by Merlin Hernandez

Consumers today want a more seamless delivery interface, a more personalized and simplified process, and a valued-customer experience but most of all they want it quickly. According to a Cisco Customer Experience Report, the most important attributes in the consumer interface are access/availability of the desired product or service, knowledge and competence in delivery, and efficiency in meeting their individual needs. In this mix what a business needs to survive the far-reaching changes in the contemporary consumer culture is a more specifically customer service orientation for a more satisfied and loyal customer.

Contemporary market leaders typically have narrowed their business focus to deliver superior customer value in one of the three value disciplines – cost leadership (best prices), product leadership (highest quality), customer intimacy (most responsive service culture) – while maintaining industry standards in the other two. Companies like FedEx and Home Depot that outstrip the competition in terms of profitability tend to excel in more than one value discipline. A firm’s relative position within an industry is given by the type(s) of value discipline chosen for competitive advantage e.g. cost leadership vs customer intimacy. Dual value disciplines as the strategic focus for a service business can become the basis of sustained market leadership. But for a small business especially a start up operating in the service sector, cost and product leadership within limited resource capabilities may not be possible. There can thus be no compromise on the customer focus.

What does this say about the business of service in the SME sector? In a nutshell, a service experience that is so remarkable that it stands out from the competition. But even more important, it is burned into the memory of the customer. The service business, by its very nature, is one of fulfilling customer expectation which intrinsically entails a value discipline of customer intimacy. The emphasis is on attention to customer detail and customer service, customization, CRM efficiencies, surpassing customer expectations, timely delivery, reliability, and lifetime value. But the same can be said for a consumer product. Companies like Apple and Nike have so surpassed industry standards as to have raised customer expectations with superior products that set a higher standard which competitors are not easily able to reach. This requires intimate and detailed customer knowledge with the kind of operational flexibility that allows fast response to changing customer needs and preferences.

Small businesses are at a distinct advantage for that kind of flexibility and intimate relationships. They are not structurally distant from the customer and bogged down by multi-tiered delivery systems and processes. In factoring customer needs into the strategic mix, businesses need to identify value-creating strategies that are most appropriate. The target market remains the most influential stakeholder around which to structure a business, and customers buy value. Market leaders are adept at understanding the value drivers that motivate their customer base. And small businesses remain closer to the ground. This does not mean that there is no need for rigorous market assessment before embarking on a small business venture. But shaping the service to more closely fit customer need brands the business as customer-focused and builds customer loyalty.

Assessment of the target market, however, should present a customer that would be more interested in a best total solution that meets their needs where quality delivery is the primary consideration. A business servicing this market segment needs to be immersed in continuous delivery process innovation and improvement to both satisfy and anticipate customer needs. This would reflect the value discipline of customer intimacy which places a stronger emphasis on more esoteric and long-lasting value e.g. organic food and good health, hypo-allergenic natural cosmetics, recycled gift paper and cards, customized cooking oils or jams natural raw materials, locally grown, chemical-free, non-GMO product etc. Value here is described as relevancy and engagement in response to long term need and wider societal benefit. Strong value added strategies and deeper customer relationships might be critical for a new small business. It can bring the solid market differentiation that gives the new business the lead time for developing brand awareness and customer loyalty. This will consolidate the market presence and establish a customer base before the competition comes knocking.

Related Articles on this Blog

Merlin Hernandez is an entrepreneurial development and management consultant who operates mainly in the small and medium enterprise sector. For more information on this and other topics, please send enquiries to businesssolutions1168@gmail.com

 

 

I find that many employers do not have an up-to-date understanding of some of the real job requirements in their businesses. There is a strong reliance on the job description as the measure of productivity but an absence of the understanding that jobs are more organic that they used to be in a fast changing economic climate. Employees are more often than not required to think on their feet and do that little bit extra to ensure that the job gets done. Job execution is now more of a feature of on-going trouble-shooting, system adjustments, and even fire-fighting to remain ahead in the very dynamic competitive game.

Productive efficiencies and employee morale can be seriously eroded when employer expectations do not match the needs of job execution. This has implications for broad-based job analyses so that businesses have a real time appreciation of what it takes to remain competitive and what employees are actually being asked to do. New acquisitions, diversifying, attrition, or sometimes a simple move to a new space may warrant some re-structuring. This brings the possibility that the current situation may now require new inputs and methodologies. The job analysis bares gaps in expectations and resource allocation for early intervention to improve efficiencies.

