Monday, May 22, 2017

Capitalism's Dilemma


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Addressing shareholders recently, Warren Buffet defended 3G Capital’s method of cutting costs and shoring up short-term profits. The comments came in the aftermath of 3G’s $143 billion failed bid for Unilever.

It is worth examining the two models of capitalism that 3G and Unilever represent.

3G’s last success was with Kraft Heinz. Kraft Heinz today is notable for its clock-like efficiency. The company has closed many of its plants, sold off non-productive assets and has waged war on costs. Fortune magazine has reported that the company has been able to shrink overhead costs from 18% to 11% in two years.

As noted by Professor Julian Birkinshaw of London Business School, the executives at Kraft Heinz (mostly planted by 3G) have transplanted the performance culture of an investment bank to the world of fast-moving consumer goods. The culture transformation is nothing short of breathtaking. If you perform well, rewards and bonuses await you. If you are sloppy, you lose your job. Period. There is no scope for emotions or empathy. 3G’s overarching mission is the maximization of shareholder wealth. Although not explicitly stated, but evident from its actions, other stakeholders simply do not matter.

It is possible to argue that 3G’s approach is perfectly consistent with the core principles of capitalism. After all, “Capitalism demands the best of every man – his rationality – and rewards him accordingly. It leaves every man to choose the work he likes, to specialize in it, to trade his product for the products of others, and to go as far on the road of achievement as his ability and ambition will carry him.” (Ayn Rand: Capitalism: The Unknown Ideal, PP20).
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Unilever is at the other end of the spectrum. Unilever’s mission is to “make sustainable living commonplace.” Paul Polman is at the forefront of “pro-social” goals and wants to double Unilever’s revenues while reducing its environmental footprint and increasing social impact. Unilever extolls performance but in a much more nuanced way. Integrity and impact mean a lot more than hard numbers. Unilever’s executives may not earn as much as their counterparts at Kraft Heinz, but they do have a more relaxed work setting, devoid of relentless pressure to deliver quarterly results.

We have these two companies, both in the consumer goods space, trying hard to push their brand of capitalism. 3G capital controls Kraft Heinz and has become a force to reckon with notwithstanding the fact that some of its methods are open to debate. Unilever has become the poster-company for “conscious capitalism.” When you think of corporate social responsibility, you cannot but think of Unilever. The notion that corporations exist to serve all stakeholders and not just shareholders is equally debatable.

Jorge Paulo Lemann (3G) is not accustomed to failure. His strategy is simple – slash costs and merge. 3G’s ruthlessness emanates from the fact that thousands of workers have lost their jobs in the target companies. That does not seem to deter either Lemann or 3G. After all, investors are happy (at least in the short term) and should owners (shareholders) worry if people lose jobs in the process of wealth creation? This is one end of capitalism where inequalities will increase, jobs will be disrupted, and people who do not or cannot acquire new skills just won’t survive. The whole idea may make you squirm, but you cannot wish it away. After all, 3G represents what textbooks advocate and very few firms can pull off – managers who act like owners (and are rewarded accordingly). It is worth noting that Kraft Heinz’s sales have fallen in four of the six quarters since the two companies combined, placing a big question mark on whether cutting costs relentlessly is compatible with growth.


 Paul Polman of Unilever is one of the most ardent exemplars of responsible capitalism. In his worldview, products that meet the highest standards of social and environmental sustainability perform better than products that don’t. Polman’s assertion appears to hold in the long-term but not in the short term, as the graphs above and below show.
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At the heart of capitalism’s dilemma is the ultimate goal of the corporation. Agency theory suggests that managers are “agents” and hence “maximizing shareholder value” is the primary responsibility of managers.

Professors Joseph Bower and Lynn Paine of Harvard Business School point out in their illuminating article “The Error at the Heart of Corporate Leadership” (HBR May-June 2017) how flawed the agency theory is. “The idea that shareholders are owners of the corporation is at best confusing and at worst incorrect.”

