Finding Common Ground Between CFO and COO–Part 9

[Continuation]

So, what are the keys to constructing irrefusable offers (Mafia offers)?

Market segmentation

The CFO and COO must come to understand the key components that go into their trading partners’ experience and what their trading partners view as improved results. More importantly, they must begin to see that different trading partners or different market segments have different experiences and seek different improved results.

In order to get a better understanding of how to segment your market, the CFO and COO should employ a combination of market analytics (business intelligence) and tools to unlock “tribal knowledge” from within the organization itself.

As the figure above suggests, different target markets will find value in differing aspects of “the offer.” Some will find the value in a product’s ability to be customized or adapted to their specific application. Others will find greater value in how the product is delivered (speed or online). Still others will find greater value in intangibles such as VMI (vendor-managed inventory) or the ability to receive small, more frequent shipments,while achieving the same price-breaks as larger orders. It is impossible to know until the CFO and COO take time to analyze and understand how and why they sell—or fail to sell—into various markets.

Capabilities

Another factor concerning which the CFO and COO must come to agreement regards the firm’s capabilities. What can be done within the firm’s capabilities to supply an improved customer experience for various segments of the market? In addition, what can be done—still within the firm’s capabilities—to help assure that the customers in various market segments are getting better results than the competition is delivering?

Understand that, until the firm’s various market segments are understood clearly, it is impossible to even formulate the right questions around “capabilities” and how to apply them toward the creation of irrefusable offers.

Creating an operating partnership with your customers

The really great and long-lasting irrefusable offers stand above the rest because they create a durable competitive advantage for both the vendor and the customer. The offer brings your firm and your customer’s firm into an operating “partnership” that produces better—and improving—results for your customers while increasing your own firm’s Throughput and profits. This combination makes three very happy parties—the CFO, the COO and the customer(s) involved.

This may mean the such irrefusable offers may sometimes need to be tendered to the customer at a higher level than the typical “buyer.” Creating and presenting the offer may involve the CFO and COO in joint discussions with their counterparts in the customer’s organization, where the value of the irrefusable offer may be more fully understood and appreciated.

Establishing these offers and resulting agreements at higher levels knits the customer’s management team with you—the vendor’s management team—in a way that makes it increasingly difficult to dislodge the vendor from the customer’s new way of doing business. Customer loyalty becomes a strong factor at this point, and the number of “touches” between the customer and the vendor tend to increase over time.

[To be continued…]

Surviving the recession with breakthrough thinking - Part 1

If there is one thing you need to survive and thrive during a recession, it is a competitive advantage. And if there is one thing that can help you and your organization discover and secure a sustainable competitive advantage, it is breakthrough thinking. But how do you and your management team go about conjuring up a breakthrough? After all, the very word "breakthrough" indicates that there is a barrier between you and "the other side" of the breakthrough. How will you break through?

Become an expert on "the solution," not "the problem"
Over my career of more than 25 years in consulting and senior management, I have met lots of executives and managers that believe that "data" is central to improving a company. They did not have this same thought before computers became widely available to small-to-mid-sized business enterprises (SMEs). It seems that as PC-based computing and storage became faster and cheaper, managers' and executives' hunger for data grew. If some data was helpful, then (it seems they reasoned) all the data would make them infallible in their management actions.

The data are not right
What many of these executives and managers fail to understand, however, is that it is impossible for the data they collect to be right all of the time. To paraphrase P.T. Barnum: Some of the data will be right all of the time, and all of the data will be right some of the time; but, all of the data will never be right all of the time.

You will never possess all of the data
Of course, we need to add to that the fact that no one will ever possess all of the data in any given situation, if for no other reason than that there are hundreds of data elements affecting any given situation that are not quantifiable and cannot be reduced to empirical data points in a computer.

The data are not objective or impartial
Even the data that is collected may not be objective. How the data is collected, the programming that went into the computer application that collects it, the operator who enters it, the people making the measurements, and even the staff that categorize, select and report on the data are all potential influencers of the end result. The reports, dashboards or presentations that many executives will consider as being "neutral," "objective," and "impartial" really may have none of these attributes.

You are wasting time, energy and moneyFor all of these reasons and more, executives and managers that seek to amass volumes of data in order to solve problems are wasting the three things most companies can least afford to use unwisely: time, energy and money. Not only so, but too much data is more often a hindrance than a benefit to breakthrough problem-solving. The executives seeking a solution are more often than not simply buried in the minutia - much of it being unmanageable and irrelevant to the underlying core problem. The result is "paralysis by analysis."

