One of the great pleasures of writing this blog is the opportunity to stay in touch with friends and former students. I received a nice note from Tenglum Low, who is a top executive in Malaysia. Tenglum took my course when he was in an executive program at Harvard.
Tenglum wrote that over the last 25 years, a significant amount of his time was spent in reorganizing two publicly listed Malaysian companies, serving as COO and CFO.
The first was a steel company which he helped grow from 200 to 2,000 employees over 15 years. He started his career in this company when it had 200 employees, and he had a key role in selecting and developing the employees during its growth period. He noted that once the company’s vision and values were aligned, it grew quickly. While the company did not have the financial resources to hire experienced people, the commitment of the employees and the strength of the culture permitted them to succeed.
However, as they expanded through acquisitions, they were not able to integrate the cultures of the newly-acquired companies with that of the “original mothership.” The management team was reluctant to divert management resources to the newly-acquired subsidiaries because they were so important to the strategic and financial performance of the main business. Tenglum noted, “The acquired subsidiaries continued to be a sore thumb in terms of financial performance.”
The second company Tenglum managed was a mature brewing company, formed through the merger of two breweries. These entities had a similar history and heritage, but were competing in the marketplace prior to the merger. After the merger, the shareholders of the respective companies, through their representative directors, were acting more as brand owners than as owners of the whole enterprise. They were suspicious of each other, and this caused further problems. The company did not reduce the workforce and wound up with two separate organizational cultures, which were continually fighting with each other.
When Tenglum joined this company as a top manager, he initiated the following changes:
- Elevated the responsibilities of the independent directors over those of the representatives of the two former companies in order to align the board members around a common vision for the whole enterprise;
- Aligned the management team with this new integrated vision, and formed a culture around it;
- Reduced the layers of senior staff who were not contributing directly to the company’s operations;
- Raised management expectations in order to identify those managers who were both committed to the new vision and capable of achieving it;
- Allowed about 1/3 of the management team, who were committed but less talented, to retire over time with dignity – and replaced them with committed, capable younger managers.
Tenglum noted that this is a painful exercise, “but the results were great, a continuous 9 years of growth to become the market leader.” He also noted, as a bottom line, that without a massive reorganization, it is very difficult to merge companies, and quickly improve their management skills and allegiance to a viable new strategic vision.
I have had the privilege of staying close to Tenglum Low for over ten years. He is a manager who combines great capability with deep compassion. He was able to learn from his experience at Malaysian Steel, and to apply those lessons to successfully turning around a major brewery and guiding it to industry leadership.
I just finished an interview with a journalist who is writing on the importance of supply chain optimization. This writer is addressing a set of distributors of products that have relatively low value for their weight and volume. This makes supply chain costs really critical to their profitability.
As I thought about the topic, it struck me that there are two very different ways to approach the problem. The traditional way is to assess the software and automation possibilities that could be deployed, and then to think about ways to get the operating personnel to “buy into” the solution. I could visualize the usual checklists of software packages and capabilities.
Certainly, a number of terrific software packages and warehouse automation systems have been developed, tested, and put into widespread use. But the real question is what to do with them.
In this slow economy, customers are minimizing their inventory, and increasingly depending on distributors for fast service. This enables strong distributors to increase business, but it also places a big cost burden on them. In the particular industry the journalist was writing about, this cost dynamic was having an extremely strong impact on profitability.
When I considered the deeper question of how to optimize this supply chain, three steps seemed especially important – steps that are all too often left out of the process.
First. Divide the business (logically) into core and non-core customers, and core and non-core products. Usually, your core customers and products are characterized by high-volume. If you think of this as a 2×2 matrix, each quadrant has very different characteristics, and each requires a different supply chain.
For example, core products for core customers should flow like a river from suppliers through distributors to customers, with minimal inventory (relative to sales) and minimized handling. Think about how radically this differs from core products sold to occasional customers, or from non-core (sporadically-ordered) products even sold to core customers.
The most important initial step in optimizing a supply chain is to understand that the right supply chain solution (decision rules, inventory levels, physical process) for each quadrant can and should be very different.
Second. Work with your customers – especially your core customers. Many customers do not have a sophisticated knowledge of how to set inventory levels and reorder patterns. You can make a big difference in both your profitability and your customers’ profitability by helping them. This is especially critical in these difficult times.
I recall working with a major distributor a number of years ago to reduce supply chain costs. After a little investigation, we figured out that there were only three or four inventory/replenishment systems that the customers used, and that most customers did not know how to keep them set correctly. We created a small team that worked with the core customers to readjust their systems. After a month or two, the cost savings were surprisingly large.