 A job analysis documents the requirements of a job and the work to be performed. It is a developmental instrument that encompasses the job definition and description, measures for performance appraisals, selection systems, promotion criteria, training needs, and compensation plans. Job analyses should be revisited every few years to remain relevant. Keeping the job requirements current would require an employer to actively seek employee input that will inform the systems and practices adopted. This makes the practice an important feature in risk reduction.

My preferred method of information gathering for analysis is the worker interview in a standardized format, which would provide subjective information from workers about standard and non-standard aspects of the job, as well as a range of regular worker inputs that may be outside of the standard but perhaps need be included. The requirements of a job are constantly evolving in a dynamic economic environment, and very often these activities are not legitimized. This can play havoc with established management structures and lead to conflicts and employee dissatisfaction.

Because the information provided will be subjective, and interviewer’s questions could be misunderstood, there is the possibility of distortion to the analysis. Selecting experienced and knowledgeable workers and trained interviewers could mitigate some of the potential bias. But sometimes new employees see things with fresh eyes and have much to offer. Unskilled workers who operate at the tail-end of productive processes can also bring some meaningful insights to bear on improving those processes. I find this aspect of the job analysis crucial so that systems remain grounded in the reality of the job both ideal and actual. Interviewing several workers engaged in the same activities will allow the analysis to abstract and categorize the information based on similarity of responses. This cumulative dimension will give greater stability to the results.

To further insert objectivity into the analysis, I often combine interviews with a web-based structured questionnaire. This would tend to remove possible interview ambiguities, and allow for a wider coverage of participants at a lower marginal cost, with less work disruption. It would also facilitate quicker analysis and feedback. Using company intranets for web-based analyses would afford easy access to the final product across the board. But for small businesses without intranet facilities, an e-mail questionnaire will suffice.

The face-to-face process of the interview will lend credibility to the information which could then be used as a baseline measure in the structuring of the questionnaire. The disadvantage of questionnaires is that they are time consuming and expensive to develop, and the impersonal approach may be a demotivating factor for respondents. But the utility and reach of questionnaires, their long term application, and cost savings in administering them would outweigh such concerns.

Related Articles on this Blog

Merlin Hernandez is an entrepreneurial development and management consultant who operates mainly in the small and medium enterprise sector. For more information on this and other topics, please send enquiries to businesssolutions1168@gmail.com

by Merlin Hernandez 

Companies today battle for a share of the market in a theater that is fiercely competitive. It has been described as a bloody red ocean of sharks and victims primarily because industries continue to strategize within a defined economic structure that is dictated by existing demand. But with supply outstripping demand in some industries, the marketing edge of differentiating strategies is quickly diffused in an information-driven culture, with the cost of competing eroding margins, and companies needing to look at new opportunities for profitability and growth. 

A divergent strategy will serve to insulate a business from competition by establishing itself in an untapped market with high opportunity for growth without threatening the immediate interests of competitors. It is a strategy meant to extend the time frame between market entry and competitor alert while concentrating on consolidating brand loyalty through value creation. This undermines the traditional approach to business by denying competitiveness as the key to success to pursue unlimited market opportunity through a leap in value creation for a different kind of demand orientation – a Blue Ocean Strategy (BOS). 

The fashion industry is intensely red ocean. But many high-end designers like Ralph Lauren, Versace, Stella McCartney, and Michael Kors have taken the best features of haute couture to offer a classic look at lower prices. It is a tactic that spans strategic groups – haute couture and mass market – to create Designer Retail as a whole new market segment to draw new customers to their brands and be less vulnerable to the competitive red ocean. Customers buy luxury and brand name (added values) at affordable prices. In other words, lowering costs and maximizing value. 

There is considerable evidence in the fashion industry where BOS has proven to be successful but with a twist. Instead of decreasing costs and lowering prices to differentiate the basic product, many designers have used a line extension RTM. Some of the literature claims that line extension is not aligned with BOS because it remains a strategy to compete for market share and only reinforces red ocean values. I tend to disagree because the line extension strategies used by these designers are specifically directed at unlocking the blue ocean by bringing previously untapped customers into the revenue stream. It does not differentiate the basic product to target the same red ocean market, there is a whole new product mix aimed at a target that is outside of the basic client profile. 

