Category Archives: Middle Market

Iterate Instead of Analyze for Innovation Success

Intrapreneurship is needed in large companies.  Commonly, these companies tend to have plenty of data that has been collected to document market dynamics. Whether it is corporate strategy or corporate development, larger businesses have departments that constantly evaluate opportunities for growth–be they organic or inorganic.  Encouraging innovation and breakthroughs can be hard. The main reason big business becomes stagnant is that the mindset required for disruptive advances is very different than the risk management and mitigation approach of many market leaders.

Kevin McFarthing, who leads the Innovation Fixer consulting firm, suggests in a recent blog that “These companies also have a very rational approach to the assessment of investment opportunities. Of course, they find that the expenditure line has a much higher level of confidence than either the timeline or the scale of revenue. For that reason large companies want to increase the level of confidence in the income stream. Various techniques are used; for example, many consumer goods companies will undertake a fairly standard sequential program of qualitative and quantitative market research. This will relate to a database of similar products launched in the past. So, as long as you do the market research correctly, you can reduce your uncertainty and proceed.”

As is pointed out above, the traditional analytical tools used to evaluate comparable opportunities are somewhat like the comparables sought out when buying a new residence: intended to estimate what already exists instead of what has never been built. Relying on historical information rather than anticipating future demand is like driving down the road only looking in the rear view mirror!

On the opposite end of the spectrum, small businesses being run by visionary entrepreneurs tend to rely far less on the projection techniques of their larger counterparts. These start-ups rely on gut instinct, passion, and drive rather than systems. Instead of evaluating a market based on dozens of data points, the executive teams of thriving young businesses gather market information, develop a proof of concept, test it on a limited basis, revise the offering, and are nimble in their adjustments to feedback so that they can quickly bring something new to the marketplace. 

leap of faith

Large companies find what is done in the entrepreneurial space to be akin to a leap of faith. It’s very hard for a corporate type to operate from a place of judgment rather than logic. The willingness to produce something that is not perfect is much less in an organization with extensive quality initiatives.  The whole concept of try…try…try again that is the mantra of an entrepreneur is eschewed in favor of taking calculated risks. While it sounds stereotypical, it is not at all uncommon for the large company approach to be one that avoids undertaking projects without tons of documentation and extensive project and/or product planning down to minute details.  This predictable approach has severe shortcomings in an environment where responsiveness can make the difference between producing an offering that resonates versus one that is a “me too” alternative.

Instead of performing market and buyer research that resembles a canned, rote methodology, what is needed is flexibility, customization, and the ability to constantly iterate. Instead of sequence and a step-wise stage gate process, truly innovative organizations are far more willing to engage in trial and error.

McFarthing says that many large organizations lack the right mindset to explore potential. Changes he advocates that they make to become more innovative include: 

–   Rely much more on judgment to move projects ahead rapidly;

–   Don’t apply the same criteria to incremental and radical innovation;

–   Use a fast and iterative sequence of prototyping and market testing to learn and reduce uncertainty;

–   Go to market as soon as you can, don’t wait for all the facts.

Follow these suggestions and you will change your culture to become more intrapreneurial!

 

 

 

Your Perspective May Undermine Innovation and Value Creation

Every company, whether privately owned or with public stockholders, is concerned about its valuation. The value of an enterprise is enhanced when its future growth opportunities are well understood, documented, and pursued. Why is it, then, that so many small to medium size enterprises fail to articulate a compelling innovation strategy that will fuel the needed growth? Kevin McFarthing, who operates the Innovation Fixer consulting firm, argues that it can be a lack of perspective. He has seen too many companies obsessed with current period performance of the exclusion of the long term “big rocks” that must be put in place to build a foundation for sustainable success.

McFarthing evokes the Three Horizons model of the late 20th century in many consulting projects as a means to draw corporate executives’ focus into more far-reaching and significant perspective. Baghai, Coley and White first outlined the model in “The Alchemy of Growth” in 1999. Markets and technology are seen as drivers in the model and are depicted in the diagram below (from Tim Kastelle’s blog).

