October 27, 2005: Distribution Channel Commentary (DCC) # 83

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TOPICS:

  1. THEMATIC QUOTES.
  2. PROGRESS ON MY "INNOVATIVE MANAGEMENT" ASSIGNMENTS.
  3. THE CURE FOR THE US’s "ULTRA-CAPITALISM" PROBLEMS.
  4. THE 80-5-80 KEY CUSTOMER STRATEGY.
  5. SELL INNOVATIVE SOLUTIONS TO ONLY 2.5 - 16% OF CUSTOMERS.
  1. THEMATIC QUOTES.

Do not follow where the path may lead. Go instead where there is no path and leave a trail.    - R. Zaphiropoulos

"It is not because things are difficult that we do not dare; it is because we do not dare that they are difficult."    - Seneca

"You have to recognize that every ‘out front’ maneuver you make is going to be lonely, but if you feel entirely comfortable, then you’re not far enough ahead to do any good. That warm sense of everything going well is usually the body temperature at the center of the herd."    - John Masters

"When the ‘weaker’ of the two brains (right and left) is stimulated and encouraged to work in cooperation with the stronger side, the end result is a great increase in overall ability and ... often five to ten times more effectiveness."    - Professor Robert Ornstein, University of California

"Great ideas need landing gear as well as wings."    - Grant M. Bright

"Innovation - any new idea - by definition will not be accepted at first. It takes repeated attempts, endless demonstrations, monotonous rehearsals before innovation can be accepted and internalized by an organization. This requires "courageous patience."   - Warren Bennis

"Winning doesn’t always mean being first. Winning means you’re doing better than you’ve ever done before."    - Bonnie Blair, Olympic Speed Skating Champion

"Turning FAILURE into SUCCESS: Ivory Soap wasn’t meant to float, but a manufacturing error became its top selling point. Kleenex failed as a cold cream remover. Repackaged as a disposable handkerchief, its success remains nothing to sneeze at."    - Grant M. Bright

"How can managers plan, let alone trust a process which, in essence, depends so much on creativity, inspiration and luck? …Although some innovations are the result of a flash of genius, most of them, especially the most successful ones, are born out of a conscious and deliberate search for innovation opportunities that can only be found on rare occasions."    - Peter Drucker, Discipline of Innovation (1985)

  1. PROGRESS ON MY "INNOVATIVE MANAGEMENT" ASSIGNMENTS.

This is the sixth commentary with the theme of "innovation". Because I have a few projects for different manufacturing trade groups on this topic, I continue to research the area in all of my spare time. Starting around 1996, there has been an exploding need for help with "innovation management" (IM) from executives worldwide. The consulting community has responded with an even bigger set of often well-researched solutions.

Turning the messy art of innovation into a predictable, consistent, scientific process for an organization is, however, not an easy task. Many of the world’s largest organizations have pursued complex solutions with the assistance of the mega-consulting firms. My biggest question is how can we take what’s out there and simplify it enough so that the science of IM can be applied to small businesses too? So far, I have far more questions than answers, but I thought I would offer a few, food-for-thought items to fuel your company’s IM path.

First, a best definition of what "innovation" is (the short answer):

THE PROFITABLE IMPLEMENTATION OF STRATEGIC CREATIVITY.

To elaborate on the four parts of this definition, let’s start with creative. We need original ideas that can yield a next level, not incremental value or cost advantage over our competitors. But, not all creative ideas can be strategically good fits for us. We need to choose the ideas that build on our best core capabilities and/or are aimed at the highest-expected-return customers, then the odds will go up for our being able to both implement them and make good sustainable profits. Most companies are quite mediocre at all four elements of the innovation definition.

Creativity is limited by both company and industry groupthink. Most industry citizens are busily copying one another’s best practices that are built on improving the past. There is no competitive advantage for any one competitor, but the bottom 20% of the competitors that don’t do the best practices drill do fade away in mature industries.

Strategic clarity is also clouded by past mindsets about how the company makes its money. Most mature product manufacturers and distributors, for example, are still too focused on selling more products to more customers. We should learn from Wal-Mart and focus instead on co-creating, next level, demand replenishment systems for the commodity products that comprise 90% of our sales. And, these lowest-total-procurement-systems should be aimed at less than 10% of our customers who are large, open-minded and have a growing future. (More on this in topics 4 and 5 below.)

