January
3, 2007 - Distribution Channel Commentary (DCC) # 95
Greetings:
If you know what these commentaries are about, go to "TOPICS" below;
otherwise, read on.
·
A FREE SERVICE
The Merrifield Consulting Group, Inc. (www.merrifield.com) is offering this
opt-in periodic (formerly weekly) commentary service that is now being posted
at www.merrifield.com. (Past DCC’s
are all posted there.)
·
SHARE THE KNOWLEDGE: ADD OTHERS (OR, DELETE ME!)
To make this free service continue to happen, we must
reach more individuals who care about making independent distribution
companies/channels more effective. If you know of others who might like to
receive this service, please: forward
this commentary on to them; encourage them to email karen@merrifield.com to have her add their email address to our list;
or, send them to our web site. If you don’t like this type of mail, ask to
be deleted, and we actually will.
·
RE-PUBLISHING/RE-PURPOSING
ANY COMMENTARY CONTENT? YES
YOU MAY!
Just let us know by email what you want to do, give us
some credit and point them to our web site. We are delighted to have a number
of: trade associations; channel publications both printed and on-line; software
firm publications; buying groups; and university programs that have all found
re-purposing applications. Some just post the entire commentary on their site,
others will post excerpts with their preface remarks. We’re flexible; the
answer is "yes", what’s the question?
TOPICS:
1.
THEMATIC
QUOTES – Forecasting, Collaboration, Appreciative Inquiry.
2.
FORECASTS
FOR 2007 ARE ESPECIALLY SUSPECT.
3.
RETUNE
OUR VISION AND CULTURE FIRST, TACTICS SECOND.
4.
NEW
ARTICLE ON FILL RATE ECONOMICS.
5.
WEALTH
CREATION THROUGH COLLABORATION E-TOOLS.
1.
THEMATIC
QUOTES
Forecasting:
“The herd
instinct among forecasters makes sheep look like independent thinkers."
Edgar
R. Fiedler
"Some
things are so unexpected that no one is prepared for them"
Leo Rosten
"Those
who have knowledge, don't predict. Those who predict, don't have knowledge.
"
Lao
Tzu, 6th Century BC Chinese Poet
Collaboration:
"I
not only use all of the brains I have, but all I can borrow." Woodrow Wilson
"Great
discoveries and improvements invariably involve the cooperation of many minds.
I may be given credit for having blazed the trail but when I look at the
subsequent developments I feel the credit is due to others rather than to
myself." Alexander Graham Bell
Appreciative
Inquiry:
“During
this summit, we will use a tool that is new to many of us – appreciative
inquiry. Appreciative inquiry is a way to rediscover and tap into our core
strengths and highest potentials. It also helps us develop our self-talk in a
constructive way and encourages us to bring out our best qualities in serving
this institution. Appreciative inquiry is a method that helps us develop the
goals and dreams that support the future of our Navy. It involves soliciting
ideas from people throughout our fleet”…
Admiral Vern Clark; US Navy: Leadership Summit 2001
“It could
be argued that all leadership is appreciative leadership. It’s the capacity to
see the best in the world around us, in our colleagues, and in the groups we
are trying to lead. It’s the capacity to see the most creative and improbable
opportunities in the marketplace. It’s the capacity to see with an appreciative
eye the true and the good, the better and the possible.”
David L. Cooperrider
Appreciation is the strongest emotion we have for
attracting what we want and directing where our attention and energy flows to
support growth. In the beginning there is a person, alone with her thought, her
soul, and her professional spirit, capable of intuitions that are at once great
and fragile, simple and complex. For others, real insights come in the company
of others. When we dream together, it is the beginning of reality. Dreaming
provides the spark of passion; talent is then the firework of its expression;
perseverance, the sacred fire of its accomplishment. Appreciation is like
looking through a wide-angle lens that lets you see the entire forest, not just
the one tree limb you walked upon. Through appreciative inquiry you are able to
grow by sharing. (An edited compilation of contributions posted at “The
Appreciative Inquiry Commons” at this link:
http://appreciativeinquiry.case.edu/practice/quotes.cfm
)
2.
FORECASTS
FOR 2007 ARE ESPECIALLY TRICKY.