Three Horizons Model

 

McFarthing’s interpretation of the Three Horizons model is as follows:

The Three Horizons process forces an assessment of technology strengths and market dynamics. It then forces a view of how much resource is allocated to each of the Three Horizons. The example above shows Google’s allocation of 70/20/10, which will differ for different companies in each category. It also forces a portfolio approach to innovation.

It also helps to retain the concept of emergent strategy in your approach to the innovation portfolio, as the days of fixed long term planning are diminishing…You can’t just write a five-year plan, lock it down and expect it to deliver. Large companies must continually revise their perspective of the role radical innovation will play in their growth.

The balance of the projects and resource applied to each element of the portfolio should be decided by the top team in the company, and be dictated by corporate strategy. Incidentally, it’s not just the resource that should follow a strategic allocation; the use of management time should also follow the Horizon split. Too often resource is applied to the opportunities on the edge, but thinking time is taken up by the short term. It should be followed through, and the temptation to reallocate Horizon Three resources to fight Horizon One fires should be resisted.

Where the application of these principles falls apart in many organizations is in the allocation of strategic (often scarce and/or over-committed) resources to pursue what has been stated as a priority. You know the saying, “You gotta walk the talk.” Breakthrough innovation, then, must move from strategy and communications (though it needs to be thoughtfully developed therein) to execution via competent actions. The right combination of talent, unique skills, and initiative, when coupled with appropriate resources, produces an environment ripe for innovation to occur.  While some organizations are able to spur internal innovation, most rely on open innovation (external sources) to re-energize their enterprises. Even large companies like Kraft Foods estimated that 98% of IP in the food industry existed outside Kraft. Knowing that an industry leader like Kraft saw value in eliciting the help of others should embolden your team to admit the need for outside help.

Three Horizons, while instructional, is not the only model used to enhance one’s perspective on the opportunity for innovation. What these models have in common, according to McFarthing, are the following principles:

  • Make space in your portfolio for bets on radical innovation;
  • Balance your portfolio over different time frames;
  • Balance your portfolio over different technology needs;
  • Exploit the potential offered by Open Innovation;
  • Balance your portfolio over different market opportunities;
  • In all cases, stretch your view and take a broader perspective.

Sounds like good risk management, creative strategy, and a plan for sustainability rolled into one approach!

Find Ways to Improve Manufacturing Company Profits

In trying to understand business issues, case studies can serve as a useful tool to show us what we may not see at first glance in our own businesses. When I was doing the research that led to the founding of the Turnaround Management Association a number of years ago, I had the “opportunity” to compile, read, and review over 900 case studies on attempted turnarounds. As I read about companies from a variety of industries, geographies, and backgrounds, I was able to decipher certain trends and best practices. While I obviously don’t have the space (or your attention span) to delve into that level of detail in a blog post, I wanted to recount a case study and point out some lessons to be learned.

better resultsA $100+ million company lost 25% of its revenue during the period 2005 – 2010. Simultaneously, EBIT declined by 91%, dropping to 0.9% of  2010 sales numbers. A turnaround firm was retained to restore revenues and achieve at least 10% EBIT by the end of 2012. The results of the project were that 2011 revenue improved by 20.20% over 2010 and 2011 EBIT was 5.5% of 2011 revenue, an increase of 470% over that of 2010.

How the Results Were Achieved

Strategic Alignment

By analyzing the markets served, rates of growth, and trends, the turnaround firm was able to highlight the very best opportunities for high growth. Historical analysis yielded insights into top customers and products, with breakout information by plant location. As insights were gleaned from the data, brainstorming sessions were held with the executive team to modify strategic and tactical plans.

Product Pricing

As with many companies who suffered a decline in fortunes, this company had begun to compete on price rather than more strategic competitive advantages. As their products and services became commoditized, considerable price variability had snuck into the company based on local market conditions. With considerable (40%+) market share in its primary markets, the company in crisis had very few price comparables available from competitive intelligence by which new pricing could be developed. The consultants helped the company do the following:

  1. Make product groups by cost and technical specs,
  2. (For each product group) establish minimum, mean, and max prices,
  3. Determine products that were priced outside of guideline rages, and
  4. Identify customers who were not profitable to serve.

