Wednesday 17 January 2007

People as an Asset

“Our most important asset is our people”. How often have you heard that one? It’s something that the HR people get CEO’s to say every so often so that they sound good – but behaviour rarely lives up the slogan.

So what are people really worth to a business? You can think of people in 3 ways – as doers of particular tasks assigned to them, as keepers of knowledge and experience built up over time and as creative sources of ideas on how to improve the ways in which the business operates.

Those who want to outsource everything to China are primarily looking at people as doers of tasks. If that is all they get from their people, then getting the same task done in a low-cost location for a fraction of the cost seems to make a lot of sense. There are of course other considerations about outsourcing to remote places, such as the length and flexibility of the supply chain, but that’s another matter.

Some companies have realised that their people are sources of ideas and have worked to harness those ideas. Those in product development or other customer-focused roles have always been expected to generate ideas, but continuous improvement and other such programmes in manufacturing and supply chain operations are also ways of doing this. Companies like Toyota are renowned for the ways in which they have involved employees in resolving problems and seeking improvements in every part of their business.

However, the role of people as keepers of knowledge is one that often escapes managers. How many times have we seen things go wrong because a decision to move an activity to a new location or to consolidate two into one resulted in experienced people being let go? All of a sudden, processes begin to break down: customers don’t get their deliveries on time; quality deteriorates; reports don’t get produced; costs start to edge upwards.

Why? It’s not that the people now doing the job are bad people – it’s just that they don’t know what the previous people did. All those little things that add up to smooth and efficient operating practices, all those customer and supplier contacts and relationships, they don’t just transfer automatically because someone on high decided that the business could operate more efficiently with less people.

Business processes are operated by people and change over time. Even those businesses that make strenuous efforts to document what they do in best ISO 9000 fashion can’t get all the subtleties and nuances and keep them up to date. In any case, they way things operate at the detailed level is usually different from the way managers think they operate.

One of the gurus of the Lean movement, Norman Bodek is at pains to point out that really treating people as assets pays dividends. If employees are confident that their future is secure, they will be more creative in driving improvements and more open about transferring knowledge and experience to others as they are redeployed. This is not a recipe for stagnation – change must continue to happen, efficiencies must be pursued and customers must be better served. But if managers ask “How can I make the best use of people displaced through change?” instead of asking “How many people can I get rid of through change?” then the possibility or truly making the best use of your most valuable assets begins to open up.

Monday 11 December 2006

Best Practice is not Good Enough

I see in a recent post on Slow Leadership that the pace of international outsourcing is slowing down, as the pool of well-educated but under-utilised people begins to dry up in countries like India. Many IT and call centre jobs moved from the UK and the USA to India over the last few years, but now many of those Indian people who gained experience working for the multinationals have moved to much higher paid jobs in the very countries those outsourced jobs came from in the first place.

What’s happening is that market forces, which for so long could not operate in India, are now operating to level the playing field. Once artificial barriers are removed, there is a sudden rush to take advantage of new ground, but after a while supply and demand ensure that these short term anomalies are eliminated.

That’s why companies who set out to copy what others do are doomed to be forever behind. Of course, it’s important to conduct benchmarking exercises from time to time, so that you know what others are up to, but this is so that you know what you have to beat, not what you have to copy.

It’s interesting that Toyota, widely recognised as the most efficient car manufacturer in the world, has launched a programme called Value Innovation which aims to cut the number of components in a car by half and to create a new generation of fast and flexible factories to build these cars. They are not looking to copy “best practice” in Ford or Fiat.

At the end of the day, being competitive is about taking the lead. That means being creative in the design of the products and services you sell, as well as in the business processes that generate and deliver those products and services. Winning companies find ways to give their customers more and more of what they want, more and more efficiently and effectively. They don’t blindly copy what others have done or go chasing after ideas whose sell-by date has long passed.

Tuesday 28 November 2006

Being Competitive

There’s a lot being said about competitiveness in Ireland these days – particularly about how cost increases are making it very hard for companies, and therefore the nation, to be competitive. Energy costs, labour costs, transport costs have all seen increases, many of them way above what might have been expected. But are these the major factors in competitiveness?

First of all, there are different points of view. The politicians and the economists look at competitiveness from the top down. They compare Irish costs with those in other countries and of course they focus on the differences and where we need to improve. Certainly these days it’s a lot harder to justify manufacturing a product in Ireland for EU customers compared to doing so in, say, Eastern Europe.

But what about the perspective of the individual business? The comparisons that matter are the costs that your competitors face. If all your competitors and customers operate in Ireland, then the costs of energy in Poland don’t really matter. If the key raw material comes from China, then what matters is whether you can manage your supply chain to get that raw material delivered to you for less than your competitors can get it delivered to them. Whether that is more or less expensive than someone using the same raw material in Hungary is beside the point. Of course, if your business is exporting electronics-based products to Germany from Ireland, then you do have to worry about Polish energy costs and the supply chain from China to Hungary. It’s all about being clear just who the competition is.