It’s the
time of the year for reviewing forecasts for 2006 and making them for 2007. Both
economic and weather forecasts by experts tend to be quite accurate in the middle
of steady cycles and almost worthless or misleading when system variables are
turbulent. 2006 was a reasonably steady world for economists, as most markets
and assets floated higher on a sea of increasing “global liquidity”. The
meteorlogists, in these years of global warming, whatever the causes may be, struggled
a bit more. The National Oceanic and Atmospheric Administration forecasted, for
example, that up to 6 major hurricanes would occur in the North
Atlantic. Over the next 6 months, only two occurred, and zero
reached the US,
which had a big impact on energy costs this fall.
Then,
there is always the un-forecastable stuff like: Google’s employee head count
growing from roughly 5,000 to 10,000 in 2006. Or, Wikipedia’s number of
articles growing from 2.5MM articles to 5.3MM in English, while the
foreign-language versions of the on-line encyclopedia doubled to over 200
languages -all with just five, full-time employees.
For 2007,
economic forecasting could become treacherous. In the US we are in
the midst of an unprecedented housing bubble meltdown during which the experts
have been consistently wrong to the optimistic side for the past 8 months. (Keep
a weather eye on the foreclosure rates and their ripple effects in the
sub-prime mortgage area.) But, in spite of big downturns in housing and
automobiles, the average economy is still being held up by an epochal global
credit bubble fueled by the creation of fiat money supply by all central
banks and compounded by financial engineering products. Global money center
firms have earned 6 times previous record profits selling leveraged derivatives
on top of leveraged derivatives that no one really understands.
The
credit bubble was highlighted in 1-02-07 issue of the Wall Street Journal, in
the “Heard on the Street” column. Key points were:
·
There is a global “liquidity boom” that is driving
merger deals (and all stock exchanges)
·
“Most experts see little hint that the cash will
dry up soon”
·
“The benign conditions will one day come undone.
But, for now, nobody can see how or why.
·
Emerging market stock markets are up 230% as a
group from the lows of 2003; Egypt
is up 14 fold. (The US
markets, however, have been flat over the past few years when priced in Euros
or gold because the global purchasing power of the dollar has been steadily eroding.)
From
Bloomberg on Dec 27th two analysts, Dana Cimilluca and Julia
Werdigier observed:
“As hot
as the mergers market is now, it’s about to get hotter. All the variables
are in place for acquisitions in 2007 to surpass this year’s record $3.6
trillion. (1) U.S.
stocks are trading close to the cheapest price-to-earnings levels in a decade,
data compiled by Bloomberg show. (2) Yields on junk bonds used to finance
takeovers also are near 10-year lows, according to Merrill Lynch & Co. (3) Leveraged
buyout firms have $1.6 trillion to spend, Morgan Stanley estimates. ‘There
hasn’t been a period I’ve seen in my career when all of those factors that
influence M&A activity have been as strong,’ said Stefan Selig, the global
head of mergers and acquisitions at…Bank of America…”
(Comment:
What is your company worth? Are
there two or more strategic consolidator buyers for it? Should you sell? The
answers are quite personal, situational and contextually specific. However, Inc
Magazine’s January issue has some interesting valuation tools and charts at
this link: http://www.inc.com/valuation. Their
simple calculator is not worth much, but their PDF graphs are interesting.)
But, if you are in a physical goods channel – making, distributing or
retailing/dealing stuff – it might be different because there are “two
economies”: services (especially financial) are strong, but manufacturing/distribution
(especially housing and auto related) are weak:
·
Domestic
trucking shipments declined by almost 9 percent in November, marking
the largest year-over-year decrease in almost six years. Because more than
two-thirds of all manufactured and retail goods in the U.S. are
carried by truck, this industry statistic is an economic bellwether.
·
Factory
inventories worldwide rose faster than sales in the fourth quarter for the
first time since 2001, according to economists at UBS AG in London. Behind the
build-up: an unexpected slowdown in demand, especially in the U.S., brought
on by the midyear surge in energy prices and a housing slump. The risk is that
cutbacks on production and inventory building will start to feed on themselves
in the first quarter of ‘07, damping demand further through slower job growth
and investment.
·
Housing-related industries shed 145,000 jobs from
May though November, according to Zoltan Pozsar, an economist at
Moody's Economy.com. Falling home values have also left people with less power
to extract cash from their homes through home-equity loans and refinancing, a
factor that many economists expect to take a bite out of consumer spending.
Along with slumping auto sales, the drop in housing activity has affected all
kinds of manufacturers, from drywall factories to furniture makers. The
Institute for Supply Management, a purchasing managers' trade group, said that its index of manufacturing activity for
November fell to 49.5, the lowest point since April 2003. (Any number below 50
indicates contraction.) By contrast, the ISM's index of
service-sector activity for the same month rose.
