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Month March 2013

Three big questions

M&A integration food for thought

1) Where are we going?

Start a conversation with your leadership team about how the new organization will create value in the future. The place you’re going doesn’t exist yet. You get to invent it.

2) How can we get there?

How will the new organization operate? How will it satisfy customers? Which people, processes, and technologies are needed?

3) What’s required to fortify the strategy?

How will the team execute a seamless integration? Deliver viable revenue and cost strategies? Sharpen their ability to lead through transformation?

The stakes

Experienced senior leaderss know that an effective integration hinges on a smooth transition for employees and customers. This same rigor and focus must also be dedicated to preparing the team who will lead the transition. Leverage your influence to guide the leadership team toward working together to create and extend the vision of the new organization:

  • Establish a collaborative environment with integration planning that is transparent and synchronized.
  • Encourage leaders to gain intimate knowledge of the day-to-day operations by talking with their people at every level, encouraging ideas and candor.
  • Ask leaders to communicate specific ways their people can contribute to the new organization’s goals and how they will be rewarded.

Challenge your leadership team to lead with vision, authority, and credibility—stretching far beyond what’s been needed for the old business as usual. Inspire and instruct them on how to think and act in ways that balance the demands of the future with the needs of the present.

The telltale signs of corporate fraud

A new working paper (abstract; PDF) by Tanja Artiga Gonzalez, Markus Schmid, and David Yermack looks for the telltale signs of corporate fraud. The paper is called “Smokescreen: How Managers Behave When They Have Something To Hide”:

We study financial reporting and corporate governance in 216 U.S. companies accused of price fixing by antitrust authorities.  We document a range of strategies used by these firms when reporting financial results, including frequent earnings smoothing, segment reclassification, and restatements.  In corporate governance, cartel firms favor outside directors who are likely to be inattentive monitors due to their status as foreign or “busy.” When directors resign, they are often not replaced, and new auditors are rarely engaged.  Cartel managers exercise their stock options faster than managers of other firms.  While our results are based only upon firms engaged in price fixing, we expect that they should apply generally to all companies in which managers seek to conceal poor performance or personal wrongdoing.

The authors are wise to note that these findings aren’t necessarily generalizable, and it is also worth wondering if this method could be applied prophylactically to identify fraud. Note: Yermack is the same man who brought us “Tailspotting: How Disclosure, Stock Prices and Volatility Change When CEOs Fly to Their Vacation Homes.”

Economic forecasts

Tool | March 2013

Economic Outlooks

GDP growth. Though slow in early ’13, around 2% for the year

Interest rates. Little change through mid-’13, 10-year T-notes at year-end, 2.25%

↑ Business spending. About a 4%gain in ’13, half of ’12’s pace

Housing sales. Existing homes up 7.5% in ’13, new ones more than 35%

Inflation. Rising slightly this year, to about 2.3%

Unemployment. Falling gradually over ’13, to around 7.5%

Crude oil. Holding steady at $93-$98/bbl., at least through early spring—Trading at $95-$100 by Memorial Day

Retail sales. 5% growth in ’13 after strong holiday sales

Trade defect. Widening about 2% this year, with export growth steady

It’s not that this economy is so bad. After all, GDP is climbing, unemployment is falling, jobs are being created, and there is little inflation.

It’s just so not good. Growth is listless. For every job that’s open there are three job seekers. Nearly 8 million part-timers can’t find full-time work. Wages are stagnant. Export growth is lackluster, and average home prices…still 15% below the peak.

Complete economic outlook at kiplinger.com/outlooks.

The Revenue-Engine™ Review

ksr

 

Key points to think about:

  • Strategy and repositioning
  • Product development and planning
  • Supply chain optimization
  • Digital disruption and channel strategy
  • Media migration and marketing strategy
  • Business model reinvention
  • Customer segmentation and messaging
  • Sales force effectiveness
  • Pricing [and, the gross-to-net/price “waterfall”]
  • Go-to-Market [G2M] approach & channel partners
  • Cross selling and customer retention
  • Sales & marketing management

Start from scratch, and explore each and every aspect of the business, analyze every product line and its competitive position, and challenge the overall execution model. Uncover possibilities that may have been overlooked or not objectively considered.

Reimagining the convenience store

A Promising Investment Opportunity?

Here is a viable scenario that is based on recent trends (e.g., Macro Demographic Changes, Lifestyle Shifts, Technological Tends, New Business Models, and Intensified Competitive Dynamics):

Reimagining the convenience store. C-stores are uniquely positioned to exploit new demands for convenience and increasing urbanization. They’re already closer to con­sumers than any other type of physical store, but there are still opportunities to improve the experience and assortment.

