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Occasional thoughts and, sometimes, useful ideas.

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Lessons from Japan

Honda’s approach to developing managers.
by Michael Taplin

In 1978 my company was invited to create a management development programme for one of Honda’s overseas subsidiaries, so I set out to learn about the Honda culture. My job was to embed the core culture of Honda into a training and development programme that fitted into the local culture. I found it a fascinating learning experience.

I found I was working in a management structure totally different from anything I had previously experienced. The local Managing Director was an expatriate Japanese, presiding over a group of divisional managers who were all local staff. The divisions were essentially organized around product groups, a mirror image of the structure in Japan. Each division manager had a young Japanese assistant whose role was to provide the communication connection with Japan, and to facilitate access into the Japanese systems. These assistants were essentially high-flying management cadets on their first overseas assignments, and they had no executive roles.
The local Honda organization had a permanent queue of people who wanted to join Honda, and would take any job that became available. When they proved themselves capable and motivated to take on more responsibility, they would be promoted to a supervisor role.

Thursday, 09 July 2009 22:24

Do black swans influence marketing success?
Michael Taplin contemplates risk and return from a marketing perspective.

The purpose of a forecast is to help you manage your market risk; primarily, the risk that your sales will be lower than your budget. Few businesspeople worry about sales that exceed budget.

My bizlearn whitepaper on forecasting for product and service businesses included a discussion on discontinuities in trends. This newsletter takes that brief discussion to the next level.

I have recently read a fascinating book “The Black Swan” by Nassim Nicholas Taleb, and it prompted me to think more deeply about what are the real risks we take in marketing our businesses, and how we can manage them better. Taleb examines at length his idea that Black Swan events govern the operation of markets, and the opportunity for super profits or the flip side of the coin, disastrous losses. Black Swan events are the same as what I have called discontinuities.

For thousands of years, all swans were white, or so we thought. Then our forebears explored Australia, and their long-held belief was turned on its head. The present credit crunch is a similar phenomenon. A few economists predicted that overvaluation of global property markets would lead to a major economic correction, but the rest of the world believed that the good times would last forever. In 2008 the black swan flew into view and the collapse has been dramatic. The consequences affect everyone. The fact that it happened before, in 1929 and 1987 did not help us to avoid the disaster. Taleb makes the point that we are bad learners, and cannot predict black swan events,

Discontinuities are like earthquakes; they are unpredictable, and they change the landscape. Trend analysis and trend based forecasts give us no ability to predict the occurrence of an earthquake or black swan event. Living in New Zealand, aka “the shaky isles” we expect earthquakes to occur, when the idea floats to our conscious level, but we live our lives as if the inevitable earthquake will not happen where we live and work. Most of the time we are right, and we blithely ignore the consequences of being wrong.

We run our businesses the same way.

Unexpected events can also be beneficial in business. When a new product happens to coincide with a major shift in the collective consumer imagination, sales take off, unpredictably, and none of our conventional forecasting models help us to predict this.
Successful businesses are the ones that encounter or create more black swans.

Let us examine this proposition from a marketing perspective. Here is an example from my casebook of a black swan, and the story of how we found it.

A small designer and manufacturer of high-class knitwear grew steadily by extending its distribution network. Then the sales growth took off, and because it was not predicted, the business was unable to supply the demand. The next year sales declined back to the long-term trend line.
What happened? Is it possible to repeat this event?
Sales analysis revealed the cause. A single new style took off that year, and supply of raw yarn could not keep pace with demand, Something about the style captured the public imagination, and it became a hot seller. Once the stock sold out, it was a dead product, a dying swan. Demand had been satisfied. Could this have been predicted? The short answer is NO. This is the nature of fashion businesses. It was a black swan product. The benefit was huge, but short lived.
Fortunately the business’ future was not dependent on the black swan product. Sales for the standard product range continued to grow at a steady rate. The question was “How can we create a steady stream of hot selling lines?” “Can we change our product development process to generate at least one a year?”

I now realize that was the wrong question. The very nature of black swan products means that they cannot be predicted. A black swan for the marketer is a serendipitous event; something in the design happens to connect with some unexpected shift in consumer preference.

Perhaps the right question is “How can we increase the probability that we will trip over some more black swans?” or “How can we change our design process to create more opportunity to connect with the public imagination?”