Third. Get the sales reps involved. In most distribution businesses, the sales reps are the primary link to the customers. In my experience, sales reps in many companies have an overwhelming number of objectives, ranging from revenues to promotional programs to brand introductions to point-of-purchase displays. While some companies include gross margin in sales objectives, net profitability, per se, is almost never an objective.
In many distribution businesses, supply chain costs are a critical determinant of profitability. These costs can vary considerably from customer to customer and product to product. They are deductions from gross margin in profitability calculations, so a simple focus on gross margin eliminates a major source of profit improvement.
It is very important for the sales force to understand the profit impact of customer orders and other supply chain costs, and to be given a fairly simple program to selectively improve customer profitability. Here, creating a simple “red-yellow-green” color-coding designation can provide terrific results.
For a sales force to be productive, the reps must have at most 3–4 clearly understood objectives. Profitability maximization must be one of them.
All too often, managers instinctively reach first for technology solutions, focusing primarily on the selection and implementation processes. But the real profit impact comes from changing the business.
I’ll always remember the immortal words of Murray Smyth, at the time CFO of one of the largest subsidiaries of a major distribution and manufacturing company, “If we haven’t reorganized in the last six months, it’s because someone missed a deadline.”
Why do reorganizations fail, and what is most critical for success? Strategic clarity and followthough.
I’ve been involved in a number of major mergers and reorganizations. In my experience the most important differentiator between success and failure is whether the company’s top management creates a new strategy that would not have been possible without the merger or reorganization. In the absence of this, the company’s factions simply focus on squabbling about “who wins.”
Companies reorganize or merge because a significant market opportunity arises that could not be fully met under the former structure. The company must change its organization and structure to meet the new opportunity, and to realize the profitability, growth, and strategic advantage it offers. The new organization necessarily must draw parts of the old organization or merged company that fit the new strategy, drop parts that don’t fit, and combine them in a new way to do critical new things.
Success requires three essential elements: (1) clarity about why the merger or reorganization is needed and what specific new advantage will result; (2) a VERY SHORT LIST of the things that the new organization must get right to accomplish the new strategy; and (3) relentless topmanagement follow-though with a clear focus (repeated message) on the reasons for the new strategy and a series of “report cards” on the organization’s progress toward implementing the very short list of things that must be done right – coupled with significant compensation behind it (not just “retention bonuses”).
Here are two instances of successful reorganizations/mergers. In the 1980s, Baxter developed a new business, called ValueLink (now part of Cardinal Health) that was a role-model for the vendor-managed systems that followed. In it, Baxter developed a way to control the movement of its products not just to the hospital loading dock, but all the way to the patient-care areas. This created great savings both for the hospitals and for Baxter, and high barriers to entry as well. When Baxter’s top managers saw the power of this relationship, they acquired American Hospital Supply in large part to have a much broader set of products to pump through the new channel.
For the new strategy to work, Baxter had to reorganize the old companies to service its focus accounts in a new way. For example, a question arose as to whether Baxter should distribute competitors’ products through its new system. The product managers argued strenuously against this, claiming correctly that it would hurt their product sales. The responsible General Manager wisely overruled them, seeing that the new strategy of developing the dominant channel was more important keeping the old strategy of simply maximizing the sales of each product manager’s products. New opportunity – new strategy – new policies and organization – rigorous follow-through – huge lasting success.
In a similar situation, when P&G developed its now-famous partnership with Wal-Mart, in which P&G drives sales and profit growth by developing supply chain and marketing efficiencies that give Wal-Mart higher returns on its sales of P&G profits, it had to radically change its account management process. In a novel move, P&G changed the structure of its account teams to feature four co-equal functions: (1) sales/marketing; (2) supply chain management; (3) IT; and (4) finance. This reorganization enabled P&G to create critical new efficiencies both for Wal- Mart and for its own business – and in the process both P&G and Wal-Mart achieved lasting success.
In both of these examples, numerous other companies, including direct competitors, tried to replicate the innovator’s success. But they faltered because they did not successfully reorganize to create the necessary foundation for success. The top managers of these companies lacked the clarity and follow-through that makes all the difference.
Profits are your reward for meeting customer needs.
The questions on the table are: Which customers? And which needs?
In my last post, I discussed the first question, which customers? Today, I’ll focus on the second question, which needs?
The essential first step to determine customer needs is to focus your efforts on your core set of sustainably profitable customers. The next step is to determine their needs.
