Deep thoughts

Citation

Lane Voss, B. (2003), "Deep thoughts", Journal of Business Strategy, Vol. 24 No. 5. https://doi.org/10.1108/jbs.2003.28824eae.001

Deep thoughts

Bristol Lane Voss

"Deep thoughts"

Consciousness, it is said, is the awareness of awareness. The catch for philosophers is what to do with that ability. In business terms, being aware of where a company's growth has to come from – whether using a business model, the customer, public relations or marketing practices – is also just one part of the equation. What to do with that information is another, and more difficult, problem.

Enter this month's Stack.

Each of the books presents its hypothesis for growth, some more persuasively than others. Each tries to move beyond the concept of "wherever there's a customer touch, there's an opportunity" and tries to show how to exploit that opportunity.

In the end, they range from business models to customer equations, from scratching the surface to reengineering the unconscious. Now there is something to think about.

How to Grow When Markets Don'tby Adrian Slywotzky and Richard Wise. Published by Warner Business Books, New York, NY (www.twbookmark.comM)

Authors' credentials: Both are vice presidents of Mercer Management Consulting.

Thesis: Future business growth will be driven by demand innovation.

Scope: 1837 to 2007

File under: Selling solutions, profitability.

Reason to buy/read: With all the talk these days about business models, Slywotzky and Wise describe an actual model that seems to show why much corporate growth has stalled. According to the authors, growth can no longer be sustained by product innovation (American Express Optima, Pepsi Blue), product enhancement (Nintendo and Sony, Avis and Hertz), international expansion (Coke, Boeing, McDonalds), or acquisitions. Even value migration (Southwest Airlines, Dell, Intel, Wal-Mart) no longer works – they are all just responses to pre-existing demand.

The only way to stimulate growth is through what the authors call demand innovation – creating value by discovering/uncovering/stimulating new forms of demand.

Not that the product "baby" is thrown out with the bathwater: the authors advocate using the product position as a starting point from which to do new things for the customer which (ideally) solves his biggest problems and improves the overall performance of the business.

Kudos for real examples and good case studies that give equal weight to B2B and B2C companies. However, almost all are North American-based except for Tsusaya, a Japanese video/music/book store.

Overall, the book highlights next-generation growth opportunities, identifies some of the challenges associated with seizing those, and discusses short-term activities and strategies one can use to begin applying customer-centric thinking about higher order needs. It concludes with an action plan for finding sources of new growth in an integrated way and with the right level of intensity.

Placement in your life: Put the themes of the book in memo form six weeks before the yearly strategy meeting and send to all your line managers. Have them submit their business plans in terms of demand growth, versus product growth, just to get them thinking in those terms.

How to read: Demand innovation is about understanding and acting on customers' most urgent problems and priorities. While that is a simple enough point, a close reading of the front of the book will give the reader the questions to ask to help define where one can do more to meet needs of customers.

The book illustrates demand innovation with real-life case studies, and, in a rarity these days, names the champions of the strategy at each company. Any that relate to the reader's industry should be tracked throughout the book. Each case study has a "borrow from the playbook" cheat sheet for skimmers.

The cases follow an arch: the book begins with opportunities for follow-on services (like GE doing financing, training, installation, etc. for engines), then shows an example of helping customers improve cost structure, reduce waste, excess capital cost, process efficiencies (Cardinal Health). Other opportunities can come from helping customers reduce complexity, make better decisions, and speed their own offerings to market (Johnson Controls).

Of further benefit to customers is helping them reduce risk and volatility in their business (Air Liquide). Finally, there is helping customers grow top line revenue (John Deere Landscapes, Clarke American).

Once well into the book, the reader is shown how difficult it can be to pursue demand innovation to its ultimate conclusion. For one thing, as the identity of the decision maker changes, the complexity and intensity of the customer relationship will increase. For another, many companies are as self-reflective as the authors think they should be, especially regarding hidden assets (relationships, market position, information) and hidden liabilities (corporate mind-set, culture, history, information systems and investor resistance). Then it becomes apparent that the current accounting darling, EVA, is dangerous to use in evaluating early stage growth initiatives.

