Wednesday, November 12, 2008

The Latest SEO Trends and Metrics: What's Hot, What's Not

I just picked up the following article from Marketing Profs. I think it is useful for SEO fans.

If you're not "living and breathing" search engine optimization, it can be easy to latch onto old SEO trends and metrics and focus obsessively on them, especially those few hot-button issues that get the most attention from the press or from your CEO.

It takes time and experience to stay on the cutting edge of SEO, and more than likely you don't have that kind of time, considering your other marketing efforts. So here's a quick update on what's hot and what's not in the world of search engine optimization.

What's hot:

* Becoming a trusted contributor on social news/content sites like Digg, Propeller, Reddit, Mixx, StumbleUpon, Wikipedia, and Knol
* Building your personal and professional network in online communities like Facebook, LinkedIn, MySpace, Flickr, YouTube, Bebo, MyBlogRoll, and the blogosphere in general, and then taking advantage of the residual network effect
* Link baiting—posting humorous/fascinating/contentious/controversial content that is a magnet for links
* Truly understanding and leveraging the power of "Long Tail" dynamics

What's not:

* Obsessively watching search engine indexation numbers and rankings on trophy keywords (like the one you know the CEO always checks first thing in the morning)
* Worrying yourself sick over duplicate-content penalties
* Relying on XML sitemaps to fix your indexation problems
* The old-fashioned link exchange

Speaking of what's hot, a new generation of SEO metrics exists so you can keep track of your progress once you've abandoned the old thinking and adopted more modern strategies. Gauging your success solely on your positions in the search engine results is old hat.

New SEO paradigms, such as the "Long Tail," universal search, and personalized search, call for new key performance indicators (KPIs).

In addressing "Long Tail SEO," consider the following KPIs:

Brand-to-Nonbrand Ratio

This is the percentage of your natural search traffic that comes from brand keywords versus nonbrand keywords. If the ratio is high and most of your traffic is coming from searches for your brand name, this means that your SEO efforts are fundamentally broken. The lower the ratio, the more of the long tail of natural search you are likely capturing. This metric is an excellent gauge of the success of your optimization initiatives.

Unique Pages

This is the number of unique (non-duplicate) Web pages crawled by search engine spiders such as Googlebot. Your Web site is your virtual sales force, bringing in prospects from search engines, and each unique page is one of your virtual salespeople. The more unique pages you have, the more virtual salespeople you have out there in the engines selling on your behalf.

Page Yield

This is the percentage of unique pages that yield search-delivered traffic in a given month. This ratio essentially is a key driver of the length of your Long Tail of natural search. The more pages that yield traffic from search engines, the healthier your SEO program. If you have only a small portion of your Web site delivering searchers to your door, then most of your pages—your virtual salespeople—are standing around the water cooler instead of working hard for you.

Keyword Yield

This is the average number of keywords each page (minus the ones that don't get you any traffic) yields in a given month. Put another way, it's the ratio of keywords to pages yielding search traffic. The higher your keyword yield, the greater the part of the Long Tail of natural search your site will capture.

In other words, the more keywords each yielding page attracts or targets, the longer your tail. So an average of eight search terms per page indicates pages with much broader appeal to the engines than, say, three search terms per page.

In a research study done by my company (Netconcepts) called Chasing the Long Tail of Natural Search, the average merchant had a keyword yield of 2.4 keywords per page.

Visitors per Keyword

This is the ratio of search engine-delivered visitors to search terms. This metric indicates how much traffic each keyword drives and is a function of your rankings in the search engine result pages. Put another way, this metric determines the height or thickness of your Long Tail. The average merchant in the aforementioned study obtained 1.9 visitors per keyword.

Index-to-Crawl Ratio

This is the ratio of pages indexed to unique crawled pages. If a page gets crawled by Googlebot, that doesn't guarantee it will show up in Google's index. A low ratio can mean your site doesn't carry much weight in Google's eyes.

Engine Yield

Calculated for each search engine separately, this is how much traffic the engine delivers for every page it crawls. Each search engine has a different audience size. This metric helps you fairly compare the referral traffic you get from each engine. The Netconcepts study found that Live Search and Yahoo tended to crawl significantly more pages, but the yield per crawled page from Google was typically higher by a significant margin.

Summary

Hopefully you're now more up-to-date on your SEO tactics, but keep in mind that any of these trends can change at the drop of a hat. Search engine optimization is a process, not a project, so as you optimize your site through multiple iterations, watch the above-mentioned KPIs to ensure you're heading in the right direction. Marketers who are not privy to these metrics will have a much harder time reaching qualified prospects.

by Stephan Spencer

Stephan Spencer is founder and president of natural search marketing firm Netconcepts and inventor of the GravityStream SEO proxy technology. He's authoring the upcoming O'Reilly book The Art of SEO along with coauthors Rand Fishkin and Jessie Stricchiola.


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Thursday, September 18, 2008

Matching the Right People to the Right Jobs

Your workforce's skills change over time, and so does your business. Getting the right people into the right jobs is key to your company's growth

by Amy Barrett

Who's on the bus? To management guru and best-selling author Jim Collins, this is the most important question business owners need to ask themselves. The bus is your company, and getting the right people is crucial to success—more important, even, than your strategy.

So how would you answer? And what do you do if you've got the wrong people on the bus? Or the right people doing the wrong things? Kevin Rees, president of New York-based translation company LanguageWorks, had a great team on his bus—until he didn't. Rees started LanguageWorks in 1993 by hiring friends and acquaintances. "I was looking for anyone I could entice to stick with me," he says. "I was a first-time entrepreneur, had little in the way of credentials, and I was undercapitalized." But as LanguageWorks was growing into a $10 million, 45-person company, Rees worried his staff didn't have the management abilities he was looking for. Between 2001 and 2006, six people from the company's early days were let go or left. Those departures ended a few friendships. Says Rees: "It was incredibly traumatic."

There are a host of reasons a once-solid—or even star—employee may no longer be right for your company. A topflight salesperson who gets promoted to be head of sales might be a lousy manager. A jack-of-all-trades could get restless if asked to focus on one area. And employees who thrive in a startup environment may chafe when asked to follow the rules and procedures of a larger company.

However much you may dread doing so, these issues need to be tackled head on. Cornell University associate professor Christopher Collins, in a study with Bradenton (Fla.)-based human resources firm Gevity, found that managing employees is one of the top three things that keep business owners awake at night. And he says that while many entrepreneurs are visionaries or innovators, they can feel challenged managing talent.

Where Rees ended up—without a big chunk of his startup team—isn't always the best answer. You owe it to your company and your staff to try to find out exactly why a certain employee may not be up to par. Then you've got to decide how much you really want to keep the person and see if his performance problems can be fixed. You may be surprised by how willing employees are to work with you, and how open they'll be about which tasks suit them and which do not. Here are five strategies to get the right people into the right jobs.
TALK IT OUT

When Vickie Pullins and Jackie Frazier founded their Hurricane (W. Va.)-based speech pathology company, LinguaCare Associates, in 1990, they were confident they could work well together. They'd been friends since meeting in college almost 20 years earlier. But as the company grew, they started to feel overwhelmed. It wasn't until 2006 that they brought in S.K. Miller, a coach with Margate (N.J.)-based Collaborative Strategies, for some outside perspective.

Miller asked the partners four questions: What are you good at? What are you not good at? What do you love about your job? What do you really dislike about it? Soon Pullins and Frazier had hired an administrative assistant to pick up the paperwork that was weighing them down. Pullins now focuses on long-term strategy, while Frazier handles the bulk of the personnel and management issues. The two became so much more productive that they decided to extend the analysis to all the employees at their $1.3 million company. With a shortage of speech pathologists nationwide, particularly in West Virginia, Pullins says LinguaCare can ill afford to let a qualified person leave or to allow anyone in the company to be underemployed.

The results of those four simple questions were just as eye-opening the second time around. Kristy Stowers, who was working for LinguaCare in a rehabilitation center, had been consistently unable to hit her target of five hours of patient work a day. After the evaluation, Pullins and Frazier discovered that Stowers was up against some internal problems at that particular rehab center, including too few patients. Yet Stowers thought she had strong organizational skills and an ability to manage big projects.

So when Stowers moved on to the next contract, with a large medical center, Pullins and Frazier had her manage two other workers. Stowers has thrived, even initiating some new screening protocols. "She has become somewhat of a visionary leader," Pullins says. "We are so surprised." Stowers is pleased, too. "This facility is more fast-paced," she says. "I'm always busy and I feel more productive." Pullins says the company now plans to reevaluate the 18-person staff on a regular basis: "We need to ask every couple of years whether we are tapping into our people's gifts and interests."
BRING IN A PRO

Pullins and Frazier did fine by chatting with their employees themselves. But sometimes it takes a third party to lead these conversations, especially if you suspect workers will be reluctant to discuss their own or others' shortcomings with the boss.

