S6 Ep 6 Advice from business’s best thought leaders made easy to understand and practical to implement - Jeremy Gray
Season 6 Show 6
Advice from business’s best thought leaders made easy to understand and practical to implement
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Quite a varied selection of articles for you this week. Starting in China, we look at which overseas companies are winning in China and which have failed. It is hard to ignore the second largest economy in the world, and many are forecasting that China will soon overtake the US to become the world’s number one economy. Although trade relations with some countries and China have become strained recently, there are signs that tensions will ease with the change of administration in the US and the realities of business. Although countries such as Vietnam are aiming to grab a piece of the markets that used to belong to China, Vietnam with its population of 100 million cannot replace China with its population of 1.3 billion.
The next article may seem a strange choice for a radio show that focuses on helping entrepreneurs. It comes from McKinsey’s Public and Social Sector Practices. It is called Moving teams from campaign to transition: Five things to get right. But when I read the article, I saw it contained a lot of useful advice for us small business folks. The transition from campaigning to governing requires a rapid shift in direction, the creation of a significantly expanded team, and the need to produce visible results in a short time frame. The same challenges you are likely to face when you are starting up, grabbing a new opportunity or reacting to a challenge that threatens your business.
We will stay with McKinsey for the final article. Getting real about mitigating price inflation. It is written with the chemical industry in mind, but like most of the articles I read and cover on my show there is something for everybody.
Which Companies Are Winning in China? From Knowledge@Wharton written by Lele Sang and Karl Ulrich
I selected this article because it is focused on the second largest economy in nominal GDP in the world, China. China already exceeds the US in PPP, purchasing power parity, and is expected to be larger than the US in nominal terms in a few years’ time. It’s hard to ignore China. I first worked in China in 2006 and last visited there in December 2019 when I went to, the now famous, Wuhan to visit one of our plants in nearby Ezhou. I have had some wins, including a successful acquisition. I have had some losses including closing down a business because the local competition was able to respond to every move we made. We would be winning for a while, then the Chinese companies caught up and under cut us. Eventually like an army facing overwhelming forces we retreated from that business.
You should note that this article was written in January of this year, so the Covid impact was ongoing, but this was before the most recent Government clamp down on Tech Companies and Teaching Institutions.
Although the article is focused on China, there are lessons for us whenever we are entering new markets at home or abroad.
The author’s have generally focused on less well known stories such as Sequoia Capital and Norwegian Cruise Lines but the first company they looked at was Amazon, which did not succeed in China. We will look at some of these stories later in the show.
The article describes three necessary conditions for success in China, which in reality apply to any market. They are: 1) You have access to the market, 2) There is a demand for your product and 3) you have a significant advantage over the local competition. These are almost a ticket to play items wherever you are in the world.
They also identify what the author’s call managerial factors, the decisions managers need to make in entering China. They are listed as commitment, government structure, leadership, strategy and product. Again I do not feel the list is unique to China. How you implement such factors may be different due to the nature of the Chinese market place. Let me give you an example. I mentioned that my company had to close down one business division in China. I was working for an MNC at the time, in most countries around the world we competed with two other global players and maybe a handful of local companies. In China, we found ourselves competing with 4500 local competitors, as well as the other two global competitors. They say in politics everything is local, in this Chinese market all competition was local. Unless we wanted to build hundreds of plants across China we were never going to be able to compete.
The final ingredient for success the authors cite is luck, things that are outside your control that can decide whether you succeed or fail. They say hope is not a strategy, and I would say that luck is not a tactic.
Before we look at the less well known success or failure stories in China, let’s talk about one that is well known, the failure of Amazon to succeed in China. Lele Sang believes that Amazon’s lack of success was because they did not master some of the fundamentals. She identifies that Amazon did not bring any competitive advantage to the Chinese market. They offered a similar service to competitors such as Alibaba but without the same level of commitment. JD and especially Alibaba have huge promotional days such as Singles Day or 11.11. They pioneered combining video promotions with online sales, a technique mastered in China. I discussed how companies can successfully master this medium at low cost in show 4 of this season.
