Moving Things Around

The logistics industry provides opportunities for both movers and shapers

Supply Chain

(Source: Flickr)

BACK in the good old days, before the PC and Macintosh, if you wanted something done you would often just do it yourself.

Companies sent their own trucks to the factory to pick up supplies, and the local department store could do “home deliveries” if you were happy to wait a week or so.

Life was simple, but also slower paced.

With the advent of hyper colour t-shirts, puffy hair and jelly shoes, successful manufacturers were increasingly turning to transportation and warehousing experts to help them get supplies from the factory and products to the store.

It turned out that moving lots of stuff from one place to another is a tricky business, and logistics experts could get the job done faster and more reliably, at lower cost.

With the dawn of a new millennium, and the growth of a novel technology called the Internet, the dynamics in the logistics industry changed, again.

The Internet enables suppliers to access customers directly, communicate with them in real time, and (if managed properly) to provide better service at lower cost.

The flip side of the coin, though, is that customers now have higher expectations than ever before.

This presents a challenge, but at the same time a big opportunity.

With the number of goods flowing back and forth, and with the amount of organisation required, an opening has emerged for managers, IT experts and business people to help coordinate the physical flow of goods.

The logistics industry, it turns out, provides opportunities for both movers and shapers.

[Note: Deloitte and BCG appear to have their fingers on the pulse. What about your firm?]

New Manager: Meenakshi Shukla

Meenakshi ShuklaINTRODUCING Meenakshi Shukla!

We are delighted to welcome Meenakshi to join the Consulting Blog as a Manager for 2014/15.

After completing the MSc Corporate Strategy and Governance from Nottingham University Business School and working on startups at Oxford’s Said Business School, Meenakshi is now completing her Chartered Accountancy at the Institute of Chartered Accountants in India. As it happens, she is also a national swimmer who has swum 6 kilometres in the Arabian sea.

Some people never sit still.

Meenakshi is one of those rare individuals who look to improve every situation, and consistently does so by applying a trifecta of talents: a positive disposition, keen intellect, and practical common sense. Plus, she has the creditials to back it up.

As you may be aware, dear reader, we are currently busy developing a new section of the website that we are calling “the HUB” – a new exclusive consulting community that contains three resources to support your consulting career:

  1. News Feed: The News Feed shares the latest consulting, industry and macro news, and members can share their own news articles that will be tweeted to the HUB’s 5,000+ Twitter followers.
  2. Consulting Forums: The Consulting Forums are a place where members can connect, share ideas and discover new consulting opportunities. If you are applying for consulting firms or preparing for case interviews, then this resource will help you find and collaborate with other like minded people who are facing the same challenge.
  3. Marketplace: The Marketplace is, as the name suggests, a marketplace. A place where members can buy and sell samples, templates, guidebooks and industry research to help other members with consulting applications, case interview prep and consulting projects. Since the HUB puts members first, the policy for the Marketplace is “Zero Commission, Zero Fee, Satisfaction Guaranteed”. We hope you find it useful.

Three months in development, these three resources are brand new and designed to aid you in your consulting career. If you have any feedback, thoughts or suggestions, please feel free to shoot us an email at [email protected] We value your thoughts.

As you might imagine, with all the activity and development going on, we are thankful to have Meenakshi on board to help bring order to the chaos. She is providing crucial strategic and operational guidance, and we believe that she has a bright future ahead working for a top consultancy – if they manage to hire her.

Please join us in welcoming Meenakshi!

Profitability Framework

The profitability framework can help executives, consultants and entrepreneurs to diagnose and respond to falling prices, declining sales volume, or rising costs

Profit Framework

(Source: Flickr)

BUSINESSES sometimes experience reduced profitability.

This is not necessarily a problem if the decline was expected because a business is sustained from cashflow, not profit, and long term growth can be pursued through capital appreciation, which shows up on the balance sheet and not on the profit and loss statement.

However, a drop in profits can be concerning if it is unexpected and unexplained. It can limit a business’s ability to achieve organic growth and may mean that its existing business model is no longer sustainable.

In order to remedy the situation, the executive team will need to find out what is happening and why, and will sometimes engage management consultants to help them understand and respond to the problem more quickly and effectively.

1. Profit

Profit equals revenue minus cost. (yep, so far so good)

Profit Framework

By investigating each branch of the profit equation, revenue and cost, and drilling down to explore a business’s current and historical performance figures (e.g. revenue, price per unit, units sold, product mix, segment mix, and gross margins) you will be able to discover the source of declining profitability. It may result from a falling price per unit, declining units sold, rising costs, or a combination of the three.