Dan Kopman knew he needed help. Kopman is the co-founder and chief executive officer of Saint Louis Brewery in Missouri, which runs two breweries and two restaurants with 90 full-time and 60 part-time workers. Saint Louis' revenues have more than doubled since 2003, to about $8.5 million. But it has also had some growing pains. For about a year, the six workers at the main brewing operation had been complaining about frequent last-minute schedule changes, and some clients were confused about how much lead time was needed for orders. Things were running "fine when we were producing 10,000 barrels a year," says Kopman. But as the company hit the 20,000-barrel mark, "we needed to be more organized."

Part of the problem was that the head of brewery operations, Jim "Otto" Ottolini, had too much to do. "Otto has a degree in French literature, so he's the natural person to be head of engineering," jokes Kopman. But after joining the company in 1992, Ottolini learned quickly, overseeing the construction of the new brewing facility from 2001 to 2003, managing it once it came online and taking a course at the University of Wisconsin at Madison to improve his technical knowledge of beermaking. Kopman had been trying to get Ottolini to delegate more effectively for two years, but it hadn't happened. And Kopman didn't want to install another layer of management.

Last fall, Kopman asked Marvis Meyers, vice-president of training at the nonprofit AAIM Management Assn., of which Kopman is a member, for help. Meyers spent a few days interviewing the brewery employees, including Ottolini. "She allowed people to speak their minds and they felt comfortable talking to her in part because she was from the outside," says Kopman. During those conversations, everyone agreed that Ottolini needed to delegate more, and, unlike Kopman, none of the brewery staff had a problem with establishing another layer of management. They said they wouldn't mind if some from their ranks were promoted to assist Ottolini. Says Ottolini: "Dan involved me in this process. I was a partner in figuring out [what had to change]. I didn't feel like I was being scrutinized, but that our process was being scrutinized."

So Kopman created two new positions, both reporting to Ottolini. One person oversees production planning; the other manages packaging. The brewery team was unanimous in choosing who should be promoted to those jobs. "We didn't want to break up the cohesiveness of the group by creating some rigid structure," Kopman says. "But we found the change didn't bother the group the way we thought it would." And while there are still issues that need to be worked out, Kopman says, "We are producing and shipping more beer with fewer mistakes. I see light at the end of the tunnel."
TAKE A TEST

When an employee issue stems from a clash in work styles, personality tests can help bridge the gap. Rees of LanguageWorks realized early in 2007 that while his right-hand manager, vice-president Christine Muller, was extremely talented, her work performance wasn't all that he wanted. Rees arranged for the two to take an assessment called the Predictive Index. He and Muller spent about 15 minutes taking the test online. They each went through a long list of adjectives—descriptors such as "dynamic," "demanding," and "persevering"—and checked off those that applied to them. A consultant then helped interpret the results. The test showed that Rees often makes decisions even with incomplete information, and that he's perfectly comfortable doing so. Muller, on the other hand, wants clear and concrete directions before acting. That knowledge makes Rees a better manager and Muller a better co-worker. Rees says he gives Muller clearer direction, and that her work is much better and her morale higher as a result. For her part, Muller says, "The way we work together is much more natural. I can read him much better now."
BE A MENTOR

Sometimes it's not the company that changes—it's the industry. Such was the case when Leon "Chip" Marrano III took over the $50 million, 27-person Marson Contracting in Bronx, N.Y., from his father.

Marrano says general contractors such as his used to control all aspects of a job, including the hiring of subcontractors. Now many developers prefer to pay construction firms a straight management fee, then collaborate on everything from design to subcontractor selection. Financial information, once closely guarded by the construction company, is now shared openly with developers. But Marson's chief estimator, Anthony Bochichio, had been with the company since 1960 and was well-schooled in the old ways of doing things, including keeping financial information confidential.

Marrano took advantage of the good relationship he'd built with Bochichio. He let him know that everyone had to change how they operated, and he made it clear he valued Bochichio's experience and wanted him to stay with the company. Then Marrano began bringing Bochichio to preconstruction meetings with architects and developers to familiarize him with the new rules of the game. Together, Marrano and Bochichio would contribute their suggestions for bringing costs down without sacrificing quality. It's worked: Marrano says Bochichio has been "great at adapting." Bochichio says he always had a good relationship with Marrano, but that "things are even better now and more open between us." And Marson found that clients really appreciated Bochichio's expertise, so Bochichio is now a regular participant in preconstruction planning.
MAKE A TOUGH CALL

Coaching isn't always as successful as it was for Marson. In such cases, business owners face some tough decisions.

Kenny Sayes, owner of Sayes Office Supplies, based in Alexandria, La., didn't realize he had issues with any of his employees until clients started to complain. Some of his customers were putting in requests for photocopier repairs but were not getting responses. When Sayes looked more closely at his copier operation, he saw weak cash flow. He soon found that some bills weren't being put through, which was Daniel Littleton's responsibility.

In 2007, after sales at Sayes' 34-person, $7 million company jumped 25%, Sayes had promoted Littleton. Littleton had been hired to link customers' copiers to their computer equipment; now he would also be dispatching other technicians and handling invoicing. When clients began to complain, Sayes asked Littleton to keep a notebook recording exactly what he had to do each day, what he got done, and what was still outstanding.

Sayes checked the notebook every few days and sat down with Littleton and other employees when there were problems. Within a month it became clear Littleton was not following through on some required tasks. "It was like baby-sitting," Sayes recalls of the fact-finding. "But I had to do it."

Sayes says he worked closely with Littleton to improve his performance and made it clear the bills needed to be up to date in two weeks. Littleton says he told Sayes repeatedly that he was overworked. And he says some of his time was still taken up going out on service calls. Littleton says: "There were not enough hours in the day for a single person to do what he wanted." Sayes says Littleton was going out on just a few calls and that the workload was not excessive.

A month went by, and the backlog remained. Eventually Sayes demoted Littleton back to his original position. Littleton quit shortly thereafter and says his replacement doesn't have as many job responsibilities as he did, a claim Sayes disputes. But things are now running smoothly. "She knows the job better than I do," Littleton says of the new hire. A sure sign that he matched the right person to the right job.


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Sunday, September 7, 2008

Implementing Innovation in New Ventures

By Roy Serpa

At the conclusion of the CE Roundtable, ”Building a Better Innovation Model Roundtable” summarized by Jennifer Pellet (March 2008) she posed a crucial and provocative question to the participants: "So how can companies connect people and their ideas with processes that will vet, refine, and develop these ideas effectively." An even more profound question for chief executives is how to move the ideas to successful new ventures. Moving these ideas to profitable business ventures confront many challenges within large corporations.

The frequently occurring challenges to innovation and new ventures in large corporations are:

1. the lack of vision at the executive level
2. the initial magnitude of the opportunity
3. the internal competition
4. the availability of resources
5. the isolation of the innovative function.

These impediments have been experienced in three large global corporations and observed in several others over the past three decades. They are typical of the obstacles that exist but are not insurmountable. The following are actual examples of such situations and strategies that can be employed to deal with them successfully.

The Lack of Vision

Many senior executives lack the vision of future opportunities from the convergence of new and existing technologies along with emerging market trends. Unfortunately due to their hubris they are not receptive to the vision of creative and insightful subordinates who yearn to contribute to the growth of their firms.

I recall a flight with the top executives of a Fortune 500 company who were returning to their corporate headquarters from their semi-annual visit to their research facility to review the current research projects. During this flight they questioned the direction of the research and its potential value to the growth of their business. It was perplexing since they never raised these questions during the day long meeting with the research director and his research team. It occurred to me that these executives were reluctant to approach these issues during the meeting with the research team because they were not prepared to provide the guidance and advice that would necessarily be expected to follow.

Another example of how this lack of vision can occur was demonstrated during the evolution of the one quart plastic oil container which became ubiquitous in the late 1980's. The pioneer of this new package was a major oil company yet it was unable to take economic and strategic advantage of this innovation by the lack of vision of one of its senior executives.

During the 1970s the one quart oil container was constructed of fiberboard which had replaced metal. At that time a team of engineers from the plastic division of the oil company started experimenting with forming the oil container from plastic sheet made of resin that they produced. The resultant container was tested and found acceptable providing that it could be produced using a higher volume production process and filled on the current filling lines in refineries. Two years of design and process development followed resulting in a blow molded plastic container with a wide mouth top that could accommodate the existing filling lines.

The plastics division moved ahead to commercialize the new container. It produced a significant quantity for part of the parent company's requirements and supplied a small number of private label motor oil package. As the business grew it came under the direction of a new business manager and was considered a viable new business venture.

The business manager could foresee the further evolution to an all plastic oil container replacing the standard fiberboard package based upon the plastic container's convenience, recyclability, faster filling speeds and lower cost. As a first mover the venture had the advantages of proven product performance, demonstrated production capability, developed graphics on plastic and an initial distribution capability. The venture offered a profitable revenue stream and the ability to consume substantial quantities of the plastic division's resin. A business plan was prepared to expand the venture and provide significant production and marketing resources. In spite of the attractive financial projections and the proven performance to date a senior executive blocked the project because he did not accept the strong probability that plastic would replace fiberboard. Five years later the plastic motor oil container became the preferred package. This outcome was a clear example of a lack of vision and the reluctance to accept guidance that occurs all too often among executives of large firms.

