Big Data is the breaking news story in the IT world.
Here’s the picture. Sometime soon company managers will have an enormous amount of information at their fingertips. They will be able to see everything and optimize everything.
What could be better?
Within the past month, two very senior, astute individuals contacted me about this – one a senior IT industry analyst, and the other a senior editor of a major business publication. They both had the same question: If Big Data actually becomes available, what will be the consequences?
My answer – Big Data offers big opportunities, but it carries the very strong likelihood of creating really big headaches in three areas: (1) paving the cowpaths, (2) managing at the right level, and (3) driving without a roadmap.
Let me explain.
Paving the cowpaths
Remember RFID?
A few years ago, RFID was all the rage. The idea was that it was becoming technically and economically possible to affix an RFID tag to every item moving through a supply chain. (An RFID tag is a small passive label that essentially emits a precise identifier when it is hit by an electromagnetic field.) Armed with this capability, managers could know the identification and location of every item in their company, and even those flowing into and out of their companies.
I remember discussing this with a former student, who is a senior operating executive of a Fortune 20 company. His reaction was similar to mine: What ever would you do with all that information?
In fact, several years ago I co-authored a column, Are You Aiming Too Low with RFID? in Harvard Business School’s Working Knowledge. In this piece, I joined with Sanjay Sarma, co-founder of MIT’s Auto-ID Lab, and John Wass, CEO of WaveMark, to argue that the biggest danger with the flood of RFID information was that almost-irresistible temptation to focus on “paving the cowpaths.”
Here’s how we put it. “One of the most exquisite challenges of living in Boston is navigating the labyrinthine maze of streets in the downtown area. This part of town is the oldest part, and the streets follow the original paths formed by settlers driving their cows to pasture. Traffic flows poorly because the city fathers simply paved the cowpaths, making the ineffective more efficient. It’s much easier to navigate Back Bay, a part of Boston with grid-like streets, built on landfill centuries later.”
In the article, we outlined a number of highly focused, high-value analytical uses for the “Big Data” that RFID could produce, and counseled avoiding the large-scale applications that simply automated routine activities.
In the absence of this disciplined, strategic approach, managers are in grave danger of utilizing Big Data to pave the cowpaths, further entrenching existing practices and rendering the possibility of developing sweeping paradigm-changing initiatives more and more difficult.
This will almost inevitably occur because in the capital budgeting process, the tactical payoffs from paving the cowpaths will be clear and easy to measure, while the payoffs from far-reaching strategic changes in the business will be hazy and unmeasurable.
Managing at the right level
This past weekend, I was reminded again of the Big Data question when I re-read Wired for War, a terrific book by P.W. Singer which traces the robotics revolution and the use of robots in twenty-first century conflict.
In a particularly telling chapter, Singer describes how the real-time video feeds from drone aircraft – Big Data – led to the systematic leadership problems that I call “managing at the wrong level.” (See my HBS Working Knowledge column, Managing at the Right Level.)
Over many years, improved communications technology has enabled commanders to command increasingly at a distance from the actual battles. This has led to a very effective management structure in which top commanders focus on strategy and personnel, mid-level commanders on operational initiatives, and local officers on tactical issues. This parallels the leadership structure of most effective companies.
However, the widespread availability of drone aircraft information feeds has led to serious and systematic command and leadership problems. The ability of top commanders to see battlefield video feeds in real time has rapidly increased the centralization of command and led to an explosion of micromanagement.
Crack for Generals
Singer relates, “Too frequently, generals at a distance are now using information technology to interpose themselves into matters that used to be handled by those on the scene and at ranks far below them. One battalion commander in Iraq told how he had twelve stars worth of generals (a four-star general, two three-star lieutenant generals, and a two-star major general) tell him where to position his units during a battle.”
Singer continues, “An army special operations forces captain even had a brigadier general (four levels of command up) radio him while his team was in the midst of hunting down an Iraqi insurgent who had escaped during a raid. The general, watching a live Predator video back at the command center…ordered the captain where to deploy not merely his units, but his individual soldiers. ‘It’s like crack for generals,’ says Chuck Kamps, a professor at the Air Command and Staff College. ‘It gives them unprecedented ability to meddle in mission commanders’ jobs.’”