If you realise that a branch or sub-branch of the profitability framework is not the problem, then you can simply come back up a level and examine the remaining branches.

By comparing the business’s performance numbers with the competition you can also determine whether the problem is company specific or industry wide.

2. Revenue

Revenue can come from various sources including advertising and product sales, but is normally thought of as being a function of price per unit and units sold. For example, price per widget multiplied by the number of widgets, or cost per click (CPC) multiplied by the number of clicks of a website ad.

Declining revenue can derive from a fall in prices or a reduction in units sold, and can be looked at in four stages:

1. Segment: The total revenue number is likely to hide important details, and so you may want to segment units sold into its component parts. There are lots of ways to do this, including by:

  • Product
  • Product line
  • Distribution channel
  • Region
  • Customer type (new/old, big/small)
  • Industry vertical

2. Examine: Compare current and historical numbers in order to find the trend and identify the source of the problem. For example, you might discover that the price of widgets in America has fallen.

3. Diagnose: Once you know what is happening, you also need to figure out why. For example, did a new low cost competitor like Walmart enter the market?

4. Respond: Once you fully understand the source of the problem, you can then develop a strategic response.

2.1 Falling Prices

If you discover that declining revenue results from falling prices, there could be a number of explanations.

Diagnosing falling prices

Although you may know that prices have fallen, you might not know why this has happened in the context of the marketplace, and you need to figure this out before you can devise a plan of action.

In examining the business situation, you will want to consider the customer, the product, the competition, and the company itself.

If falling prices turn out to be an industry wide problem, then you can explore the competitive dynamics of the industry and may discover that the issue results from:

  1. Increased competition (for example, entry into the market of a new low cost competitor like easyJet),
  2. Increase in the number of substitutes,
  3. Reduced barriers to entry (for example, the Internet has enabled new entrants in the markets for book stores, newspapers, and taxis),
  4. Increased buyer bargaining power (for example, Amazon has used its market dominance to drive down the price of books much to the chargrin of book publishers), or
  5. Decreased supplier bargaining power (for example, excess supply of American shale gas forces all suppliers to lower prices).

Responding to falling prices

You would be forgiven for thinking that the best way to respond to falling prices is simply to raise them. But unfortunately things are not that simple. A business’s ability to raise prices can often be constrained.

Before responding to falling prices, a business should consider the following issues:

  1. Market Power: Does the business have market power as a monopoly or oligopoly producer? For example, De Beers had (and largely still has) a monopoly on the diamond trade which allows it to keep the price of diamonds high.
  2. Competitor Pricing: Have competitors changed their prices? How does the business’s product mix, product quality, and cost structure compare to the competition?
  3. Customer Price Sensitivity (or “price elasticity of demand”): A business has to think not only about its competitors but also about its customers, who will normally respond to higher prices by demanding less. If customers are very price sensitive (e.g. students) then higher prices may result in lower revenues.
  4. Price Discrimination: Can the business distinguish between customers and charge different prices for the same product? This could be done by offering quantity discounts, or by distinguishing between people in different groups (e.g. students) or in different locations (e.g. you pay more for popcorn at the cinemas).
  5. Product Differentiation: Is there something different about the product that might allow the business to raise prices? For example, a trusted brand, appealing design, unique product features, or strong customer service.

2.2 Declining Sales Volume

If prices are not the issue, then declining profitability may have been caused by declining sales volume.

Diagnosing declining sales volume

Declining sales can result from:

1. External factors (see Porter’s Five Forces and PEST Analysis):

  • Increased value for money of substitute goods due to lower prices or improved quality
  • Reduced value for money of complementary goods due to higher prices or reduced quality
  • Increased competition
  • Reduced barriers to entry
  • Shrinking market size
  • Political upheaval
  • Shrinking size of the regional, national or global economy
  • Changes in consumer demographics or consumer preferences
  • Introduction of new disruptive technologies

2. Internal factors (see Value Chain Analysis):

  • Supply chain bottlenecks
  • Limited operating capacity
  • Restricted access to distribution channels

Responding to declining sales volume

Faced with falling sales, there are a number of ways that a business can respond, for example:

  1. Market penetration: increase market share or grow the size of the market by using various marketing strategies focused around pricing, product differentiation, promotion, and product placement (see Four P’s Marketing Framework),
  2. Market expansion: expand into new markets in order to sell existing products to new customers,
  3. Product development: develop new products for existing customers, or
  4. Diversification: develop new products to be sold in new markets.