The Initial Magnitude of the Opportunity

It is unlikely that a new venture will result in hundreds of millions of dollars of revenue in the initial five years of operation. Due to this fact senior executives perceive little impact on the firm's financial performance and thus tend to display little interest and support for such activities.

At the outset new innovation opportunities for revenue and profit seem miniscule when compared to the existing businesses of billion dollar corporations. All too often large corporations seek the elephants that may offer immediate sizeable revenues and profit through acquisition strategies. They lack the foresight to realize that the lion cub can become part of a pride of kings of the jungle.

If DuPont executives had it to do over again would they have sponsored Bill Gore in his new venture rather than have him leave to start W.L. Gore on his own? He left DuPont in 1958 started a business in his garage and created a company recently estimated to have billions of dollars of revenue and to extremely extremely profitable.

The Internal Competition

In spite of all that has been written in the past decade about the need for teamwork especially at the executive level many senior divisional and functional executives continue to compete internally. This internecine competition can serve as a serious challenge to new innovations when either marketing executives sense a potential threat to their position at a major customer or research executives resent the licensing or acquisition of emerging technology. So often marketing focuses on existing business and its potential loss rather than how a new innovation can bring synergies to their existing customer relationships. Research executives on the other hand may try to convince senior executives that they are capable of developing better technology than can be acquired externally.

An example of this internal competitive challenge from marketing occurred when a major supplier prepared to enter a rapidly growing and extremely profitable market served by a large customer. The marketing executive convinced senior management that such a move would result in the loss of their supply position. Based upon this perceived threat the new venture was aborted. Shortly after, this supplier's major competitor entered this market directly and due to their strategic position and size continued to supply the customer. More than two decades later the aforementioned supplier entered the market by acquisition and became a minor factor in this now exploited downstream market. More recently the major competitor acquired the major distribution outlets for the business.

An example of this challenge from research concerned a new venture that was blocked by a research executive in an emerging area of technology. The corporation in this case was a major supplier to the food packaging area. For several years the research department had tried unsuccessfully to develop new technology that would produce a revolutionary new product to add to the firm's line. A Japanese company became successful in this area of technology and was searching for a joint venture partner to exploit it in the United States. This opportunity appeared to provide an excellent strategic fit for the above mentioned companies. During the period of preparation for launching the joint venture it was terminated when the research executive convinced the senior executive that they were on the verge of completing the development of a more economical technological approach to producing the product. The Japanese company found another partner, moved ahead with the venture and built a large extremely profitable proprietary business. The original potential partner stopped their research two years later due to the lack of progress and never pursued that area of technology again.

The Availability of Resources

In many large firms the availability of funding is the least of the resource challenges to the new innovative activity at the outset. The greatest challenge in this area is the availability of talented, entrepreneurial personnel with a balance of technical and commercial knowledge and experience. These same individuals are much sought after by the established departments and divisions in spite of their interest in pursuing their intrapreneurial desires.

I recall a young, extremely capable individual who was anxious to leave an existing departmental function to join the new venture department but was held back by the functional department head because this individual was extremely talented. It was not until he had resigned and accepted a position in another firm that the department head allowed him to be considered for the new venture function the day before he was scheduled to leave. Fortunately, he reconsidered and remained with the large firm in the new venture department.

Often those assigned to the new venture effort are past their prime and have lost their entrepreneurial enthusiasm and are caste off from the existing businesses. At the same time there is a reluctance to recruit leaders for new ventures externally since they may not fit the caretaker cultures that exist in many firms. In addition, their aggressive leadership style may pose a threat to the existing executive group.

The Isolation of the Function

There have been many proponents of the need to isolate a new venture function in order to avoid the interference and cost that a large corporate bureaucracy can impose upon it. This isolation can be political suicide since it allows a definite lack of understanding, interest and support from the existing corporate function of executives. It can result in the latter influencing senior executives to question the value of the new ventures and lose patience with the slow progress that may occur.

One such situation took place when a major corporation formed and funded a highly talented intrapreneurial team that was isolated from the divisions and began to evaluate new business opportunities outside the direct sphere of corporate interest. With no exposure to the existing divisions it was considered by the division executives as a renegade activity that was consuming valuable financial and human resources. The division executives convinced the senior executives that this effort was wasteful and that it should be terminated. They prevailed and the new venture function was disbanded and the personnel were transfered to the divisions.

Overcoming the Challenges

Creating The Vision

Peter Drucker has characterized different kinds of managerial "work" within an organization and among them are:

1. The operating task, which is responsible for producing results from today's business
2. The innovative task, which creates the company's tomorrow and directs, gives vision and sets the course for both today and tomorrow.

The innovative executive performs the innovative task as well as assists top management develop the vision and set the course for tomorrow. To do so he/she must become extremely well informed about market trends of the existing and related technologies to the firm's business. In addition, he/she searches for potential technological and market synergies. With this knowledge guidance and advice can be provided to senior management and to research colleagues as they explore new technology or the modification of existing technology. This guidance and advice will aid in rapidly transferring applicable technology to the market place. As the relationship with the research function develops senior research executives will aid in assisting senior corporate executives create the vision of the company's tomorrow.

Enhancing the Magnitude of the Opportunity

Initially new venture revenue and profit potential may be forecasted to be modest when compared with the firm's current size. It can be enhanced by convincing senior executives that there are related opportunities that can be expected to evolve. The selection of the new venture should allow for the "Corridor Principle" to apply. That is, the new venture should readily lead to other new ventures as entering a new corridor will lead to other corridors and doors of business opportunity. During the past ten years many firms have moved from an initial product position to distribution and then to installation and repair service. The magnitude of the opportunity can grow substantially as the awareness of new corridors become evident.

An example of the Corridor Principal occurred at the Bayer Corp. when a new venture that introduced the returnable plastic milk container led to a larger business in the five gallon water bottle.

Avoiding Internal Competition

Since most internal competition is likely to come from marketing and research, relationships with both of these functions must be developed and nurtured. If the collaboration with research to assist senior management in creating the technological vision is successful a similar outreach effort should be made with senior marketing management. In this case the latter function should be requested to provide guidance and advice on the potential new business opportunities that compete with existing customers but are vulnerable to competitors and those that are in related markets.

An example of how internal competition can be avoided was the entry of a major raw material supplier to the conventional pipe market. This large corporation chose to start a new venture in the specialty pipe segment that had not been pursued by its customers. Later as the specialty pipe business grew the supplier took a major step forward by acquiring the largest remaining non-captive conventional pipe manufacturer. The initial venture laid the foundation for the acquisition.

Accessing Resources

Capable individuals from within and outside large firms are the critical resource needed for successful new ventures. In order to attract them, the visionary executives must build both internal and external networks. Once the vision of the new venture function is developed it must be communicated through the internal network. Experience has shown that promising candidates will come forward as evidenced by the example in the section on the lack of resources. Enlightened functional and divisional managers will encourage prospects to consider new ventures as part of their career path in such a culture. To facilitate this effort the visionary executive must establish linkages to these managers.

To overcome the reluctance to recruit externally requires the careful identification of the need as well as the selection of such individuals. Special technological and/or market knowledge along with entrepreneurial talent are the requisits. On this basis internal candidates and their supporters must be convinced that external recruiting is needed and in the firm's best interests. Here the visionary executive may use an external network as a means of identifying candidates that have special experience and skills for specific new venture projects.

Avoiding Isolation

Several years ago the Boston Consulting Group contended that the improvement in corporate performance is possible in four areas:

1. Within existing divisions
2. Through new divisions created either by acquisition or by in-house research and development
3. By collaborative effort between divisions, and\
4. Through divestment.

It is in areas two and three that the new ventures function can contribute to improved performance, growth and profitability. Two organizational approaches may be taken to avoid isolation while facilitating understanding, communication and even support from existing divisions and functions.

One approach that was the most successful from my experience with both is to establish a subsidiary of the major firm to pursue new ventures. This approach was taken by the Gulf Oil Corp. when it formed Gulf Plastic Fabricated Plastic Products Co. The board of directors of this subsidiary had representatives from an existing division, the legal, research and finance functions and was chaired by the innovation executive. New venture managers were to be added to the board from within and without the parent firm as new ventures proliferated. This structure would allow the existing divisions and departments to have a stake in the new subsidiary, provide guidance and support as well as keep communication flowing to and from their respective areas. This subsidiary had the option to contract for support services from within or from without the parent firm and avoided bureaucratic involvement and cost.

