Expanding your firm’s products portfolio to meet customer needs

Back in 2000, the online shoe retailer zappos.com sold to customers through dropship relationships with shoe manufacturers. This strategy allowed the firm to avoid expensive stocking costs. They signed up many manufacturers and offered a large choice of shoes online. However, when the firm wanted to increase sales and meet customer expectations, they realized that they had to stock shoes to provide better choice. In 2000 they did $1.6 million in sales. In 2001, they ended up doing $8.6 million. Expanding the product mix turned out to quintuple sales. 75% of sales came from inventories.

A Framework to Diagnose a Company

This framework is taken from David Ohrvall’s book on strategic consulting with some minor adaptations.

STRATEGY
1. Scope evaluation: does it make sense to expand into new products/categories, or divest existing activities?
2. Direction: should you enter new markets or exit an existing market to re-focus? Should you develop new products and services, or reposition your existing brand image?

MARKETING
1. Price optimization. Most businesses spend a lot of time on driving unit volume or reducing costs, more than on price optimization. Yet, a 1% increase in price (holding volume fixed) has a much greater impact on operating profit than a 1% increase in volume or a 1% decrease in cost.
2. CRM. Increase retention, increase share of wallet (buy more of the same product, buy new products from us), or change the mix of volume sold (promote products with higher margins).
3. Acquire new customers. Change sales tacticts to reach a broader set of the market or invest more in advertising/marketing.

OPERATIONS
1. Cost reduction. Evaluate cutbacks against service level or quality measurements. Minimum KPI need to be achieved or cost savings will be offset by revenue losses. Evaluate internal / external costs (outsourcing): where is it cheaper to perform the activities?
2. Processes. Quality measurements, internal efficiency, capabilities.

ORGANIZATION
1. People. Skills, compensation schemes, organization architecture.
2. Information systems. Quality of reporting, data. Automation of non-value added activities to focus your people on what is truly important to the business.
3. Measurements. Track the most important activities (15-20 max), consistently throughout the company, and gather/review them often. Despite all the talk about measuring results, most companies are very weak in this area. Compare metrics YOY.

FINANCE
1. Reduce inventory
2. Reduce receivables
3. Increase payables
4. Balance debt and equity

EXTERNAL FORCES: Porter’s 5 forces analysis.

How to manage crisis situations

Crisis management can be broken down into four parts.

First, what is the right thing to do?

Second, mathematical calculations. What is the size of our business to protect? (sales volume, value of brand). To which extend will the crisis impact us? (potential sales lost, damage to the brand). How much would it cost us to fix the problem, from your point of view but most importantly from the customers’ point of view?

Third, communications. What would be the impact of our response? Effective crisis communications would comprise off the following:
1. How the message is delivered: where, how
2. Who delivers the message: your CEO or your PR person?
3. The content of the message: is your message credible and trustworthy? Trust depends on four key factors : empathy (50%), honesty (17%), expertise (17%), dedication (17%). Do your messages demonstrate these four key factors?
4. Who is targeted by the message: shareholders, consumers, etc

Fourth, turning a crisis into an opportunity. A crisis is a great opportunity to demonstrate your company values and show the world what you are about. It can be a great communications platform.

Expanding into new markets and products

Amazon.com is a very interesting company to study growth strategies. First, the company specialized in online book selling. When it started to expand into new categories such as electronics or home improvements, many questioned the strategy because it was going against some basic principles of marketing. Branding is about focusing your products and owning keywords in the mind of the customer. Products expansions under the same brand name (Amazon) actually hurts a company's ability to stay top of mind with customers for specific categories. The more specialized you are the more likely you are to be number one in people's minds. However, Amazon successfully expanded into a lot of different product categories with the same name. Not only did they expanded into new consumer product categories, but also expanded into business to business applications such as web hosting and e-commerce technology turnkey solutions - all under the same brand name.

There are three specific factors to consider when looking at growth opportunities beyond your core. First, is the growth opportunity building on your core? This seems to be obvious but research shows that managers make a lot of wrong assumptions about the true relationship between the new growth opportunity and the initial core business. They think that there is a match when there is not. According to Chris Zook in his book “beyond the core”, to assess the distance from the core, look at:

• Customers (are customers the same?)
• Competitors (or competitors the same?)
• Cost structure (is the infrastructure the same?)
• Channels of distribution
• Singular Ability: is there a singular asset, technology or brand that gives the core business its uniqueness that is relevant to the new opportunity?