Ansoff Matrix 4

3. Costs

The third driver of declining profitability is rising costs.

Diagnosing rising costs

If your examination reveals that rising costs are the problem, then you will need to inspect the cost structure of the business in order to locate the source of the cost blow out.

A few questions that you may want to ask:

  1. Does it make sense to segment costs using the value chain? For example, raw materials, procurement, operations, distribution, customer service.
  2. What are the business’s fixed costs? For example, Sales General & Admin, overheads, rent and interest expenses, depreciation, capital costs, R&D, and wages under fixed employment contracts.
  3. What are the business’s variable costs? For example, raw materials, shipping, energy, and wages based on commission or performance bonuses.
  4. What are the main cost drivers?
  5. How have costs changed over time?
  6. How does the business’s cost structure compare with the competition?

Responding to rising costs

After determining the source of rising costs, you then need to figure out how to respond.

Here are three questions to think about:

  1. How long will it take to reduce major cost drivers?
  2. Are the activities strategically important?
  3. To what extent do the activities contribute to operational performance?

Outsourcing Decision Matrix

The method that you employ to reduce costs will depend on the situation.

You may want to consider the following common cost reduction techniques:

  • Improve the utilisation rate of plant, property and equipment (PP&E)
  • Consolidate procurement across business units
  • Outsource manufacturing to China/India/other
  • Relocate operations to lower cost cities, regions or jurisdictions
  • Partner with distribution companies (e.g. FedEx)
  • Use IT and digital channels to reduce communication and organisational costs
  • Eliminate costly activities that have low contribution to operational performance and low strategic importance

4. Profitability Framework Cheatsheet

As a bonus for aspiring consultants (and perhaps also as a refresher for practicing consultants and business leaders), we have prepared a one page profitability framework cheatsheet to help you understand and use the framework.

You can download it here.

[For more information on consulting concepts and frameworks, please download “The Little Blue Consulting Handbook“.]

Consultant and Client Perception

Consultants best serve their clients by being consistently seen as approachable and interested in the client’s business problems

Consultant and Client Perception

(Source: Flickr)

This guest post is from Tat Biswas, an IT consultant and blogger based in Sydney. He works with organisations to help them implement software and undertake business process improvement.

I would like to share my observations on the professional approach adopted by many consultants, how clients perceive them and the resulting impact on solving business problems.

First of all, I would like to clarify that I am not a Management Consultant. I work as an IT Consultant helping companies with system implementation and business process improvement. However, I imagine that most consultants find themselves in a similar situation when they enter a client office and start dealing with client staff for the first time.

In my experience, when a Consultant enters a client office for an assignment, they are definitely not considered as ‘one of us’ by client staff.

They are there to solve a specific problem and can be extremely approachable and friendly when they want to obtain vital information. However, they tend to limit this approachability to certain senior staff members that they need to influence.

If the approachability issue were just limited to the consultant’s social interactions that would be one thing, but it is also visible when consultants need to dig deeper to understand a problem.

Many consultants don’t appear interested in understanding the client’s pain as much as the in-house people feel it. This reserved air and controlled approachability can often limit their ability to get the full story from the client’s people, and this can translate into consultants delivering solutions that, while they may appear good enough to justify value for their expensive engagement fees, are in reality far less than ideal.

I suppose as with everything in life, there is no one right answer. But based on my experience so far, most Consultants want to keep their ‘treat-me-special’ image when they work at client sites. I have personally adopted a different approach and interestingly most of my client project sponsors and client staff have found this to be a refreshing change, even those at senior management levels.

I still remember the day when I got my IT consulting job and my former boss joked by saying, “So you are now leaving us to become one of them.”

As a consultant, I do believe we need to maintain our distinct identity by keeping our distance from internal client politics so that we can push for solutions when the client’s staff are unable to do so due to internal bureaucratic bottlenecks.

Beyond that though, I believe that consultants best serve their clients by being consistently seen as approachable and interested in the client’s business problems, not just by those who will pay the consultant’s hefty invoice but also by those who provide invaluable insights, albeit in small measures, without which Consultants would be unable to make any worthy breakthroughs.

McKinsey’s Larry Kanarek on Dealing with Activist Investors

Are activist investors having a profound effect on American board rooms? McKinsey Director Larry Kanarek says, “I think the answer is absolutely yes.” How should executives respond?

ACTIVIST investors are having a profound impact on American board rooms. Faced with this new situation, Larry Kanarek argues that executives should work with activists, rather than against them, in order to improve performance.