Another approach to avoiding isolation was tried with moderate success by Gulf Oil Chemicals Co. It involved the creation of a new ventures function at headquarters reporting to the President of a large firm. This function was linked to the new venture functions within its divisions and shared the funding of new ventures with the divisional executives. In this arrangement the divisional new venture managers reported to the leader of the innovative function as well as to the divisional executives. Essentially the divisional executives were partners with the head of the headquarters new venture function in building new business opportunities for the divisions while they could concentrate on their existing business activities. This matrix organization although challenging insured that isolation could be avoided.

The Bottom Line

In a Business Week-Boston Consulting Group survey published by the former in 2006 focused on the major obstacles to innovation confronting executives. Of the 1070 surveyed 72% indicated that innovation was one of their top three priorities. Almost half said they were dissatisfied with the returns on their investments in that area.

Chief executives have placed strong emphasis upon creating corporate cultures that encourage innovative ideas however, the struggle to move these ideas to successful new ventures has been inadequately addressed. Although there are many innovative ideas that originate in large corporations these executives must become more knowledgeable of the challenges that confront moving them to successful commercialization that exist within their organizations. These challenges have been clearly identified during the past thirty years and strategies have been developed to overcome them.The commitment to implement these strategies rests with these executives if they intend to have their corporations survive and grow in the global environment of the twenty-first century.

Roy Serpa served as CEO of Permian Research Corp. and EnviroGuard Corp. Earlier in his career he was manager of new business ventures of the Bayer Corp., director of commercial development of Borg-Warner Chemicals and chairman of the Gulf Plastic Fabricated Products Co., a subsidiary of the Gulf Oil. Since retirement he has been a volunteer consultant with the Executive Service Corps of Houston providing free assistance to non profit organizations. He can be reached by e-mail at luzo03@yahoo.com.


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Wednesday, September 3, 2008

Taking advantage of a downturn

Harvard Management Update 03/01/08
by Sarabjit Singh Baveja, Steve Ellis, Darrell Rigby

Description: Call it a trial by fire, but a recession may in fact be good for your company.

Recessions are famous for breaking companies. But what few people realize is that recessions are in fact more likely to make a company's reputation.

A recent study by Bain & Company found that twice as many companies made the leap from laggards to leaders during the last recession as during surrounding periods of economic calm.

Case in point: Walgreens, the Chicago-based drugstore chain. In the midst of this last recession, the company focused on expanding its lower cost, generic drug business. Earnings and sales for the fourth quarter of 2001 grew by 10.7% compared with the same period in 2000. Not only has Walgreens gained market share on its key competitors, but at a time when many drug retailers face capital constraints and a shortage of pharmacists, it plans to build 475 new stores and two new distribution centers this year.

Walgreens' success is not unique. The Bain study, which analyzed more than 700 firms over a six-year period that included the recession of 1990-1991, offers insight into how companies can take advantage of downturns. But first, you have to understand the strategic impact of a recession.

1 Recessions "shuffle the deck" more than boom times do.
The Bain study found more than a fifth of companies in the bottom quartile in their industries jumped to the top quartile during the last recession. Meanwhile, more than a fifth of all "leadership companies"-those in the top quartile of financial performance in their industry-fell to the bottom quartile. Only half as many companies made such dramatic gains or losses before or after the recession. Arrow Electronics (Melville, N.Y.) offers a striking example of trading places when times are tough. During an industry downturn in the late 1980s, the financially troubled distributor of electronic components and computer products launched a series of audacious but smart acquisitions that allowed it to increase sales by more than 500%, turn operating losses into profits, and seize market leadership from competitor Avnet (Phoenix, Ariz.), which was once twice Arrow's size. During the recent recession, Arrow has been acquiring again and widening its industry lead.

2 Gains or losses show up early.
Many managers tolerate sub par results during a recession, believing that their firms will accelerate past competitors once the economy recovers. This rarely happens. More than two-thirds of the companies that made major gains in our study period did so during a recession, not before or after.

In 2001, Dell Computer grew unit sales by 11% even as industry sales declined 12%. Realizing that price elasticity sometimes increases during a recession, Dell used sensible price cuts to gain more than six points in U.S. market share and, in the toughest period of all-the fourth quarter of 2001-to capture more than 90% of the profits in its industry. Such opportunities always exist for strong companies, but the impact of exercising them is much higher during a recession, when many competitors are either distracted or hibernating.

3 Gains or losses made during recessions tend to endure.
Of the firms that made major gains in revenue or profitability during the last recession, more than 70% sustained those gains through the next boom cycle. The corollary was also true: fewer than 30% of those that lost ground were able to regain their positions. After losing significant ground during the retail downturns of 1987 and 1991, Kmart continued to slide downhill from there-all the way to a Chapter 11 bankruptcy filing earlier this year. Meanwhile, Wal-Mart continued to invest in service infrastructure during these periods; rolling back prices, it gained an estimated 2% to 4% in comparable-store sales over Kmart and Target.

These findings show that recessions are not so much "slowdowns" as they are intense crucibles of opportunity. Why is this so? Good times can cushion the hard truths of company performance, whereas tough times reveal true strengths and weaknesses. Then, too, the number of strategic opportunities to make deals or to take advantage of weaker players increases during a recession. Many companies either hunker down or stray outside their core business in a desperate bid for growth, creating openings for companies willing to pursue thoughtful and balanced recession strategies. Judging from the experiences of the best performers of the last recession, the key is to stay focused.

Know your starting point. The biggest failures from the last recession were companies that misunderstood their starting point and invested inappropriately. Example: Borden Milk Products (Dallas), which diversified from its core in dairy products and lost market leadership. Winning firms undertake careful internal and external diagnostic inquiries at the beginning of a downturn. Identifying their key strengths and weaknesses, they develop a watertight definition of their core business and strategy. This provides a reliable yardstick by which to measure new strategic options.

Maintain strategic discipline. If the data says your core business is weak, don't try to invest through the downturn until you've fixed the problem. During the last recession, Mattel maintained a clear picture of its business needs. It reduced capacity, eliminated costs, and refocused manufacturing and management resources on its core brands: Barbie and Hot Wheels. It also forged a strategic alliance with Disney. By tending to its core, Mattel was able to grow despite the turbulence; in fact, it achieved double-digit annual growth in sales and income during the boom that followed.

In the late '90s, Mattel seemed to forget the importance of strategic discipline with its ill-advised acquisition of The Learning Company. But since divesting itself of The Learning Company, Mattel has gone "back to Barbie."

Correct your wrong turns promptly. Companies that fared poorly during the last recession exhibited a common response: they overreacted, then "stayed the course" even when rougher seas lay ahead. The lesson? If your strategy isn't showing results, reevaluate it. Don't expect it to start paying dividends just because the economy is recovering. Winning firms react to trouble early, scrapping ideas that aren't working and turbo charging those that are. Firms that hunker down can miss opportunities and create even bigger problems down the road.

In the recession of the late '80s, Kmart diversified to hedge its bet on a struggling core discount retail business. But the acquisition of a slew of unrelated retail businesses sapped much needed resources and attention from Kmart's core. As the company struggled to manage and later unload these unrelated businesses, Wal-Mart and Target were able to make sizable inroads in many of Kmart's key markets and customer segments.

Even the deepest recessions have bright spots. Housing and some consumer goods segments, for instance, held up reasonably well in 2001. Conversely, boom times have dark spots: nearly 20% of U.S. industries will be battling downturns any given year. For companies hoping to get ahead during down times, the good news is that you may not have to wait long: your sector may experience some turbulence-well before the next recession.

Sarabjit Singh Baveja is a vice president in Bain's San Francisco office, where Steve Ellis is managing director. Darrell K. Rigby, a director in Bain's Boston office, is the author of the study Winning in Turbulence. They can be reached at MUOpinion@hbsp.harvard.edu


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Wednesday, August 27, 2008

Secrets of the Private Equity Trade

Private equity firms manage some $1 trillion of global capital, yet because they are highly secretive, much remains unknown about their internal economics. How do PE firms organize themselves, for example, and how do they capitalize on their success?

Some answers emerge from a paper by Wharton finance professor Ayako Yasuda and Yale School of Management finance professor Andrew Metrick titled, "The Economics of Private Equity Funds." The paper was presented at a recent Wharton conference, sponsored by the Weiss Center for International Financial Research, whose theme was "A Global Perspective on Alternative Investments." The authors gained access to an unusually fertile data set, the private equity portfolio of one of the world's largest limited partner investors. On condition of anonymity, the investor furnished data on 238 different PE funds in which it had invested between 1992 and 2006. Of those 238 investments, 144 were buyout funds and the other 94 venture capital funds.

Stable Fee Revenues

The study's most important conclusions, according to Yasuda: First, some 60% of PE firm revenues come from fixed-revenue components that are unaffected by performance; and second, while venture capital firms tend to earn more than buyout firms per dollar under management, buyout funds are substantially more scalable and, therefore, can earn much more per partner and per employee. In addition, managers of successful funds can command better terms for themselves as they launch new, larger funds.

