Josh Hurewitz – Page 2

Innovators versus Imitators: Who Wins?

Much of business media celebrates innovators for developing the next new thing. However, imitators, not innovators, usually generate the greatest value from the innovation. A broad study determined that imitators capture a whopping 98% of the total value of an innovation.

We have been socialized to consider imitation as undignified and objectionable, yet in the marketplace of value, imitators generally dominate. McDonald’s imitated a system pioneered by White Castle which invented the entire low-cost, efficient, fast food category; Visa, MasterCard and American Express all borrowed the Diners Club innovation of aligning customers and merchants with plastic cards; Walmart copied many of its ideas from predecessor companies like Korvettes. However, these were not direct mimics, but improvements over a predecessor’s idea to create a winning formula that creates more value.

Huge value creation might happen from simply copying an idea, but odds are that a modification to make it better or cheaper, (and better), can disrupt the innovator by investing in an offering that is based on the market reaction to the original idea. Take-away thought: Imitate to share the market with the innovator – but imitate and improve to be dominant.

Ideas for this article were taken from Harvard Business Review April 2010, “Imitation is More Valuable Than Innovation.

Growth Can be Hazardous to Your Health

Growing sales and profit can push companies to the brink

In working with clients across a range of growth scenarios, I have found that successfully growing businesses experience unintended consequences of success. It’s a good challenge to face, of course, but it can, and should, be predicted and managed.

Strong and profitable sales growth is obviously desirable, but besides the operational challenges related to fulfillment, managing cash becomes even more important. Accountants will tell you to track two key ratios that can easily be calculated, as follows:

Ratio

What it says

How to Calculate

Quick Ratio

Are there available funds to cover short-term obligations?

Cash + Receivables

Current Liabilities

(Should be 1:1) or higher

Operating Cash Flow Ratio

The amount of cash being generated compared to amount of cash being required to lay out

Cash flow from Operations

Current Liabilities

(Should be more than 1:1)

While these ratios provide a valuable partial picture, they only reflect history and are not adequate to project future cash positions. That is simply because not every business decision about future financial obligations is captured in accounting systems. A growing company can be making abundant profit (on an accrual basis), but quickly run out of money to cover bills. This could occur because a company decides that it needs to increase future expenses by hiring another person or have plans for increasing inventory; neither decision of this type is reflected in these ratios.

What to do? Use a budget! That is, consider how individual actions, which will affect cash but are not yet captured in accounting processes, will affect cash flow forecasts. The process will require updating predictions based on the reality that occurs. While using a realistic budget is not foolproof, it helps reduce the risk of unpleasant surprises related to cash.

Importantly, if forecasts push a company’s cash flow to the edge, either secure cash to meet the predicted needs or, if one cannot get cash under reasonable terms, slow down and even stop trying to grow so aggressively. Growth can create a very tenuous cash-flow situation that can undermine the viability of the entire business. Of course, you should manage A/R and A/P to tip cash in your favor, but after that, especially in rapid growth environments where cash lags behind sales, you may need to slow down so that cash needs do not exceed the ability to generate short-term cash.

I went through this exact situation with a client who insisted on continuing to grow at all costs. And the company did grow – all the way to bankruptcy.

Growing May Require Organizational Change

I like retelling the story of my conversation with the head of a marketing group for MCI, the long-distance telephone carrier. (Remember those?) Before embarking on a project, I asked to see an organizational chart. The response: “We have not updated it since the last reorganization.”

Undaunted, I asked for an old organizational chart. The person came clean, saying that the company did not have one because it was considered futile. She explained that competition with AT&T and Sprint involved almost-weekly promotions, requiring the marketing staff to reorganize that often to either respond to an attack or preemptively attack to capture market share. MCI, at that time, was an extreme, atypical case of being willing to organize to take advantage of a current or a future situation.

Generally, management, in its haste to grow, overlooks critical organizational and developmental challenges to growth, and instead anchors its thinking in the past business environment. Instead of asking what the organization should look like to accommodate impending growth, there is a bias to focus on where the organization has been and holding on to that.

