What’s the most valuable attribute that a manager can possess and develop? The answer bobbed up in an enthusiastic review of my latest book, The Fusion Manager, whose theme was accurately described thus: ‘blending the lessons of the past with the realities of the present and future, taking on board the useful and intelligent insights of the gurus, without becoming a slave to any one of them’.
The reviewer went on to say this might sound ‘a bit like’ that ‘old friend common sense’, adding quickly ‘there is no harm in that’. In fact, here is that top-value attribute for managers. The opposite of ‘common sense’ is presumably ‘rare nonsense’, which is a sure route to disaster - and one which, paradoxically, is commonly taken. ‘Rare sense’, on the other hand, is uncommon - the brilliant, complex insight with which the occasional genius turns the world upside down.
Finding examples of the latter category is extremely hard. As Edward de Bono has pointed out, creative breakthroughs look obvious in hindsight. It was obvious that personal computers would find their way on to every desk and into most homes: but only a few people, led by the precocious Bill Gates, saw the obvious and acted on what they saw. Similarly, it’s blindingly obvious that you don’t buy stocks which are keenly sought and priced above their intrinsic value: you do the opposite, buying stocks which are demonstrably undervalued.
CONTRARIAN CASES
Anybody could have acted on this piece of common sense. But only Warren Buffett became the world’s second richest man, after Gates, by capitalising on the obvious. Both of these extreme examples are cases of contrarianism - going against the crowd. The mob, though, believes that its common view is common sense. It was obvious to nearly everybody in the computer industry that Ken Olsen, the boss of Digital Equipment, was right. Who on earth would have any use for a personal computer? And then, who in their right mind would buy unwanted stocks?
Doesn’t the collective wisdom of the marketplace far outweigh the brainpower of a single investor? Isn’t that just common sense? It turns out that common sense has two meanings. The first refers to propositions that are logical, verifiable and verified, and may actually be uncommon. The second meaning refers to views that are very widely held, but may be both illogical and untested. Take these three examples. Do you believe any of the following well-known propositions?
1 Companies should ‘stick to the knitting’, developing their ‘core businesses’ and not being seduced into new ventures.
2 Customer loyalty is so important that it should be constantly and comprehensively measured by detailed surveys and tested against yardsticks such as retention figures.
3 Brands are invaluable sources of market share, and the strongest companies prove this by possessing the largest numbers of the best-known brands.
If you accept any of the trio wholeheartedly, you are on apparently firm ground. For a start, three-quarters of all new ventures fail. Then, there’s a clear correlation between customer retention and profitability. And pitting a company’s diverse brands against each other has for long been a foundation of modern marketing. On ‘second thoughts’, however, each of the three propositions raises more questions than it answers.
SECOND THOUGHTS
‘Second thoughts’ are a clear application of common sense. However compelling the case put to you, or your own brainwave, it always merits reexamination - not to kill, but to check assumptions and inferences. Thus the company that sticks to its knitting is likely, one foul day, to find that its core products and markets have run out of growth and profit. By then it may be too late to start afresh and find a new and viable core. Anyway, a vital organisation will always need new pastures on which ambitious up-and-comers can up and come.
As for that customer loyalty, yes, it must be regularly measured. But which manager actually believes that the typical long-winded survey with its multiple choice answers provides any truly useful guidance or any predictive value? Customer retention, what’s more, only tells you about existing customers, when the future must lie, to a very important extent, in finding and capturing new buyers.
Finally, faith in brand proliferation runs foul of Pareto’s Law. By this definition, 80% of your brands are producing only a fifth of sales and profits. Wouldn’t it be better to lavish all the attention on the top 20% and consign the four-fifth failures to oblivion - unless, that is, they are capable (which may well be the case) of development into members of the top-selling, top profit club.
But these general second-thought considerations need translation into specifics. What do the facts show? By coincidence three separate articles in the December 2003 Harvard Business Review show exactly what happens when you challenge assumptions with careful research, applying common sense investigation to the realities of the market and the company.
On customer loyalty, the pearl of wisdom offered by Frederick F.Reichheld, director emeritus of consultants Bain & Company, is backed to the hilt by data which any well-informed manager already knows. Instead of those lengthy questionnaires, Reichheld now recommends very few questions. He cites a car hire company which asks two: how highly the customers rate their rental experience, and whether they would use the company again.
But there’s a vital twist. The company isn’t interested in any response or respondents save those giving it the highest approval. That may seem to fly against common sense. Surely you need to know what the less satisfied buyers think, and why? No, you don’t. For years I’ve been preaching that good isn’t good enough, and that you shouldn’t lump good ratings with excellent when tracking customer approval. That’s because the excellent bunch are six times more likely to buy from you again than those who merely think you good.