Come to think of it; shareholders have absolutely no incentives to think like owners. Therefore, the agency theory produces a moral hazard. Shareholders are not worried about the morality of decisions nor do they have a clearly defined responsibility as to the consequences. It is unrealistic to assume that all shareholders have a common purpose or an overarching vision. Managers feel constrained in their ability to perform due to the constant pressure from over-zealous shareholders.

What is the way out? Which “brand” of capitalism do you espouse? Why?


Thursday, May 11, 2017

Design Thinking For A Better Life


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Design Thinking is a problem-solving approach that uses a combination of empathy, creativity, and analysis to tackle unique problems. At a macro level, the approach can be used by governments and organizations. An emerging economy launching a hundred smart cities project or an organization looking for the next big business idea can both use design thinking.

Design Thinking can be applied equally well at a personal level.

Bill Burnett is an adjunct professor at Stanford and leads the Design Thinking program. In a distinguished career spanning decades, Bill has used the principles to generate dramatic new designs in a variety of domains. In the last decade, he has also pioneered the “Design Your Life” course at Stanford. The course, among the most popular at Stanford, is now offered at the freshman, graduate, and doctoral levels. Bill is the co-author (with Dave Evans) of the book “Designing Your Life: How to Build a Well-lived, Joyful Life.” (Knopf, 2016).

Most of us have faced the question “What do you want to be when you grow up?” multiple times over our lives.

Bill Burnett argues that this is a wrong question to ask.

Suppose we reframe the question:

What can I do to keep exploring throughout life?”

In other words, how to we nurture the curiosity of a five-year-old over a lifetime?

Psychologists and behavioral scientists (and employers) try to find out what our passion is.

Bill and Dave propose this is the wrong approach. It appears that only 20% of any population can identify a single passion. For the overwhelming majority (80%), there simply is no single passion. Most of us are passionate about many different things, and these may vary from the time of day to particular days of the week all the way to different stages of life.

The challenge is to apply the principles of Design Thinking to the “wicked problem” of life – be it managing one’s career, pursuing one’s heart, or realize one’s true potential.

A “wicked problem” is a large, ambiguous problem that is poorly defined, and even more poorly bounded. You will agree that life fits this definition.

First, the principles of Design Thinking:

1.    Empathize: Design Thinking places people and their needs at the center. What does the end user want? What is the “job to be done”? This step requires observation, engagement, and conversation. Most market research studies fail this first step. It should not come as a surprise that most products and services fail.

2.    Define: Once we identify the real “job to be done” from the perspective of the end user, we need to define the “problem” or “challenge” in a meaningful way. Defining the problem right is half the solution.

3.    Ideate: Use your creative mind to generate as many “solutions” as possible. Never mind whether the solutions make sense. Don’t try to figure out the “right” answer. Just allow your mind to come up with solutions that do not exist at present. Brainswarming (not brainstorming), mind mapping, and doodling are some of the useful tools for this stage.

4.    Prototype: Design Thinking is all about “learning by doing.” Convert as many solutions as you can into working prototypes. The essence of this step is speed. Don’t aim for the perfect solution. Look for a tangible solution that the end user is likely to be pleased with. Remember: it is better to fail and cheaply at this stage than to fail spectacularly later.

5.    Test: Go into the real world and test your solution/s. Don’t expect the smell of sweet success. Expect end users to trash your solution. Learn from their feedback. Iteration is at the heart of Design Thinking. Don’t ever think that your first solution is indeed the best. More often than not, your first solution is likely to be your worst – from the end user’s perspective.

Applying Design Thinking to Your Life

Use the core principles of Design Thinking. Find out what is working and what is not. Experiment. Dare to challenge the status quo. Applying Design Thinking to life involves “improvisation” and “wayfinding.”

1.    Maintain a “Good Time” Journal.

Assumption one: We find something missing in life. How do we improve this situation?

Start with a “Good Time” Journal. Keep a record (hour to hour) of all of your daily activities for a week.

Check the activities that you find most fulfilling.

When are you completely immersed in what you do? Why?

Which activities make you happy? Which ones make you unhappy?