This direct meddling by military leaders has led to the rise of what Singer calls the “tactical general,” as the line between timely supervision and micromanagement has became blurred. Officers in the field lament what they call the “Mother may I?” syndrome which has come with these new technologies.
Moreover, power struggles are common when the feeds are available to multiple command groups. Singer notes, “At its worst, this pattern can lead to the battlefield versions of too many cooks spoiling the meal. A marine officer recalls, for example, that during an operation in Afghanistan, he was sent wildly diverging orders by three different senior commanders. One told him to seize a town fifty miles away. Another told him to seize the roadway just outside of town. And the third told him, ‘Don’t do anything beyond patrol five miles around the base.’”
But, the biggest problem with top-level micromanagement in the military – just like in business – is the huge hidden opportunity cost of failing to manage at the right level: a leader ignoring the critical issues of high-level strategy and organizational capability because he or she is so caught up in real-time micromanagement. This causes two very big, related problems.
First, the top managers fail to plan for the future. For example, in business, vice presidents should primarily be focused on defining and developing the company as it should be in three to five years, since that is the time it takes to develop a new set of capabilities. Their other critical responsibility: coaching and developing the next generation of leaders.
In the absence of this hierarchical discipline, the company is in grave danger of getting mired in the present, and falling further and further behind.
Second, when top managers – or generals – take over tactical decisions, the lower-level leaders cannot develop their skills. Instead, they must be empowered to act with initiative, even if it means making a few mistakes along the way. No – especially since it means making a few mistakes along the way, since false starts and errors are a natural and necessary part of doing anything significant and new.
The answer? Singer calls it “enlightened control,” a concept he credits to the great Prussian generals of the nineteenth century, whose ideal was that the best general gave his officers the objective and left it to them to figure out how best to achieve it. He cites the commanding general who so trusted his officers that the only order he supposedly issued on the eve of the Prussian invasion of the Danish province of Schleswig was, “On February 1st, I want to sleep in Schleswig.”
The action question for managers: Will Big Data be “crack for your vice presidents,” or will they have the insight and discipline to double down on “enlightened control.”
Driving without a roadmap
One might ask: But won’t Big Data let a company’s managers optimize everything? After all, every manager will have, theoretically, the information needed to get everything right. And if a company’s managers optimize everything, won’t the company be great?
This question embodies one of the biggest false assumptions in thinking about Big Data.
The glib answer is that if it weren’t for the humans, this premise might actually happen. Let me explain.
When I think of Big Data, an analogy comes to mind. Imagine that you were living decades ago, at the time of the invention of the automobile. Assume further that all of a sudden, all the dirt roads and tracks were paved. What would you do? Where would you go?
The obvious answer is that either you would stay local or you would be paralyzed in the face of the enormous number of opportunities. In fact, you would need a roadmap, so you could see how to get to different places. Beyond that, you would need to understand the nature of the destinations so you could decide where to go, since you couldn’t get everywhere in one lifetime.
Further, if you had a number of different drivers, it is likely that each would head in a different direction, since each would go after the goal that he or she thought best. If these drivers had to coordinate, like the managers in a company, what would happen? The result would be chaos.
The problem here is two-fold. First, a company can’t do everything, because it takes significant time and resources to manage the change required to harvest any IT-based initiative. And second, the initiatives have to be coordinated and focused on the right long-term strategic goals to be effective. If the availability of Big Data encourages a massive flock of independent tactical initiatives, it will do more harm than good.
The problem with low-hanging fruit
This raises an important related problem. Managers have an almost overwhelming tendency to focus first on opportunities that are near to hand, and have quick, visible payoff. Sometimes these are called “low-hanging fruit.”
The problem is that these relatively small, parochial projects will absorb the organization’s resources and capability to change, even while they give the illusion of progress. The huge opportunity cost is losing the opportunity and ability to focus on the really important initiatives with the really big long-term payoffs.