Most private equity funds take the form of limited partnerships, with a PE firm serving as general partner; the limited partners -- large institutions and wealthy individuals -- put up the bulk of the capital. Each limited partnership typically lasts for 10 years, with terms of the general partner's compensation spelled out at the fund's inception. The general partner's compensation contains a fixed component -- an annual management fee of 2% or more -- plus a variable component that includes carried interests in partnership holdings. Successful buyout firms often lay claim to some of the transactions fees that their funds generate. In addition, the most powerful limited partners -- large state pension funds, for instance -- may also command a share of the carried interest.

Private equity firms stay in business by launching new funds every three-to-five years. If a firm's previous funds have been successful, it can generally earn higher revenues with the new one by setting higher fees, demanding more variable compensation and raising more capital.

But there are striking differences in strategy and practice between venture capital and buyout funds -- the principal components of the private equity industry. To begin with, Yasuda notes, the study confirms what many investors already sense -- that the economics of venture capital and buyout firms are different, even though both depend upon fixed management fees for the preponderance of their revenues. The differences lie not only in the superior scalability of buyout versus venture capital funds, but also in the fundamental skill sets required.

Early-Stage Investing

Venture capitalists tend to be scientists and engineers by training, with the necessary experience in operations, marketing, management and related skills to help small companies grow. Early-stage investing is time- and labor-intensive, notes Yasuda, and even experienced VC professionals have difficulty overseeing more than five companies at once.

The typical venture capital firm has five partners and invests in five companies per year over the first five years of a fund's 10-year life, with the value of each early-stage investment rarely exceeding $100 million. On average, each VC professional is apt to be responsible for one new investment a year during the fund's first five years -- for an aggregate investment of $350 million to $500 million. That professional typically spends the fund's second five years aggressively fostering and monitoring those five companies.

VC funds tend to derive the bulk of their revenues from just 20% of their investments. They depend on hitting a "home run" -- a return five times greater than invested capital -- with one in every five investments. Another 20% of VC investments can be expected to fail or achieve minimal returns, with the remaining 60% returning an average 2.5-to-3 times invested capital -- not a fabulous result, considering the risks, but one most firms can live with.

Larger, more successful VC firms -- like Kleiner Perkins Claufield & Byers, known for such home runs as Amazon, Compaq, Genentech and Netscape; and Sequoia Capital (Google, Yahoo!, PayPal, Apple and YouTube) -- can raise substantially more capital in launching new funds, but they, too, are constrained by the time-consuming nature of VC work. To invest in more small companies with outsized potential, they must hire more VC professionals. Thus, in the world of VC firms, larger scale does not necessarily mean greater profitability.

Less Hand-Holding

The reason buyout funds are much more scalable than VC funds is that they invest in larger, more mature companies that typically need less hand-holding. In Metrick and Yasuda's sample, the median buyout fund began with $600 million in capital and invested an average $50 million in 10 to 12 different companies over its 10-year lifespan. By applying substantial leverage, buyout funds can acquire very large businesses -- on the order of Chrysler, RJR Nabisco or Hilton Hotels.

Because buyout funds invest in businesses already equipped with sophisticated management structures, a buyout firm partner can oversee large investments without a proportionate increase in personnel. The job is not to supply needed management skills, but rather to make sure there is effective management in place, to oversee financial strategy and to help identify new efficiencies.

Buyout partners are usually grounded in finance and operations. And because buyout funds invest in larger, more sophisticated businesses, the typical buyout partner need monitor no more than two or three investments at a time.

The paucity of debt capital available to private equity firms has had relatively little effect on venture capitalists, Yasuda says, because the investments they make are seldom highly leveraged. Right now, venture capital firms are much more concerned about the long-term drought in the IPO market, which limits their ability to exit investments and makes them more dependent upon selling their businesses to larger companies.

The depressed IPO market dates from the post-2000 technology crash, which occurred just after VC firms had launched their largest funds ever. Those funds are now eight or nine years old, Yasuda notes, and will have to exit their investments over the next two years. Should they fail to do so successfully, a number of venture capital firms could themselves go out of business.

By contrast, illiquid credit markets do direct harm to buyout firms because few investments look attractive to them without a heavy dollop of leverage. The buyout firms raised record amounts of equity capital before the debt markets collapsed last summer, and many now find it difficult to put that money to work. The longer the credit markets remain in the doldrums, the higher the odds that some funds will have to return capital to their limited partners or else start investing in a greater number of small- or mid-sized companies requiring greater oversight.

Should that happen, the buyout business might become a lot less scalable, and the economic differences between buyout and venture capital funds may be somewhat harder to discern.


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The Myth of Differentiation

Mike Schultz pointed out what we might not know the pitfalls of differentiation.

"One is the loneliest number." —Three Dog Night

Few would question this simple truth: Businesses must differentiate. Growth, profit—survival, even—hinge on their ability to set themselves apart from competition.

Professors Terrell and Middlebrooks of the Northwestern University's Kellogg School of Management and University of Chicago Graduate School of Business, respectively, say it well:

Service companies need to dare to be different. To find a leadership position in the market...and then to lead. The key strategy is to be different from competitors.... They break free from "be better," internally oriented initiatives to "be different," externally oriented strategies. Being different is grounded in providing customers with unique value that they cannot get from any other competitor.1

They go on to cite McKinsey as their first example.

The "need" for differentiation is so well accepted, it's considered simplistic to even make the case for differentiation. Why make a case for something everyone already knows?

Much of the differentiation conversation therefore centers more on how to do it and how strongly to do it. (Terrell and Middlebrooks go as far as to say you should position yourself so far opposite competitors that they coin the nifty term "oppositioning" to describe it.)

That we need to be differentiated at all... accepted without further thought.

I disagree. Put some further thought in it. Most everything I've read and heard about differentiation is wrong. I suspect the same is true for you.

On Unique Selling Propositions

Among the favorite platitudes of the high priests of business is that every business—nay, every person—must have a unique selling proposition (USP). A USP can be defined as doing or saying something about yourself or company that is unlike what anyone else does or offers. In other words, unique... one of a kind.

I deliver about 40 speeches and presentations per year. During presentations I frequently ask the members of the audience to take a few minutes to deliver their elevator pitches—the minute or so discussion they would use to describe themselves to the CEO of a company they would like to win as a client.

When they're done, I ask folks to raise their hands if their partner delivered a fabulous elevator pitch. Many hands go up. When I ask what was so great about them, I typically hear things like this: They were clear about what they do, what difference they make for their clients, and which industries they serve. Often I hear of stories told that brought their companies to life.

I then ask who has heard of the concept of a USP, and who has been told at least once in their business lives that they need to have one. Most hands go up. I then ask whose elevator pitch partner said something unique. Usually no hands go up, but here and there a bold person or two jump into the fray.

In the end, good as their elevator pitch partner's delivery might have been, most people back off their stance that their partner was unique.

The "Unique and Different" Label

Too often in elevator pitches, and in marketing messages in general, professional services firms ill-advisedly label themselves as unique and different. A quick Google search for "unique consulting firm" (with the quotes, so it would get results that only had these words in a string), yielded close to 4,000 sites. Here's one from the first page:

[Firm Name] is a rather unique consulting firm.... Our target audience is composed of those firms that seek quality rather than quantity and price. Our company specializes on small and mid size businesses, but we are looking for clients that are less worried about prices, than exclusive services and results that they will receive. Thus, a price conscious client is not really suited for our firm; our services are of high quality and slightly higher priced, but the customer service and end results are virtually almost exceeding the client's expectation.

[Author's note: I tried to find more professional-sounding copy that included the term "unique consulting firm," but they were all pretty much like this. Can't make this stuff up, folks.]

Once a firm labels itself as unique, it elicits this question from the reader: Is it really unique (or, as in the case of the firm above, "rather unique") while, at the same time, "virtually almost exceeding the client's expectation?" Ugh.

Should the answer be no, and by and large it is, the firm loses credibility. More than anything, its sounds as if they've read in some marketing textbook that they have to have a USP or differentiated message, thus they use words to that effect.

Many admit later just how amateurish they sound, and sometimes acknowledge that they thought it sounded amateurish before they launched their unique-speak publicly. Firm leaders tend to have good common-sense radar, but they seem to check common sense at the door when it comes to self-designated uniqueness.

Some firms seem to take the quest for differentiation literally, creating a spate of "we're different" messages. Consider a top Boston law firm with the following message:

At [FIRM Name], we practice law differently. While our attorneys agree that results drive our business, building relationships with our clients and providing value-added service is the key to our success.

This firm might be amazingly good—and, from what I know of their reputation, they are. However, results' driving business, building relationships, and providing value-add are pretty par for the course—both as firm goals and marketing copy.

What Clients Really Want

Much as firms might hear otherwise, being different isn't much of a factor in winning or keeping clients. Often, the "we're different" message affects them negatively. Consider the following scenario: Your tooth hurts and your dentist is out of town. You need an oral surgeon and you need one fast, so you ask a few trusted close friends, Trip and Beverly, if they know anyone.

Referral #1: Close friend Trip suggest Dr. Phlox.