Research shows that the odds of success declined very quickly as a business opportunity moved away from the core business,  based on these five dimensions above.

When evaluating these five dimensions, managers can realize that growth opportunities are typically not as close to the core as they thought. In the case of Amazon category expansions, customers and competitors were often different. One could have very reasonably argued that these growth opportunities were too far away from the core for Amazon.

However, the cost structure and the singular capability where the same. Amazon had very specific assets and technologies that gave the core business its uniqueness and were very relevant to the new growth opportunity.

A second very important factor to consider is the size of the profit pool. The profit pool evaluation represents an industry potential profit dollars. Some industries, like the airline industry, have decades long histories of not earning their cost of capital. Some industries simply go down or do not deliver the profits that people hoped for. Amazon.com expanded into growing, profitable markets: e-commerce and web technologies.

The third factor to consider is the company's potential for leadership. If you do not have the potential to achieve economics equivalent to the leader, you may be constantly out invested and out competed. According to Bain, a consulting firm, “the difference in a relative market share of 1.0 to 1.6 is worth 3 to 6 percent additional return on investment a huge difference in a competitive battle”. Yet, the consulting firm found that many weak performing company allowed themselves to be lured to investments in clear follower positions without leadership economics. It is likely that Amazon.com has succeeded into new markets because it was the undisputed leader in E-commerce, was focused on long-term vs short-term, and was able to invest significantly into these new markets to achieve leadership economics.

The first 90 days

I am currently reading a book called “the first 90 days". I did not expect much initially because these types of books typically yield very few powerful insights. However, I was pleasantly surprised.

First, the author argues that leaders that have been assigned to new positions often fail because they have not reassessed exactly what are the skills and learning experiences required for the new job. Perhaps the biggest pitfall that people make is assuming that's what has made them successful to this point in their career will continue to make them successful in the future, but the new job require a different approach, different skills and a different learning experience. What skills will you now need to be excellent at and where do you need to focus your learning in the next 6 months?

Second, in light of the new job, you should assess your new key responsibilities and understand how they will differ from your previous job. How is the situation different? If you fail to self reflect on the new job and fail to understand how the new organization differs from the previous companies you worked in, you will become vulnerable. Engage in a systematic learning process: write down a list of questions about the organization (including questions about past performance, goals, organizational design, benchmarking, marketing campaigns, strategy, technical capabilities, culture, politics, etc). Customers, distributors, suppliers, employees, company reports and outside analysts can help you understand the company situation – and ultimately how you fit in.

Third, build a productive working relationship with your boss, with your direct reports. Define expectations and agree on a diagnosis of the situation with your boss and direct reports. Take 100% responsibility for developing the relationship. Understand that you may know about 20% of the solution and you will need to talk to a lot of different people to be where you should be - understand about 70% of the solution. Work on coalitions and networks within the firm. Relationships are critical to get things done.

Managing people from different countries

Should a manager interact differently with direct reports if they are foreign? Leadership is about building a rapport with people from different backgrounds, whether they are engineers, salespeople, introvert, extrovert, Indian, Japanese or French. New theories of leadership talk about “situational leadership” to highlight the need of a manager to adapt to different situations and different people to get things done. Ultimately, it is about building rapport, communicating and motivating people based on their background. Building rapport is typically more difficult if the person is from a different country. For instance, Americans are typically very friendly, outgoing and loud. On the contrary, Indians are typically quieter and more reserved. The leader should know how to adapt to the different culture and identify how they can build rapport. They should reflect the other persons behavior. Motivating people from different backgrounds can also prove to be challenging. Some cultures value team spirit and community, while other cultures value individualism and personal rewards. You should be mindful of your direct reports preferences when it comes to giving credit and handing out rewards.

Great leaders and interactive management style

Many people think that a good manager is a manager that will make the right decisions and call the shots. This is true to some extent but the process of leading to that decision distinguishes great leaders from average ones. Faced with an issue, great leaders are the one that initiate conversations with the right people, pick their brains and eventually manage to “spot” the right solution based on all the feedback. They don't assume that they know the right solution from the get-go. They don’t simply manage based on gut feelings. Indeed, they recognize that they may know only about 30% of the solution. They know that by interacting with five or 10 other people in the company they will get to 70% of the solution. They are information gatherers, or, as described in an article in the Harvard Business Review, they are "sensors".