Think of it this way. The analogy breaks down because the big money is not in harvesting fruit more efficiently, but rather in changing the location of the orchard and the type of trees you plant.
This dissipation of effort, with its focus on a large number of small, incremental projects – rather than on the smallest number of game-changing, high-payoff initiatives – is the ultimate danger of Big Data.
Keys to Success
Big Data offers great opportunities – and huge dangers. How can you navigate toward the benefits while avoiding the hazards?
The key is management insight and discipline.
The true promise of Big Data is to make your company better, not just to make parts of it more efficient. To accomplish this, you need one part technology to nine parts vision and great management.
During the holidays, I read Walter Isaacson’s biography of Steve Jobs – which I strongly recommend.
Steve Jobs was a very complex individual, to say the least. He was abrasive and insightful. He drove people who worked with him to achieve things they didn’t think possible.
Over his career, Steve Jobs weathered near-failures, and built one of the most valuable companies in the world. This book offers a unique and valuable perspective on business strategy and management. The chapters on how Jobs built Pixar and refocused Apple after he returned from being fired are both fascinating and instructive.
At the end of the book, Isaacson quotes Jobs as he reflects on his business career. I offer a few excerpts below, and after that, some things to think about.
My passion has been to build an enduring company where people were motivated to make great products. Everything else was secondary. Sure, it was great to make a profit, because that was what allowed you to make great products. But the products, not the profits, were the motivation. [Ex-CEO John] Sculley flipped these priorities to where the goal was to make money. It’s a subtle difference, but it ends up meaning everything: the people you hire, who gets promoted, what you discuss in meetings.
Some people say, “Give the customers what they want.” But that’s not my approach. Our job is to figure out what they’re going to want before they do. I think Henry Ford once said, “If I’d asked customers what they wanted, they would have told me, ‘A faster horse!’” People don’t know what they want until you show it to them. That’s why I never rely on market research. Our task is to read things that are not yet on the page.
Edwin Land of Polaroid talked about the intersection of the humanities and science. I like that intersection. There’s something magical about that place. There are a lot of people innovating, and that’s not the main distinction of my career. The reason Apple resonates with people is that there’s a deep current of humanity in our innovation. I think great artists and great engineers are similar, in that they both have a desire to express themselves. In fact some of the best people working on the original Mac were poets and musicians on the side. In the seventies computers became a way for people to express their creativity. Great artists like Leonardo da Vinci and Michelangelo were also great at science. Michelangelo knew a lot about how to quarry stone, not just how to be a sculptor….
At different times in the past, there were companies that exemplified Silicon Valley. It was Hewlett-Packard for a long time. Then, in the semiconductor era, it was Fairchild and Intel. I think that it was Apple for a while, and then that faded. And then today, I think it’s Apple and Google – and a little more so Apple. I think Apple has stood the test of time. It’s been around for a while, but it’s still at the cutting edge of what’s going on.
It’s easy to throw stones at Microsoft. They’ve clearly fallen from their dominance…. And yet I appreciate what they did and how hard it was. They were very good at the business side of things. They were never as ambitious product-wise as they should have been. Bill likes to portray himself as a man of the product, but he’s really not. He’s a businessperson. Winning business was more important than making great products. He ended up the wealthiest guy around, and if that was his goal, then he achieved it. But it’s never been my goal, and I wonder, in the end, if it was his goal. I admire him for the company he built – it’s impressive – and I enjoyed working with him. He’s bright and actually has a good sense of humor. But Microsoft never had the humanities and the liberal arts in its DNA….
I have my own theory about why decline happens at companies like IBM and Microsoft. The company does a great job, innovates and becomes a monopoly or close to it in some field, and then the quality of the product becomes less important. The company starts valuing the great salesmen, because they’re the ones who can move the needle on revenues, not the product engineers and designers. So the salespeople end up running the company. John Akers at IBM was a smart, eloquent, fantastic salesperson, but he didn’t know anything about product. The same thing happened at Xerox. When the sales guys run the company, the product guys don’t matter as much, and a lot of them just turn off. It happened at Apple when Sculley came in, which was my fault, and it happened when [Steve] Ballmer took over at Microsoft. Apple was lucky and it rebounded, but I don’t think anything will change at Microsoft as long as Ballmer is running it.