First, margins and consumer loyalty can be improved by growing private-label offerings beyond packaged goods. C-stores are already starting to more closely resemble quick-serve restaurants in their offerings. For example, Casey’s General Stores recently started offer­ing fresh pizza.

But there is still tremendous opportunity to expand c-store private-label offerings to in­clude more general merchandise, transform­ing c-stores into one-stop shops for modern urban consumers. For example, 7-Select at 7-Eleven in the U.S. includes more than 250 food items from donuts to frozen pizza. But in Taiwan, 7-Select also includes a much wider assortment of general merchandise, including clothing, laundry detergent and light bulbs. And the strategy is paying off, with 7-Eleven’s operator in Taiwan reporting a 27% increase in net income in the third quarter.

And new technologies can also help make the c-store shopping experience easier and faster. For example, retailers could deploy RFID tags to let consumers check them­selves out. Or, U.S. c-stores could take a page from Tesco’s book and build virtual stores. Finally, online ordering and in-store pickup would help make the experience even easier and give first adopters an incredible compet­itive advantage. Retailers to watch: 7-Eleven, Alimentation Couche-Tard, Pantry, Casey’s General Stores and Wawa.

We have worked with all of these players, and know them intimately.

Beyond Quantitative Price Analysis

This is an old Mesa Associates [the forerunner to Axis Associates] pricing paper that was published in The Journal of Professional Pricing.

It reminds me of the old George Santayana [philosopher, essayist, poet, and novelist] quote from his work titled The Life of Reason (1905-1906):

“Progress, far from consisting in change, depends on retentiveness. When change is absolute there remains no being to improve and no direction is set for possible improvement: and when experience is not retained, as among savages, infancy is perpetual. Those who cannot remember the past are condemned to repeat it.”

Introduction

There are four major categories of models — quantitative, mental, narrative, and graphical — of importance to a price manager hoping to perform at optimum effectiveness and creativity. The models that price managers apply to problem solving obviously vary considerably from firm to firm. No doubt the most commonly-used pricing models today are those which can be input into spreadsheet software in order to perform sensitivity (“what if”) analysis. However, sensitivity analysis is only one window to the inner workings of the complex system called “price.” Complex systems and series of events can only be understood through patterning of data, which reveals relationships, symmetries and sometimes anomalies. In patterning data and in problem solving, formulas, words and graphics are analogous to the three legs of a stool.

Quantitative Models

Management scientists most often think of a model as a quantitative approximation of reality, which can be used to explain past behavior and predict future behavior. Applying knowledge from mathematics, statistics and other disciplines, they have produced such elegant pricing tools as conjoint analysis and simulation analysis. However, no matter how dazzlingly complicated quantitative models appear to be on the surface, they are based on simplistic assumptions. Hence, over reliance on number-crunching approaches to solving pricing problems would be a grave mistake.

Mental Models

What MITs Peter Senge calls “mental models,” i.e., shared mindsets or stereotypes, are far more prevalent representations of reality than quantitative models.1

Moreover, because they block insightful thinking, mental models often have extremely detrimental effects on business outcomes. To illustrate, consider the recent upheaval in Sears Roebuck & Co.’s mail order catalog business. Sears’ decision to shed its century-old catalog represents a prime example of the inability to replace one mental model with another. The mail order catalog industry, as a whole remains profitable and continues growing at a healthy clip. Yet rather than make changes necessary to emulate the success of competitors, Sears pulled the plug on a catalog, which contributed $3.3 billion in sales in 1992. Now that the cost-plus pricing paradigm is crumbling after centuries of blind acceptance, Senge might advise price managers to examine their mental models further to see what other flawed views and practices need to be shed.

“Sears’ decision to shed its century-old catalog represents a prime example of the inability to replace one mental model with another.”

Nonquantitative Models

Creativity experts have yet a third view of models. They think of models as tools for communicating ideas and developing new ones. Creativity models are often based on narrative and graphical rather than quantitative techniques. Most of these techniques are word-based and rely upon the power of words for creative insight.