Data-gathering is not accomplishment
Sadly, far too many executives and managers equate information gathering with actually accomplishing something that benefits the organization even though the act cannot be linked to increasing Throughput, reducing Inventories or demand for new Investment, and/or cutting or holding the line on Operating Expenses while sustaining significant growth. This approach to problem-solving frequently reports "progress" without any real accomplishment leading to improvement - short-term or otherwise.

Missing the goal and a frameworkIn management's misplaced attempt to become an expert on "the problem" through data-collection, they have already taken a wrong turn. Management should not be in the business of becoming expert on "the problem." They should be seeking to become expert on "the solution." However, their mistaken belief is that the data will lead them to a solution. This, however, is highly unlikely.

Data is nothing more than documented experience - the organization's history having been captured as data. However, as W. Edwards Deming told us so clearly:

• "Information is not knowledge. Knowledge comes from theory." 
• "You should not ask questions without knowledge."
• "There is no knowledge without theory."
• "Experience teaches nothing without theory."
• "If you do not know how to ask the right question, you discover nothing."

Managers busy amassing and combing through data frequently have neither a goal nor a theory in mind. They are, as Deming would say, "Asking questions without knowledge." They are seeking to be "taught" by the firm's experience (as captured in the data) without a theory about what the data should be showing them.

Begin with a goal
It is the awareness of a goal or purpose that will enable managers to determine what data might really be relevant to achieving a breakthrough.

Firefighting does not qualify as a goal
Firefighting might be a requirement, but it cannot qualify as "a goal." I say this because - like real, honest-to-goodness firefighting - the most it can do is minimize damage and restore the "normal condition" of "no fire." It cannot bring progress, let alone lead to breakthrough thinking and competitive advantage for your company.
 
If your executive team is going to achieve breakthrough thinking, then the breakthrough better be about something more important to your organization's success than how to put out - or even prevent - the next fire in department X. Your thinking had better be focused on the critical matters of achieving more of your goal - and, in a for-profit enterprise, that goal should be how to make more money tomorrow than you are making today. Any other goal is short-sighted: improving quality, improving customer service, and even making happier, more satisfied employees are require making money if they are to be done well and for very long.
 
So, if the goal is making more money tomorrow than you are making today, what are the right questions to ask and what is the theory (or framework) in which to ask those questions in order that you and your management team might come away with real and practical knowledge leading to breakthrough improvements?

The theory and the goal
Let us begin with this hypothesis: Every for-profit organization has at least one constraint to making more money. Of course, the evidence supporting this hypothesis is that if at least one for-profit organization existed with no constraint, its profits would be approaching infinity. The resulting theory - set forth by Eliyahu Goldratt more than 25 years ago - is called the theory of constraints, or TOC.

There are many nuances to understanding all of the implications of this theory and it is beyond the scope of this present writing to discuss them all. However, it seems simple enough as a concept: the organization - the "system" - is, in a for-profit situation, nothing more than a "money-making" or "profit-making" machine. Therefore, the following two statements should be considered:

1. The "system" - the entire organization - should be considered as a whole and not managed piecemeal by department and function. It is the "system" that produces profit, not the individual products, processes, departments or functions. The constraint is - or constraints are - related to the "system" and should be addressed in the context of the "system." 
2. In order for the "system" to make more money tomorrow than it is making today, it is important that the following occur:
1. IDENTIFY the constraint(s)
2. EXPLOIT the constraint(s) - i.e., take steps to get the most Throughput available under the current constraint(s)
3. SUBORDINATE to the constraint(s) - i.e., subordinate all other decision-making across the organization to the governing factors surrounding the constraint(s)
4. ELEVATE the constraint(s) - i.e., take steps to expand the capacity(ies) of capacity-constrained resources (CCRs)
5. CHECK to see if the constraint has moved - i.e., see if you now have a different constraint or set of constraint(s)
6. GO BACK to the first step - do not let inertia set in; enter into a POOGI (process of ongoing improvement)

Now you can start thinking - wisely
Now, with a theory in-hand (the theory of constraints) and a goal in mind (making more money tomorrow than you are making today), you and your management team are actually ready to begin "thinking" toward a breakthrough.

[To be continued]
 
©2010 Richard D. Cushing

The New ERP – Part 33

One of the things I try to do in working with a new team of executives and managers is to get them to enlarge their view of their own organization – their own enterprise. I encourage them to think in terms of potential and not just the results they are beholding today.