I hate it when people call themselves “entrepreneurs” when what they’re really trying to do is launch a startup and then sell or go public, so they can cash in and move on. They’re unwilling to do the work it takes to build a real company, which is the hardest work in business. That’s how you really make a contribution and add to the legacy of those who went before. You build a company that will stand for something a generation or two from now. That’s what Walt Disney did, and Hewlett and Packard, and the people who built Intel. They created a company to last, not just to make money. That’s what I want Apple to be….
You always have to keep pushing to innovate. Dylan could have sung protest songs forever and probably made a lot of money, but he didn’t. He had to move on…. The Beatles were the same way. They kept evolving, moving, refining their art. That’s what I’ve always tried to do – keep moving. Otherwise, as Dylan says, if you’re not busy being born, you’re busy dying.
What drove me? I think most creative people want to express appreciation for being able to take advantage of the work that’s been done by others before us. I didn’t invent the language or mathematics I use. I make little of my own food, none of my own clothes. Everything I do depends on other members of our species and the shoulders that we stand on. And a lot of us want to contribute something back to our species and add something to the flow. It’s about trying to express something in the only way that most of us know how – because we can’t write Bob Dylan songs or Tom Stoppard plays. We try to use the talents we do have to express our deep feelings, to show our appreciation of all the contributions that came before us, and to add something to that flow. That’s what has driven me.
(From Isaacson, Walter, Steve Jobs, Simon & Schuster, 2011, pp. 567 – 570.)
Things to think about
Your product is the value you create for your customers – the totality of your customers’ experience. This is how Steve Jobs saw the world. He saw his essential job as always pushing the envelope on customer value creation.
Here’s a challenge – something to think about as we enter the new year:
Are you focused on pushing the envelope on creating customer value in new ways?
Do you always “try to read things that are not yet on the page” when you think about customer value creation?
Is there a “deep current of humanity in your innovation”?
Does your company “exemplify your industry”? Are you at the “cutting edge of what’s going on”?
Are you building a company that will “stand for something” a generation from now?
Years from now, will you be able to look back and say that you “added something to the flow”?
If your answers to these questions are positive, you will always make money. Real customer value always wins, and gives you sustained high profitability and growth in the process.
Best wishes for a successful and happy 2012.
Dear friends and colleagues,
I am writing at this very special time of year to thank you for bringing happiness and meaning into my life in so many ways.
I am grateful that so many of you are the source of so many terrific ideas that I write about, and that you share your reactions in ways that encourage me to stretch my understanding.
I am grateful that so many of you give me the deep joy of teaching – as students, as executives, and as alumni. Most of all, I am grateful that you allow me to stay in touch with you, and experience the great pleasure of seeing you grow and succeed.
I am grateful that I have been able to volunteer for years in alumni affairs, meeting and becoming good friends with so many great people.
I am grateful that so many of you are wonderful friends, often for decades, sharing both joy and sadness, but always deepening our lives with caring.
And, I am grateful to my family for giving me the ultimate happiness in life. I am especially grateful beyond words to my wife, Marsha, for being the blessing of my life since we met in Cambridge 37 years ago.
Marsha joins me in wishing you and your families a wonderful holiday season and a new year full of peace and blessings.
Jonathan
Pictured: Kristin, Dan, Marsha, Jonathan, Steve, Nicole
Sunday, December 7th, 1941. Admiral Chester Nimitz was attending a concert in Washington D.C. He was paged and told there was a phone call for him. When he answered the phone, it was President Franklin Delano Roosevelt on the phone.