Then, implementation or "just do it" is the next challenge. Change within a company to do something significantly different from the past and better than the competition is tough. What, after all, is our track record for achieving successful change over the past 5 years? How do we get the bottom 80%+ of the payroll excited about being part of the change solution instead of, perhaps, part of the problem? (More on this in topic 3 below.)

Second, some best-of-the-web links on the subject of IM. For an article on managing innovation as a corporate capability, check out the short, pithy read at this link: http://www.woodsideinstitute.org/articles/CEParticleLV.pdf.

For a diagrams on "innovation frameworks" check out both a simple one and a more complex one at these links: Simple by Accenture: (see page 7 in this pdf document) http://www.accenture.com/xdoc/en/ideas/innovation/inno_good_ideas.pdf

More comprehensive by thinksmart.com: http://www.thinksmart.com/mission/dna/dna_poster_large.html

  1. THE CURE FOR THE US’s "ULTRA-CAPITALISM" PROBLEMS.

When you tell folks around a university town like Chapel Hill that you are a "business consultant", you often see immediate signs of body tension. Casual conversation can then turn to solutions for "social injustices". One of the most frequent questions that I hear is: what should the US do about the rich getting richer and the poor getting poorer? Within the corporate news scene, they will point to the obscene pay packages for public company executives while the good-pay factory jobs continue to be outsourced to Asia. (I touched on this in DCC #82, topic 2: Delphi’s Bankruptcy Underscores the New Work Reality.) Why has the US migrated to the most dog-eat-dog brands of capitalism? What is the solution to this "ultra-capitalism"?

There isn’t a simple, satisfying answer to this question in the context of casual conversation with socialist-leaning people. But, I would guess that about 90% of American businesses could double the margin contribution per employee if they:

  • Defined, measured, achieved and sold basic service brilliance focused on one segment and niche of customers at a time.
  • Shaped up or out the biggest losing customers from an estimated operating profit contribution basis.
  • And, refocused 100% organizational team effort on understanding and selling more deeply and thoroughly to their top 10% most profitable customers AND the handful of fast-growing, perpetually innovating target accounts that exist within their market space.

These objectives can not be accomplished, however, without engaging the bottom 80 to 90% of the payroll in a new contractual way to be part of the solution. AND, how would we share a 100% increase in margin dollars per employee with the employees? For a new, "democratic capitalism" employment contract to work, the employees would have to be first educated to understand:

  • Why wage ranges are what they are for every job niche in the marketplace.
  • Why premium compensation for a job niche can only be supported by achieving a high margin contribution dollar average per full-time equivalent employee.
  • How we can shoot to double margin dollars per employee ONLY IF the employees are willing to be part of new, innovative solutions for the objectives listed above.
  • Why some of the high margin or value-added per employee ratio must also flow through to the bottom line in order to have enough profit dollars to reinvest back into the working capital of the business which grows in proportion to sales growth. Profits reinvested will in turn finance the future growth of the employees' career path and compensation.

If going open-book with employees as a pre-requisite for educating them about new solutions for old problems seems daunting, read articles at www.merrifield.com #ed: 5.11, 5.12, and 5.2 in that order. http://www.merrifield.com/articles/5_11.asp; http://www.merrifield.com/articles/5_12.asp; and http://www.merrifield.com/articles/5_2.asp.

If you want a total education solution for teaching your employees the ABCs of free market wages and corporate finance realities, buy our DVD-based training system entitled: High Performance Distribution Ideas for All. This comprehensive product will also educate everyone on how to make distinctive service happen and how to re-focus on the best and most profitable customers while shaping up or out the losing ones. The cost is a bargain; satisfaction is guaranteed; and more info on it is in the center of our home page at www.merrifield.com.

If you want THE BOOK on "democratic capitalism" as a very comprehensive backstop read, check out the book entitled Democratic Capitalism by Ray Carey at Amazon. Mr. Carey was President of ADT, Inc. for many years where he installed a "Care and Share" program that made all stakeholder groups far more wealthy than what 90%+ of US companies are not doing for their stakeholders, especially shareholders.

Do well for your shareholders by doing good for all of your stakeholders, buy our DVD's and get going.