It’s like the story about the two hunters in the woods surprised by an angry bear. One hunter immediately threw away his gun, his backpack and his jacket and started to run. The other one asked: “Surely you don’t think you can run faster than the bear?” The first hunter shouted back over his shoulder: “I don’t need to run faster than the bear – I just need to run faster than you!”

You don’t get to choose where you start from – you are where you are. You also don’t get to choose about things like regulated energy prices, world commodity prices, local transport infrastructure and so on. The key thing is to understand what you do get to choose – and the importance of making those choices.

Most companies have already looked hard at the obvious – cost cutting. Can you do with less people? Can you be more energy efficient? Can you squeeze some price reductions out of your suppliers – or at least delay their price increases? Should you operate somewhere else? A friend recently described the process as seeing how much you can shave off the walls without the building falling down.

Most companies have also tried (probably with less success) to pass on cost increases by increasing their prices. Everyone has gone after more market share through special offers, promotions or other initiatives that may provide some temporary boost in sales, but more often than not, results in no net change on the bottom line.

Really improving competitiveness is much more fundamental. It is a comprehensive process that looks at the purpose of your business and the customers that it serves. You will be more competitive if you meet your customers’ needs better than anyone else and use up less resources in doing so.

If you really understand your customers’ needs and if you know how your competitors operate, than you can get creative. Finding a whole new way of doing something is much more likely to make you competitive than purely looking at how to take another slice off your cost base.

That is not to say that managing costs can be neglected – you have to keep working at them. But don’t kid yourself that that is enough to be a competitive leader.

To talk about how to make your business more competitive, give me a call at Markree Consulting.

Wednesday 22 November 2006

Channels to Market - the key to growing market share

Whether they are selling to consumers or to business customers, it’s surprising how many companies don’t know whether their channels to market actually get the products in front of all potential customers at the crucial time those customers are deciding what to buy – and who to buy it from.

In some cases, channels to market are fairly well-defined – or at least some of them are. For example, the largest channel for consumer food products is through the multiples (supermarkets). To make any impact on the market, your product needs a listing with all the major players. However, there are also convenience stores, hotels, restaurants and catering establishments, such as schools and hospitals, all of which can be reached in numerous ways. How much of the potential market are you actually getting to?

Exporters often trust their distributors in other countries to take care of the local market for them. But is the distributor really covering the entire market? Are they motivated to cover sectors of the market that don’t provide them with opportunities to sell some of their other products? Your distributor provides you with a window on the market, but that window may not be seeing the whole market landscape.

There is a simple way of looking at this. First, determine the total potential market for your product. You’ll probably find the market defined at a higher level, so that your products cover part of it, but not all. How many customers buy such products annually? Then ask where they buy. These are the different channels available. Are you sure you know all of them? How many of these channels are you present in? Where you are present in a channel, how effective are you in addressing every purchase that takes place in that channel? For every 100 customers that buy, how many of them see your product as one of their possible choices? Finally, when they make the choice, how many choose your product rather than a competitor’s product? Express the answers to all of these questions as percentages.

For example, let’s say there is a market of €500 Million per annum in a certain business-to-business industry in Europe and that your products address 60% of that market. Let’s say that you are present in all the major countries, which account for 75% of the business. Already that €500 Million is down to €225 Million (€500M x 60% x 75%) of potential business for you, but that’s still pretty encouraging.

Now, country by country, take a look at the channel coverage. Are these products sold by direct sales, local sub-distributors, retailers, mail order houses, internet sales or perhaps all of these? Do you know all the competitors and how they go to market? Do you have more than one distributor or do you have an exclusive deal? What other products or services are or could be bundled with yours in a sale? In most cases, you’ll probably discover that your channel coverage is way below 50%. Let’s be optimistic and say that it’s 35% on average. So now we’re down to €67.5 Million.

Now, even if your product is present in a channel, it doesn’t get to 100% of the sales opportunities. Your direct sales rep may not call on the customer on the crucial day when he’s ready to buy, or a phone call may not have been returned. A customer may not have bothered to go to the retail store that has such a great display of your products, or he may have gone on the day that the store ran out of stock. So let’s say you get to 50% of the sales opportunities in the channels you cover.

Finally, for every customer that actually considers buying your product, let’s say you win 25% of them.

So, from a European market of €500 Million, your likely market share if all the assumptions above are right, is somewhere in the region of €8.4 Million. That’s less than 2%. Not much, considering you cover all the major countries and have a pretty good product range.

Many companies, looking at a low market share, focus on improving their product offering. They all put more pressure on their sales people. Advertising and promotion activities are talked about, but rarely are the channels examined. Look again at the numbers:

€500M (1) x 60% (2) x 75% (3) x 35% (4) x 50% (5) x 25% (6) = €8.4M

What sort of action can this company take?