He told Admiral Nimitz that he (Nimitz) would now be Commander of the Pacific Fleet. Admiral Nimitz flew to Hawaii to assume command of the Pacific Fleet. He landed at Pearl Harbor on Christmas Eve, 1941. There was a spirit of despair, dejection, and defeat, as if the United States had already lost the war.
On Christmas day, 1941, Admiral Nimitz was given a boat tour of the destruction wrought on Pearl Harbor. Big sunken battleships and navy vessels cluttered the waters. As the tour boat returned to dock, the young helmsman of the boat asked, “Well, Admiral, what do you think after seeing all this destruction?”
Admiral Nimitz’s reply shocked everyone. “The Japanese made three of the biggest mistakes an attack force could ever make, or God was taking care of America. Which do you think it was?”
Shocked and surprised, the helmsman asked, “What do you mean by saying the Japanese made three of the biggest mistakes an attack force could ever make?” Nimitz explained:
Mistake number one: the Japanese attacked on Sunday morning. Nine out of ten crewmen of those ships were ashore on leave. If those same ships had been lured to sea and been sunk, we would have lost 38,000 men, instead of 3,800.
Mistake number two: when the Japanese saw all those battleships lined in a row, they got so carried away sinking those battleships, they never once bombed our dry docks opposite those ships. If they had destroyed our dry docks, we would have had to tow every one of those ships to the mainland to be repaired.
As it is now, they are in shallow water, and can be raised. One tug can pull them over to the dry docks, and we can have them repaired and at sea by the time we could have towed them to the mainland. And I already have crews ashore anxious to man those ships.
Mistake number three: every drop of fuel in the Pacific theater of war is on top of the ground in storage tanks five miles away over that hill. One attack plane could have strafed those tanks and destroyed our fuel supply.
That’s why I say the Japanese made three of the biggest mistakes an attack force could make, or God was taking care of America.
My friend and classmate, Fred Hooper, sent me this story. Supposedly it came from a book that Admiral Nimitz wrote, which is now out of print. Whether it is factual or merely a very compelling urban legend, the story offers important strategic lessons.
Strategic lessons
I thought about this anecdote during a recent meeting. I was reviewing a company’s situation with one of its top officers. A competitor had developed an innovation and was deploying it rapidly. The action question was how the company should respond.
The seemingly obvious answer was to pick up the pace and try to match the competitor. When I thought about how other companies I had worked with had responded in similar situations, two things became clear: (1) the competitor had indeed made tactical gains that raised concerns, but (2) it was not at all clear that this innovation would produce a clear long-term strategic win.
The answer was to look very carefully at the customer value proposition that the tactical initiative created, and to set this against the broader opportunity to develop a more sweeping, strategic value proposition. Was the tactical initiative a long-term win strategy, or merely a short-term gain?
Would it win the battle, or win the war?
What’s especially interesting about this situation, and so many others like it, is that the rush of events – the concerns about keeping up with a competitor’s tactics, or, conversely, enjoying the satisfaction of tactical gains – can essentially blind a company’s management team to the broader, more subtle opportunities to develop a truly creative, compelling strategic partnership.
Worse, managers all too often feel that they don’t have time to concentrate systematically on the deeper, more subtle opportunities because they are so busy trying to keep up in the tactical battles.
In short, most managers instinctively focus on how to win the battle, rather than how to win the war.
Three steps
How can a management team shift perspective from winning the battle to winning the war? Three steps are essential.
First, walk in your customer’s shoes. There is no better way to build a powerful customer value proposition than to spend significant time physically in a set of customers. The objective is to watch the entire purchase/use cycle for your products. This includes everything from selecting the products, to obtaining them economically, to understanding how to use them.
Here, you are looking for opportunities to build the broadest, most powerful value proposition by expanding your extended product (the full set of activities that relate to the purchase and use of your product). The early development of innovations like vendor-managed inventory and category management provide examples. (For more on this, see my blog post, Turbocharge Your Value Proposition).
Importantly, building your extended product can offer the opportunity to create compelling value in unexpected ways.
Think about Nalco, a company that provides chemicals to water treatment systems. It installed sensors in the chemical tanks on customer premises. This enabled Nalco to be much more efficient at replenishment and production. But the company didn’t stop there.