Kanarek may be right, but before we consider how executives should respond to activists, let’s first be clear on what we mean by “an activist”.

Basically, activists are individuals or groups that provide an alternative investment vehicle, like private equity or hedge funds, that seeks to achieve above average returns for investors by doing three things:

  1. Firstly, they identify companies that are under performing; this may be due to any number of reasons including mismanagement, a high cost structure, or poor corporate strategy;
  2. Once they have a company in their crosshairs, they buy a large number of shares in the target and seek to take control or gain influence by forming a voting bloc or obtaining a seat on the company’s board; and
  3. Finally, the activist attempts to use their influence to effect an organisational change (usually a major one) with the aim of increasing performance, raising the share price and selling its shares for a profit.

So, in essence, activists make a living by improving organisational performance. This sounds pretty reasonable, right?

Well, not so fast.

While it may be true that executives of public companies can be complacent in pursuing growth, and that this can attract activist investors in search of profit, we disagree with Kanarek’s broad and sweeping argument that executives should necessarily and happily work with activists in order to improve performance.

We suggest instead that executives take a more considered approach. Boards should deal with activists on case by case basis, and keep in mind that the long term best interests of the company and the interests of the activist will often not be aligned.

This view is based on two observations:

1. Short term profit versus long term growth: As Kanarek tells us himself, activists are seeking to achieve above average returns for investors. Given the time value of money (that is, a dollar today is worth more than a dollar tomorrow), activists by their nature are interested in short term profits. The problem for executives is that there are lots of ways to increase short term performance that can undermine the long term stability and growth of a company. For example, increasing the use of debt, divesting low growth (yet countercyclical) businesses, firing loyal long term (and hence expensive) employees, or paying dividends instead of holding cash.

Richard Branson, who recently spoke at the Skoll World Forum, outlined the predicament that executives of public companies find themselves in when he stated:

“The approach to running … private companies is fundamentally different to that of running public companies. Short-term taxable profits with good dividends are a prerequisite of public life. Avoiding short-term taxable profits and seeking long-term capital growth is the best approach to growing private companies.”

2. Stakeholder versus shareholder: Kanarek tells us that activists are all about driving shareholder value:

“[In a] few situations, they have gotten management in boardrooms, at least across America, on edge, talking about them, worrying about them. And by the way, I’m not so sure that’s a bad thing, because it means they’re asking themselves hard questions about whether they’re doing the kinds of things that drive shareholder value, which is what activists are all about anyhow.”

Or, to state Kanarek’s position another way, “Activists are all about driving shareholder value. That is, they are in it for themselves. They are not interested in driving value for customers, employees or the community.”

Executives should be cautious about favouring one set of stakeholders over another, and should certainly be skeptical about the argument that companies exist solely to drive shareholder value. For activists, this is a convenient story. However, in the long term it doesn’t ring true.

If executives are serious about the long term interests of shareholders then they need to focus on serving their customers. A company that loses the desire to serve its customers will soon be denied the privilege of doing so. Such a company is like a ship without a sail, it loses the ability to propel itself and will soon need to be fixed (restructured), salvaged (acquired) or scuttled (liquidated).

Activists are not necessarily illegitimate, nor should their activity be banned. But, we believe that Kanarek’s argument provides only one side of the story, the activist’s side.

Executives need to take a balanced and long term view, especially when dealing with people who, by their very nature, have short term interests at heart.

6 Rules to Simplify Work & Increase Productivity

The real battle is not against competitors, but against ourselves. Morieux and Tollman make the case for a new approach to management that they call “smart simplicity”

BCG partners Yves Morieux and Peter Tollman have written a new book called Six Simple Rules: How to Manage Complexity Without Getting Complicated, in which they make the case for a new approach to management called “smart simplicity”.

The approach is based on the authors’ discovery that management teams, in trying to cope with complexity, often add to the problem by introducing rules, procedures, departments, meetings, policies, [insert more red tape here] without ever stopping to find out what their people do and why.

The book provides six principles that the author’s believe can make organisations more agile, competitive, and responsive by helping employees become more autonomous, cooperative and empowered.