Most managers and executives think in terms of "forecasts" versus "actuals." In their minds, they compare forecast sales with actual sales, and they compare forecast profits with actual profits. But what the enterprise is really giving up is not the difference between "forecast" and "actual." What the firm is actually giving up – what the enterprise is actually losing – is the difference between their actual profit and the full profit potential for the firm. These losses are irrecoverable – gone forever – as a lost opportunity.

Cost-world thinking

If you are like most folks in management, you've heard the oft-repeated mantra of the cost-world: "Every dollar of cost (or expense) that is cut falls directly to the bottom line." This makes sense because it is true.

Unfortunately, this concept is a very constrictive, and sometimes misleading, fact when taken by itself.

Three or four decades ago, it was possible for companies to actually "cut costs" in a way that made, in some cases, a real difference. New technologies – not necessarily computer-related – were making companies more efficient. Competition from abroad just beginning to emerge in a good many industries, and real waste had to be cut away to stay profitable as prices fell.

By the 1980s and into the 1990s, most U.S. companies had already completed (or were wrapping up) major cost-cutting efforts. By this time, executives and managers had trimmed a good deal of the true waste available in their systems. Attempts to reduce costs further frequently butt heads with the law of diminishing returns: the efforts to reduce costs further simply do not produce enough benefits on the bottom-line to make them economically sensible to undertake.

Cost-Cutting Period	Est. Cost to Implement	Savings	Change in Profit
Pre-1980 Cost-Cutting	$10,000	$80,000	15%
1980 - 1999 Cost-Cutting	$20,000	$25,000	4%
21st Century Cost-Cutting	$30,000	$10,000	2%

Actually, the real picture gets worse than this simple chart of diminishing returns.

Understanding protective capacity

Every business entity or other functional organization has two types of capacities: First, there is the organizations core capacity. This is the capacity the organization calls upon day-in and day-out to meet its normal workload. However, surrounding your enterprise's core capacity is another layer of capacity that is automatically generated. No deliberate act of management created this layer of capacity and its appearance varies dramatically from firm to firm. We refer to this capacity as protective capacity, and it is this capacity that is called upon whenever "Murphy" attacks and disrupts the organization's ability to meet its normal day-to-day demands. When protective capacity engages, it causes resources in the organization to work harder, faster, longer, more efficiently or in other ways to meet short-term requirements. It causes the organization the "sprint" to catch up at a pace that is unsustainable in the long-run.

Note: Some organization's have a third type of capacity: namely, excess capacity. We will address that capacity in a few moments.

During cost-cutting cycles, many management teams fail to recognize the presence of and need for the organization's protective capacity. When this happens, such firms run the risk of cutting away, not "fat," but protective capacity that is necessary to the maintenance of the organization in the long-term.

If protective capacity is, in fact, trimmed away during cost-cutting actions, the natural reaction of the organization is to shrink core capacity in order to rebuild the layer of protective capacity and thus protect itself against "Murphy." The resulting reductions in core capacity will have several ill effects on the enterprise:

• A reduced capacity to recover from business disruptions
  
• A reduced capacity to meet periods of unusually high demand
  
• A reduced capacity to emerge rapidly or successfully from economic recessions
  
• A reduced capacity to take advantage of unanticipated opportunities
  

Understanding excess capacity

During cost-cutting cycles, what executives and managers are frequently looking to efface from the organization is what might be deemed "excess capacity." But, if management will stop to consider, what might be classified as "excess capacity," is really the capacity in your organization that is unconstrained and which your management team has not yet exploited in the production of Throughput and profit. It is precisely that capacity that your enterprise has been paying for all along but failing to reap the benefits of leveraging it toward reaching the firm's full potential.

Cutting is always easier than thinking, but thinking is generally the more profitable.

Consider how Federal Express got its name. As I understand it, Frederick Smith, founder of FedEx had developed the concepts behind such an overnight courier service in college. When he got ready to put his ideas into action, he bought or leased some airplanes and hired some pilots, on the one hand, while negotiating with the U.S. Federal Reserve system on a contract to courier money and documents between the banks of the Fed on an overnight basis. However, just he was about to put it all together, the Fed backed out of the deal. That left Smith a lot of excess capacity in the nature of airplanes and pilots. The name "FedEx" stuck, but Smith put the excess capacity to work in private commerce by developing offers that made economic sense to his customers while creating new Throughput.

Had Frederick Smith been a "cost-cutter" rather than a visionary and an entrepreneur, FedEx may have fallen by the wayside instead of becoming the firm it is today.

©2009 Richard D. Cushing