Nalco’s managers realized that this innovation allowed it to monitor the actual rate of chemical draw-down, and compare it to the expected rate if the system were operating at peak efficiency. When the Nalco engineers saw a variance, they would call the water system’s managers and alert them to adjust the system. This routinely led to customer savings many times the cost of the chemicals.
In the process, it made Nalco indispensible – transforming the company’s positioning from commodity supplier to essential strategic partner. I think of this as drawing a bigger box around your business.
Here’s my take on the ultimate truth in business: you always have an opportunity to increase your value footprint, and real value always wins.
Second, always move toward the middle. When I was young, I read a book on how to win at checkers. What I remember to this day is that if you are in doubt about what to do, move toward the middle of the board. This is how you develop a dominant board position.
In fact, the classic rookie move in chess is to go for checkmate on an early move, instead of laying out your board position.
What is the equivalent of board position in a supplier-customer relationship? In a nutshell: real value and trust. Once you have worked to understand and develop a truly winning value proposition with a very creative extended product, the next essential task is to systematically put the core pieces in place. And, often the core pieces are subtle.
For example, suppose a supplier wants to develop a highly integrated supply chain with a major customer, and the customer is not interested in this type of relationship. What should the supplier do?
Here, the core building blocks, as always, are real value and trust.
Even with an arm’s length relationship, the supplier can arrange for its operations managers to meet periodically with their counterparts in the customer. Over time, the supplier’s operations managers will develop a trusting relationship with their customer counterparts. Note that this process does not focus on selling products or solving problems, only building trust.
Later, once the trusting relationships have developed, the operations managers can bring the customer counterparts to meet operations managers in other customers that already have productive, highly integrated supply chains with the vendor. These meetings will naturally gravitate toward identification and confirmation of the value produced.
Through this process, the supplier can build the essential core of real value and trust that will lead to a highly productive, and highly differentiated, relationship with the target account.
Contrast this with another supplier that might instead focus on tactical gains like merely expanding the product portfolio sold to the customer. This supplier might win the battle, but would surely lose the war.
Third, touch the dream. Every top manager in every company has a dream – a vision of what real success looks like. This nearly always centers on business growth and creative new business initiatives.
When your value proposition enables your customers to move toward their dreams, you will be an essential strategic partner. You will win the war.
This can happen in unexpected ways. For example, I’m deeply familiar with the operations of a number of vendor-managed inventory systems and other supply chain innovations. These certainly create important benefits, including customer cost reductions. But surprisingly often, the most powerful, but unexpected, benefit is that the partnership enables the customer to enter new markets or offer new services because it can draw on the supplier partner’s deep, specialized capabilities.
By enabling the customer to grow its business in powerful new ways that the customer alone could not have done, the supplier becomes an essential part of the customer’s success. The supplier wins the war by touching the customer’s dream.
Win the war
It is so tempting to operate close to the surface of a customer relationship, focusing primarily on the day-to-day sale of your products and services, searching out tactical gains. And, if you do achieve tactical gains, it is overwhelmingly tempting to focus on accelerating your “victories.”
However, the top managers that succeed in the long-run have the discipline to remain focused on understanding and developing the most powerful customer value proposition. When they have created this understanding, they redouble their efforts to push the value creation envelope even further – continuing to search relentlessly for new ways to create real value and trust.
I’m reminded of a wonderful exhibit mounted several years ago by the Smithsonian Institution on American Ingenuity: If We’re So Good, Why Aren’t We Better?
The best managers in the best companies are always relentlessly focused on this question, and almost frantic to find an even better answer. This is how they got to be market leaders, and this is why they stay in front.
What is the ultimate secret to success? Remember Admiral Nimitz, and don’t be satisfied with anything less than winning the war.
In this 10-minute video, Finding Islands of Profit in a Sea of Red Ink, I discuss the enormous opportunities for profit generation today, the sweeping transformation currently occurring in business, and how managers can succeed in this new era.