Margins were terrible, so the company implemented the following procedures recommended by the turnaround firm: 

  • Pricing for non-strategic customers was immediately increased,
  • Held meetings with strategic customers to explain the fair price increases, and
  • Future price increases were planned in unison with strategic customers.

Product Costing & Standardization

The old product costing model was jettisoned in favor of a more accurate, easier to maintain one. Product Standardization was accomplished by analyzing SKUs across key product groupings. A small list of products were designated as standard offerings. Everything else was labeled “custom,” with appropriate cost and pricing decisions.

Operations Improvement

Process improvements were instituted after plant visits. Highlighted items included:

  • Supply chain improvements through TQM and JIT were achieved
  • Minimum order quantity guidelines streamlined production runs and enhanced scheduling efficiency
  • Setup and preventive maintenance routines were sharpened
  • Paperwork and scrap reduction and recycling were instituted

The culmination of 2011 efforts was that higher contribution margin at the plant level. Production scheduling and materials requirement procedures were highlighted as areas for additional improvement. 

When an outside team is brought in to focus on profitability and the executive team cooperates fully, great things can happen in a turnaround. Clear communications, improved decision-making, unified focus all lead to enhanced morale and the profitability becomes an outgrowth of good management.

 

Put Sharks & Jets to Work in Strategic Design Thinking

When we think of design, we think of products. Industrial design as a field is scarcely 10o years old. However, technology tools such as CAD (Computer Aided Design), 3-D modeling, and stereolithography catapulted design into a rapid prototyping process towards the end of the 20th century. Companies like Apple rode the crest of this wave–to an extent–but really took design to a new frontier. Rather than simply looking at features and benefits as expressions of design and product marketing, what emerged was a new way to view business problems. Many business schools have incorporated not only courses on innovation, but specific foci on “design thinking.”

Kevin Budelmann penned an article for Metropolis magazine last month discussing design thinking as a modern motif. Budelmann credits Bill Moggridge, cofounder of the pioneering design firm IDEO with contributing significantly to thought leadership in this domain. Moggridge is said to have been the genius who reengineered IDEO from a product design practice to strategic design thinking powerhouse. Budelmann notes that part of the transformation occurred as a result of asking staff from divergent disciplines to work together, requiring that they become humble in the process. 

Budelmann’s firm, Peopledesign, has amassed a team of talented contributors who may not have worked for design firms years ago. A clear distinction is made, however, in hiring MBAs who understand design and designers who understand business.  The inevitable difference of opinions pits “sharks” (MBAs) against “jets” (designers) in true West Side Story musical terminology. Here’s Budelmann’s take on the natural interaction between the two employee types in his design firm:

It’s not even clear anymore which neighborhoods are Sharks’ turf and which belong to the Jets. Maybe that isn’t such a bad thing. The gym is neutral territory, and we might be able to work something out at the dance. Clearly, we Jets could learn a few new moves from the Sharks. The Sharks need to cool their jets anyway, so to speak.

When it’s show time, it isn’t us against them. In truth, we’ve made great strides. We’re learning every day. A colleague once mentioned that when people talk about collaboration, they usually mean cooperation. True collaboration is hard. Real communication is hard. It’s not about holding ground; it’s about ceding turf.

Two decades ago I was in school at Carnegie Mellon, where everyone is a geek in their respective discipline.The least geeky and (excuse the perception) least interesting people got a business degree. General management, which we assumed was to generally manage something general. It left us scratching our heads.

Now that I own my own business, I value management greatly. Business is an engine, and we don’t go very far without it. Besides, what do designers really do anyway? How do they do it? Is it describable to a non-designer, or do you have to be part of the gang?