And the book, to Stack's mind, dramatically underplays the resistance one will face in implementing such a new business model: new growth means new talent, new ways of doing things, and, most importantly, next generation opportunities are often fundamentally different from what one's core business is now, with different economics, capital structure, methods of capitalizing value, etc.

The authors do have a chapter meant to inspire middle managers about how much power they have (and an example of one who successfully pushed for a new initiative way beyond her formal sphere of control).

It is worth reading the conclusion of the book: the growth spectrum and growth action plan template, together, represent hundreds of thousands of dollars in consulting fees you will not have to pay. On top of this, the authors direct readers to Mercer Management's demand innovation Web site (www.demandinnovation.com) for other tools, frameworks, templates and analysis.

Unintended effect: The case study companies look like good investments that you or your broker should check out. 

Irresistible miscellanea: Each year four billion prescriptions are filled for US patients. Less than one-tenth of 1 percent produces serious enough side effects to require hospitalization and less than 2 percent of those are fatal. However, that number of deaths is 50,000 more than are killed annually in auto accidents.

You will throw this book across the room if: The marketplace is moving faster than ideas can move through your corporate strata.

Price/value: $22/full.

Angel Customers & Demon Customers: Discover Which is Which and Turbo-Charge Your Stockby Larry Selden and Geoffrey Colvin, Penguin Portfolio, New York, NY (www.penguinputnam.com)

Authors' credentials: Columbia University Business School professor and Fortune magazine editorial director. 

Thesis: All the profits and value of a company come from its profitable, high-potential customers.

Scope: 1995-2002

File under: Customers are the ultimate source of shareowner value.

Reason to buy/read: While many have said it is no longer good enough to use conventional analysis to solve today's business problems, the authors Selden and Colvin actually deliver a new method of crunching the real numbers.

While the concept of customer-centricity sounds bland, the authors have ripped it apart, applied their formulas of business success and completely repositioned the concept. To embrace the concept, for most CEOs, would mean completely changing the way they do and measure business.

Be warned the angel/demon title is off the mark. A more descriptive title/subtitle would be: Hitting the sweet spot: segment your company's customers in a way that hold the greatest potential to create a sustained premium P/E.

The book is quite an avant-garde wolf hiding in conventional sheep's clothing: The authors use new definitions for traditional concepts. For instance, an unprofitable customer is one who fails to earn the cost of capital. Superior returns for shareowners mean consistently better-than-average share price appreciation (not earnings per share or EBITDA or revenue growth or customer satisfaction or anything else).

Placement in your life: Perfect "thought you might enjoy this" gift to the blowhard you met on the plane who said his company was customer-focused.

How to read: It is obvious in less than a dozen pages that taking the authors' recommendations to heart will strain any organization and require a lot of hard work. The vast majority of companies are organized along product, territory, or functions.

And, frankly, Stack would not overhaul any firm based on the advice in this book alone for the chief reason that the authors' reasoning is syllogistic. They deduce conclusions that may or may not be true: earning the cost of capital is good business; managing by customer segments is good business; therefore managing by customer segments will ensure that a company earns the cost of capital. Not exactly. Some readers may want to give up at the point of realizing this.

Then there is the tendency to blithely link hard numbers and guesswork and present that as an accurate formula. The book does provide a framework for figuring the value of a customer and it explains why a company can be unprofitable even when all the products have positive gross margins and capital is not tied up in inventory. But it is not one-size-fits-all. The thumbnail formula: customer profitability is the sum of the profitability of the products and services the customer buys, adjusted for costs specific to that customer, including capital costs. Yes, the authors are saying that all the company's cost, invested capital and capital charges should be allocated to each customer.

The example they give is of a printing company that calculates customer profitability on a conventional basis (i.e. ignoring the capital charge) and finds that its largest customers appeared to be its most profitable. Then, by recalculating on the basis of economic profit (with an appropriate capital charge) it found the opposite. Its biggest customers were actually highly unprofitable. The reason was these customers required the company to hold large inventories of expensive specialty papers which tied up capital and the charge for all that capital wiped out the apparent profits. By contrast the small customers the company served on an opportunistic basis accounted for a significant portion of the company's economic profit.