A very useful way to approach the question of customer needs is to separate three distinct perspectives: perceived needs, articulated needs, and real needs.
Perceived needs refers to what you think the customer needs. This is the basis for your product development and marketing efforts. The critical question here is: where did your perception come from?
This can best be answered historically. Try looking at your product development efforts over the past 2–3 years, and thinking about these questions:
What customer information did your product development group consider? Did it come from the customers? If so, which customers? Which individuals within these customers? Did it come from your field engineers or sales reps? If so, how did they find out? Were they certain, or was it just a surmise based on their experience? Was your product development effort simply an extension of a preexisting initiative? If so, were the customer needs reexamined?
The next perspective concerns articulated needs. Again, think about what actually happened in the last few years.
Did your customers articulate their needs to you? If so, who in the customer articulated the needs? Was it a procurement manager? If so, did he or she really understand the company’s operational needs, or was he or she reporting what a few “squeaky wheels” were saying? What actual evidence led them to their views?
The problem of getting a good understanding of articulated needs is an especially important issue with customer surveys. Most often, survey results are simply tabulated to get the relative frequencies of responses. This is a huge issue in many companies.
The most important questions concern who in a customer organization is giving which responses. Do the purchasing managers say the same things as the operations managers? Do the high-level customer decision makers say different things than the lower-level managers in their own organizations? Do you get different answers from your core customers with high sustained profitability than you get from your money-losing customers? Did you survey the most important potential customers (who should be in your core)?
By averaging the results, you lose the best information. And in my experience, the really important information is almost impossible to dig out of most presentations.
Not only that, but the detailed untabulated primary data gives you a terrific roadmap into the markets to guide your subsequent sales efforts. It tells you which customers will be early adopters and which fast followers. It also lets you chart the attitudes, hopes and fears of a customer’s entire buying center. This roadmap will accelerate your sales and profits, but most often it is simply lost.
The third perspective is real customer needs. Here, you have to ask the question that is in the title of this post, “If I ran my customer…”
To answer the question of real customer needs, you have to understand your customer even better than the customer understands his or her own company. The best way to get this knowledge is literally to spend a lot of time physically within your core customers “walking in your customers’ shoes.” (Several chapters of my forthcoming book, Islands of Profit in a Sea of Red Ink, describe how to do this.)
Here, the big issue is whether you are meeting customer wants or customer needs.
If you are meeting customer wants, you make the customer happy. But when you meet real customer needs – needs that even the customer does not yet see – you are an essential business partner. This is the ultimate in competitive differentiation, and this is how you earn high sustainable profits.
Which brings us back to my last post. If you don’t identify and focus your marketing and product development efforts on your core group of sustainably profitable customers, you can’t hope to develop products that meet their real needs.
Profits are your reward for meeting customer needs.
Sounds obvious, right? But here are two critical questions: Which customers? And which needs? The answers will have a huge impact on your profitability and business success.
Today’s post will focus on the first question, which customers? My next post will discuss the second, which needs?
I recently had a lengthy conversation with a product development engineer in a well-known high-tech company. His product is an important component of his customers’ products, and the specifications of his product are an important determinant of what business initiatives his customers can pursue. The subject of our conversation was how to determine customer needs.
The first step is to ask the question: Which customers? The company has a wide range of customers with very different needs.
In my writing, my core premise is that in virtually every company, 30–40% of the business is unprofitable by any measure, and 20–30% both provides all the reported earnings and subsidizes the losses. This means that every company has a core of “good” business that offers sustainably high profits.
One of the biggest problems in marketing and product development is the failure of all too many managers to identify this core of sustainably profitable business.
In my experience, most companies lack focus when it comes to creating compelling new value for the customers that are capable of giving them high sustained profitability. Instead they spread their efforts across their whole customer base, or focus mostly on large accounts, without regard to which do, and which do not, yield sustainable profitability.
The underlying reason is that most product development programs implicitly try to maximize revenues, not sustainable profitability. The net result in most companies is a set of products that is aimed at most customers, but which may well not meet the real needs of the core set of customers.
(Think about all those broad-based marketing surveys sent to a random sample of customers. What is the population that is being sampled: All customers? The best customers?)
It is far better to meet the precise needs of your core sustainably profitable customers, and then focus your sales efforts on using this critical competitive advantage to secure these accounts, increase your share of wallet, and hunt down and land more customers that should be in your core.
If you aim your product development efforts at your average customer, average performance will be the logical result.
My next blog post will focus on the second question: Which needs?