The approach splits the market into two separate targets – expensive high-end/low volume and low-cost mass market/high volume – with two separate and distinct product mixes. Companies maintain their brand identity as a high-end label and use that equity for value creation with a BOS strategy of low-cost luxury to reach into the mass market for volume output and higher profit margins. 

Apple has also embraced superior value creation through service delivery. In the face of intense competition, and similar products on the market before the company can achieve its full market projections, Apple has shifted its short to medium term emphasis from value innovation as its differentiation strategy to heightened value-creation as a way of getting one leg out of the competitive bloodbath (red ocean). This can be seen as a strategic re-alignment in an attempt to balance the components of value by measuring its economic and financial impact with both qualitative (value) and quantitative (financial metrics) tools for strategic and economic control. It is a methodology based on the integration of the investment curve for innovation, the value of the market generated by these investments, and the value-price ratio that impacts the company’s market position.  

 

“Given the expectation that competitors will quickly develop similar products and threaten the investment curve, companies like Apple need to push the life cycle boundaries as far as possible by ratcheting up the value-creation – not based on product improvement at additional R&D outlay but on the level and quality of service. It is a strategy of great market value that brings a new opportunity to take the product into the blue ocean. It will serve the function of buying time to cover capital investment, keep the share price steady, and have the surplus for the next wave of innovation” (The New Apple, Hernandez, 2012). Note the imminent arrival of I-Phone 5. 

Apple is currently operating in the blue ocean with the iPhone by creating new buyer value. “This is the mature phase of the smart phone life cycle where declining revenues and decreasing customer loyalty are to be expected along with and sharpened competitive tactics” (Apple and Samsung, Hernandez, 2012). Apple has actually opted out of the intense competitive red ocean strategies of increased marketing and branding spend, drastic cost cuts to increase margins, and price wars. Instead, Apple has re-defined its value map to offer a superior service product to sail the blue ocean. The brand loyalty generated might just carry the company through several cycles of competitor innovation. 

Related articles on this blog

Apple and Samsung

Developing the Business Idea

Google’s 70/20/10

Google v Facebook

Market Hunger

Mass Customization: Fashion Industry

The New Apple  

Merlin Hernandez is an entrepreneurial development and management consultant who operates mainly in the small and medium enterprise sector. For more information on this and other topics, please send enquiries to businesssolutions1168@gmail.com

by Merlin Hernandez

 

Innovation in communication technology and the Information Age have shifted the face of marketing from an emphasis on product placement to a to a heightened customer orientation. The traditional production concept of mass production and distribution, high inventories and high risk is giving way to customization and customer empowerment where the customer is seen as a partner to product development and production processes. This allows manufacturers to be more responsive to customer need, carry less inventory, and minimize surplus and waste.

The ease of Internet comparisons has led to a more savvy buyer with greater price sensitivity and much less brand loyalty. Businesses have to do much more to gain and hold market share and maintain a customer base. Companies are now finding that the old production concept of production efficiency, low cost, and mass distribution needs more service and value overlays in order to maintain competitive advantage.

This has implications for the product concept itself. While performance and innovation remain key elements to success, the idea of relationship marketing has undermined the old notion that a good product will create its own market (the selling concept). This kind of orientation presupposes an aggressive approach to placing the product in the hands of the consumer, without factoring, in any meaningful way, the consumer perspective.

Business operations today however, seek to satisfy a broad base of stakeholders – suppliers, distributers, customers, shareholders – to the benefit of more long-term relationships and more holistic strategies for maximizing profits (the marketing concept). It is based on delivery efficiencies that include product quality, performance, innovation, availability, price, service, and intangible value through added value creation. This may include a unique service culture, new uses for the product, or new technological integration and applications for expanded product usage.

The selling concept epitomizes a philosophy of selling what is made rather that making what the market needs. In the contemporary business environment, success will of necessity need to be aligned with a marketing culture that places the customer at the center. As the heightened competition inherent in globalization offers multiple options and greater capacity for comparison to consumers, businesses need to offer more than just a well-made product.