Ms. Seng talks about the clumsy strategy Amazon relied on, using a global template and allowing the Chinese company little or no autonomy. She cites the example that the local unit could not even add a button to its website without HQ approval. The attitude of HQ knows best is a strong detriment to success in new markets. And it also gives fertile ground for the Not Invented Here syndrome, the tendency to dismiss the ideas of others.
What companies have achieved surprising success in China and how? In the article Mr Ulrich mentions Sequoia Capital. This venture capital firm is the most successful or one of the most successful venture capital companies in China. The article does not hint on how Sequoia achieved this success, so I invested a few dollars of my hard-earned cash to buy the book. Put briefly, Sequoia US allowed Sequoia China to develop its own investment strategy. They hired someone they could trust and let him make the decisions. With his insider knowledge, Mr Shen identified opportunities that the American investors would have passed by. The list of companies Mr. Shen invested in is impressive. I am sure there were some mistakes along the way, but the overall results were exceptional. I mentioned that I started to work in China in 2006, about that time a book called Mr. China was published. It was required reading for us newly located expats in Shanghai. It’s about one of the earliest US Venture Capital funds in China. Unlike Sequoia this fund felt that they would “educate” Chinese companies on how to do business. The long and the short of it is that they lost all their money. Contrast the approach taken by Sequoia with the approach taken by Amazon and then note the outcomes for each company.
Another company that impressed the authors was India’s InMobi. The Chinese tech industry has been a challenge for outsiders to break into, many star players have tried and failed. InMobi is China’s largest independent mobile advertising network. The key to their success was to build a product for the China market. Initially the product was produced in Bangalore India but as the Chinese market accelerated the Bangalore was strained to meet conflicting priorities. The global market wants perfection, but the Chinese market demands speed. To resolve this conflict InMobi created a local product design team in Beijing. InMobi in common with Sequoia also learned to listen to their local Chinese Management.
If you are thinking of venturing into the Chinese or other Asian markets, you need to understand that the culture is one of deferment to the boss. Your employees may allow you to proceed along a path that they know is wrong rather than speak up. You must create an environment where employees feel safe in expressing an opinion. An extreme example of deferment to the boss is demonstrated by the crash of Korean cargo jet in 1999. The flight had left London’s Stansted airport when one the captain’s flight instruments failed, as a result he put the aircraft into an unrecoverable attitude and the plane crashed.
The co-pilot, whose instruments were working, could see that the aircraft was banking too steeply, but he did not feel empowered to criticize the captain. In effect he chose death over speaking up. To be fair to Korean Airlines, this accident was over twenty years ago and they have put a lot of effort into improving the use of Cockpit Resource Management and encouraging less senior crewmembers to speak up when they see things are going wrong.
InMobi succeeded by tailoring their product to the Chinese market, but you need to be careful to understand what the Chinese market really wants. When Norwegian Cruise Lines entered the Chinese cruising market they built a ship to cater for Chinese tastes. They made the shopping and casino areas larger, the Chinese are known for their love of shopping and gambling. They made the pool deck smaller, the Chinese are not fond of sunbathing. They made the boat look like China, they added teahouses and karaoke rooms. This backfired in many ways, the folks who booked tickets with Norwegian were predominantly middle class who were not keen to gamble or buy extravagant items. They did not appreciate the Chinese trappings, they wanted a western style experience.
Norwegian Cruise Lines venture into China only lasted 19 months. They misunderstood their customers' real desires.
If Asia is on your target list for expansion the article and book are worth reading. Even if you are not considering overseas expansion, the article is an excellent reminder of the fundamentals of business which are much the same wherever you are in the world.
The next article may seem a strange choice for a radio show that focuses on helping entrepreneurs. It comes from McKinsey’s Public and Social Sector Practices. It is called Moving teams from campaign to transition: Five things to get right. But when I read the article, I saw it contained a lot of useful advice for us small business folks. The transition from campaigning to governing requires a rapid shift in direction, the creation of a significantly expanded team, and the need to produce visible results in a short time frame, the classic 100 days. Although not many of us will enter government, there are similar situations faced by entrepreneurs and SMEs. When you launch, you switch from raising funds to implementing your ideas. You want to be able to show your backers that you are making progress. When a new opportunity or challenge arise where you need to act rapidly to take advantage of the situation or to avoid disaster. These are just two situations where you need to implement rapid change.