  1. THE 80-5-80 KEY CUSTOMER STRATEGY.

I’m amazed that there are still American businesses that extol the benefits of 80/20/80 thinking which is: if 80% of our sales come from 20% of our customers then let’s spend 80% of our time selling and servicing them better.

I’ll admit that it strategically makes more sense than treating all customers the same, but why not go to the next level if you are in a mature industry in which you are selling mature, consolidating customer segments. The next level has two key aspects to it – profitability of customers and future growth prospects for customers.

On profitability, regular readers and users of our High Performance DVD know that if we rank customers from high to low by estimated operating profit contribution dollars, then:

  • the top 20% of the customers generate about 140% of our profits
  • and, the bottom 1% of our customers lose 20% of our operating profit.

If this seems new and incredible to you, check out this slideshow at our web site: http://www.merrifield.com/articles/Identify_Customer_Niches.pdf.

For future growth, less than 4% of US businesses in every mature industry are growing 2 to 5 times faster than their competitors and 4 to 6 times more profitably, because they are perpetual innovators. We have to marry these "gazelles", so they will in turn grow us. Because all of our competitors are clamoring to be the suppliers to these same gazelles, we just have to focus a lot more brainpower, extra service hustle, etc. on them than the competition. This isn’t hard, because even the best competitors are doing the 80/20 drill and delegating the gazelle work primarily to the sales rep who happens to be assigned to the account.

Here are two articles at our site that sum up how to rethink and refocus your corporate capabilities on the right accounts – most profitable, most promising and (converting) biggest losers – which total less than 10% of all of the accounts, then check out articles #ed 2.20 and 4.10 at these links: "A Strategic Time Management Assignment" http://www.merrifield.com/articles/2_20.asp and, "Transform Big Losing Accounts to Winners" http://www.merrifield.com/articles/4_10.asp.

  1. SELL INNOVATIVE SOLUTIONS TO ONLY 2.5 - 16% OF CUSTOMERS.

A manufacturing client was lamenting to me about how they had an innovative, breakthrough product that should be selling like hotcakes, but was not. I asked if they had started out by focusing most of their marketing energy on selling only through the most progressive 2.5% of their distributors to the most progressive 2.5% of the end users. They were admittedly taking the story to the entire channel with broad market coverage marketing.

I suggested he check out Everett Rogers’ "diffusion of innovations" theory at www.wikipedia.com. Here’s what you would find there:

"Everett M. Rogers (1931 in Carroll, Iowa - Albuquerque, New Mexico, 21 October 2004), communications scholar, pioneer of diffusion of innovations theory, writer, and teacher. He is best known for his ‘diffusion of innovations’ theory and introducing the term ‘early adopter’. Rogers achieved academic fame for his Diffusion of innovations theory; his book, Diffusion of Innovations, is now in its fifth edition. He proved that adopters of any new innovation or idea could be categorized as innovators (2.5%), early adopters (13.5%), early majority (34%), late majority (34%) and laggards (16%), based on Bell curve mathematic division. Each adopter’s willingness and ability to adopt an innovation would depend on their awareness, interest, evaluation, trial, and adoption. People could fall into different categories for different innovations—a farmer might be an early adopter of hybrid corn, but a late majority adopter of VCRs. Rogers showed these innovations would spread through society in an S curve."

Some of the characteristics of each category of adopter include:

  • Innovators - venturesome, educated, multiple info sources,
  • Early adopters - social leaders, popular, educated,
  • Early majority - deliberate, many informal social contacts,
  • Late majority - skeptical, traditional, lower socio-economic status,
  • Laggards - neighbors and friends are main info sources, fear of debt.

His research and work became widely accepted in communications and technology adoption studies, and also found its way into a variety of other social science studies. Geoffrey Moore’s Crossing the Chasm drew from Rogers in explaining how and why technology companies succeed.

If my friend does refocus his company’s efforts on and succeeds with the innovators, he may find that the early adopters don’t quickly and easily follow right behind. There could be a "chasm" between the two groups that Moore’s book addresses. And, even if my client tries Moore’s strategies for crossing the chasm, he may find out that the breakthrough product is destined to only be a niche product. Some ideas like saving to invest and ride compounded interest curves upwards over the long term are just beyond the average human’s capability.

 

That’s all for this week!

 

Bruce

Bruce@merrifield.com