That’s human nature. Psychologists have long stressed that current behavior is driven by past experience more than by what lies ahead. This gets some companies in trouble if they need to change to accommodate growth, but ignore it. Larry Grenier, Professor of Organizational Management at Harvard, in what has become the classic paradigm for organization development, identified generalized developmental phases through which companies tend to pass as they grow. Each development growth phase begins with a period of evolution, with steady growth and stability where the organization grows with only limited organizational change, and then moves to a revolutionary period of substantial organizational turmoil and re-adjustment. For example,

In startup mode, a company’s founder singlehandedly makes every major decision, and is focused primarily on listening to the market and adjusting the offering – and, less so (and appropriately so), on operations. Beyond the initial startup phase, operations need to be more closely focused upon to generate profitable growth. Without reorganization of staff under a professional operations manager, steady state growth would not be able to be accomplished.
Similarly, when the company becomes more complex it can outgrow the skills of a single operations manager who has broad general operations skills, but not necessarily depth of skill in some required areas. With growth, responsibility would need to be spread to department heads with deeper expertise in narrower functional areas, and they would need to operate more autonomously.

In my “Growth Readiness” seminars, I expand on this paradigm to include more phases of organizational development to accommodate growth. Readers will get a general sense of this idea from the graph below, which depicts a period of evolutionary growth (smooth upward sloping line), followed by a revolutionary change (jagged portion of the line), which then leads to another stage of stability, followed by another stage of change.

When an organization plans for growth, it needs to assess its current development stage and determine if it can grow incrementally (Evolution) as currently structured, or if profitable growth is impeded by the current structure and more fundamental changes are required. This is not to say that drastic organizational changes are required in all cases as a prerequisite for growth – but it might be, and leaders may have a bias against it and be reluctant to disrupt the status quo.

Returning to the lesson from my MCI experience, a willingness to reorganize, and especially to develop the organization, if necessary, is a critical attitude to possess – one that can enable profitable growth, even if it is unsettling in the short term.

(This analysis is primarily based on the article “Evolution and Revolution as Organizations Grow” by Larry Grenier, Harvard Business Review, May 1998)

First Choose a Strategy, and Only Then Adapt

I spend a lot of time studying new business ideas, then figuring out how to apply that knowledge to my clients in the middle market. Recently, I came across an interesting debate online about approaches to strategy shifts where the rapid rate of changes in markets and technology suggest “strategy resets” Here is my assessment.

The days are long gone when companies could leisurely plan and slowly execute. Established companies in industries with low barriers to entry, with nimble competitors able to pivot as opportunities emerge, reap the benefits of rapid swings in market share. This experience has encouraged some companies to modify their approach to adjusting strategy, given the volatility and vulnerability of their market position.

Traditional strategy has been bungled by slow-moving, overly processed activities (environmental scans, SWOT analyses, customer analyses, competitor analyses, financial modeling, and so on) that lead to a well-researched and well-written plan that may have only limited bearing on how companies actually behave and perform. Especially because the process is slow, and some argue slower than the rate of change (technology cycles have already outpaced planning cycles), a newer approach known as “adaptive strategy” has been suggested as the new mantra.

The argument for adaptive strategy goes like this: Market volatility, uncertainty, complexity, and ambiguity (together known as VUCA) are much greater now than previously. As a result, the traditional pace of strategic planning is inadequate to get answers and execute − and by then, another short planning cycle is needed. The implications of an adaptive strategy relate to the need for planners to be less oriented toward managing a stable situation and far more oriented toward leapfrogging competition with a disruptive strategy. Think about it: Since 1960, a company’s average stay in the S&P 500 has fallen from 60 years to less than 20 years.

I don’t buy the argument that one can move from adaptation to adaptation and enjoy sustained success. I agree with those who argue that serial adaptation is really an overreaction to managers who are faced with unsettling, rapid change and don’t feel like any inputs into formulating a strategic plan are stable enough to count on. There’s nothing new here: Strategy formulation has always required making hard choices in an uncertain context, and managers tend to seize on some pretext (VUCA included) to avoid making choices and taking responsibility for their choices. Sure, you can adapt, even repeatedly, but the point is that you first have to make a strategic choice that you can then adapt. The temptation regarding adaptive strategies could lead one to never make that initial strategic choice.