He says that his aunt Deanna needed oral surgery and went to Dr. Phlox, who has been in the town next door for 20 years and has a very busy oral surgery practice. Word on the street is that he's pretty solid. When aunt Deanna went in, the doctor took the time to explain the surgery and what was going to happen, and to answer all the questions that Deanna had.

The surgery went fine (for all they knew) and Deanna hasn't had any problems since. He's a little more expensive than average, but Deanna says he's very booked and established so it's understandable.

Referral #2: Close friend Beverly suggests Dr. McCoy.

Supposedly McCoy is well known throughout the nation as a cutting-edge oral surgeon, often going where no other oral surgeon has gone before. He has a unique blend of people at his office, process for oral surgery, and tooth technology that he has pioneered. His results, says his brochure and Web site, are 22% better than all other oral surgeons', which is how he justifies his very high prices.

His uncle Pavel went to McCoy and all went well with the surgery (for all he knew), though uncle Pavel met McCoy only for about 30 seconds, as he was so busy.

At a gut level, even with uncle Pavel's satisfaction, few people would choose referral #2. This is because many of the dynamics of how clients buy business-to-business professional services is similar to how people choose dentists:

* Should failure happen, the consequences are painful.
* You don't need the world's greatest outcome. You just need a very good outcome.
* Since you can't sample a service like you might sample a piece of gum, you have to rely on reputation, experience, and expertise as proxies for expected results.
* Price is a factor, but you'd rather not skimp when the outcome is important. (Side note: if I told you that Dr. McCoy's innovations have enabled him to charge less than half of what other oral surgeons charge, would you have been more interested in buying his services, or less?)

Innovation in the sense that the doctor does something different from others, or is somehow unique, by and large won't tip the scales of purchase preference in the favor of the innovator.

So what is it that clients are, indeed, looking for? In my experience, and according to research such as How Clients Buy, most buyers want to tell service providers the following:

* Reliability. Do what you say you are going to do, and be on time about it. (This is listed first, because it's so important. If only the service providers I've worked with in my life were better at keeping their commitments...)
* Accessibility. Be there when I need you.
* Impact. Help me buy the most helpful and impactful services from you, and help me translate your services into success for my business in my industry.
* Fit. Be a good fit for the specific needs that I have. If you're not the best fit, help me find a provider that is. Don't shoehorn your service into something that, in the end, won't meet my needs as well as something else would.
* Importance. Make me feel like we are, as a client, important to you and your team.
* Service. Deliver great service as well as great services.
* Prudence. Be careful and do your homework before you suggest a course of action for me.
* Research. Stay on top of the developments and trends in your industry and in mine.
* Listening. Understand my business, my team, and my clients so you can come up with ideas relevant to me.
* Teaching. Help me understand what you're doing. I might not be an expert in your area, but I'm pretty bright and I make the decisions here. Help me understand what's new in your area of expertise so I can apply that knowledge in my business.
* Business management. Run an efficient operation and constantly improve so I don't pay for your inefficiency.
* Relationship management. Be pleasant and fair, and work with me through communication or other breakdowns on your end or mine. In essence, treat me like a person.

Different situations warrant different mixes and degrees of the above. For example, with many necessary-type services like Sarbanes-Oxley compliance, efficiency is important as well as expertise. On the other hand, buyers looking to hire product-innovation consultants will likely be concerned less about efficiency and more about the creativity and innovative thinking of your team.

Regardless of the mix of what's most important to your buyers, you probably won't see many of them inserting this into the list of client wants: "Different and Unique: Be one of a kind, offering something that no one else in the market offers."

So be different: Stop listening to the continuous pleas from consultants, marketers, and textbooks to be different... one of a kind.. .a shining beacon of newness in a sea of same-old same-old.

Focus instead on actually delivering the value to the market that you say you deliver (which, in and of itself, can be uncommon if not unique), and find ways to create a conversation with buyers around that message.

Not only is it better marketing, it's less lonely than being unique.

Endnote:

1 Terrell and Middlebrooks, Market Leadership Strategies for Service Companies. 2000 McGraw Hill. P. 31.

Mike Schultz is president of the Wellesley Hills Group (www.whillsgroup.com), a consulting and marketing services firm, and publisher of RainToday.com. Mike can be reached at mschultz@whillsgroup.com.


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Wednesday, August 20, 2008

Seven Tips for Managing Price Increases

Another article sent to me by MBA Depot. However, the article is originally from Harvard Business School.

Published: June 16, 2008
Author: John Quelch

Editor's Note: Harvard Business School professor John Quelch writes a blog on marketing issues, called Marketing Know: How, for Harvard Business Online. It is reprinted on HBS Working Knowledge.

When driving these days, do you look at the prices every time you pass a gas station? Do you notice yourself paying more attention to the prices of everything you buy? You are not alone. Consumers everywhere are more price aware. People who've been indifferent to price increases for years are suddenly amazed at what things now cost. How can marketers cope not just with inflation but with consumer sticker shock?

1. Understand Your Customers. There are at least four ways in which customers can respond to higher gas prices: downgrade from premium to regular; take fewer trips by car, consolidate errands, switch to public transportation; take the same number of trips but reduce the miles driven per trip by, for example, vacationing closer to home; drive more economically and less aggressively to improve miles per gallon; and buy a specific dollar amount of gas rather than filling up every time, even though this may mean more visits to the pump. Some consumers may even trade in (at a loss) the SUV for a hybrid, an example of how price inflation on one product can cause demand shifts in a second, related, category.

More customers than usual will be looking out for price promotions, but don't give away the store to those who don't need the discount.

2. Invest in Market Research. You must discard your existing customer segmentation assumptions and segment consumers around product usage behavior and price sensitivity. You must get out into the marketplace yourself and talk to consumers directly to understand their pain points and how they are changing attitudes and behaviors in response to price inflation. You must then quantify these shifts and develop product and pricing strategies that balance the need to maintain both profitability and market share.

3. Redefine Value. Customers buying soft drinks can think about price in three ways: the absolute cost per can or bottle, the cost per ounce, and, less common in this category, the monthly consumption cost. Customers short on cash will focus much more on the absolute price. They'll go for the 99 cent soft drink rather than the $1.29 container with 50 percent more volume. To motivate cash-poor consumers, marketers must reverse engineer products and packaging to hit key retail price points. This may mean downsizing package sizes, something the candy industry always does in response to inflation.

4. Use Promotions. If you've always passed through raw material price increases to the end consumer, you don't necessarily need to change that policy. However, lagging competitors in passing on price increases can have the same effect as a temporary price promotion. More customers than usual will be looking out for price promotions, but don't give away the store to those who don't need the discount, and cut prices not across the board but only on items selected as your inflation-busters. For cash poor consumers, these promotions should hit the key price points on small pack sizes. For cash rich consumers, encourage multi-unit purchases ahead of the inevitable next price increase.

Strong brands can hold consumer loyalty while increasing retail price points.

5. Unbundle. Customers who previously welcomed the convenience of buying product, options, and services rolled into one may now ask for a detailed price breakdown. Make it easy for your more price-sensitive customers to better cherry-pick the options and services that they truly need by giving them an unbundled menu of options.

6. Monitor Trade Terms. Beware of powerful distributors paying you more slowly than they turn the inventory they buy from you. In an inflationary environment, they're making money on the float by stretching their payables. Manage your inventory on a last-in, first-out basis to insure that increases in your realized selling prices do not trail the increases in your input costs.

7. Increase Relevance. You need to persuade customers to cut back their expenditures on other products, not on yours. In tough times, consumers more than ever need and deserve the occasional treat. So, if you are Haagen Dazs, tell the consumer to substitute private label peas for the name brand but to not forego the comfort of curling up on the sofa with a tub of her favorite ice cream. Strong brands can hold consumer loyalty while increasing retail price points. Weaker brands risk private label and generic substitution.

Clearly, not all marketers are equally affected by price inflation. Commodities like gasoline, where the manufacturer adds little value before the product reaches the end consumer, are more vulnerable, while sales of the most exclusive global luxury brands hold up pretty well regardless of price. Especially challenged are marketers of goods and services for which consumers don't necessarily understand the input costs: decorative candles, for example, are highly sensitive to oil prices and the purchases are discretionary. The key here is to educate the consumer, apologize for the uncontrollable price increases, give price-sensitive consumers some promotional options, and reemphasize product benefits.

John Quelch is Senior Associate Dean and Lincoln Filene Professor of Business Administration at Harvard Business School.


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Thursday, August 7, 2008

Picking winners

It is a good article about venture capital from the Economist.com. Again I got it through MBA Depot. Enjoy reading it...

Is it better to choose the horse or the jockey?

“A GREAT management team will find a good opportunity even if they have to make a huge leap from the market they currently occupy.” Thus Arthur Rock, a legendary figure in the venture-capital (VC) industry who has argued that it is more important to find outstanding management teams than to try picking winning businesses. His track record, which includes backing the creators of Apple Computer, suggests Mr Rock's belief that first-class entrepreneurs are what matters most to start-up success has much to commend it.

