June 27, 2017


















Article 1.11

STRATEGY FOR ’06? STOP DOING WHAT WE’RE DOING!

If insanity is doing the same thing repeatedly with increasing effort hoping that results will change for the better, then there must be a lot of crazy companies in the US that also have a nervous weather eye on gathering clouds on the ’06 horizon.

Planning now to make lots of evolutionary refinements that fit nicely into our old industry and groupthink may not improve results for two reasons.

  • We may not be as good at implementing planned changes as we think. Have we honestly scored our success rate for past annual objectives? And,
  • As we review past accomplishments, did they have the big impact we thought they would have or did the top 80% of all competitors do the same things leaving us with no sustainable competitive advantages?

LESS PRODUCT PUSHING, MORE VALUE INNOVATION?

Are we still hoping for big results from lots of "new" product pushing promotions when the effectiveness of such efforts has been declining for years? In mature industries, 90% percent of sales typically involve commodities that often have equally, excessively-excellent-and-for-less, clone competitors from Asia. Anyone in their "right" brain might advise us to look for sustainable advantages and better value propositions in non product-centric ways that are aimed at specifically the bigger, faster-growing and/or more profitable customers in the right target customer niches for our strategic capabilities.

Switching from product-centric thinking to service or total value thinking isn’t easy; consider the struggle going on at General Motors. GM lost $95 million on $193.5 billion in sales in ’04, which included $2.9 billion in profits from its financial service division. What will GM do when the easy money in mortgage refinancing declines with rising interest rates and an eventual correction in housing-bubble values?

GM’s mobile, internet/phone service shows promise. In ’04, GM had 3.3 million subscribers for its On-Star service who were paying $300 per year in fees at profitable margins. In ’05, GM plans to offer the service in all of their car models, because they think that they can get 8 million more subscribers per year going forward. I still wouldn’t buy GM’s stock, because they have been innovating too little, too late for too long to overcome their problems with labor costs and un-funded retirement liabilities in their losing car production business, which is now tanking due to over-dependence upon gas-guzzling SUVs.

Assuming that they were publicly traded, would we buy stock in the bottom 90% of all distributors that participate in industry financial performance surveys? We’d do better in muni bonds with less risk. But, the top-4-percentile of all performers have exceptional profit growth and financial returns due to continual service value innovation.

BIG DISTRIBUTOR INNOVATION STORIES

What type of big innovations do the top 4% do? It can vary, but here are some innovative case stories I’m familiar with:

An industrial supply distributor surveyed their top 50+ accounts to discover that 20 of them were interested in having the distributor provide a public warehouse service for supply goods that the customers had been and would continue buying direct (e.g. custom-made packaging materials and business forms). These customers wanted to re-deploy in-house storage space and personnel activity into additional manufacturing capacity. The distributor created a public warehouse service division and delivered both traditional supply needs and the new materials at the same time to the same locations on the same deliveries.

In one year a contractor-supply distributor lowered its total sales force compensation costs by 40% while growing the customers covered by outside sales reps by 20%. They "out-placed" the least effective 50% of the sales force and reassigned their best reps to more deeply penetrate the best accounts. The compensation plan was changed from a straight commission percent of the margin dollar to guaranteed salaries with growth bonuses for growing the margin base to a higher level. The rest of the active accounts - that had been called on very infrequently by outside reps - got much better with frequent coverage from two, new telemarketers who were supported with both faxgram and email support.

Another contractor-supply distributor finally decided to improve basic, service excellence metrics after years of false starts. They identified 7 basic service metrics that the company began to measure and improve daily. As all of the service metrics improved in a range from 10% to 500%, the company’s - sales, order size and profits - all started to grow significantly without adding any people. The quick and steady improvements in service levels, gross margin totals per employee and gainsharing bonuses for all helped to contribute to a snowballing, can-do culture. More service value innovations are now successfully being added to the service excellence platform.

An automotive parts wholesaler ranked its customers by estimated profitability to find that the bottom 10 accounts totaled about $100,000 in losses. The CEO and the VP of Sales visited managers at all 10 accounts to see how they could re-invent these lose-lose relationships because both parties were killing themselves with small order transaction costs. The net result was that 2 accounts switched their cherry-picking, small orders to some other competitor while the other 8 increased their purchases 300%, their average order size 600% and their combined profits to a positive $25,000. No new employees were needed to handle selling more old items to more old customers on a larger average order size basis. The bottom line improved by roughly $125,000. Not bad for a few days of innovative work!

These story headlines may seem incredible or even heretical to many distributors. But, any breakthrough innovations have to be uncomfortably out of the boundaries of traditional company and industry groupthink to create advantages over the competitive herd that is doing me-too, "best practice" refinements.

RETHINK MANAGEMENT MEETINGS

How do we escape groupthink in our next planning meeting? Here are some suggestions:

  • Do most of the financial performance reviews before hand by email. Reviewing numbers in any detail are: boring; reinforce try harder the same way next year activity; and haven’t been causing enough innovation in the past. Give highlighting the numbers and any discussion no more than 20% of its historical time allocation.
  • Send participants novel information with related questions to think about in advance of the meeting and then discuss them at the meeting. If you can’t think of ways to do this, contact us for suggestions.
  • Ask all participants to send, in advance, their own additional innovative ideas in the form of questions. Encourage them to preface the questions with key facts and assumptions that led them to each question. Then, summarize all of the questions in a value-added way and guarantee optional anonymity for contributors if so desired.
  • List all of the big ideas of the past few years that have been discussed and were going to be done, but weren’t. Then some discussion time can be spent on: "how we might reinvent how we mange change".
  • Plan to discuss how much time both managers and outside sales people have been and should be spending on innovative projects. How should we measure the old and new innovation activity levels? How should we shape up or out losing activities to free up the time to work "on" the business instead of spending 110% working "in" the business? If reactive fire fighters and activity triage artists are lionized, who will ever have time to work on bigger, important long-term projects (like securing levees in New Orleans before Katrina arrived)?
  • Have someone facilitate the meeting to encourage open "dialogue" about deeper root cause issues instead of "debating" the details for how to refine past practices. (See exhibit 39 at http://www.merrifield.com/exhibits/Ex39.pdf for more on this.)
  • Point out that this meeting will be the first of many in which the team will begin to try many "cheap experiments" to "fail forward" toward innovating a new planning (meeting) process that supports true innovation for the benefit of all stakeholders.

To avoid repeating the past, what experiments will you try at your next management meeting to stimulate more effective innovation management?

 

Merrifield Consulting Group, Inc., Article 1.11

October, 2005