Strategy is not developed using a simple recipe, a fill-in-the-blank process. It is not simply using a standard set of tools (as mentioned above) or broad, conceptual, future-oriented, big-picture views. Strategy is iterative. The reality is that strategy is about all of those things, but an adequate strategy cannot be formulated with analysis or big-picture views alone. One has to tie the logic together. One simple approach is to develop a set of answers to some linked questions that cascade logically from first to last:

What are our broad aspirations for our organization and the concrete goals against which we can measure our progress?
Across the potential field available, where will we choose to play and not play? In which markets and segments?
In our chosen place to play (market-offering combination), how will we choose to win against the competitors there?
What capabilities are necessary to build and maintain to win in our chosen strategy?
What management systems are necessary to operate to build and maintain the key capabilities?

In my consulting practice, I use these five questions to generate broad strategic alternatives. I then use a modified BSC (Balanced Scorecard) method to help companies formulate, communicate, and measure the results of their strategy, as well as develop tactical plans. The strategy and plan can be completed in a very short time, if management is aggressive.

Want help to take on strategy formulation on? Call me: (410) 598- 0719.

[Some content for this article was taken from a Harvard Business Review blog, contributed by Greg Satell (DigitalTonto.com) on June 25, 2014, and Roger Martin, the author of Playing to Win: How Strategy Really Works.]

Classic Strategic Marketing: The Ansoff Matrix

AnsoffMatrix

Middle-market businesses need simple ways to consider strategic market options. A simple and effective, compact tool is the Ansoff matrix, a simple, 2×2 matrix that guides planners in developing options.

Basically, it provides four options that are dependent on two variables: developing new products and entering new markets. Both involve expense and, therefore, risk. They also pose risks to the company brand. Here is a simple way to think of the four options:

Market Penetration

How do you grow if you sell the same product to the same customers? Consider adjusting the marketing-mix elements: more effective promotion, product improvement and lower pricing. It is the least risky option, but likely to reap limited rewards.

Product Development

If a company is entrenched in a market with respected products and services, it might be possible to sell that same set of customers other products. This leverages companies’ current market good will and credibility. The risk is going so far afield that customers would not relate the new product with the brand.

Market Development

This is simply selling the same product to a different market. Brand might not be relevant at all, and the risk, therefore, is higher for companies penetrating a less-understood market.

Diversification

The risk here is typically greatest: You don’t know that much about your product or the market. The rewards here are potentially substantial, but the failure rate is the highest. It is not uncommon for post-mortem analysis of failures to ask, “What were they thinking?”

My take-away thought for you is this: Obviously, there is a risk/reward equation to consider. My experience is that success is not only a function of a company’s ability to understand and mitigate risk, but also of a company’s being grounded in the potential upside of a business, which, all too often, is overly optimistic.

The basis for this article comes from www.simonbrand.com.

Market Penetration

Product Development

Market Development

This is simply selling the same product to a different market. Brand might not be relevant at all, and the risk, therefore, is higher for companies penetrating a less-understood market.

Business Strategy is Often Limited by Company Structure

Companies can research and develop strategies that, in theory, would dominate a market, but not every company can execute a most-desired strategy, such as companies limited by how they are structured and how they function. For example, a company with many layers for securing approval to take action cannot generally move quickly, but also rarely makes a critical “process fumble.” By contrast, small entrepreneurial companies can change direction on a dime, but are subject to shortcutting processes that could hurt them down the road.

I like to use a very powerful analogy: In the northeast United States, the late summer and fall trigger activity in nature that enables different species of animals to deal with the lack of available food in the winter, each using a strategy unique to its structure and function:

Birds fly south, where food is plentiful.
Bears eat in excess and store large amounts of calories in their bodies, then hibernate in the winter to consume stored calories very slowly.
Squirrels store calorie-dense nuts in the ground and access them as required.

These are structure-enabling and structure-limiting relationships. Bears and squirrels cannot make it to the south, like birds do, since they cannot fly. Squirrels and birds cannot store calories in their bodies, like bears can — and even if they could, they cannot reduce their metabolism rate and hibernate. Bears and birds cannot store food as squirrels do because they do not have the same incredible memory capabilities that squirrels have in relocating hidden food.