Here is the link to the video:
http://www.dcvelocity.com/dcvtv/viewercontributed/1288398437001/
I hope you find it helpful.
A year ago, my new book, Islands of Profit in a Sea of Red Ink, was published. Since then, it was named a best book of 2010 by Inc, and many companies have purchased copies for their top management team. Here are fifteen key questions – with brief answers – that managers have asked me.
Why is 40% of most businesses unprofitable?
All of our management information and processes were developed in a prior business era. Our accounting categories are too broad to see which accounts and products are profitable and which aren’t – so people simply assume that more revenues equals more profits. Some revenues are very profitable, and a surprising portion produce big losses. In virtually all companies, no one is responsible for monitoring and managing the interaction of revenues and costs at the grass-roots level to maximize profits.
How do top managers react to this?
They strongly agree. In years of writing about this in Harvard Business School’s Working Knowledge e-newsletter and website, no one has disagreed. When I speak to top managers about this at MIT and in my consulting clients, no one disagrees. The problem is that they don’t know what to do about it, and they are rightly concerned that just “firing bad customers” (wrong thing to do) will hurt their stock price.
How can this be fixed?
Four building blocks: (1) the right information – granular (specific products in specific customers) not aggregated; (2) the right priorities – first, secure and grow the profitable business, then improve the marginal business, then reprice the money-losers; (3) the right processes – mostly coordinating sales, marketing, and operations to get things right; and (4) the right compensation, especially for sales – matching compensation to real profitability, not just revenues.
Why is your advice particularly important in our current economy?
Today is prime time for rapid improvements. Customers are desperate for new ways to get better, and they’re very receptive to trying new ways of doing things. Most competitors are frozen in the headlights trying to cut costs indiscriminately. The key is to focus on growing the 20-30% of your company that can give you high sustained profitability, and then get more high-potential business that fits. You’ll rarely have this great an opportunity to lock in the best business – just stop wasting good resources on business that will never generate profits.
Why are so many companies today meeting their sales targets but still losing money?
Because budgets are developed and performance is judged relative to history not potential. If a company is 30-40% unprofitable, and its budget aims for a 10% improvement, the company will still have a huge amount of embedded unprofitability. Everyone looks at the improvement and celebrates. But 10% better than last year, and just as good as the competition is simply not good enough.
What are the most common mistakes businesses are making that prevent them from being consistently as profitable as possible?
Three big mistakes: (1) assuming that more revenues means more profits; (2) failing to focus attention and resources on securing and growing the business that produces high sustained profitability – this makes a company vulnerable to focused competitors and reduces reported profits; and (3) failing to put anyone in charge of maximizing account and product profitability at the grassroots level (in contrast with putting lots of people in charge of managing budgets).
What is “the age of precision markets” that we have entered?
In the prior “age of mass markets,” companies sought the economies of scale of mass production, coupled with mass distribution using arm’s length customer relationships. In that era, more revenues really did mean lower costs and more profits. In today’s “age of precision markets,” companies form different relationships with different sets of customers, each with different costs and profits. Yet, virtually all of our management information and processes were developed in the prior era, when all revenues really were equally desirable. This is the underlying reason why almost every company has so much embedded unprofitability and why so many managers fail to see and build their sustainably profitable core of business.
How should the role of the CFO change to adapt to today’s new economic conditions?
In these difficult and uncertain economic times, companies need broad-gauge, strategic CFOs. An effective CFO must be able to chart a course to sustainable profitability and growth, and orchestrate the company’s functional managers to accomplish this objective. This process goes far beyond managing operating efficiencies, cash flows, and budgets. It involves three essential elements: (1) profit mapping – moving beyond our traditional, overly broad, aggregated accounting measures to construct a granular transaction-based picture of account and product profitability; (2) sustainability – identifying the 30-40% of the company that is unprofitable, and more importantly, the 20-30% that is capable of strong sustainable profitability and growth, even in tough times; and (3) driving performance – identifying and prioritizing the key initiatives that will cement and grow the sustainably profitable portion of the business.
