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2011

In their enthusiasm to cut costs during the great recession, American corporations cut spending across the board. These cuts included major reductions in capital spending, of which information technology is a substantial part. The result: Companies are now feeling constrained by the ability of their (obsolete) technology to enable new strategic business functions.

image For example, consider this study published by McKinsey Quarterly that shows the impact of not adopting an integrated life-cycle-based pricing strategy. As a product moves through its life-cycle of introduction, ramp-up, maturity, and decline, the costs associated with the product change. So does the profitability. However, this is not easily visible to the company unless they adopt an integrated life-cycle pricing strategy. In addition to the product life-cycle, the factors affecting the prices depend on product demand, movement, inventory, promotions, mark-downs, and competitor pricing. For any retailer to capture all these contextual information and consider them in pricing their merchandise, the integration technology and a streamlined integrated process that spawns across organizational boundaries are an absolute must.

An integrated pricing strategy becomes ever more important with proliferating channels and the mobile revolution that allows consumers to compare prices anywhere, anytime.  

This predicament of needing to enable an integrated pricing strategy and unable to do so, is precisely what is being captured in a recent RSR survey. In the survey from RSR, 76% retailers reported having to “operate within an extremely price competitive environment” which necessitates an integrated pricing strategy, but almost half the retailers felt that their technology infrastructure constrains their ability to adopt optimized pricing strategies. When asked what would be the most valuable way to overcome the barriers, a whole of 56% selected “improved integration technology tools” closely followed by their desire to have their business leaders help them change their process and process analysis for improvements. You can read the complete RSR article by clicking here.

But most companies have themselves to blame – in the heat of the great recession, sometimes to survive and at others to meet expected Wall Street numbers, companies aggressively cut costs including capital investments.  The result is that most companies have fallen behind on their technology investments and are either saddled with higher maintenance costs to support older technologies or are unable to support business innovations, such as the integrated pricing situation described above. 

Research from Georgia Tech College of Management shows this declining trend in capital investment driving the companies where they are unable to leverage their technology assets to support changing business requirements.

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To understand the relationship between the business goals and how technology enabled business capabilities can help you achieve them, review my book on business strategy

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© Vivek Sehgal, 2011, All Rights Reserved.

Want to know more about supply chain processes and supply chain strategy? Check out my books on Supply Chain Management at Amazon .



Originally posted by Vivek Sehgal at http://feedproxy.google.com/~r/SupplyChainMusingsstrategyVisionOperationalExcellence/~3/c8Isu8f-UpI/technology-enabler-or-inhibitor.html

“We do not believe there is a conflict between sustainability and profitable growth”, says Paul Polman, Chief Executive Officer of Unilever. The words may be different, but similar sentiments are now reflected in more than one companies business plans. Sustainability seems to have found its (business) footing. And more and more companies seem to develop an understanding of what it means for their survival and growth. It is not constrained to saving energy in the stores or fuel in distribution, it now touches all aspects of the business: A wholesome rethinking of the corporate business.

I will take three examples here to augment and understand how corporations are responding to the social, political, and customers pressures for being better guardians of the environment and natural resources. This is definitely going to be one of the biggest forces that will shape the business and operational models of these pioneers during the next decade. 

image image First, let us talk about Wal-Mart. A few years back, Wal-Mart simply stated three goals for its sustainability aspirations, (1) Be supplied 100 percent by renewable energy, (2) Create zero waste, and (3) Sell products that sustain people and the environment. Since then Wal-Mart has set-up targets and published their progress. In their fourth such report, 2011 Global Responsibility Report, the focus has expanded to include a lot more than optimized logistics. In the words of Mike Duke, president and CEO, Wal-Mart, “We have worked especially ******* the social aspects of sustainability. We know we can play such a positive role in communities around the world. And if we are going to be at our best as a business, we have to recruit, develop and retain the best people and leaders.” Some of their reported accomplishments:

  • Globally, an absolute 10.61 percent reduction in the greenhouse gas (GHG) emissions from its 2005 base of stores, by the end of 2009 (most recent year for which we have data).
  • 119 factories in China have demonstrated greater than 20 percent improved in efficiency compared to 2007 baseline.
  • Plastic bag waste was reduced by 47.95 million pounds, or approximately 3.5 billion bags, globally.
  • Wal-Mart de México reduced water use by 17 percent compared to 2008 baseline.

The second example I will pick is Unilever. Unilever has actually come up with the most extensive business plan marrying the sustainability. They have an extensive agenda and have defined specific goals to reach by 2020. Unilever seems to want to transform its whole business around the concept of sustainability. Their image “UNILEVER SUSTAINABLE LIVING PLAN” merges their sustainable goals with their business goal of doubling their revenues by 2020. Of course, this is fully aligned with Paul’s sentiment above at the beginning of this article.