SIMPLE AND FACTUAL
It follows that rises (or falls) in the excellent performance tell a company all it needs to know about perceived quality. Note the simple nature of the two questions, and their factual approach. Ask ‘how likely is it that you would recommend us to a friend or colleague?’ and you will get a much clearer answer than by asking a broad qualitative question. Moreover, the results are quickly obtained and processed. That car hire company needs only a few days to get the feedback to all 5,000 branches in the US.
The magic number, says Reichheld, is the figure for ‘net promoters’; that is, the percent-age of your promoters minus detractors. The author recommends a scale of responses from 0 to 10, ranging from ‘not at all likely’ via ‘neutral’ at 5 to ‘extremely likely’. Use the ‘would you recommend’ question, which is all you need. Count the 9 and 10 ratings and deduct the 0 to six. The result could mortify you - 16% promoters is typical. But work to raise that score and you could achieve the 75-80% heights of an Amazon or eBay. That’s not only a big score, it’s big money.
The loyalty issue obviously has major bearing on the business of the brands. Companies often hang on to a brand simply to retain its customers. But Nirmalya Kumar, who teaches marketing at IMD in Lausanne, reckons that the retention very often comes at a heavy price. Pareto’s Law may even be left behind, with some businesses earning 90% of their profits from under a fifth of their brands. If you don’t believe that, try this little questionnaire:
1. Diageo sold 35 booze brands in 1999. How many were required to make over half the sales and 70% of profits?
2. In 1996, Nestlé had over 8,000 active brands. What percentage of these contributed the bulk of profits?
3. Procter & Gamble marketed more than 250 brands in 1992 ; between then and 2002, what percentages of sales, profits and revenue growth were accounted for by the top ten?
4. In 1999, Unilever’s brands totalled 1,600. How many generated 90% of profits?
The answers are shocking to anyone who doesn’t know Pareto. For Diageo, eight of the 35 brands did the business. Nestlé’s profits relied on only 2.5% of its portfolio. P&G’s top ten earned over half of sales and profits and two-thirds of sales growth. It took a mere quarter of Unilever’s brands to deliver that 90%-plus of profits. Yet who is there who doesn’t know Pareto? Doesn’t common sense demand a constant check on brand profitability and proliferation to ensure that the company stays on the right side of his Law?
EMOTIONAL FORCES
The sad and sober truth is that the economic realities get outweighed by emotional forces. Every brand has a team of managers and a corps of other workers behind it. So deep is the commitment, including the historical residue, that accurate audit of profitability may never be undertaken. I remember a case where a money-losing brand was bitterly defended, ostensibly because it ‘contributed to the overhead’. Analysis showed that it was the overhead. Axing and replacing the rogue brand raised group profits by a needed £1 million.
In another case, corporate identity guru Wally Olins was advising the moribund British motorcycle industry, and wanted to know why the obsolescent Matchless brand was still being supported. A highly aggrieved supporter explained this by the reputation Matchless had won in the Middle East in the war. Total Arab sales proved to number just three. There is no substitute for rigorous, dispassionate, regular audit of brands and products to ensure that common sense, not personal or tribal loyalties, determines their existence.
Both customer loyalty and brands have a close bearing on the third area studied in the HBR - sticking to the knitting. After five years of study, Chris Zook and James Allen of Bain found that you really can have your cake and eat it. That means staying within your areas of competence and experience, but at the same time developing strong new, profitable growth by the strategy most likely to succeed - pushing out the ‘boundaries of the core business into… adjacent space’.
This sounds like, and is, common sense. Moving into an entirely new area, either by internal initiative or external acquisition, is inherently risky - which is why, of course, these strategies commonly fail. But what the authors call ‘adjacencies’ are what I have described as ‘concentric’ expansion. That is, all extensions revolve around the central core, Microsoft being a stunning example. Nike is another. Since 1987 it has vastly outgrown Reebok, then twice as big. Expanding sales 6.7 times, Nike now outsells its rival over fourfold.
REPEATABLE FORMULA
The formula is to create a leading position in shoes in the chosen sports market, then widen into clothing for that market, next step up from accessories to major equipment, and finally go global. This formula is repeatable, and each successful repetition improves the odds on future success. Shunning such nearby opportunities makes no sense at all. You need to look for (1) new geographical markets (2) existing activities adjacent to the core that have under-developed potential (3) extensions along the value chain - for example, into distribution (4) new customer segments (5) new distribution channels.
In many cases, following the dictates of common sense is as profitable and obvious as in the cases above. They all hinge on taking advantage of the opportunities that lie closest to hand - in what is actually happening in the operations you are running. Strategy formed and well executed in this manner involves no pies in the sky. But it does demand opening your eyes to reality - and that, while great sense, is far from common.
Source:thinkingmanagers