This is what the best small fashion businesses do, and if successful, they become fashion leaders.

Another example, on a larger scale …..

Macintosh, iMac, iPod, iPhone. Steve Jobs.

Each of these words signify a black swan. Apple has lurched from slow decline to dramatic turn-around at regular intervals in its history. Every time it seemed doomed, Steve Jobs engineered the turn around in Apple’s fortunes. The man is a black swan.
But what has he really done. He has created a product development process that consistently, over the last 10 years, has captured the public imagination. You can analyse the elements as much as you like, but analysis will reveal only the ingredients of the recipe. You can buy the ingredients, but that does not reveal how to bake the cake. You cannot buy the creative, intuitive sense of the next big thing that Jobs personifies.

Apple consistently creates products that its loyal customers love, with a passion. Ask them about the ingredients and you will hear words like elegance, style, simplicity, personal productivity, ease of use. Ask people outside the Apple world and they will use words like power, speed, range, capacity, features and all the boring bits.

So, what can you do?

An ideal solution would be to secure the long-term future of the business with products or services that have a steady underlying demand. These are the boring things that customers cannot manage without, even in a recession.
Then you can build a culture in your organization of creativity and innovation, and reward experimentation and risk taking. You can put good ideas out there and hope to get lucky. It won’t happen often, but when it does the rewards are great. But don’t bet the business on the rare hope of finding a black swan. Don’t let the task of achieving your sales budget depend on a black swan. You need to balance the past and the future. The yin of your strategy requires reliable milking of the cash cows in your portfolio. The yang relies on generating a source of new ideas, then picking and backing the one (never two or three) that attracts some intangible element in the consumer psyche, and explodes.

Nassim Nicholas Taleb has applied this to his investment strategy. He recommends putting 85% into the safest, lower yielding securities, government bonds, and the balance into the high risk, high yield investments in the knowledge that wiping out 15% of your capital, in a black swan event, will not sink the business. This is a large yin and a small yang. The payoff for the small yang is so high that the low probability is acceptable. If you have no high risk, high profit investments, you cannot perform better than the conservative average. If you have only high risk, high profit investments the next black swan event will sink you like a small boat in a tsunami.

Is there a business that is good at this?

I suggest that you take a close look at 3M. It is a high performing business that earns most of its solid cash flows from long established products, and constantly backs new business ideas that emerge from an innovation culture that pervades the whole organization. One idea that pervades 3M is “never kill a new idea.”
The best description of this successful strategy I have read is in Jim Collins and Jerry Porras’ “Built To Last”, pp 152-155. I commend it to you.

In summary …..

The tricky bit is to apply this philosophy to a smaller business, with limited resources and people. To do it you need a few people whose heads can work in both spaces, without succumbing to bipolar disorder.

Most small businesses are started on the yang side of the ledger. High risk and high failure rates are the natural territory of the entrepreneur. As they balance the ledger by acquiring conservative yin they become more risk averse. To be high achievers they need a portfolio of internal investment in their future that maintains the 85:15 ratio, and puts them in the way of finding their next black swan product.

It can be done with a limited product range, but it requires conscious effort to build a product strategy that combines the yin and the yang. Without the yang you cannot expect that your black swan products will emerge. You have to have some “skin in the game” to stand a chance of winning.

I suggest you give some real thought to how you can create a product portfolio with the right mix of cash cows and a few prospective “black swans”. But don't bet the business on your yellow goslings!

A Community of Interest
Michael Taplin offers a lesson from his apprenticeship.

Shared interests bind people together to form a community. If we consider an organization as a community of interest we can transform our approach to management and governance of any organization. When we are considering any action we simply ask “How does this serve our community interest?”

An example from my apprenticeship years may help to illustrate the power of this approach. As a young man I was appointed to a directorship of a manufacturing company in Australia. The company employed 250 people mainly from diverse migrant backgrounds. We had people from Italy, Malta, Greece, Lebanon, Turkey, Cyprus and England with a sprinkling of others, even a few Australians. Most members of our workforce spoke limited English, but adopted English as our only shared means of communication. I have never worked in a more culturally diverse organization.

The amalgamation of three independent, purchased businesses and relocation to a new factory created real turmoil. All 250 of us had to learn to work together. Our small management team was focused on important issues like producing goods, looking after customers, and trying to turn a loss into a profit. In August of our first year, our factory manager was approached by an informal group of workers with a simple question “What are we doing for our Christmas Party?”