Products will need to resonate more specifically with customer need, fit into their lifestyles and aspirations, and provide some intrinsic value that extends beyond the product – enhanced social status, group leadership, luxury etc. The selling concept has shifted to more of a marketing concept which requires sound research into what customers want and need, at a price they can afford, and the most efficient methods of getting it to them. Businesses need to be market-driven with customer satisfaction as the primary focus.

Related articles on this blog

Developing the Business Idea

Focusing the Business

Marketing Service

Service as Commodity

Merlin Hernandez is an entrepreneurial development and management consultant who operates mainly in the small and medium enterprise sector. For more information on this and other topics, please send enquiries to businesssolutions1168@gmail.com

by Merlin Hernandez

Many consultants swear by the SWOT analysis and often develop a strategic focus on that basis. I share the notion that the SWOT remains fundamental to building strategy but by itself, it is incomplete. Strategy should be multi-perspectival using different tools for broad-based analytics that leverage risks across the business profile. A SWOT analysis is a conceptual approach to strategy formation that can overemphasize internal strengths and ignore the fact that a strength that does not directly impact the opportunities and threats in the external environment may not necessarily be a source of competitive advantage. Furthermore, SWOT analysis does not usually factor changing environmental threats.

Strategic analysis should integrate the strengths and weaknesses of the SWOT with the necessary activities for creating value for the customer through Value Chain Analysis (VCA). VCA examines activities throughout the supply chain, production processes, and distribution networks that add value to the product. Each step or link in the process adds value to the product along the way.  Best practices which are repeatable and can be further used for on-going product improvement or new product development, can be extracted from the VCA as a template for quality delivery.

The SWOT analysis is also enhanced by Resource-Based Analysis to determine the degree to which available resources can become the basis of sustained competitive advantage. Resource capabilities that support organizational strengths and reduce the impact of weaknesses should be shown to mitigate threats to customer and supplier relationships, delay competitive entry and rivalry, and retard the threat of substitute or alternative products in the market.

Resource capabilities can be analyzed through the value, rarity, inimitability, and organization (VRIO) framework for the strategic process. VRIO is part of internal analysis that can be used to audit all resources and capabilities of the firm to evaluate the competitive potential and sustainability of a venture. As a complement to the SWOT analysis, VRIO poses four questions about the value of resource capabilities in exploiting opportunities and mitigating threats; the rarity or uniqueness of resource capabilities in sustaining competitive advantage; the difficulty to imitate or duplicate the resource base on the part of a competitor (due to significant cost or other disadvantages), and organizational readiness to exploit available resources to advantage.

VRIO ANALYSIS
 Strength

(1 – 5)

Value Rarity Inimitability Organizational

Readiness

Market

Advantage

Organic Food

5

4

4

5

4.5

Total Customer

Service

5

4

3

5

4.25

Exotic Cuisine

5

4

4

5

4.5

 

Elegant Setting

5

3

3

5

4

 

Customization

5

5

5

5

5

 

Nutritional Value

5

4

4

5

4.5

Supplier Relationship

5

4

3

5

4.25

Expansion Capability

5

4

5

5

4.75

AGGREGATE SCORES

5

4

3.88

5

4.47

Market Advantage

4.47

Fig. 1    The VRIO analysis is linked to market advantage based on criteria that offer growth opportunities in value creation. It is a way of defining the market space to determine the strategy map. The venture scored high on market advantage, driven by high scores for value creation and organizational readiness. But the median score for inimitability is an indication of some competitive pressure.

In the above scenario, decision-making would be enhanced by considering the imitability factor. If the new product is no more than a clever amalgam of available methods and technologies, then no wall of patents could stop opponents from getting in on the opportunity. Recognizing this vulnerability, an entrepreneur might want to think more carefully about the length of the expected entry lag between insertion and meaningful competition. This critical period allows the business to build some market power through brand identification before the entry of direct competition (expectational advantage).

An appropriate response might be more aggressive advertising, publicity and/or customer incentives. There may also be some possible advantage due to firm-specific learning or asset mass efficiencies i.e. the years of accumulating those efficiencies in the knowledge base – recipe building, skills mastery, specialized talent  – or the cost and availability of specialized equipment. Additionally, it might help the business to utilize the expectational lag to take advantage of gains for enhanced contingency planning. 

