(Practical Solutions to Difficult Problems) Advice from business’s best thought leaders made easy to understand and practical to implement - Jeremy Gray
Season 6 Show 1
Advice from business’s best thought leaders made easy to understand and practical to implement
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Today we are going to review 3 articles, one from McKinsey discussing technology and the retail sector but the article is relevant to all businesses, one from HBR on why strategies fail and I will focus on mistakes entrepreneurs often make. And then another article from HBR that discusses a topic that is so unusual you wonder how they came up with the idea to conduct research on the subject.
How Tech will revolutionize retail. McKinsey & Company. John Straw. A senior advisor to McKinsey based in London, a serial entrepreneur and technology expert.
In this McKinsey article John Straw is focused on larger corporations but there is much in what he says that is applicable to entrepreneurs and not only in the retail sector.
Mr. Straw recounts a story when he was talking with a Silicon Valley investor who said “You know what I’d really like from one of my startups? I’d like a dollar in revenue with a hundred users engaging a thousand times a day with a product, rather than a thousand dollars in revenue with a few hundred users engaging one, because that is where I am going to place my bets – that level of engagement.
The point this investor was making is that a high level of engagement shows you have got the product right. Where people come only once it is the marketing you have got right. And marketing does not scale but products can. Continuing with the theme of getting the product right Mr. Straw mentions the value of prototyping. In this case this does not mean a prototype that does not see the light of day beyond a design studio. These are prototypes that you get into the hands of consumers early in the development stage and judge the level of the consumers engagement. Use feedback to improve the product. Producing some prototypes need not be prohibitively expensive; there are many design and build companies that can help. Do not try to get the prototype perfect, get a functioning version and get it into the consumer's hands.
You may want to consider setting a self imposed deadline for the launch date. There is nothing like a deadline for focusing the mind. Backward planning will help in this regard. I talked about backward planning in Show 4 Season 4 as part of the series on strategic planning. In summary you will identify when you want to launch your prototype and all that needs to be done to get there. You then work backwards to today and build what is effectively your to do list with milestones. If you are disciplined this will keep you on track and enable you to celebrate as milestones are reached.
Based on his experience John Straw says the first lesson he would draw is to be sure that in the early days you have something tangible to show. Show and tell is very important if you want to gain financial traction. Show, tell, engage.
Augmented Reality AR and Extended Reality are creating opportunities for retailers. John Straw recounts how IKEA quickly took advantage of the AR feature on iPhones to create an App that enabled customers to see how a piece of furniture would look in their own rooms. IKEA went further by finding a company whose technology could measure a room and allow the consumer to see how a complete range of furniture would look. The big news is that Apple is rumored soon to launch a range of XR glasses. Based on Apple’s track record these glasses will be a significant advance on anything that has gone before. If you sell high priced items it is time to start thinking of what AR/XR can do for you. You can be sure there are developers working on Apps for Apple products already. If you could work alongside a developer as a beta test site, you could be the coolest retailer in your town.
The progress in virtual assistants and chatbots will provide opportunities for retailers to allow customers to interact with virtual assistants with no limits on their knowledge and experience. Chatbot technology is not where it needs to be today. I am sure you have had frustrating conversations with chatbots. Where you ask a question, get an unsatisfactory answer, so you try to ask the question another way, only to get the same unsatisfactory answer. I know there are challenges. I once listened to a developer of Chatbot technology for IRAS, the Singapore Inland Revenue service and he talked about the difficulties of handling local dialects. However we can expect virtual assistant and chatbot technology to improve. A retailer or anyone who hopes to implement such systems needs to be thinking about how to capture the knowledge and experience of their employees. Especially those nearing retirement. And not just what works but what has failed in the past. I am not sure I subscribe to the “there is nothing new under the sun concept” but there are very few truly innovative ideas. With my long tenure with the MNC I worked for, I would often be presented with new ideas that we had tried years ago and failed. When I was presented with such ideas I never dismissed them out of hand. I would spend time talking through our past history along the lines of we tried that, but we failed because of X or Y. If you can develop a way to overcome X or Y then you could have a real success on your hands. It is not too soon for you to start to gather this information and experience. I do not like to think of this as data as that implies a rigid format, think of it as knowledge.
Another topic that Mr. Straw feels strongly is that he would not invest in a company being led by someone under 50. He admits this is an arbitrary number but believes the experience of been there done that is important. Now you can point to many companies founded by 20 somethings that have been successful, but it is likely you will find there is an experienced mentor in the background. As my fiftieth birthday is a dot in the review mirror I, of course, value experience. But help is available through many organizations.