The third example comes from P&G: Another global corporation that has merged its business goals with the sustainability goals. P&G has made a public commitment to the long term vision for sustainable growth:

  • Powering our plants with 100% renewable energy.
  • Using 100% renewable or recycled materials for all products and packaging.
  • Having zero consumer and manufacturing waste go to landfills.

Time will tell whether the trends hold and continue to grow, but the fact is encouraging that more and more corporations are seeing sustainability as integrated part of their business goals rather than an overhead or a marketing ploy…

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© Vivek Sehgal, 2011, All Rights Reserved.

Want to know more about supply chain processes and supply chain strategy? Check out my books on Supply Chain Management at Amazon .



Originally posted by Vivek Sehgal at http://feedproxy.google.com/~r/SupplyChainMusingsstrategyVisionOperationalExcellence/~3/69pHkS0l_iY/sustainability-gets-wholesome.html
vsehgal

Is Bigger Better?

Posted by vsehgal May 3, 2011

Bigger may not necessarily be better: Not when it comes to companies’ ability to grow and make money. So says the CFO magazine ( Too Big to Succeed , Gregory V. Milano, CFO magazine, April 29, 2011). But what is a big corporation to do, when the conventional growth strategies fail? Innovate!  

The conclusion is based on the research on the 1,000 largest public nonfinancial U.S. companies for the full decade of the 2000s. The companies were categorized based on their size and assessed for several performance metrics. The summary of results is reproduced here from the original CFO article. The highlights:

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  • Total Shareholder Returns showed the greatest variance with 9.7% for the smallest companies (less than 2 billion in size defined using EBIDTA) and 2.7% for the largest companies with size more than 10 billion dollars. TSR (Total Shareholder Returns) is defined as the change in a company’s stock price for a given period, plus its free cash flow over the same period, as a percentage of the beginning stock price. (For a more detailed view of the metric and  examples, see this article from strategy+business).
  • Conversely, then, the biggest companies seem to have not much opportunities or inclination in terms of reinvestments back into the business – since the Distribution Rate for the largest companies is 30.5% as against only 18.3% for the smallest group. Distribution rate is a measure of the dividends paid to the shareholders.
  • image The author also points out that the bigger companies have trouble growing as fast as the smaller companies, reflected in their revenue growth numbers (7% versus 11.3%). 

While higher dividends to shareholders appear appealing, is that the best use of money to provide shareholder returns? Gregory’s research suggests otherwise, he says: “While those distributions are often labeled "shareholder friendly," our research shows that reinvestment yields strong share-price performance benefits”. See his other article on CFO magazine, “ Are You Reinvesting Enough?” for details of his research on the impact of reinvestments on TSR.

Again, the summary of the results is reproduced here for a quick review: Companies that reinvested between 0-50% of their cash-flow generated a median TSR of only 18% compared to a TSR of 193% for companies that reinvested above 150% of their cash-flow.  This, of course, directly aligns with the other finding that the growth rate of bigger companies is smaller than the smaller corporations.

Why are the bigger companies not inclined to reinvest and grow faster? Part of this can be explained by reviewing how conventional growth  happens at companies. In their book, “ The Granularity of Growth”, the authors, Sumit Dora, Sven Smit, and Patrick Viguerie contend that the growth results from one of the three, “portfolio momentum, or the market growth of the segments in a company’s portfolio; M&A; and market share gains”. All of these opportunities get limited in mature industry segments where larger companies are most likely to operate – reflecting the trends confirmed above by the research by Gregory’s company. 

So what is a large company in a mature industry to do? Innovate. P&G remains one of the best examples for such innovation driven growth. Between 2002 and 2008, P&G’s revenues almost doubled in spite of it being in one of the most mature industry segments. While some part of the expansion was acquisitions (Gillette, for example), a lot of growth came from products that were simply part of the P&G’s push to innovate when Lafley arrived in 2000. In his book, The Game Changer, co-written with Ram Charan, Lafley describes the case of their fragrance business. P&G acquired the Max Factor and Ellen Betrix cosmetic and fragrance lines from Revlon Inc. in early 90s. At the time, the fine fragrance industry was characterized by slow growth of 2 to 3 percent a year, low margins, and weak cash flow. But P&G wanted to change the game. P&G focused on the innovation that was meaningful to their consumers, including fresh new scents, distinctive packaging, provocative marketing, and delightful in-store experiences and leveraged their global scale and supply chain to reduce complexity and cost. As a result in 2007, P&G became the largest fine fragrance company in the world, with more than $2.5 billion in sales — a 25-fold increase in 15 years.

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© Vivek Sehgal, 2011, All Rights Reserved.

Want to know more about supply chain processes and supply chain strategy? Check out my books on Supply Chain Management at Amazon .



Originally posted by Vivek Sehgal at http://feedproxy.google.com/~r/SupplyChainMusingsstrategyVisionOperationalExcellence/~3/8OxKP7Bsbok/is-bigger-better.html