Which activities help you to be calm and poised? Which ones create anxiety, fear, and anger?

When do you feel that life is a smooth flow? When do you find it turbulent?

What are you doing when you are most alive, present, and animated?

This is the critical step. The more insights you gather in this step, the better off you will be. Use the Design Thinking process to reinforce the activities that make you happy, and relegate or do away with activities that are not fulfilling. Iterate.

For the rest of your life.

2.    Track Your Energy.

You will find from the Journal that some activities energize you. And some activities just drain you. Maintain the Journal for a few weeks. You will have a clear idea of activities that energize you and activities that drain you. Merely knowing how each activity affects you propels you to do more of what energizes you and less of what drains you.

3.    Create Three Odyssey Plans.

Think of the next five years. Identify three paths or scenarios which you can pursue realistically.

The first scenario is a continuation of your current state. Status-quo.

The second scenario is what you would do if your current situation suddenly changes. What if you lose your job? What if you have a quarrel with your boss? What if there is a natural disaster in your area?

The third scenario is a hypothetical “wish list” of all that you might want to do over a life time. Sell off everything and walk or bike across the world? Become a chef? Go para-gliding or bungee-jumping? Go ahead. Create the most preposterous list that you can imagine. The point of the third scenario is to explore many different paths – most of which you might not have thought of consciously till now. Remember it is never too late to learn. Ten hours a day for three years can get you to the magical 10,000 hours to master anything.

4.    Define Your Problem.

Use the first three steps to generate a template.

What makes me happy and how can I do more of it?

What makes me unhappy and how can I do less of it?

What do I want to do next?

What skills do I need to move in a different direction?

Honestly, how much room do I have to maneuver?

Now that I have examined my situation, how can I make it better?

How do I create the next version of myself?

What do I need to change the most?

How do I reinvent myself?

5.    Ideate.

Please understand the difference between navigating and wayfinding.

You can navigate when you know exactly where you want to go.

Life does not afford the simplicity.

We know we want to go somewhere, but we are not sure exactly where.

Wayfinding is the answer.

Wayfinding is the method hunters use to identify their target.

Look for clues. Come up with alternatives. Brainswarm. Doodle. Draw mental maps. Once you have what you think will make you happy, start prototyping and testing your ideas.

6.    Prototype and Test.

When it comes to life, a prototype is a quick and inexpensive way to determine whether a certain idea will make you happy or not.

As an example, let us say you want to run a marathon in three years.

Ask a runner what it takes to do a marathon.

Start running short distances.

Increase the distance gradually.

Do you feel energized?

If yes, continue.

Taken to its logical conclusion, one day you might indeed run a marathon.

Or at some point, you may realize that running itself is more beneficial than running a marathon.

You may find that running two miles every day makes you healthier and more full of energy.

Make these course corrections and iterations again and again.

Do you want to learn a language? There are many portals that allow you to learn languages for free. Try one for a week. Feel excited? Continue. Feel drained? Think of another language, or music, or an MOOC. Experiment.

Don’t be afraid of failing.

Failures are the stepping stones to success.

What are you waiting for?

Use Design Thinking to create a new future – and a new YOU.
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Thursday, April 27, 2017

The CX Challenge









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80% of CEOs surveyed recently claimed that their organizations delivered an exceptional customer experience.

8% of customers of the said organizations agreed.

This chasm between what service providers think and what their customers think has a new name – the experience gap.

Mature customer experience programs have five principal objectives:

1.    Improve customer retention and loyalty.

2.    Increase customer share of wallet and lifetime value.

3.    Optimize customer acquisition.

4.    Reduce cost to serve.

5.    Improve brand awareness and equity.

(Source: QUALTRICS)

IMPROVE CUSTOMER RETENTION AND LOYALTY

Why do customers desert and defect?

How many organizations can you think of that have high retention rates rooted in great customer experiences?

The fact remains that no matter what, some customers will defect. Any organization that claims to have zero or near-zero defections is living in a delusionary world.