The business that offers a well-differentiated, inimitable product might consider trying to use this head start to build other cospecialized resources that are less available e.g. customization or a reputation for service on a new technology. The general point is that by analyzing the value chain the business would be able to evaluate the maturity of the business idea as well as its readiness to exploit the opportunity. An analysis of the resource position would give a clearer indication of whether the situation meets necessary conditions for a sustainable advantage.  Approaching the feasibility of the business idea from several angles means that fewer strategic mistakes would be made. This combination of resources and strategies can satisfy VRIO questions and Value Chain Analysis for sustained competitive advantage, and only begins with a SWOT Analysis.

Related articles on this blog

Decision Making

Developing the Business Idea

Focusing the Business

Resource Planning and Costing Systems

Strategic Capacity Planning

Supply Chain Management 

Merlin Hernandez is an entrepreneurial development and management consultant who operates mainly in the small and medium enterprise sector. For more information on this and other topics, please send enquiries to businesssolutions1168@gmail.com

by Merlin Hernandez  

A well-executed business evaluation provides a valuable planning instrument for the establishment of priorities and resource allocation for overall operational improvement and the satisfaction of customer needs. Evaluations also offer a measure of whether objectives and goals are being achieved, and whether the organization is effectively adapting to new environments, trends, and technological changes. 

Evaluations, however, can be a double-edged sword in that they often bare deficiencies in operations especially if there is a granular approach that does not recognize integrated efficiencies. This can become a disincentive to making the necessary improvements which may appear overwhelming if each deficiency is viewed in isolation. Cost is the most common deterrent and many smaller businesses may not be able to afford the time and expense of installing new systems and procedures. Evaluations can also bring some disruption to work routines which can impact short term goals. 

Business evaluations assess policies and procedures for coherence between systems and specific objectives e.g. measuring whether customer service policies actually respond to identified customer need. Evaluations allow the business to take an objective view of where it stands in relation to where it wants to go. The business might then leverage its assets to achieve its objectives through more informed choices about what systems work and what do not. 

Evaluations might examine organizational culture and structure, governance policies, work flow processes, KPIs, employee turnover, client satisfaction, and funding streams, among other inquiries. They also bare inherent and potential risks that will guide decisions about the design of business functions and the establishment of priorities. The elements of an evaluation are organizational objectives and goals, a needs assessment from end users of evaluation results, and a trained assessment team. 

These assessments can be done in anticipation of a strategic move to better position the company for success or as an exercise in assessing effectiveness. It is through the evaluation process that the most meaningful strategies are developed, improved, and refined. An evaluation provides the kind of insights that bring clarity of vision and purpose in building strategy. There are distinct advantages to an integrated evaluation framework that examines preparedness or efficiencies throughout the entire organization in order to maintain internal and external consistencies. An integrative evaluation takes a collaborative approach among both internal and external stakeholders so that findings dovetail seamlessly for an action plan that is strategically acquired. 

Key factors for a meaningful assessment are the organizational culture and decision-making policies, power hierarchies and centers of influence, horizontal communication, and a trained assessment team. It is often a good strategy to use external SMEs for organizational assessments since having line managers (internal SMEs) as evaluators risk introducing bias to the process through departmental agendas and priorities. But external evaluators can add to the cost and many medium and small enterprises may postpone or eliminate the evaluation exercise as a planning tool. One way to address the issue is to have line managers trained in evaluation techniques and expectations. 

But an evaluation is not a luxury that can be cut from the budget or postponed. It needs to be done from an assessment of a new venture’s potential to meet an identified market need, through an expansion of the customer base or to tap into new markets, to evaluating the resource capability required to achieve goals and objectives. Evaluations also enable the development of contingency plans that would mitigate an emerging risk profile to emphasize anticipation and preparation over after-the-fact response and crisis management.   

As the business plan evolves from the assessment and analysis phase, it is also good strategy to measure the proposed venture against industry best practices and the heuristic rules that apply. This is done from the perspective of process mechanics as well as change management aspects to arrive at a conceptual framework suited to that particular business in all its specific peculiarities in terms of cost, flexibility, work flow, time and resource constraints etc. Failure to conduct an evaluation when it is indicated can result in ill-informed decision-making, unrealistic expectations, poor appreciation of threats that can impair desired outcomes, and unpreparedness for contingencies. 