There is a lesson here: Just because there is an “ideal” or a “desirable” strategy does not mean that you can pull it off. A company is limited by how it is structured and how it functions today. You may ask dejectedly: Am I doomed to be stuck in a less desirable strategic position? The answer is decidedly “no,” because a business is not really restricted from changing its structure or function.

However, you cannot necessarily get there quickly without a concerted effort. The first step is to honestly assess existing structures and functions. Then, determining the key changes and the sequence of changes to implement requires a realistic sense of how change will be led and then reacted to by staff. Change is hard, and even harder to execute from within. If you need help with strategic business transformation activity, give me a call: 410.598.0719.

Business Process Automation to Enable Growth: What and Why?

Technology enables the automation of activities or services that accomplish specific functions or improve workflow. Business processes exist for many operational aspects of company activities, and leaders planning for their companies’ growth frequently ask me if they should consider automating some of those activities. My answer invariably is that it depends.

Generally, “whether to automate” needs to be broadened from a stand-alone question dealing with a single process to one considering it in the context of an organization’s overarching business strategy. Analysis must first determine the scope of the automation question.

The absolute first thing to avoid doing, though, is having a technical team determine if automation is the correct approach. Technical teams are great at answering the “how” question – how to technically do something – but not at analyzing if it should be done. While such teams are great at understanding how systems can solve problems, translating a technical solution to a business solution is typically not their strong suit. I’d advise bringing technical people into the conversation later, so that they can be told the business reasons for considering automation and the goals being considered – and then let them solve a precisely defined challenge.

Generally, companies struggle with the question of whether to start with a simple process or a larger process. The larger process could be more critical to develop first, which would offer the greatest value from automation in efficiency and savings. See the table below for a comparison between issues related to automating a simple process versus a larger, more complex process.

Comparison of Automation Efforts: Simple Versus Larger Process
Issue	Simple Process (Low-hanging fruit)	Larger Process (More critical, more potential gain)
Success Speed	Faster – fewer steps	Slower – more steps, more integration
Progress	Quick win, but noticeable by fewer individuals	Slower win but more noticeable day-to-day because it touches many individuals and has substantial, palpable impact
Chaos Control	Fewer people involved, easier to pay attention as issues emerge, then address them	Process automation time not properly estimated will generate doubts if it exceeds initial timelines and unexpected issues arise. Given the scope of the automation project, it might require extensive retraining and resistance by staff.
Process Importance	May not be considered critical in terms of cost savings, efficiency or improvements in customer relations	Larger, more important processes are generally deemed to be critical and likely to be given resources to improve upon them.
Return on Investment (ROI)	Lower	Generally, a higher ROI given the span of the process being automated

Here are some questions that I tend to ask that could help determine which processes offer the most value from automation:

Are there “paper heavy” processes? Is there a paper form (or e-mail or documents on a server) that gets routed to different participants as part of the process? Do your process workers waste time looking for forms or documents needed to complete a specific step?

Does the process require manual duplication of data, where something needs to be keyed in from one place to another?

Do processes “hang” because an individual was not alerted to proceed with the next step? Do other “routine,” time-consuming tasks halt the process in its tracks if the relevant employee is absent, overloaded with work or forgets?

Are there “repeatable labor” processes, in which individuals do almost the same thing in almost the same way in almost all cases?

If you answered “yes” to any of these questions, you are looking at a process with automation potential. If you’re still not sure whether a process is a good fit for automation, or if you want more time to figure out the impact of such a “yes,” then it’s time to speak to the people who perform the process every day.

Understand though, that these process owners (people who do it now) might be comfortable with the status-quo; in fact, they might find that what they do today is ideal. It could be that many of them have already created workarounds to avoid potential process problems. Either way, these details need to be gathered to create an idealized automation scenario that reduces error rates and significantly decreases process cycle times.

To this point, you might have identified the benefit of automation, but what about other factors? Here are some that may lead you to not automate processes:

Cost of Automation – What is the realistic ROI for automation? Include in this calculation the actual cost of automation, like software and hardware. Additionally, be aware of somewhat hidden costs, beyond salaries focused on this effort, testing the automated process, training cost and productive time lost to eventually become efficient at using the automation.