The best organizations are happy to have single-digit defection rates.
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According to the TEMKIN Group:

Apostles have 6 – 12x more customer lifetime value than defectors, hostages, and mercenaries.

A Bain and Company study shows that 86% of customers are willing to pay more for a better customer experience.

What is holding back organizations from providing the “better customer experience”?

It appears that the tools we use to measure customer satisfaction are flawed.

Consider a typical Likert Scale of 1 – 5 where one is “very dissatisfied” and 5 is “very satisfied.”

Most organizations would consider a score of 4 to be good and acceptable.

And they would be wrong.

A Forrester Study shows that customers who rate their experience at 5 are 6x times more likely to recommend the product or service to others compared to those who rate their experience at 4.

Further, customers who rate their experience at 5 are 4.5x times more willing to pay a higher price than customers who rate their experience at 4.

The problem is that customer satisfaction surveys are lagging indicators. The more the interval between the experience and the feedback, the more distorted is the result.

What is the solution?

Instant feedback. Even-numbered scales that force customers to take a position and avoid ambivalence (neither satisfied nor dissatisfied).

One change that I see in the great organizations is the speed with which they gather feedback. For example, all the Ivy League institutions implore you to provide feedback the moment a Webinar is over. And consciously work to avoid the pitfalls that you may point out.

To quote the Wallet Allocation Rule:

“Customers may be satisfied with your brand and happily recommend it to others – but if they like your competitors just as much (or more), you are losing sales.”

In fact, recent studies show that Customer Effort Score (CES) is a better predictor of the propensity to repurchase as well as increased spending than either Net Promoter Score (NPS) or Customer Satisfaction Score (CSAT).


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Swiss Re, a leading global reinsurer made the painful decision to jettison unprofitable segments (it is still true that 80% of revenues emanate from 20% of customers), measured the cost of customer acquisition (both visible and invisible costs), captured instant feedback, adjusted strategic initiatives and improved its market share by 3% in just six months in a highly competitive market.

REDUCE COST TO SERVE

In hyper-competitive industries and markets, the difference between the winners and the also-rans is often the cost to serve. Creative organizations incentivize performance that matters (customer loyalty and higher spend) and are quite ruthless in punishing underperformers. It is vital to track costs in real time. Since accounting tends to be historical in nature, organizations may find themselves out of their depths by the time they realize something is amiss. The key drivers of marketing efficiency and the corresponding costs are best measured synchronously so as to derive the best ROI on every dollar spent.

Cross-industry research by the Temkin Group shows that happy customers are:

5x times as likely to repurchase.

6x times as likely to forgive.

8x times as likely to try the organization’s other offerings.

3x times as likely to spread positive WOM.

IMPROVED BRAND AWARENESS AND EQUITY

Customer experience programs seek to change brand detractors to promoters and promoters to evangelists or apostles. Mature CX companies combine analytics and comparative assessments to understand customer behavior and brand performance in the context of competing options (Source: QUALTRICS).

Customer centricity is not a project.

Customer focus is not a program.

Placing the customer at the focal point at every level in the organization is critical to success. In the words of Chris Fisher of Allianz, “True customer-centricity is a culture and a way of doing business that will help us grow and be successful for decades.”

According to Forrester Research:

84% of firms aspire to be a CX leader.

Only 1 in 5 ultimately succeed.

Where are you on this journey?

For an extensive discussion of CX Maturity Levels, please read the White Paper by QUALTRICS.















Friday, April 14, 2017

Jobs to be Done



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For five decades, marketing has focused on the principles of segmentation, marketing, and positioning (STP).

Segmentation of consumer products is generally along demographic, psychographic, and behavioral dimensions. B2B segmentation includes firmographics.

Of the more than 20,000 new products evaluated in Nielsen’s 2012 – 2016 Breakthrough Innovation Report, only 92 (0.46%) had sales of more than $50 million in year one and sustained sales in year two (Source: HBR).

What is wrong with STP as we know it?