Related articles on this blog

Decision Making

Developing the Business Idea

Performance Metrics

Resource Planning and Costing Systems

Strategic Capacity Planning

 

 

by Merlin Hernandez

 

Businesses need to keep current with capital markets since they remain a major source of investment funds for capital formation and working capital and have some of the highest returns on investments. Larger businesses use the funds generated from issuing stock in an IPO to finance long term capital expenditures like new equipment, projects, acquisitions or new technology. For companies that are not publicly traded, as well as small businesses, the use of marketable securities is important in building collateral for business loans from financial intermediaries. Choosing the right securities in which to invest, and determining the best risk-return trade-off in order to support the goals of the company is part of the measure of effective management.

Managers also need to be mindful that the share price on the stock exchange is directly related to demonstrated operational efficiencies as evidenced by annual corporate financial statements. This also supports consumer and credit market confidence – an appreciating stock is an indication of a healthy prognosis and worth consideration in decisions about where to place the investment dollar. For smaller businesses, CDs and Treasuries are also extremely liquid though they may yield lower returns. The advantage is that they remain low risk.  Bond markets are particularly useful for short term financing like working capital – meeting inventory needs and receivables within the next year. 

Commercial paper has been a cheap way to raise capital by corporations with strong credit. With slightly higher return rates than T-Bills, and minimum credit risk, commercial paper has been regarded as a safe asset. The mortgage crisis of 2007 where mortgage-backed securities fell significantly in value changed the perception of commercial paper as low risk. The lesson might be that heavy reliance on commercial paper as an investment/financing instrument can flip the portfolio risk from low to high. A good strategy when investing in commercial paper might be that investors should spread their risk with a diversified portfolio, and perhaps restrict investment to blue chip issues. Short term T-Bills can form part of a contingency plan.

 In terms of short term loans in the current economic climate, the maturity matching approach can leverage a firm’s risk of default on a loan portfolio by using T-Bills that mature at the same time as the loan term. This offers protection from default but if receivables can cover the loan as expected, returns from the T-Bills can become part of the company’s liquidity cushion. What I am saying is that when loans are cheap as they currently are, firms can aggressively take advantage of the climate to access working capital while using asset reserves for investment and liquidity cushion. This would be a combination of aggressive and maturity matching approaches to working capital financing.

A multi-purpose revolving line of credit is one of the most useful resources for businesses of any size and can serve both short and long term needs. It is a valuable source of working capital that can be applied to receivables, payroll and marketing expenses, and occasional cash flow shortages. Many times a bank will extend a line of credit to a firm based on receivables as the only collateral. They may look at AR and cash flows only in making the decision. This might however be specific to industries like fashion, toys, school supplies, the gift trade etc. – with their high seasonal demand and cash flow spikes. The bank would hedge its risk by only extending such a facility to clients in good standing or those with a cash flow history that demonstrates a high probability of meeting their payments.

For small businesses, trade credit is perhaps the most obvious and flexible form of short term financing. On the demand side, trade credit remains one of the most common modes of short term financing for businesses with working capital or credit challenges seeking better cash flow management. It can be seen as an interest-free line of credit.  The terms of trade credit are supposed to benefit a supplier as well through an increase in short term sales, moving inventory that would soon be out-of-date, or to reward valuable customers – credit terms function as a form of sales promotion.

The value of trade credit can be analyzed in terms of opportunity cost. The Time Value of Money increases an amount of money as a result of interest earned and is an opportunity cost attached to the deferment of a payment obligation. Small firms may not have an in-depth understanding of APR/APY terms or true rates of return. They tend to measure the benefits of credit terms by the length of the collection period. Payables are often prioritized by due dates and cash availability and a longer payment period is seen as an advantage. Perhaps there should be no difference but in practicality, there might be, especially as the opportunity costs attached to a small payable may be almost negligible in relation to the convenience of the longer term.

The fact that there are no interest penalties attached to a trade credit arrangement is motivation for the customer to defer payment in favor of immediate liquidity needs, which may include a short term investment, the gains of which could give an amount greater than the trade credit payment. The longer the collection term, the more attractive the arrangement might be. An added advantage is that deferment, even beyond the collection term, lowers the financing costs due to an extended period at no additional cost.

Related articles on this blog

• Financing a Small Business
• Decision Making

• Diversifying a Small Business

 

 

Follow

Get every new post delivered to your Inbox.

Join 60 other followers