Graphical patterns structure and stimulate new thinking in ways that verbal and numerical reasoning cannot.2 In short, graphical techniques can help to define a problem, model a concept, communicate a thought, reveal a pattern, reach a solution and stumble upon new insights. To demonstrate the potential power of graphical techniques, creativity expert Margaret Boden reminds us that gaps in Mendeleyev’s periodic table of the elements hinted the existence of elements not yet discovered.3

Conventional graphical tools such as line graphs, bar graphs and pie charts illustrate only quantitative relationships. Other graphical techniques are useful for analyzing linkage, flow and other nonquantitative relationships. For instance, Alfred Oxenfeldt introduced the idea of using “consequence nets” as a means of diagramming immediate and delayed effects of pricing decisions upon interest groups and dependent variables.4 Though the consequence net concept has been around for a long time and is perhaps one of a price manager’s most powerful tools, it seems to be buried in the toolbox. Would American Airlines have introduced its four-tier pricing strategy in 1992 or would Phillip Morris have slashed the price on its Marlboro brand in 1993 if consequence nets had been constructed first?

The power of graphical techniques stems largely from their usefulness in recording expert judgments, and thought processes. This is why they are growing in popularity among business managers who find themselves bumping up against the analytical limitations of computers and computer software and groping for new paths to problem solving.

“Would American Airlines have introduced its four-tier pricing strategy in 1992 or would Phillip Morris have slashed the price on its Marlboro brand in 1993 if consequence nets had been constructed first?”

Business executives are just now beginning to discover the utility of a graphical technique called “mind mapping” invented by creativity expert Tony Buzan in the 1970’s.5 The San Francisco-based consulting firm High Gain and others are introducing this technique to corporate clients as a new method of problem-solving. Mind mapping taps into the pattern-making powers of the human brain, which still far exceed that of the most sophisticated supercomputer. Mind mapping, once discovered by price managers, is destined to either become analytical essential or a dust collector like the consequence net.

“Focusing on profit, market share, and ROI numbers, we tend to forget that how often these performance numbers are a function of ideas expressed in words.”

Although we express written and verbal thoughts mainly in linear fashion, neither the brain nor other complex systems (such as the price variable) operate that way. Mind maps can be thought of as crude external representations of thought patterns and processes, but also, and more importantly, they are a means of defining and changing reality. Whereas geographical maps aid us in getting from starting point A to destination B, mind maps help us to define destination B, i.e., create the future.

To construct a mind map one starts with a mind idea at the center of a blank page and expands outward as additional ideas emerge. A variety of devices can be used to increase the explanatory and discovery potential of mind maps. Lines show connections between ideas, arrows indicate direction of influence or sequence, and geometrical shapes outline ideas having a common thread (e.g., threats, opportunities, solutions, causes, symptoms, effects) or a certain order of importance. Creativity images such as a snowball rolling downhill can be used to concisely communicate concepts. Mind maps can either be hand-drawn or created with the aid of computer software. A software application called Inspiration marketed by Ceres Software of Portland, Oregon is one of several programs designed solely for the purpose of providing computer-generated mind mapping graphics based on user input. Use of such software greatly streamlines the mapping and remapping processes.

Summary

Modem business culture places a higher value on numbers than words. Focusing on profit, market share, and ROI numbers, we tend to forget that how often these performance numbers are a function of ideas expressed in words. One of the biggest marketing success stories of the 1980’s was MCI’s ‘Friends and Family” discount program. Who can deny the important role words played in the success of MCI’s innovative price promotion?

If words stored in human memory are thought of as multi-ordinate or, as Buzan suggests, balls with hooks to which other words can be attached, it is easy to understand why verbal pattern-making possibilities are infinite. To appreciate the contribution of creative word linkage to the pricing domain, consider such pricing terminology as “competitive upgrade,” “baker’s dozen,” and “anticipation discount.”

Until more business managers begin embracing nonquantitative analytical tools such as consequence nets, perspective of the complex price variable will remain myopic. And until creativity techniques such as mind mapping are vigorously applied to the price element, a false mindset will persist that product Innovation is more important than price innovation.

  1. Peter M. Senge, The Fifth Discipline: The Art & Practice of The Learning Organization (New York: Doubleday/Currency, 1990).
  2. Keith Albem and Jenny Miall Smith, Diagram: The Instrument of Thought (London: Thames and Hudson Ltd., 1977), 7-11, 34.
  3. Margaret A. Boden, The Creative Mind: Myths & Mechanisms (Basic Books, 1991), 48.
  4. Alfred R. Oxenfeldt, Pricing Strategies (New York: AMACOM, 1975), 22, 72.
  5. Tony Buzan, Use Both Sides of Your Brain (New York: E. P. Dutton, 1991).