Though the authors are misguided in forming their hypotheses, it eventually becomes clear from the examples they use that, in addition to the printing example, there is a subset of industries particularly well suited to their ideas. Those are publicly traded companies that do direct business with the end user about whom the companies know or can find out a great deal (banks, credit card companies, certain retail environments). For that reason, it would be a good read for managers in those industries or for those whose companies compete with the case study examples of Dell Computer, Royal Bank (Canada), Fidelity Investments, Best Buy, Tesco (UK).

And, even if the reader does not wholeheartedly accept everything the authors say – or one's company patently does not fit the mold (companies that earn the bulk of their profits from hedging came to Stack's mind) – the authors introduce plenty of thought-provoking assertions that will lead almost any reader to seeing old issues in a new light.

The book is definitely a call to action – how much of that action a reader can take is debatable.

Unintended effect: The reader becomes very P/E sensitive. The authors love having a company's P/E multiple more than the average of the S&P's 500 average P/E – or the market average – and not measured against the industry of a subgroup.

Irresistible miscellanea: The formulas underpinning the authors' theories are based on a 1961 paper by Nobel laureates Merton Miller and Franco Modigliani.

You will throw this book across the room if: It bothers you that all the savings and opportunities the authors identify are always in the trillions of dollars.

Price/value: $27.95.

Full Frontal PR: Getting People Talking About You, Your Business, or Your Productby Richard Laermer with Michael Princhinello, Bloomberg Press, Princeton, NJ (www.bloomberg.com/books)

Authors' credentials: Founder and CEO of RLM, a public relations firm with such clients as ETrade Financial, Kozmo.com, Barnes and Noble, Allergan Pharmaceutical, and LookSmart; vice president of RLM.

Thesis: Any company can create buzz without a PR firm.

Scope: From the dot-com heyday to 2002.

File under: Buzz marketing. Public relations is sales in its purest form

Reason to buy/read: The book describes techniques that a professional PR firm would employ if it took on the reader's company as an account. One of the most valuable pieces of advice is how to "source file" executives at your company nationwide (getting your spokespeople in the Rolodexes of journalists).

It is also full of examples, mostly from the authors' PR company and mostly in the technology and consumer products realm. In their world, thus the world of this book, the dot-com crash was a fender-bender.

The book is written in a breathless, chatty style that captures the kind of hyper energy one would expect from a PR company. The authors, Laermer and Princhinello, use exclamation points! They use pronouncements "You are there to enlighten others". They make asides. They use jaunty Diana-Vreeland-esque "Why don't you" advice such as, "one of the first things you should do" is "coin a new phrase".

On the other hand, the authors do not hold back on the specifics. The book lists nearly 20 gossip columns where one can plant a "whisper" item, several dozen news publications to scan, and more news, PR, and various Internet sites to bookmark.

Placement in your life: Read before you hear a pitch from a PR company.

How to read: If you are applying for a job at the authors' company, RLM, read the whole thing. If you are in the technical field, ditto.

All others can skim. The book provides an accessible overview of what is what – a press release, an embargo, news hooks, and the like. But the information is scattered about with some crucial bits omitted. The authors breezily suggest on page one the value of wire services to send out press releases and do not even address the costs until page 194.

The book is a not-so-soft sell for PR – especially at the expense of advertising, "free press validates what you say about your product".

Unintended effect: Will make one want to re-rent Glengarry Glen Ross, Wall Street, and Boiler Room – the movies RLM staffers use to pump up their confidence.

Irresistible miscellanea: Journalists, the authors say, "are at their desks, waiting for the phone to ring or e-mail to ping with a good idea". Who knew?

You will throw this book across the room if: Sloppily edited. Seven pages from the end of the book, the authors mention a topic and say it is "something we get into a little later on".

Price/value: $24.95/$4.95 an article at best.