Practically all the data (including big data) on customers focus on correlations such as 70% of customers prefer product A to product B. Correlations do not necessarily show causality. Managers find it comfortable to use correlations because it is very difficult to understand causal mechanisms.

Understanding causal mechanisms (what causes us to do something?) is possible if we use Professor Clayton Christensen’sJobs to be done” construct.
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A fast food chain introduces a milkshake. The milkshake has customers only in the morning. No one understands the reason. A team of researchers is called in to investigate the anomaly.

After painstaking observation and interviews with everyone who buys a milkshake, the following become apparent:

1.   Commuters driving to work buy the milkshakes typically between 0630 and 0700 hours.

2.   The commuters have a 30 – 40-minute drive ahead of them.

3.   They want something to eat or drink throughout their commute.

4.   They have tried everything possible – fruits, doughnuts, chocolates, protein bars, yogurt, and sandwiches.

5.   All the alternatives fail because (a) they don’t last 30 minutes and (b) they are messy to handle while you are driving.

6.   The milkshake is preferred because it lasts 30 minutes, gives the person a filled feeling, and is easy to use.

In other words, customers buy the milkshake not based on any demographic or psychographic characteristics. Rather, they have a “job” – having something to drink for 30 minutes and they “hire” the milkshake to do the “job.”

The same milkshake does not sell at other times because the “job” is different. For example, parents collecting their children from school in the afternoon and stopping by for a quick snack don’t want a thick milkshake – instead, they want a drink that a child can finish quickly. Make the milkshake thinner, add an exotic flavor and you have another solution to anotherjob.”

A similar approach is visible in the spectacular success of American Girl dolls.

Why would anyone pay over a hundred dollars for a doll? And why would anyone pay hundreds more for the doll’s apparel and accessories?

American Girl has sold 29 million dolls and has revenues of over $500 million a year. The firm has remained the undisputed leader in its category for 30 years. Competitors including Walmart and Disney have tried to replicate but without success.

What is the secret of American Girl?

It turns out that American Girl does not sell dolls. The firm provides an unforgettable experience. Each doll has a history and a story to tell. The doll is an instrument for communicating values, customs, and traditions from one generation to another. Every little detail, from the custom made clothing to the packing, is meant to provide an uplifting experience. American Girl stores have “hospitals” that can fix tangled hair or fix broken parts.

Marketers should ask and answer some critical questions:

1.  What “jobs” do customers wish to be done and how can we help them address their problems?

2.  What obstacles or inconveniences might customers face and how can we remove them?

3.  What are the functional, social, and emotional dimensions of the job?

4.  How can we integrate the dimensions into an experience that customers will cherish and come back to us?
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Organizations have two choices:

1.   They can rely on data-rich models and continue with the hit-or-miss innovation and marketing.

2.   They can look through the “joblens and figure out how they can innovate specifically to get the “job” done better than the competition.

One choice relies on luck.

The other starts and ends with the customer, leaving luck to the competition.

Take your pick.

For more on the concept, please read:

Christensen, Clayton M, Taddy Hall, Karon Dillon, and David Duncan: Competing Against Luck: The Story of Innovation and Customer Choice; Harper Business; Harper Collins; 2016.


Wednesday, April 5, 2017

Simplifying Complexity


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As a graduate student, I worked as an intern at a large corporation. Into my second week, I had collected data on a project and wanted to place the papers in groups based on processes. When I requested my mentor for a few paper clips, I had my first experience with complexity.

While handing over the paper clips, my mentor told me that to get a box of paper clips, the organization required 17 signatures!.

Ever since I have been intrigued and baffled at the complexity that is an integral part of modern organizations.

On the one hand, the advent of new technologies at a pace that could not have been imagined even at the turn of the century, new entrants more than willing to disrupt traditional frameworks and mindsets, and the changes in customer expectations,  have combined to produce an unstoppable force.

One would expect organizations to seize the opportunities and move forward. The twin factors that can provide a competitive advantage in today’s business landscape are agility and adaptation.

Few businesses show the characteristics needed for speed and change. On the contrary, the typical response is for more processes, endless meetings, brainstorming, disengaged employees, and ever escalating costs.