·
The panel of 60 economists who participated in the Wall
Street Journal's latest semiannual economic forecasting survey offered an
optimistic outlook for 2007: The service sector should keep humming along as
the recent weakness in housing and manufacturing abates and the Federal Reserve
begins to reduce interest rates. That would allow the economy to expand at
a rate fast enough to keep investors happy, but slow enough to keep inflation
at bay.
Reading between
the lines of the four points above, we can guess at why there seems to be a
“widening gap between the super-rich and the rest”. If you lose a high-wage
factory job to Asia, you could get two, new
service jobs and still not be making as much as before, especially after health
insurance costs and reset adjustable mortgage interest costs are deducted. But,
the top .01% of taxpayers – about 13,000 in 2006 – averaged $24MM in reported income.
These super-earners can’t mathematically all be Fortune 1000 CEOs who are
stealing from the shareholders with back-dated options, etc. The other 12,000+
work on Wall Street and run hedge funds to service and gamble on the upside in
the global, liquidity-boom, casino economy. This theory also explains why carriage-trade
firms serving the hedgies are doing better than Wal-Mart where recycle factory
workers can’t buy more year-over-year amounts of goods.
Final Conclusions:
1.
The central banks, with the help of Wall Street
financial engineering, have cooked up an interesting global economy for us in
which a global credit bubble has created other bubbles. This economic backdrop will
make market volatility and forecasting especially tricky in 2007.
2.
Forecasts for when and how the credit bubble might
end are all over the map. I’ve seen one forecast that believes that it can all
continue for 2.5 more years.
3.
No matter what the future brings, there is nothing
wrong with running our businesses ever better.
3.
RETUNE
OUR VISION AND CULTURE FIRST, TACTICS SECOND.
One of my
distribution-chain clients has had a good financial run for the past three
years. One way of measuring their success is by the amount of profit-after-tax (PAT)
they have made per full-time-equivalent-employee(FTEEs). For their fiscal year
2003, they made $3000 PAT/FTEE; in ’04, $8,000; and in ’05 $18,000; and in ’06,
$28,000. Aside from amazing inflation in some of the core products that they
distribute, they have made some smart, strategic, structural productivity moves
during this run. But, for the multiple reasons why their profit leverage took
off, they realize it can and has already started to go the other way as some of
the markets and product pricing has begun to turn.
Because
all of their stakeholders have gotten spoiled by the last three years, they are
asking: how shall we innovate going forward to create new value propositions
and wealth for all of our stakeholders? The pithiest answer can be found in a
book entitled “The Origin of Wealth” by Eric Beinhocker (which I’m not
recommending). The simple, profoundly powerful, three step formula is: 1) differentiate, 2) select, 3) amplify.
To unpack
this bumper-sticker mantra: we can’t have a unique value proposition for
somebody unless we are sufficiently different in a better way than the
fast-follower, great execution competitors and the thundering herd behind them;
so, differentiate! Try to reinvent
what we are doing.
Because all
of our theories for how to innovate new value won’t strike gold, we should try
a number of cheap experiments in which we fail forward as fast, cheaply and
learning-full as possible. With this portfolio approach, we must then “select” by weeding the losers to
better feed the winners.
Once we
get traction with some new vector of profitable growth, than we need to “amplify” it. This stage is best led by
warriors who are persevering, 110%-focused-and-effortful people. When we: think
we have captured all of the new opportunity; are getting bored with the slowing
growth rate of our new found success; and we are looking for the next rocket
ride – that’s when we should redouble our efforts and renew the same old effort
to get the last 30-100% we didn’t know was still out there.
But, Mr.
Beinhocker’s three-part formula is also missing a few upfront guidelines. I’d
advise most companies to start the differentiation work with their very best,
core customers within their number one niche of customers. And, when we do
figure out how to define that niche and those customers, we will also need the
“innovative culture memes” that will enable us to execute the three step
formula. For more on “innovative culture memes”, check out our annotated slide
show at this link:
http://www.merrifield.com/articles/SixCultureOfInnovationMemes.pdf.
For a
seventh “meme” that supports innovation, please consider skimming through out
summary notes on “appreciative inquiry” which are posted at our site at this
link:
http://www.merrifield.com/exhibits/Appreciative_Inquiry_Exhibit.pdf.