Should your advice be adapted differently when we’re in a recession vs. when we start recovering?
The management to-do list is the same, but the distractions are different. In a recession, there is an overwhelming instinct to cut costs across the board and to hoard cash. This is exactly the wrong thing to do. Instead managers should step on the gas – identify and grow the sustainably profitable portion of their business by focusing their resources and investments on these customer relationships. When times improve and all ships rise on the incoming tide, the instinct is to cling to all revenue increases – no matter what the profit impact. Rather, managers should shift their resources to the business that produces high sustainable profits and growth.
How can a company’s sales force become more profit focused?
Four key elements: (1) know the score – both account potential and profitability; (2) know the priorities – secure the best (most profitable) accounts, then get more of the best business, then turn around the marginal business, and lastly reprice the remaining losing business; (3) know the company’s best practice – observe the president’s club winners’ best practices, codify them, and teach them to the others (especially the critical task of ramping up high-potential underpenetrated accounts); and (4) know how to link sales compensation to profitability, not just to revenues and gross margins. Note that these are top management’s responsibility – how can a sales rep maximize profitability if the company’s top managers don’t know how to do it?
How can you make your customers more profitable?
If your operations managers can’t tell you what they would do to maximize a key customer’s profitability, they need to spend much more time in their customers – walking in their customers’ shoes. (Note that I said operations managers, not sales reps.) They need to work directly with their customer counterparts to develop three things: (1) great rapport, relationships, and trust; (2) a joint end-to-end understanding of the activities and costs of the intercompany supply chain – and an agreement on how to lower costs and increase asset productivity for both companies; and (3) an understanding of the political situation and attitudes of the members of the customer’s buying center. These three things will drive huge sales and profit increases, even in highly penetrated customers. Unfortunately, most managers incorrectly assume that operations managers should only meet with customers after a mature sales relationship is established.
How should supply chain management be adapted to be more profitable?
Supply chain managers should have a critical role but are in danger of being bypassed. Traditionally supply chain managers focused primarily on internal cost reduction, an artifact of the age of mass markets. Today, they have to shift focus to supply chain productivity, which involves four critical tasks: (1) understanding and maximizing the earnings of their assets, not just minimizing costs; (2) spending a large portion of their time with their counterparts in key customers (those capable of providing high sustained profitability and growth) in order to figure out how to drive sales by making the customers more profitable; (3) working with the sales and marketing team to develop a standard set of customer relationships (arm’s length to highly integrated), so they can fulfill each in a streamlined and economical way; and (4) teaming with sales and marketing to match customers to relationships.
How should marketing be adapted to be more profitable?
At budget time in many companies, the marketing group gets concerned about quantifying its value-added. Yet marketing is at the center of two critical profitability variables – customer relationships and product development. Customer relationships are the key to securing and growing profitable revenues. Marketing should lead the way in developing a standard set of relationships (from arm’s length to highly integrated), matching customers to relationships, and establishing relationship migration paths to deepen key account integration. The key to effective product development is to meet the needs of the customers in the core of sustainably profitable business, rather than designing products for the average customer. By excelling in these two critical areas, marketing managers can make a huge lasting contribution to profitability.
Does profitability require a different sort of leadership?
Yes, everyone has to manage at the right level. Vice presidents should spend most of their time positioning the company for the next 3-5 years – since that’s the time it takes to develop major new initiatives. Directors (department heads) should spend half their time coordinating with each other to manage the company’s profitability, and the other half directing the managers who report to them. Managers should run the day-to-day company. Instead, in many companies, everyone focuses primarily on the company’s day-to-day performance.
What are the first steps anyone can start taking tomorrow to make their business more consistently profitable in today’s economy?
A small team of managers can analyze the profitability of a multi-billion dollar company at a very granular level in several weeks using standard desktop tools. This is the first step. With this view, the management team can develop a highly targeted set of initiatives to secure and grow the best business, and to turn around the marginal business. Within a year, the company will experience a dramatic, sustainable increase in profitability.