Why is there such a disconnect between what is needed and what happens?

First, very rarely do organizations try to figure out the cause of any problem. The classical approach is to look at the symptoms, not the disease itself. It is like applying a band-aid to an ever enlarging sore.

Second, organizations typically argue that the problem lies elsewhere – in regulation, in the economic environment, in political uncertainty, in unfair competition – and never within the organization itself.

Third, it is hard to measure certain problems. As an example, when was the last time you came across anyone in your organization questioning the cost of time wasted on unproductive meetings?

An Atlassian estimate places the amount spent on unproductive meetings at US$ 37 billion per year (2016). A Harvard Business School app quickly shows that in a typical organization, an hour’s meeting attended by 20 people is over $1,000 in opportunity costs.

Finally, organizations are in the comfort zone owning “collective responsibility” for everything. In other words, there is no ownership and hardly any accountability.

The Boston Consulting Group’s Smart Simplicity approach has two key principles:

1.   Performance is a function of what people do (behavior).

2.   Behavior is a function of people’s rational responses to their context.

Thus, Smart Simplicity tries to make desired behaviors rational.

Observed behavior, and not an assumed ideal state (what people should be doing), needs to be the focal point.

For organizations that embrace simplicity, the rewards are significant. Large organizations report order-of-magnitude benefits achieved through simplification. In my experience, I have seen concept-to-market cycles shrinking by 25%, costs being reduced by 30%, and revenues going up by 15%, all due to simplification.

Organizations can simplify their processes through a four-step approach:

1.   A “complicatedness survey” that identifies the processes that show built-in characteristics of complexity.



Example: In the physical world, customers willingly scan the shelves of supermarkets to find what is best suited to their requirements. In contrast, in the digital world, customers are extremely impatient for results. If a prospect visiting your web page cannot find what she is looking for in the first five minutes, she is likely to give up the effort and start looking for alternatives.

A significant part of complexity starts with the leadership team. A team that focuses on providing the “best possible solution” invariably ends up having complex processes. Instead, it may be prudent to start with a “good” solution and make it better on a continuum.



2.   Diagnose the root cause. Admittedly, this is the most difficult part.


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Example: When Paul O’Neil took charge of ALCOA, his first message to shareholders had a single focus – employee safety. Petrified investors rushed out of the meeting to sell their shares. A few years later, ALCOA had regained its position in the industry. Counter-intuitive as it may seem, the focus on safety reduced accidents, empowered employees, dramatically brought down attrition, and increased productivity to record levels. Obviously, those who had sold off their shares had to regret the decision.

Organizations can identify the root cause if and only if they are willing to take a deep dive into socio-cultural contexts in which they operate. Such a soul searching requires enormous courage and the willingness to go against the tide of conventional wisdom.



3.   Test-drive. Just as rapid prototyping is the preferred route to innovation, organizations should take up pilot projects to test-drive simplicity.



Example: Toyota considers more designs than its US and European counterparts and yet can shorten the concept-to-market cycle to 18 months compared to 4 years for competitors. The magic is in its now-famous production system that adopts a “pull” design and carries no inventory in contrast with major manufacturers who even today rely on a “push” system and loads of inventory. The Swedish furniture maker Ikea has successfully replicated the system resulting in close-to-zero waste and extreme modularity in design. Logs of wood go through a “scan” to determine the most appropriate way of slicing them.
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4.   Implement: Once a pilot project is tried and adjustments made as required, organization-wide implementation is the logical final step.



Example: The first Indian company to reach both CMM Level 5 and PCMM Level 5 in software technologies achieved the incredible feat in 18 months. The secret was to de-layer bureaucratic approaches and empowering middle-level managers to do whatever was required, within a broad set of core values, to achieve the desired results.



The organization that I referred to in the opening paragraphs was able to achieve a 60% increase in ROI by simplifying processes across the board.



The message is clear. In a world where organizational life-spans are shrinking, and turbulence is a given, only those that can embrace simplicity will survive.