Why Do So Many Strategies Fail? By David J Collins an adjunct professor of business administration at Harvard Business School.
This is an excellent article that looks at strategy from both the perspective of the disruptor start up and the incumbent needing to defend its business as it faces new competitors.
You will have heard stories of young ventures who raise millions of dollars, attract tens of millions of customers, achieve lofty market valuations only to collapse when they cannot figure out how to turn a profit or hold off competitors. WeWork might be considered an example of this type of failure. Certainly, WeWork created a hype that was sold to experienced investors such as Japan’s Softbank. But the barriers to entry for this business model are low. You or I could rent a building, put in high-speed Wi-Fi, add some recreational facilities and a beer tap and hey presto we have a competitor to WeWork.
Mr. Collins believes that failures occur because the CEO’s approach to strategy does not take in all the aspects of the business. The article mentions two different types of mistakes. The CEO identifies ways to generate value by addressing unmet customer needs, yet do not understand what it takes to capture a sufficient portion of that value for themselves. Getting your pricing strategy right is vital. Many start ups take a loss leader position to gain customers and establish themselves in the market. This is acceptable if you have a clear strategy of how you will transition to a pricing model that will deliver you enough profit to grow your business and deliver an adequate return. WeWork did not succeed in this aspect. In contrast in Asia Grab which is the Uber of ASEAN has managed to get this right. When Grab started its car hailing service, I was getting rides for as low an S$2, about a USD1.50. I knew this was clearly unprofitable for Grab, but they gained my loyalty. Those $2.00 fares are a distant memory and I now pay an economic rate for my rides. Sometimes when the bars empty in Singapore at the covid mandated 10:30 PM closing I pay a significant premium but I accept this as part of the price of having a reliable car hailing service whenever I want to go somewhere. If you are going to start with a loss leader pricing strategy make sure you know how you will pivot to a profitable pricing strategy without losing your customer base.
The other mistake that start ups make that Mr Collins identifies is that the company gets seduced by the initial success and fail to invest in the capabilities needed to sustain long term competitive advantages. In the excitement of business start up it is hard to step back and think about the longer-term business strategy. Success builds confirmation bias, what is working now will always work but customers’ needs and expectations change and mature. Jawbone the bluetooth headset manufacturer might be seen as an example of this type of failure. In its heyday its Jambox product line was known as America’s favorite bluetooth speaker. But a pivot towards health tracking without enough care being taken about product quality led to its downfall. This is despite Jawbone having attracted nearly US$1 billion in funding. As they say, hardware is hard to get right.
How does Mr. Collins suggest a CEO develops a well-structured strategy.
Firstly, he says you need to identify opportunities. As an entrepreneur you probably have already done this. You have your idea which you have tested and know there is an opportunity that your product or service will succeed.
The next step is to find the best way to tap into that opportunity. You need to develop a business model that maximizes the potential value of your business concept. Understand the value you bring to the customer which will identify the price the customer is willing to pay and for the product or service and the size of the market. Determine what you need to bring the product or service to market, the assets needed, both hard and soft, the materials required, this will help you understand the cost of the product. Hopefully the price the customer is willing to pay, or at least you believe the customer is willing to pay exceeds the cost. The model should include how you will charge for your product or service. One off purchase? Subscription Model? Freemium?
To grab the value in the short term requires designing a strong competitive position. Ask yourself why will I win in the marketplace? The article says you should assess the industry’s attractiveness. I assume you have already done this and do not plan to invest in a dying industry and the structure allows you to make a decent return. Understand your competitive position, can you sell your product for less than the competition? Do you deliver a benefit that your competitors do not have? And is it valued by the customer? Is your product “cooler” than the competition? Ask yourself why should a customer buy my product or service? Finally assess how the competition is going to react to your market entry. You may be able to launch unnoticed by your competitors but once you start achieving success they are going to react? Not mentioned in the article but if you believe the competition will quickly respond to your market entry, one strategy is to have an improved product or service waiting to launch once the competition copies your initial offering. As you develop your offering keep one or two features back that you can launch later. You know, our product would be even better if….. This ties back to the idea we talked about in the first segment about managing product development cost via a self-imposed deadline. Avoid the delays caused by scope creep but keep the ideas available for version 2.