How Customers Think: Essential Insights into the Mind of the Marketby Gerald Zaltman, Harvard Business School Press, Cambridge, MA (www.hbspress.org)

Authors' credentials: Professor of marketing at Harvard Business School and Fellow at Harvard's "Mind, Brain Behavior Initiative" as well as founder of Olson Zaltman Associates (www.olsonzaltman.com).

Thesis: A marketer need a deeper understanding of what consumers think as well as how they think.

Scope: 1960s to 2002

File under: Quality thinking.

Reason to buy/read: By any measure, traditional market research provides only a small part of available knowledge about consumers. The book explains why this is so and what to do about it. Beyond being a marketing tool (how customers think), however, the book is about how everyone thinks and is genuinely fascinating for readers in any discipline.

The book is an accessible and scientifically-sound foray into human thinking and draws heavily on insights from many fields beyond marketing. The author Zaltman gives specific and actionable suggestions for the many ways marketers can make use of this information. He leaves nothing in the realm of theory but explains how companies like Citibank, Disney, Kraft, John Deere, Coca-Cola, Hallmark, Unilever, Glaxo, and General use the hypotheses of the book in real-world examples.

The unconscious mind represents a significant frontier where marketers may establish a secure beachhead of competitive advantage. Zaltman assumes a high degree of ethics in marketing that the average consumer may doubt. He writes, "The possibility for misuse shouldn't frighten us from discoveries". Indeed, he cheerfully shows how managers can use certain insights to "reengineer consumers' consensus maps to boost customer satisfaction, strengthen brand loyalty, and enhance sales".

Placement in your life: Next to a favorite chair and a large bottle of Scotch.

How to read: This is a brilliant but dense book that will yield little to the casual reader.

On one hand, the reader can easily get the two basic propositions of the book from this review. First, the more skilled marketers are in listening to customers, the more effective their marketing strategies will be in establishing the value of the firm's offerings. Second, the more clearly current and potential customers understand the value of the firm's offerings, the larger the top line will be.

On the other hand, much of what the book says is brand new and disquieting. However readers can take comfort from the fact the ideas are firmly grounded in the scientific research of multiple disciplines (in that there is formal research that supports each of Zaltman's ideas that meet standards of internal and external validity).

No one will argue the fact that a deep understanding of consumers enables marketers to find common drivers of behavior shared by otherwise diverse target markets. This book shows how to drill down to that level. The executive summary is to market, use metaphor; it is the engine of imagination.

The book also addresses real consumer phenomena such as what consumers say in response to an explicit survey question often contradicts what they really feel, intend to do, and actually do. Add to that, what a researcher thinks he might find (his prior interpretation of the data) flagrantly influences his findings.

The good news in all of this is that "marketing" per se works. Marketing is a major source of influence on what consumers recall, remember, or think they remember so one may as well take advantage of it.

Unintended effect: The reader comes away extremely versed in current thinking on thinking: (1) what we think - the content of an idea – is not captured in words but in metaphors; (2) how we think - the process – mingles metaphor with memory and stories forming concepts, constructs and consensus maps that integrate the conscious and unconscious cognitive processes of the cortex, thalamus, and amygdala. And how a thought occurs is distinct from how one consciously experiences a thought.

According to the author, one's mind is constantly playing a highly sophisticated, multi-dimensional game of "free association" with every stimulus it encounters. The mind, in turn, is part of a mutually informing and codependent alliance that includes the brain, body, and society. Basically, a thought ricochets everywhere, activating previous thoughts and stimulating new ones inside and outside the head. And all this is just the tip of the iceberg, as they say. A particular thought never stands alone.

Irresistible miscellanea: The brain is one vast network. For comparison, the number of particles in the known universe is ten followed by approximately 79 zeros. The number of neural-circuitry connections possible in the brain is ten followed by more than a million zeros.

You will throw this book across the room if: It bothers you that the author is a footnote fanatic when it comes to documenting the science but haphazard at saying what the sources are for business people's quotes in the book.

Price/value: $29.95/full value and then some. The book is fascinating and engaging from the preface through the end notes.