With tougher economic times looming, it seems an especially good time to put one's faith (and cash) behind an experienced management team with a history of success. Of course, investors ideally want to back firms that have brilliant managers and a brilliant business model. But some venture capitalists favour the former.

The view that excellent leaders can make the critical difference to a new company permeates the classroom as well: ask any gathering of MBAs if it is the business “horse” or the management team “jockey” that matters most in an investment appraisal and a sizeable number of students will pick the jockey (perhaps because they fancy sitting in the start-up saddle themselves one day).

Yet a new study* shows that in the real world most venture capitalists put far more emphasis on the runners than the riders. The study's authors—Steven Kaplan of the University of Chicago Graduate School of Business, Berk Sensoy of the University of Southern California and Per Strömberg of the Swedish Institute for Financial Research—look at a sample of 50 firms backed by ten different VC companies, examining their early business plans and then tracking their performance through to initial public offering (IPO) and several years beyond. Most of the early-stage business plans they scrutinise were produced between 1995 and 1998 by firms from a range of different industries. The biggest sector was biotech, which accounts for 17 of the firms.

The research shows that during the period the academics studied—typically from three years before IPO to three years after—only one of the 50 firms changed its line of business and none made acquisitions in areas outside their core activity. In other words, the horses pretty much stayed on the same track.

But the jockeys often changed. At the end of the period covered by the research, only 44% of the CEOs were the same ones involved at the time that the initial business plans had been drawn up. There had been significant turnover among other senior executives too, such as the chief financial officer and chief marketing officer. The implications of this are clear: investors are far more likely to change a firm's managers than its strategic direction.

To test the validity of their findings, the researchers studied all American IPOs that took place in 2004. After removing flotations of closed-end funds and other financial investment vehicles, they were left with 106 offerings, 88 of which involved VC-funded companies. Again, they looked closely at the IPO prospectuses of the firms and at online databases of business news to see if they could identify any significant shifts in their business models. And again they found that only a handful had strayed from their early business plans.

The companies were far less faithful to their original leaders: over the period covered by the research, half of the chief executives were replaced by the firms' owners and only a quarter of the other senior managers remained the same. Such turnover does not mean that managers are irrelevant to a successful start-up: after all, the new CEOs in the sample were given an average of 4-5% of the equity in the firms that they were brought in to run, which is proof of their value. But it's clear that most venture capitalists don't consider them the vital factor in a winning business plan.

Indeed, many well-known investors have minted money by backing start-ups in markets they think have explosive growth potential, even if the firms' managers are not seasoned hands. Take, for instance, the example of Donald Valentine of Sequoia Capital, a leading Silicon Valley VC company. In 1987 he encouraged his firm to invest in a little-known start-up called Cisco, even though the company had been shunned by many other investors who thought it had a feeble management team.

Looked at another way, there is scant evidence that a brilliant management team can take a lousy horse and turn it into a race-winning champion. As Warren Buffett, the Sage of Omaha, likes to remind his many followers: “When a management team with a reputation for brilliance backs a business with a reputation for bad economics, it is the reputation of the business that remains intact.”


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Thursday, July 31, 2008

How Workforce Specialization Can Transform Talent into High Performance

It is an interesting business article which was sent to me by MBA Depot. I think it will be great to share with my blog reader. Enjoy reading..............

If a company is to leverage its workforce to create a distinct competitive advantage, it must develop a strategic talent-management function that can advance its employees faster and more reliably along a clearly defined path.
By Donald B. Vanthournout and Maeve Lucas

Outlook Journal, May 2008

Around the world, senior executives in every industry are hearing strong and consistent messages about workforce talent as a key to achieving and sustaining high performance. But what happens when those who take the talent message to heart decide to do something about it?

Their first stop will be their HR and learning organizations—where they are likely to discover a painful contradiction.

Although the game-changing innovations and transformational initiatives that can redefine a company's competitive position will probably come from employees with deeper and more specialized skills, a large percentage of enterprise learning investments are, in fact, often directed at providing training to those just learning a new skill or job. Imagine an architecture firm looking to reinvent an urban landscape but investing only in its apprenticeship program, and you have some idea of the problem.

If a company is to transform its talent into a distinctive capability—something identified by Accenture's ongoing research as a building block of high performance—it must create a strategic talent management function that can advance its employees faster and more reliably along a clearly defined path—from novice-level capabilities to more advanced levels characterized by deeper and more specialized expertise.

Precisely what is deep specialization? The definition will vary according to the job being performed or the domain being learned. In a sales force, deep specialization might mean the ability to understand a customer's industry thoroughly enough to recommend suites of solutions rather than just a list of products. For a pharmaceutical R&D function, it might mean conceiving and executing a new course of research rather than simply performing steps directed by another researcher.

But regardless of its specific meaning in terms of a particular skill domain or job, the broader, more strategic reason for developing specialized skills is to create workforces more prepared to innovate, to open new markets, to find new ways to serve customers better or more efficiently. For that to happen, however, companies must bring more structure and rigor to bear on a host of activities—from mentoring to on-the-job experience to collaboration—that take the organization and its people well beyond the boundaries of traditional, formal training.

Investments versus impact
Understanding the current disconnect between workforce investments and the practices that actually result in better business performance requires a bit of background on how the typical work environment has changed during the past few decades. It's also useful to review what we know about workforce enablers that have an impact on performance.

Recent research suggests that the demands of the knowledge economy have altered the relevance and applicability of the information we retain to the work we actually perform. One study, for example, found that 20 years ago, about 75 percent of the knowledge needed to perform a typical job was stored in the worker's mind; today, that number is less than 10 percent.

According to another study, less than 30 percent of workplace performance is knowledge- or skill-related—that is, the result of applying identifiable lessons from a formal learning experience to an actual job goal.

The other approximately 70 percent is influenced by informal learning and by other factors in a worker's environment—feedback, coaching, leadership, incentives, clear work objectives and processes, and so forth.

Does all this mean your company is currently not investing in the kinds of training needed to transform your most important workforces into a distinctive talent capability?

Chances are it does. About 80 percent of a typical company's people development budget is indeed spent on formal learning, and only 20 percent on the informal learning and support environment that has been shown to have greater impact on workforce and, by extension, company performance.

Advancing toward more specialized skills and capabilities is not the same thing as advancing up the career ladder. More typically, employees' skills grow and become increasingly specialized at one level of their careers; when they take the next step up the ladder, however, they may become beginners again. Experienced workers on an auto assembly line may become highly adept at a specific task, but when they get promoted to a supervisory position, suddenly they're novices at a new critical skill: managing groups of employees.

The path to specialization
The path to deep specialization can be defined in general terms, however. Consider the chart on the opposite page, which shows the developmental path taken by a person who begins a new job, takes on a new role or learns a new work domain.

At the first, or "novice," level, workers begin from a position of minimal understanding of what their performance goals are and how they are supposed to reach those goals. Mistakes are common. Through a combination of training and practice, they rise to the second, or "proficient," level. Now they understand what they are doing and, for the most part, why, but they still often perform inefficiently. They require a great deal of oversight, and generally must follow a carefully prescribed path to accomplish their work.

Workers who reach the third, or "independent," level clear a hurdle that means a great deal to their personal productivity and the productivity of their organizations: They can work independently much more of the time. They have a good sense of the "landscape" of their jobs, see the various destinations that are a part of their performance, and only occasionally need the guidance of a supervisor to reach those destinations.

When employees attain the higher levels—"advanced" and then a stage where they can truly be considered "expert"—they are no longer simply following set paths. They are also occasionally reinventing those paths—creating ideas for new products and services; devising business strategies with the potential to redefine their industry; coming up with new ways of serving customers, new markets, new customer bases; and so forth. At the very highest level, these experts may have truly unique specialized skills and a reputation—inside and/or outside the organization—as deeply knowledgeable practitioners and innovators.

To be sure, not every person is going to advance inexorably upward in this manner. Workers may lose interest in a particular area or job, or they may not have the ability to learn the skill or perform at advanced levels. (Applied to career advancement, this is where the famous Peter Principle—the tendency of organizations to promote people to their level of incompetence—comes into play.)

It is nonetheless critical to make the right kinds of enablers available to employees so that those with the interest in and innate capacity for a particular skill have the best chance possible to advance and succeed—and so that the company as a whole develops people with deeper skills and, by doing so, gains a competitive advantage.

Again, most organizations are not investing properly in those enablers. In fact, significant percentages of a typical company's workforce enablement budget are being spent to get people only to a level of proficiency (Level 2). The enablers—all the classroom and online learning, the practice, the availability of knowledge assets—get people only to the point at which, most of the time and given enough attention from a supervisor, they can perform most of their tasks correctly. That is not a blueprint for creating a distinctive talent capability that sustains high performance.

The limitations of traditional learning often come as a shock to line managers looking for a training solution to their workforce performance challenges.

