty sure that the potential benefit is large enough to justify the cost and effort. Is your business with the customer substantial? Is there potential to reduce your combined inventories? Are there technical adjustments that could reduce manufacturing costs or improve productivity?

You also have to be aware that it takes two to tango. Your customer has to see the potential benefits and commit to allocating resources to the effort. You both have to be willing to share data, some of which may be proprietary or confidential, in order to identify and allocate the benefits of collaboration. Customers who take a confrontational approach with suppliers to get the best price often feel that information is power, and resist sharing information with suppliers for fear of compromising their negotiating position. And this brings up the issue of the issue of trust. Trust is important in any relationship, and that includes the customer – supplier relationship. If you can’t trust the other party to provide accurate data, keep your data confidential or not use it to beat you or your competitors down on price, you probably don’t have a good basis for successful cooperation.

Despite the difficulty, customer collaboration can be very beneficial, and can help you create a competitive advantage. I have been involved with a couple of very successful collaboration efforts in the last few years. In one case we began working with a customer to optimize the supply chain with limited success when we stumbled on opportunities to improve manufacturing costs. By re-focusing our efforts on understanding our respective manufacturing processes, including constraints and real costs, we were able to substitute products that cost much less to produce in some of our customer’s applications without impacting the quality of their finished product. We significantly reduced our manufacturing costs and shared the savings with the customer. With another customer, we worked together to review their specifications, which hadn’t been changed in years, in light of our manufacturing constraints and costs. We were able to make adjustments that significantly reduced our raw material costs and passed some of the savings to the customer.

In both cases, we generated substantial bottom line improvements for ourselves and our customers well in excess of anything we would have achieved in the normal course of business and price negotiations. In addition to the substantial bottom line benefits, the interaction at the technical, commercial and senior management levels significantly enhanced our relationships with both customers, and made it more complex and costly for them to change to another supplier.

To find out how we can help visit our website www.octopusinternational.com, or give us a call at 832 748 1900.

Oct 292009

Business analysis is all about better understanding yourself, your customers, your competition and your environment in order to make better business decisions and develop strategies that create value by improving your competitive position. Many companies place too little emphasis on business analysis. Maybe they believe they know all there is to know about their customers because they’ve been in business for a long time and get together for golf at least once a year.

But the golf course and negotiating table are not the best places to get insight into your customers’ economics, which is what you really need to understand. If you ask customers what’s important to them on the golf course, they will probably answer that they want it all – lower prices, better quality, better service and better credit terms; or maybe they’ll joke that they’re happy as long as you pick up the tab for dinner. At the negotiating table you might get the mistaken impression that only price is important to your customers.

The trick is to understand how your product or service really impacts your customers’ economics, creates value for them, and makes their own products more valuable to their customers. The best source of information about what’s important to your customers may well be your own employees. For example, employees who are involved in technical or supply chain collaboration with your customers usually don’t get involved in price negotiations, and probably have a pretty good insight into things other that price that are important to your customers. Sometimes, particularly in the case of consumer products, where you don’t have direct contact with end users, outside customer surveys and market research might be your best sources of information. Annual reports, financial statements, technical journals, industry consultants and former employees of your customers are also potential sources of information about your customers’ economics. The bottom line is that by understanding your customers’ economics, you can focus on activities that create value for them, and avoid activities they don’t really need or value. It doesn’t make sense to develop expertise in distribution if your customers prefer to handle their own shipping.

Understanding your competitors is just as important as understanding your customers. The table below demonstrates an approach to ranking the relative competitive strengths of your competitors based on the needs of your customers. In the “Strength of Offer” section, choose the factors that are important to your customers, and reflect how your customers might rank their suppliers in each category on a scale of one to five. The “Strength of Company” section considers factors important to each company’s staying power, financial strength and cost position. If raw material supply is an issue, or access to low cost energy is important in your industry, you should also include these factors. To come up with a total score for each competitor, it’s useful to weight the factors for their relative importance. Quality and price are likely to be more important to your customers than technical service or credit terms.

us

In true consultant’s fashion, it’s possible to chart your competitive position on a matrix (every consultant needs a matrix!).

them

This chart provides a good visual overview of the market and your relative competitive position. However, the value of this analysis is not in the visual impact. The value is in what you learn about yourself, your customers and the competition as you go through the analysis and debate that’s necessary to complete the exercise. Involving as many people as you can in your organization who have direct contact with customers at any level is very useful in getting as complete a picture as possible of your competitive position. This knowledge is essential to help you develop strategies that move your bubble to the upper right corner and create a sustainable competitive advantage.

To find out how we can help visit our website www.octopusinternational.com, or give us a call at 832 748 1900.