Our factory manager brought the question to us, and received a blank look. Our response was very simple, “Tell them they can do what they like and we’ll pay for it.” We had more important issues to occupy our minds. Only later did we realize we had written a blank cheque.

The lost art of supervision

Wednesday, 08 April 2009 22:11
Almost every business disaster of recent times has lack of supervision as a root cause. Yes, this is a bold statement, but to demonstrate the essential truth of the proposition I need to start from the beginning. What do we mean by supervision in a business environment? Supervision means literally to oversee or to watch over; “from above” is implied. Who was supervising Bernie Madoff? Certainly not the US financial regulators, or the SEC, and his audit arrangements have been revealed to be a sick joke. Who was supervising Kenneth Lay and Jeffrey Skilling while they built the fraudulent empire that was Enron? We relied on the governance of corporations by a board of directors. In too many failed corporations we find little evidence of governance from a group of directors dominated by a powerful chief executive who also held the position of chairman. As we pore over the entrails, we find no trace of supervision at the higher levels of the corporation. Supervision has become deeply unfashionable.
Read more...

Focused strategies improve profit prospects

Tuesday, 10 March 2009 22:22

..... even in a recession.
When things are going downhill and the brake is not working it is tempting to cast a net wide to find ideas that may work to stop the slide. Can you use 25 ways to beat a recession. If you tried them all, chaos would result.

This is a form of PANIC, and it happens because the things we did in the good times don't work in the present recession. As you have heard, doing more of the things we always did will only get us more of what we always got. That does not look like a recession-proof strategy to me.

I am reminded of a few lines from the classic BBC comedy series "Yes Minister". When Minister Jim Hacker was facing a crisis he told Sir Humphrey "Something must be done. This looks like something. Therefore we must do it."

Strategy in tough times is about finding the few things that are most likely to generate a result, and configure the business for survival, then look for growth opportunities that will kick in when we start to move back into a growth phase. The real question is "How do we find things that we can rely on to work? We have limited resources, so anything we do has to fit within that space".

If you believed me that there are only 5 ways to improve profitability of any business the choice would be narrowed right down. I know that you will find that only one or two ways will be relevant to your business, so that immediately improves the focus. Now you can zoom in on ways to put the best idea into action, and I am sure you will find that complex enough. As I pointed out most businesses can do Three New Things (check out my blog) in any given year.

Where do you find opportunity?

Opportunity always occurs at the intersection of your best (fastest growing, most profitable) market segment and your capability. It is always easier to find new customers where you are known and this is always going to be close to your established customer base. Look for this initially by segmenting your customers by profitability, or contribution. Look closely at the characteristics of the top 20 or !0% of your customers. Rank them in order of importance, either sales or gross profit. Are some of them different? What distinguishes them?

An example may help explain this:

I worked on a marketing strategy project for a steel distributor. I looked at their top 20 customers out of a list of 3,000, checking annual sales first. I noticed that 0.7% of customers generated 15% of total gross profit. A closer look at their names told me that 5 out of the top 10 were redistributors. I asked the sales team about this. "Oh, we don't like them; they are competitors."

I took a closer look at the top 100, and found that 15 were local redistributors. I noticed a long tail of very small infrequent customers. GP analysis showed that they were unprofitable.

"What would happen if we gave our unprofitable tail to our best redistributors?" This was a radical idea but it did not take long to try it. They loved my client and sales to this small group grew dramatically. My client was shipping truckloads at good margins instead of dealing with unprofitable small orders. Profitability soared. We made some other small changes to make it easier for redistribtors to do business with us. We were the only people in the industry who loved redistributors; competitors lost business hand over fist, and were happy because those horrid people had gone away. When the market share numbers came out they realised what had been done to them, but it was too late.

This was a great marketing idea because no-one believed it was possible until it was too late. Where di the idea come from; a simple piece of analysis of sales records to find a new market segment. We plugged the numbers into the KPI model to prove it would work.

There are other strategies. You will find them if you know where to look. There are only five places to start looking. I can show you where they are and help you pick the right place to start.

You can test your ideas before you start on the work so that you know what has to be done to make them work. The trick is to use your KPI model to test them, and I will give your my basic model if you register for a free tutorial some time over the next 4 weeks.

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