What to do with exceptions to the automated process − What percentage of all the cases will follow the automated process and which cases should be handled as exceptions outside of the automated process? Are exceptions easy to identify? Can methods of handling exceptions be included in the automated process over time?

In my work with clients, after we have a clear strategy for growth, I frequently spend a fair bit of time focusing on processes and building models for processes. I ask this question: If business doubled, could you handle it the same way you are now? What generally results is that companies recognize that they have not paid serious attention to their current processes for a long time. The problem is that the processes in place have evolved without anyone having taken a step back to ask if this is the best way to do things. To really understand whether automation makes sense, you may want to start with a re-engineering effort (start with a clean sheet), as opposed to a process-improvement effort. Typically, performing process analysis with clients is quick, with some of the automation opportunities obvious and some processes too inconsistent (no hard and fast decision criteria that is a basis for automation) to automate.

Beyond that, determining the cost-benefit answer requires applying subjective judgment. There are no easy answers here, and even if automation is to be introduced in multiple steps, the order of its introduction is another question to be considered. Fearing their being inadequately prepared to grow, some companies automate too early or automate the wrong processes in the wrong order. More commonly, though, companies automate too late, and the expected economies of scale from growth are not realized because growth both uncovers and introduces inefficiencies.

One more thing: Companies readily automate customer-facing activities to save on the cost of an employee who answers the phone. While this may have obvious financial advantages, it can significantly hurt a company’s relationship with customers.

Automation – the how, what and when – is a key aspect of my consulting engagements related to growth. Let me know if I can help you.

Best Practices: Adapt and Adopt

When instituting a new process or upgrading an existing one, first identify “best practices,” that is: the gold standard for performing that practice. Best practices are a way to borrow processes from others who have learned from multiple iterations and have instituted a practice that yields positive results. But companies that attempt to institute best practices blindly tend not to be satisfied because they did not achieve the results reported by others. Two primary hazards exist for those instituting best practices:

Failure to adapt. What works well in one company will not necessarily work well in another, unless the process is customized for the company’s culture, environment and people. Tailoring without diluting the core of the best practice is usually required.
Failure to adopt. A borrowed process will only work with the commitment of leadership and those responsible for executing it. Be sure that you have support from all key constituencies before and during implementation.

Are Branding and Customer Loyalty in Decline?

Established Brands Beware! Opportunities for Growing Companies!

Conventional wisdom holds that you need to build a trusted brand to get people to spend their money, and that establishing a brand is notoriously expensive. Branding generally includes increasing awareness and name recognition through heavy advertising.

That was then. It can be argued that a fundamental shift is occurring in the way consumers evaluate and purchase products and services.

Customers can now more clearly consider a product’s absolute value, as opposed to its relative values. Relative evaluations are comparisons with another product that is prominent or is placed in front of shoppers on a store shelf or catalog page. But absolute evaluations go beyond those constraints by using the most relevant information available about each product and feature – and absolute evaluations usually produce better answers.

Absolute valuations are now possible because technology provides much more powerful tools to gather information and process it to assess the quality of products and services. A recent example of this is Angie’s list, where consumers in a cohort share their experiences and evaluations of residential service providers. A somewhat old example is the way aggregation tools were applied to airline tickets. Prior to the 1990’s, a customer had to call an airline or, early in the Internet age, go to a single airline’s website to inquire about a flight. This search was limited to looking for airlines that the customer was familiar with. Conducting comparisons was very challenging. Aggregation sites like Kayak vastly improved the process because customers could determine the absolute value of an airline’s flight schedule and price by comparing alternatives side-by-side. Other aggregation tools, advanced search engines, reviews from other users, social media and access to experts enable consumers to make better decisions without having to rely on relative evaluations.

Absolute value in this context does not mean the best option; rather, it means the “good enough” solution that can vary depending on the individual consumer’s subjective preferences. The point is that customers can more easily determine the absolute value of something – and get closer to knowing what their experience will be with an individual product.