For this show I will focus on the aspects of the article that are relevant to you as a business leader. I will not cover the overtly political aspects, such as finding governmental roles for folks who have helped during the campaign. As an aside McKinsey suggests that it might be better to find alternative ways to reward those who supported the campaign other than creating unnecessary roles.
Let’s take a look at the five things McKinsey suggests you have to get right.
Number 1: get the right people into the right roles. Sounds common sense but the human sense of reciprocity, the need to return favors, can get in the way. When transitioning a business there is usually a desire to find roles of those who have helped you in the past. And indeed it is important to show loyalty to your staff but maybe they are not suited for the top roles they may be seeking. You should have the courage to have the difficult conversation explaining why they are not a good fit.
I can recall when I was running a business in the US we had a top performing sales rep who desperately want to become a district manager. I knew he was not suited to manage a team, he was too much of an individualist. But he kept applying for every district manager role that became vacant while continuing to deliver excellent sales results. Against my better judgement the National Sales manager persuaded me to give him a chance. As you might have guessed he did not succeed as a district manager and left us less than 12 months after being promoted. I did offer to allow him to return to being a sales rep at his district manager’s salary, but his pride did not allow him to take this option. I hope he found success elsewhere, but I did him and my company no favors when I agreed to his promotion. This happened more than twenty years ago, and it is a lesson that has stayed with me. Get the people in the right roles for them and for your company. If you manage this both the individual and your business will be the better for it.
The second imperative in this article is to decide who gets to decide. In any transition roles and responsibilities may become blurred.
Getting agreement on decision paths prevents duplication, makes it clear where staff go to get questions resolved quickly. It also ensures that the right people are involved along the way. If you do not get this right, some of the following problems may arise. People find back channels to get answers, and those back channels may not provide the answers you would like to see. Decisions get delayed because leaders become bottlenecks as they have not appropriately delegated decisions. No decisions are taken as too many folks need to be consulted and there are too many differing views. Or conversely poor decisions are made because not all the relevant voices are heard.
To avoid this McKinsey recommends:
Developing a clear decision process at the outset, especially for the most critical challenging areas. It is difficult when in the excitement of a launch or the challenge of a new competitor to stop and take the time to get this right, but it will probably pay off even when you are time strapped.
Delegate decision making authority appropriately. Make clear for each role what decisions they have the ability to make, and as importantly which decisions they do not have the authority to make. And avoid failing to walk the talk here. I have seen instances where managers have been told they have the authority to make a decision, but the published delegation of authority DoA puts such a low dollar limit on their authority that in effect they have to refer each decision upwards. Hire people who you trust and let them do the job you have hired them for.
The third point made is that as the leader you need to set the tone for the team. Confusion can reign when a company is going through a transition. So make sure you are providing guidelines on what are the company’s core values, how you expect your leaders to behave. And then of course make sure you lead by example. A related point is to take a brief pause before jumping into execution to communicate what are your goals and objectives for your business launch, transition or pivot.
Finally consider appointing a dedicated manager to be responsible for the change initiative. Someone who will be responsible for items such as identifying and resolving key internal issues, to ensure that communications are consistent, to consider your staff’s interests.
This is no more than change management, but in the context of transition from campaigning to governing there is an absolute deadline. The winner will be in office on a day that has been set whether they are ready or not. This creates a sense of urgency which is helpful if it is managed well. As the leader of your company, when appropriate you need to create the same sense of urgency. In a 1995 article in HBR John Kotter, a leading change management expert, wrote that the failure to create a sense of urgency was the number one reason that change management initiatives fail. This sense of urgency needs to be maintained and the actions of you and your leadership team need to reflect this. In a company I worked for a few years ago the CEO dramatically announced the company needed to change stating that we were on a burning platform that needed urgent attention. However, the leadership team’s actions did not change and within only a few weeks the rank and file staff had lost interest.