Having established a competitive position that allows you grab the value you need to be able to maintain it. This means being attuned to the changing business environment. Monitoring threats and opportunities. These can come from many areas, the actions of your competitors or governments, external factors, covid is the obvious example, but sustainability will become more important over the next few years. Will consumers insist on industries being net zero? Diversity targets etc. What is going to be the next important trend. I once attended a presentation by the business guru Ram Charan and during that he recommended that you should skim read a business related newspaper each day with the objective of identifying trends. He suggested the Wall Street Journal or London’s Financial Times. Years later I still follow this advice but with a twist. I read both the Wall Street Journal and the New York Times. Two papers with vastly different points of view of the world. This helps me see both sides of the argument. In the UK you might consider contrasting the Financial Times with the Guardian. You want to learn what the people, and therefore your customers, are thinking, not just have your own opinions reinforced. In today’s world maybe social media – what’s trending, could be a source of information, but to my mind this is usually pretty short term. You need to identify long term trends.
The article discusses strategy mistakes the incumbent companies make when faced with new competitions or technologies. As you are an entrepreneur, I will skip that part. and move to some of the mistakes identified by Mr. Collins that you should be aware of.
The more value your business model creates the more competition you will face. Netflix has been copied by many competitors including the powerhouse Disney corporation. Encouraged by their immediate success entrepreneurs often spend on an investment that never yields a decent return.
In 2014 Facebook paid $19.6 billion for WhatsApp. At the time WhatsApp’s revenues were running around $32 million and it was losing money. Today WhatsApp faces many free messaging services and to date Facebook has failed to monetize any of WhatsApp’s 2 billion users.
Getting the balance right between adjusting to market changes and chasing the latest fad is an area where the entrepreneurial CFO needs to provide guidance. Understanding what strategy is and what are tactics is key. In my series on strategic planning in Season 4 we covered this aspect is some depth. Companies can lose direction because they mistake tactics as strategy. Strategy is where are we going? Tactics are how do we get there? Equally CEOs need to identify when tactics warrant their attention. When tactics involve multiple functions, conflicts of interest are likely to arise and a CEO may well have to step in to provide direction. Incentive programs if not planned properly can disrupt execution of plans if there are conflicting goals.
Chasing too many opportunities or continually changing direction can undermine the ability for companies to develop the organizational capabilities needed for success in the long term. The article cites the example of Nasty Girl an early mover in online fashion retailing that went bankrupt after it pursued too many expansion efforts. This overstretched the organizations capability which combined with a lack of effective management led to customers looking elsewhere for their fashion items. Launching initiatives without thinking through the resources required is a mistake that management of companies large and small often make. Somehow the CEO or senior manager think because they decide on a new initiative the organization will have the ability to follow through using existing resources.
A solution proposed is that CEOs encourage experimentation within clearly establish bounds. In his article Mr. Collins recommends that each project should have a clear objective process, a timetable, metrics, milestones that trigger cutoff decisions and after-action reviews. All good stuff but notice there is nothing about resources. Maybe the assumption is that the resources will be made available but all too often they are not or they are so tightly restricted that they are useless.
If you have a good idea that you believe in, make the resources available. I worked for a company where the senior management where always talking about finding the home run project, the big swing. I know it’s not smart to use a baseball analogy with a global audience, but I felt they always struck out looking. That is, they never had the courage to make the commitment to any project, the big swing. As a result, nothing never moved forward. They never got off home plate to continue the analogy.
Good strategic planning keeps a company pointed in the right direction, If you want to know more please listen to 3 shows I did on the topic of strategic planning during season 4. I think you will find them helpful.
CEOs with unusual names pursue unusual strategies by Amy Meeker HBR.
Can it be true that your name can influence the strategies you implement as CEO? Professor David Zhu of Arizona State University thinks so, and he has the research to back up his claims.
Dr Zhu started with the findings that children with unusual names feel that they are different from other children. And as our perceptions of ourselves are formed during childhood this belief that they are different carries on into adulthood.
Dr Zhu mapped the first names of around 1200 CEOs of the last nineteen years versus the popularity of their names.
They looked at six ways in which companies allocate resources: advertising intensity, inventory level, purchases of new plant and equipment, R&D intensity, nonproduction overhead, and financial leverage. All have a strong effect on a firm’s performance, and all are likely to be under the CEO’s control. For each dimension they calculated the absolute difference between what a given firm allocated and the average allocation of all other firms in the same industry in each year. From this a composite measure of strategic distinctiveness was developed. If a CEO’s resource allocations across those dimensions are very different from the industry averages, the company is doing something pretty unique. The more the unusual the name the more unusual the strategy. An unusual name like Elon comes to my mind.
Unfortunately, the research did not identify if these unusual strategies led to unusual success, so the jury is out on that one.
But if as a Board of Directors you are looking for someone to shake things up a bit then hiring someone with an unusual name may give you an edge.
And what about your competition? If the CEO of your competitor has a distinctive name he or she is more likely to make a move you haven’t seen before. That leader might inject a lot of surprise into the competitive environment—and a lot of new energy, too.
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