4.
NEW
ARTICLE ON FILL RATE ECONOMICS.
We have
posted a new article at our site at this link: http://www.merrifield.com/articles/1_15%20fillrates.asp
This
article offers specific ideas on how to better: understand, measure, achieve
and benefit from higher fill-rates with the same or less inventory investment.
With a more complete understanding of fill-rate economics, many manufacturers
and distributors will figure out how to partner with either traditional master
distributors or a new breed of third-party-logistic, “channel utilities”.
If any
readers would like to know more about this subject or better-yet contribute to
in a collaborative web site space, please let us know.
5.
WEALTH
CREATION THROUGH COLLABORATION E-TOOLS.
Here are two,
best-practice, collaboration, case studies that failed:
CASE ONE:
A large distribution chain created a secure, online forum for all of its sales
managers to post questions, answers-to-those questions and other helpful
information. The VP of sales and some other HQ types were also in the forum.
The guiding assumptions were:
·
The best performers could help the weakest with
their questions and problems.
·
General communications from HQ to a target segment
of managers could be broadcasted faster through and archived better at a forum
rather than snail mail or email.
·
Tactical questions about and answers to
time-sensitive marketing programs could be handled better through the forum.
·
And, we all know from kindergarten that sharing is
good.
Results?
Less than 5% of those invited into the forum ever participated and over half
had to be personally guided into the on-line forum to see what it was all about
and how it worked. The few who used and contributed to the forum quickly
stopped investing in the space.
CASE TWO:
A highly successful software firm created a users group, on-line collaborative
space in which no two, competitive wholesale distributor clients were included.
The target participants were the top one or more IT people at those client companies.
The guiding assumptions and intentions were much the same as in CASE ONE: “no
one is smarter than all of us”; collaboration will help all clients be top
80%-ile power users of the software solution across all of its potential
applications. And, the results were the same as Case One!
Why do
both intra-company and inter-company collaboration opportunities fizzle in
spite of big upside benefit potential and ever-dropping e-costs for
collaborating? Smarter and more experienced people than me have been working on
this question, so for instant good insights here are:
A PDF
article on the subject at this link:
http://www.ashridge.org.uk/Website/IC.nsf/wFARPUB/Why+in-house+collaboration+is+so+difficult
A blog synopsis
of the great article above at this link:
http://www.nevillehobson.com/2006/02/27/four-steps-to-overcome-collaboration-obstacles/
Who has
and who will use e-collaboration tools to create significant innovative wealth?
At what rate will this trend catch on? There are three new books out on this
subject:
Wikinomics:
How Mass Collaboration Changes Everything by Don Tapscott and
Anthony Williams.
Some key
concepts from this just-out book are: Experience the total output and behind
the scenes activity at wikipedia.org. How can we harness outside expertise? How
can we reduce the transaction costs of producing value? Companies exist because
of transaction costs. Doing business by assembling all the right people and
resources inside an establishment has long been more efficient than trying to
find and coordinate those things in the world at large. For this 1937
discovery, Ronald Coase won the Nobel Prize for economics. What if
e-collaboration tools allow companies to rake in expertise from all over and
reduce lots of different types of transaction costs, so – for example –
“manufacturers” outsource lots of research, design and manufacturing activity?
Open
Business Models: How to Thrive in the New Innovation Landscape by Henry
Chesbrough. This is a far more academic book which is focused more on how
companies might structurally alter their business to incorporate more outside research.
There is little on e-collaboration tools.
A third
“book” is the one that is attempting to be written on-line using wiki-tools at
wearesmarter.org. I registered at the site to prowl around, but I think too
many cooks for one book might not work as it has for creating over 5MM articles
on all kinds of topics at wikipedia.org.
Because I
do believe that there is real opportunity at the intersection of formal
“innovation management” and e-collaboration tools, I’m conducting some of my
own experiments at an e-collaboration site (www.near-time.com).
I have, for example, set up a “space” for the topics of “fill-rate economics
and vendor managed inventory” which is seeded with my fill-rate economics
article above. If anyone in reader
land would like an invitation to get into the space to lurk, question or
best-yet contribute, please contact me. I’m still looking for a way to
prove my elementary school teachers were all right about the benefits of
sharing.
That’s
all for this edition. Here’s hoping we all have a healthy, happy and prosperous
2007!
Cheers,
Bruce (bruce@merrifield.com)