Today we operate in a post Sharks vs. Jets world. Our team looks different. Our projects look different. Our sketches, books, and processes look different. As for the star-crossed lovers, our children have certainly taken the best of both of us. It’s the same for our ensemble at work. This is clear: Our hybrid future is stronger than our disconnected past.

Designers focus on asking questions, but often don’t like to answer them. Business people focus on answers, but often don’t ask the right questions. The combination can be powerful. The future of business and design lies in our ability to overcome our small worlds to make room for a bigger one.

The phenomenal power of strategic design thinking is unveiled in that final paradox–designers must become better at answering questions and business folks must become better at asking the right questions. Seek to apply this principle to your own business. Challenge your concrete thinkers to think more divergently; your creatives to think more convergently. In doing so, you will experience some transformation and create a new language of productivity.

 

Sales Shifts Into 21st Century Mode

People wonder what will become of the sales profession in the new, creative economy. Some suppose that most transactions will be done online, without the interpersonal component that has existed since at least the Industrial Revolution. Few expect the demand, however, for sales folks to increase. Yet, in an article for Inc. magazine, Geoffrey James (the Sales Source columnist for the online magazine) shares some findings of a project he has conducted over a two year period with his peer, Howard Stevens. Reports on the project are available for free on the Chally website (HERE), so if you’re interested, you might want to download them (especially since there’s no guarantee they’ll be free forever.)

1. The Web will make salespeople MORE important.

Conventional wisdom says that the ability of customer to research products and buy them online should make salespeople less important. It turns out that the opposite is the case, and companies are hiring more salespeople than ever.

However, customers expect much more of the salespeople who contact and work with them. Customers now expect salespeople to have a expert’s view of the customer’s business, act as a manager of some crucial part of the customer’s business, and be effective at protecting the customer’s interests within the vendor organization.

2: Sales jobs will become further differentiated and specialized.

Conventional wisdom says that the best sales professionals are hard-driving mavericks who can drum up business, develop opportunities, and close deals like crazy. However,  according to Chally’s research, there is no “one size fits all” salesperson any longer.

While some sales jobs may demand the stereotypical “go-getter” behavior, other jobs favor employees with less showy strengths, like strong analytical skills, the ability to empathize with customer problems, or a deep understanding of complex business issues.

3. Universities and colleges will offer more courses on selling.

Conventional wisdom is that top sales professionals don’t need anything other than a high school diploma (if that) in order to sell. However, because selling is becoming more specialized, U.S. firms alone are spend $7.1 billion on sales training every year.

Given the demand, colleges are now ramping up dozens of sales-oriented business classes, many of which are producing exceptional graduates who “ramp up” 50% faster than the average candidate, and are 35% less likely to leave their employer.

4. Selling will be less of an art and more of a science.

Conventional wisdom says that sales is an art (aka “black magic”) that’s only measured by your financial results at the end of the quarter or fiscal year. However, sales-oriented technologies have now made it possible to use science to increase sales performance.

For example, using psychological assessment tests, it’s now possible to create an accurate map of a salesperson’s individual skills, competencies, motivational drivers, work habits and potential for developing new skills. Such metrics make selling (and forecasting sales) more predictable and therefore more manageable.

As you may be able to infer from the comments above, James sees the current flux in sales as monumental. He compares it, in fact, to a revolution, not unlike marketing advances in the 60s or computers in the 80s. The premise that online transactions will fuel the need for more sales is an exciting one. It will be interesting to see whether the need will be for technicians or consultants, or a hybrid. Enhanced consultative skills will be welcomed by purchasing professionals and consumers alike who cringe at the thought of having to interact with the stereotypical pushy salesperson. With a new sales training center, faculty dedicated to sales training, and a growing amount of resources being pledged to course offerings in sales topics, my MBA alma mater, Elon, is an example of a school that has picked up on the executive sales training movement.  Finally, the professionalization of sales through career development tools employed in other roles and fields is another encouraging development that should lead to smoother communication between sales teams and the remainder of corporate departments. What do you think about these trends as James has articulated them?