Professor Kotter has published many books and articles on the topic of change management. As a bonus I have included a link to an article on his 8 Step Change Model from this year. It’s from a consulting company who is hoping to sell you change management services, but the link is free and will take you to some useful information.
We will stay with McKinsey for the next article. Getting real about mitigating price inflation. It is written with the chemical industry in mind, but like most of the articles I read and cover on my show there is something for everybody.
Covid 19 has elevated security of supply to be more important than cost which was the previous number 1 concern of many procurement executives. Note I use the word cost rather than price. The lowest priced supply may not be the lowest cost supply, if delivery, quality, and fulfillment issues more than eat up the difference.
With security of supply comes higher costs. The decision to multiple source rather than single or dual costs has a price. Your economies of scale are reduced, systems must be created to ensure you meet your commitments to each supplier. I have often seen cases where the procurement team negotiates a second or tertiary source but never placed any orders with the supplier. Then when a crisis hits and they need to move from their primary supplier they are surprised when the alternative is unable to fill the gap. Often the crisis is a general shortage in the marketplace, under these circumstances you cannot be surprised if the alternative gives preference to loyal and regular customers.
So for security you may have to pay more but how do you avoid paying more than you need to?
Firstly be sure you understand the market supply demand structure and the outlook. As in many things in business there is no substitute for research. Your procurement team must understand and track the elements that trigger price increase and demand these are rescinded when the driver are no longer applicable. There is an economic principle called the rocket and feather effect. You will have seen this at the gas or petrol pump. When the price of oil goes up the price at the pump increases immediately, like a rocket. When the price of oil goes down the price and the pump declines slowly, like a feather. Your supplier may reduce prices slowly to reflect market conditions but you can accelerate this by showing you understand what is happening and that you expect the supplier to pass on any savings they are seeing to you.
Next when your supplier asks for a price increase make sure they clearly explain why they need the increase and test their reasoning. It's not unusual for a supplier to exaggerate the impact of raw material price increases on their costs. If you understand, or at least can estimate, how much each element impacts their cost structure, the better placed you are to resist price increases. Keep in mind that raw materials are only part of the cost structure, there will be conversion costs which may be a significant part of the finished products cost and which are influenced by other factors.
Consider any price increase as a temporary surcharge rather than a new baseline. Shift the burden of proof onto the supplier. Insist on a price review when market conditions change, or accept the price increase for 3 months with a review at the end of the period to see if the justification for the price increase is still valid.
Ensure cost management is a multifunctional process. Ask your operations team to find ways of improving yields, reducing waste. Work with your product formulators to determine if the purchasing specification can be broadened, enabling more alternatives to be acceptable, or allowing your supplier to make savings which are shared with you. This is a time when you can really drive your sustaining engineering initiatives. Sustaining engineering is the process by which you identify ways of reducing the costs of your products or services so that you can remain profitable in an increasingly competitive market. It should cover all aspects of the costs, raw materials, conversion cost, packaging, warehouse and delivery costs etc. There are often obstacles placed in the way of sustaining engineering initiatives. Operations may prefer to receive materials in smaller quantities to meet their inventory targets. Or they may push back on broader purchasing specs, fearing more rework to bring the finished goods into specification. Use material increases as a driver to implement change.
And maybe most importantly work with your sales team to pass on price increases. In my experience most sales folks hate asking for price increases, it is not a comfortable conversation. I recall asking one sales person why they had not achieved a needed price increase at a customer. His response was that the customer’s procurement team had rejected the price increase. I pointed out that it was their job to reject or reduce price increases, it was his job to get the price increase. Where I had failed is that I had not convinced him that we truly needed the price increase so his resolve, or as the term that we were using at the time, his internal fortitude was weak.
What I should have done, and I am sure you would do, was to give him the ammunition to get the price we needed. If he had knowledge of the cost increases we were facing and the impact on our margins, his internal fortitude would have been stronger. Work with your procurement team to identify information, preferably in the public domain, that supports your need for a price increase and share that with your sales team. Produce materials that can be shown to your customers that they can cross reference to justify your price increase to themselves. And remember if you are not willing to walk away for a customer, you have already lost the argument.
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