Mary Jo Burfeind, who leads learning and development for the Subscriber Services Division of Health Care Service Corporation, notes that the company's managers sometimes expect that when their employees come out of formal learning programs, they will be self-sufficient and capable of independent problem solving.

"But that is rarely the case," says Burfeind. "The training that our claims and customer service people receive, for example, is really about getting them to a level of basic proficiency." After that point, moving those same employees to a level where they are acting independently or even coaching others requires them to be continuously learning on the job—getting guidance, learning from their experiences and talking to their peers.

Constraints
Learning organizations may struggle to figure out how to provide the enablers for deeper specialization, given the constraints under which they operate. Continues Burfeind: "As employees grow and develop, and as their jobs become more complex, it really is as if they've graduated. We don't see them again except on occasion. The learning organization is less actively involved in their development."

However, as Burfeind says, "It's really during those years when a degree of directed development activity could have the most effect on their individual performance, and on the impact they make on the company. So we're working to take advantage of that dynamic by planning more targeted learning activities for incumbents."

A fuller suite of enablers
The development of a distinctive talent capability depends on two things. First, management must understand the different kinds of learning opportunities that can help workers attain deeper levels of specialization. Second, the company must apply the same kind of organizational and process rigor to those opportunities as they are accustomed to applying to their formal training programs.

The full suite of enablers to advance workers toward deep specialization includes programs in three basic categories.

Formal learning. This includes traditional training programs in a classroom or via e-learning, as well as access to reference information and knowledge. Recall, however, that today, such formal learning really only supports less than 30 percent of the performance requirements of a typical knowledge worker's job. To move workers beyond proficiency to advanced or expert status in a particular area, companies must also create programs in the following two areas.


Guided experience. Experience is the best teacher, but simply throwing workers into an experience without guidance or structure is not an efficient way to proceed. By analogy, flailing away at the ball for several hours a day is one way to "experience" playing tennis, but one can achieve higher levels of performance more rapidly by working with a coach.

So organizations must put in place the processes by which workers can mine the lessons of actual on-the-job experience, and then use those learning experiences to improve subsequent performance of similar tasks. Another essential part of on-the-job experience is the feedback and guidance (both reinforcing and corrective) a worker receives from a coach and/or mentor.

Other ways of formalizing the experiential dimension of learning include actual apprenticeships, which link formal learning to experience in a phased development process. (For a related article, see "Turning experience into leadership," Outlook, January 2008.)


Collaboration. The value of collaboration is about more than simply accomplishing a common task. "Co-laborers" are also "co-learners." Individuals learn in real time as they observe others successfully accomplishing a task. They also learn as they share with one another how they met a particular performance challenge. Creating the "whole that is greater than the sum of the parts" through collaboration is part of developing a distinctive talent capability.

Jim Demme is the program manager for the Learning Center at Grainger, a leading distributor of facilities and maintenance supplies. He notes that this combination of formal training with other, experiential learning opportunities is important because it more faithfully reflects the real work environment. In Grainger's case, such a combination of enablers helps sales and service employees develop more specialized capabilities.

Says Demme, "We can sit our people down in a classroom, but until they actually go on-site to a customer's location and implement one of our solutions, it's all theoretical to them. They have to experience it."

That's why Demme and his learning colleagues try to be as direct as they can about the on-the-job experiences and guidance they need on top of the formal training. Only with those experiences, he points out, "will they ever be able to say, 'Now I understand the steps in solving not just this one problem but any similar type of problem.' And that's when we can say they've achieved the kind of independent and advanced performance status we need from them so they can better serve our customers."

Several activities and strategies are crucial to being more purposeful and deliberate about moving employees forward on the path to advanced or expert status—and, in so doing, creating a distinctive talent capability.

Create a specialization roadmap
The five-step path to specialization is a generic one, of course, so it is important to translate the general "path" into what we call a specific "roadmap." This defines what the various levels mean for a given job, putting in place the enablers that can most effectively advance workers toward those levels, and accurately assessing when a worker has achieved a new level of specialization.

As shown in the chart on page 99, such a roadmap plots the progression of an employee from novice to expert in the context of the actual programs and activities within each of the three categories of specialized learning just discussed. It makes the steps needed to achieve deep specialization both explicit and actionable.

As an example of how such a roadmap works in practice, consider the actual case of a senior executive charged with transforming the project management capabilities for the managers of a large multinational. When the executive first came to his learning organization for help, he requested a comprehensive training curriculum. But faced with the growing realization that formal learning could not, almost by definition, accomplish his goal of transforming independent and adequately skilled workers into deeply skilled, expert project managers, he became discouraged.

Eventually, however, using a specialization roadmap, the executive was able to work with his learning professionals to put some compelling plans in place for leveraging coaching, collaboration and on-the-job experiences to advance the managers toward deeper expertise.

For example, those workers performing at a proficient level (Level 2), were encouraged to tap into the experience of others by participating in "communities of practice"—informal groups meeting monthly by phone to exchange best practices and lessons learned. Employees who had already achieved the independent level (Level 3) were provided with specific stretch goals (leading a new project or process, for example) to expand the scope and responsibility they would typically take on in this area.

Those who had reached advanced status (Level 4) were asked to serve as mentors to others. This not only helped less experienced colleagues, it also helped advance these Level 4 employees toward expert status—since research has shown that teaching others is a critical part of achieving expertise in any field.

Create rigor and structure around what experience and collaboration really mean
It is certainly true that the skills needed to perform at an advanced or expert level become more difficult to define. But they do not become totally mysterious or magical either. Organizations that are serious about creating a distinctive talent capability need to provide as much structure as they can around the activities beyond formal learning, including coaching, collaboration and mentoring.

As Health Care Service Corporation's Mary Jo Burfeind puts it, an effective mentoring program depends on specific definitions of the competencies and skills required. "And then we have to find out who's good at it already and who needs help, which means we also need the means to perform accurate assessments of our mentors' current performance. As we move forward, we will be looking to use tools such as leadership surveys or 360-degree feedback tools to make our mentoring program more structured and data-driven."

It's also important to be as specific as possible about what "expertise" means, even for very complex skills.

For example, Talethea Best, director of US talent development for Aon Corporation, has been involved in the creation of several new executive development programs for her company. "We're at the point," she says, "where we need to take to the next level our ability to specify exactly what it means to say that someone is 'better' than someone else at a complex activity, such as crafting business strategy. To me that means identifying the executives who have demonstrated their effectiveness at being global strategists, tapping into what's in their heads and exposing others to that knowledge and that approach."

What you end up with is some-thing that at least approaches what Best calls a "curriculum for on-the-job experience." "It's not formal training," she says, "but it's extremely active and hands on. A less experienced person brings their draft business plan or strategy to the conference table and gets feedback from more experienced executives. Ultimately this is about forging 'thinking partnerships' with experienced executives so others can benefit."

Coordinate action among all the important stakeholders
For individuals to build deeply specialized skills, they need clarity, direction and support from several quarters.

Organization leadership must define the body of knowledge that underpins and guides a specialty area (found in books, specific research, best practices) and then—as alluded to in Best's example of crafting business strategy—define and communicate expectations about the necessary skills and experience.

Then leadership must work with learning professionals to devise strategies for developing deep skills in the target group. Tracking mechanisms also need to be put in place to measure the program's effectiveness.


Career counselors should assist in setting employees' development goals. A realistic assessment of the employees' critical skills must be made, and those assessments must be matched against management's expectations.

This communication about expectations is often overlooked. When more specifics are provided, employees frequently respond positively. It's as if they are saying, "No one ever told me before what I needed to do to improve my performance or reputation in this area." Career counselors play an important role in providing feedback on the self-assessment and setting the right expectations.


Supervisors must actively look to give individuals on their teams the opportunity to deepen their proficiencies through on-the-job learning and "stretch" assignments. They must also provide regular performance feedback, optimally in real time rather than waiting for an annual performance review. Perhaps most important, supervisors need to allot sufficient time and resources for their employees to engage in the new kinds of learning required to become deeply skilled.

The key stakeholders, of course, are the employees themselves. A distinctive talent capability must now be seen as an outcome of that "thinking partnership" between an organization and its people. Executive leadership, for its part, must become much more purposeful and structured about what the path to deep specialization looks like for critical jobs and roles, and about how to move people along that path.

At the same time, successful employees will be those who proactively and independently seek out new experiences and learning opportunities, new relationships with mentors and coaches, and new kinds of collaborations with colleagues. The willingness to learn new things and to take on new experiences can now be seen as something critical to the success of employees and the organizations they work for.

About the authors
Donald B. Vanthournout is Accenture's chief learning officer and the head of Accenture Education, the company's capability development organization. He is the author of Return on Learning: Training for High Performance at Accenture (Agate, 2006). Mr. Vanthournout is based in Chicago.

Maeve Lucas is a Chicago-based senior manager with Accenture Education, where she oversees the development and implementation of learning strategies across Accenture's consulting, enterprise and outsourcing practices.


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