In the past, consumers used their own experience with a brand as a key quality proxy. They might reason the following: “In the past, I used Brand X. It was pretty good.” Their reference point was used to conclude that selecting Brand X has limited risk. But currently, when technology enables quality to be more quickly and objectively assessed, customers will be less hesitant to try something new. This enables newer brands to lower the barriers to entry and gain a foothold, at the expense of established brands with lower absolute value.

What helps support this conclusion are these two findings: 30 percent of U.S. consumers start researching products on Amazon and study reviews, with the average online shopper consulting more than 10 information sources prior to making a purchase. Brands, especially those that convey prestige, status and emotions, will continue to be of value. But, in realms where objective, specification-based quality is important – and can be assessed and communicated — relying on a brand may not be as reliable a market signal as it once was.

(Based on “Is Tech Eroding Consumer Loyalty,” Strategy+Business. Summer 2014)

Alliances: Beyond Organic Growth

On the one hand, companies attempt to focus on becoming leaner, more efficient and concentrate on their core business. On the other hand, growth opportunities may demand that companies go well out of their core business comfort zones to reach distant markets, employ new technologies and adopt a wider range of skills.

Growth involves some risk, such as adding staff and investing in marketing, systems and capital/non-capital expenses. To alleviate some of that inherent risk associated with organic growth, companies might consider forming alliances with other companies that already have some of what is required for growth. Forming an alliance could provide many advantages of growth, but would not demand as great of a direct investment in time, resources and skill as it would to organically grow the business from within.

An alliance is an agreement between companies to collaborate by leveraging each other’s resources. The table below illustrates two dimensions against which all alliances can be described: ownership and commitment. To best understand the table, trace rows and columns from left to right and then from bottom to top. For example, along the bottom row from left to right, the relationship of one company to another goes from a simple purchase order, to joint marketing and advertising, to a purchase order with up-front funding. The row above that demonstrates a greater commitment than the lower row, and a higher level of engagement as you move from left (Multi-year purchase agreement) to right (R&D program partnerships). There is also a large variety of strategic alliances, which encompass many types of teaming too extensive to discuss here.

In looking at the table, a company may realize that it already has an asset or experience to share in an alliance. Or, it might notice a deficiency needing to be ameliorated, possibly through an alliance. Of course, specific circumstances might suggest particular arrangements. In my experience, companies often are guilty of not looking objectively at themselves. This tends to lead to two opposite issues: Companies overestimate the value of something that they possess, and thereby try to drive too hard a bargain in an alliance; or companies fail to even notice something which they possess but take for granted, which could have tremendous value to another company.

Reasons to form an alliance might include:

Distant-market access: The Company does not have access to geographic markets.
Market-segment access: The company does not have a presence in a desired market segment and cannot build access fast enough to leverage its strengths.
Changing distribution channels: Destabilizing conditions are forcing a new look at delivery options.
Management skills: The Company’s core competency is under pressure by formidable competitors.
Value-added barriers to competition: The Company wants to strengthen its value-added skills and raise the level of competitive intensity within the industry.
Risk sharing: The Company does not want to take on all of the risk in developing products or markets.
Funding constraints: The investment burden is straining scarce resources.
Technology base: Industry is requiring rapidly developing technology.
Barriers to acquisition: Opportunities are limited because of size, geography, or ownership’s reluctance to cede control.

Except for joint ventures and acquisitions, two allied companies generally remain independent, while agreeing on increased commitments and dependencies. To be sure, alliances present significant challenges: boundaries need to be defined, people with unfamiliar skills need to be combined functionally, and communication across the alliance needs to be established. This is all within the context of clearly communicating the value creation of the alliance.

Many companies are unfamiliar with the skills and approaches needed to form alliances, but an alliance may hold the key to growth that would be unachievable alone – and this holds true for both companies involved. I have worked to engineer a wide range of alliances of the types described in the table, but two absolute, inviolable requirements for success are: 1) clear communication about expectations and responsibilities, and 2) trust, because it is never possible to anticipate everything. This may be an unfamiliar, uncomfortable path to growth for some companies – but it might be the best and sustainable path to growth.

(Information for this article was derived from Smart Alliances by Harbison and Pekar, 1998 and Alliance Advantage by Doz and Hamel, 1998)

Author: Josh Hurewitz