1. Total Market Size. This can be increased – by launching innovative new products and by finding new uses for products so that they may be of value to more customers. Potentially expensive and also something that can be of as much advantage to your competitors as to you.

2. Product coverage. You can develop new products to broaden your range. Depending on the industry, it may be hard to maintain full coverage, particularly if product lifecycles are short.

3. Geographical coverage. You are in all the major European countries. Should you go into more of the smaller ones? Think about languages and translation costs if your product has a user manual or needs assembly instructions.

4. Channel coverage. On average, your channel coverage is only 35%. Getting this up is one of the cheapest things you can do. As coverage increases, there will inevitably be some channel conflict, where your product may be offered by more than one reseller to the same customer. However, if channels are selected carefully so that the overlap is not too great, this can be managed. Sometimes, minor product variations will allow you to use multiple brands as a way of maximising channel penetration while reducing channel conflict. Often, a really good look at channels can identify segments of the market that you were completely unaware of.

5. Channel effectiveness. It is crucial to understand how effective your channels are. There may be more effective choices out there. The starting point is to measure it. Not everyone does.

6. Winning the sale. This is down to competitiveness and salesmanship. How good is your product and how does the price compare? How well known is your brand? What about the reputation of your reseller or sales rep in the eyes of the customer? This is the area that most companies look at when deciding how to improve market share. There may or may not be easy or inexpensive things to do.

In conclusion, reviewing your channels to market and improving your channel coverage can probably do more in less time and at less cost to improve your market share than anything else.

To talk further about channels to market contact me at Markree Consulting

Monday 20 November 2006

Mergers - What do you want to do with it?

Acquiring & Merging Companies

Google’s recent takeover of the lossmaking YouTube for a whopping $1.65 Billion got me thinking about the reasons behind mergers and takeovers. It’s quite amazing how many company mergers fail to deliver the expected benefits, particularly given the amount of time and money spent on them.

Why is this? It can be because the acquisition happened for the wrong reasons – “We bought it to make sure that our principal competitor didn’t” or “They were in trouble and we got it a really good price”. While these kinds of reasons are not invalid, they don’t address the most important question – what will you do with it once you’ve bought it? Platitudes like “It’s a great strategic fit” are no substitute for a clear vision of what you bought it for.

Did you buy it as a complete standalone business? In that case, you obviously believe that your management skills will improve its performance enough to pay the premium that it cost you. Maybe you’re right, but what do you bring to the table that the previous owners couldn’t have done?

More likely, you bought it because you could combine some of what you do with what they do and get some synergies. Selling their products down your distribution, or vice versa, or both, could increase sales. Consolidating manufacturing, administration, or sales forces could reduce costs. Most acquisitions are valued on the basis of expected synergies and most failures happen because they are not achieved. These strategies need to be well thought out.

Make sure that you don’t destroy what you just paid good money for. Many of the factors that make a company work well are not on the balance sheet. Valuations, on the other hand, look at physical assets, sales revenues and such like. But revenue streams are not like buildings. They depend on customers continuing to be happy to buy from you. To what extent do sales depend on personal relationships with the sales force? Will those customers be happy to continue buying with you as the new owner?

The technology you just bought may be critically dependent on keeping the R&D team happy. How well documented are the manufacturing operations that you plan to combine? Is critical know-how kept exclusively between the ears of people you have decided to dispense with? Even if you have done your homework well and identified the key people you want to keep, are your HR policies and management culture going to get their backs up so they don’t want to stay?

Another catch can be the bits you don’t want. You valued the business based on the UK operation. They also have a small Dutch operation, but you attributed no value to this as you don’t want it. You’ll just get rid of it, OK? Then when it’s too late you discover the Dutch labour laws and how difficult “just getting rid of it” is.

Most people are aware of the importance of due diligence. The way it works is that the seller is obliged to give you all the relevant information that you ask for. If you don’t ask the right question, they don’t have to tell you. So the importance of checking out and valuing the potential bad debts, any potential lawsuits, the stocks of raw materials and finished goods, the legal titles to properties, even the obligations to give back grants received, is fairly well understood. Legal advisers and accountants will tell you all about this. But there are other aspects of due diligence that are just as important and are not so frequently mentioned. How much critical knowledge about products, processes, or customers is written down? How important are customer relationships? How good is employee morale and what will happen to it when you take over?

What you have to bring to the party is a clear view of what you want to do with what you just bought. What will you close down or sell off? What will you combine with what? What are the critical success factors for each of these steps? What are the risks and how will you mitigate them? Where is the value and how will it be enhanced? Only then can a good due diligence plan be put together and only then will you know how much you can afford to spend.

Like any good marriage, even though it takes a lot to get to the altar, it's only then that the hard work starts.

To talk further about making mergers work, contact me at Markree Consulting