Here is a super summary of the six principles (some are more illuminating than others):

  1. Understand what other people do. The authors argue that large organisations suffer from a cooperation problem. When people in one department do not understand what people in other departments are doing, they can inadvertently impose costs on their colleagues and, as a result, on the organisation as a whole. Morieux gives an example of a car manufacturer that threatened to move its production engineers to the after-sales warranty department after a car went into production. By forcing the engineers to understand the problems faced the warranty department, car designs became more reliable and cheaper to fix.
  2. Reinforce existing managers. The authors suggest giving existing managers the power and incentive to make people cooperate by removing unnecessary organisational layers and placing them closer to the centre of the action.
  3. Empower employees to use their judgement and intelligence.
  4. Extend the shadow of the future. That is, create mechanisms whereby employees are exposed to the consequences of their actions. The car manufacturer tried to do this by moving its production engineers to the warranty department. Another familiar example is in publicly listed companies where executives are granted long dated options in an attempt to align their incentives with the long term best interests of shareholders.
  5. Increase cooperation by removing some support systems that make people self sufficient. This is a curious suggestion since, at first glance, it appears to contradict the prevailing idea that companies should always drive to increase efficiency. The authors argue that by making each employee too self sufficient this can reduce their need to cooperate and result in a more dysfunctional organisation. The take away lesson seems to be that companies should strike a balance between the pursuit of efficiency and encouraging cooperation and interdependence. For example, in a consulting firm, it makes sense to provide every consultant with their own computer, but it might be counter-productive to provide everyone with their own printer and coffee machine since a lot of serendipitous conversations and informal learning opportunities happen when people are forced to share resources.
  6. Reward those who cooperate and punish those who don’t. Don’t blame people who fail, but people who fail to help or ask for help.

Monopoly Money

If you were playing Monopoly, Quantitative Easing would be the equivalent of helping yourself to a $100 note every time you rolled the dice and never having to pay it back

Monopoly

(Source: Flickr)

CENTRAL banks continue to finance government spending by easing monetary policy in order to help economies get back to “potential output”. (It remains unclear whether Grand High Priest Bernanke slaughters a lamb before proclaiming what the level of “potential output” should be for the US economy. It would be interesting to know.)

Quantitative easing (referred to as “QE”) is an unorthodox monetary policy tool that involves creating new money to buy assets, usually in the form of government bonds. The policy was introduced during the financial crisis to enable central banks to continue stimulating the economy even as interest rates approached zero (see, liquidity trap). During the crisis the policy was viewed by many people as helpful in providing liquidity to the banking system and in preventing long term interest rates from rising.

In America, the Federal Reserve pursues QE by buying US government bonds in the secondary market, which basically gives the government a blank cheque to sell as many bonds as they want to private investors in the primary market (who then turn around and on-sell these bonds to the Fed in the secondary market).

QE makes things easier for a cash strapped government in times of crisis by providing a willing buyer for their bonds.

But by allowing governments to continue running deficits, QE removes the need for fiscal discipline.

Where will it end?

The Fed already owns around $2.3 trillion of Treasury bonds, and the Bank of England owns around £375 billion of gilts. Any attempt to sell these bond could result in an unwanted rise in interest rates. And, The Economist reports that Mark Carney, Governor of the Bank of England, recently signaled that the Bank is not expecting to sell all of its holdings.

What does this mean exactly?

In effect, central banks are providing their governments with interest free loans financed by printed money. If you were playing Monopoly, this would be the equivalent of helping yourself to a $100 note every time you rolled the dice and never having to pay it back.

Or, to speak more plainly, our governments are cheating us.

Obituary: Booz & Company

RIP Booz & Company

PwC completed its acquisition of Booz & Co today.

Regulators approved the deal, as we expected.

They appear to have conveniently overlooked or ignored the large conflict of interest issues posed by a merger of this size between an accounting firm and a consultancy. We outlined these risks in an earlier article.

Booz & Co (a well known and respected brand in the consulting world) has also changed its name to “Strategy&”.

We understand that the name was changed for legal reasons, but if PwC is trying to create a new and powerful brand then “Strategy&” is a horrible choice. The name is not distinctive, remarkable or in any way interesting. It is merely descriptive & self limiting.

PwC reported that “This new name, which will be used alongside the PwC name and brand, reflects the strength in strategy consulting that Booz & Company brings to the PwC Network and the benefits this deal will bring to all clients and stakeholders.”

From the way that PwC describes the transition (and judging by the choice of name itself) it is clear which firm wears the pants in the PwC/Booz marriage.

PwC’s announcement also lacks any semblance of celebration. It feels to us more like reading an obituary. “Booz & Co is dead, and the employees who formerly worked there now serve the PwC juggernaut [insert evil laughter here]”.

As we highlighted in our earlier article, cultural integration is a difficult and delicate process.

We predicted that PwC would be tempted to do too much too soon, and these predictions appear to be coming true.