From Strategy to Marketing 24 May, 2011

At a high level, marketing can be broken down into four steps:
  • Understand needs
  • Plan for meeting those needs
  • Communicate & execute the plan
  • Build relationships
The first and last items in the above list are largely marketing oriented. The middle two are strategy oriented. Strategy and marketing are often taught separately, but are very intertwined.

Marketing is all about capturing value from targeted customers by creating profitable relationships with them and building value for them. This requires a great deal of strategy.

During the screening and concept phases of product development, a need is targeted. This need is compared to current solutions using both marketing concepts and value propositions.

Targeting and Segmentation
Markets can be segmented in many ways. Segment variability and available resources determine a which segments are targeted (chosen as the buyers or consumers). The most common segments are based on:
  • Geographic
  • Demographic
  • Age
  • Lifestyle
  • Gender
  • Income
  • Psycographic
  • Behavioral
  • Occasion
  • Benefit

Effective segmentation means that a segment and resulting reactions must be:
  • Measurable
  • Accessible
  • Substantial
  • Differentiable
  • Actionable

One way to identify holes in the market, or segments that are not being served is to use positioning maps. An example is shown below:



Marketing Concepts
Concepts in marketing (your overall strategy for selling) include:
  • Availability and affordability
  • High quality and high performance
  • If large scale marketing and selling efforts take place
  • Knowing the needs and wants of the consumer
  • Long term interests of consumers in business and society

Value Propositions
A value proposition (all the value that you are offering) points you in the direction of your positioning strategy. A positioning strategy is generally one of the following:
  • More for more
  • More for the same
  • More for less
  • The same for less
  • Less for much less

To communicate this to the customer, you create a positioning statement. This statement takes the form of:
"To our is that "

The marketing mix supports the positioning strategy and statement.

Corporate Governance 07 April, 2011

While management is about directing activities, governance is about setting the conditions within which activities can be directed. Formally defined, corporate governance is about management and the board of directors enforcing policy that:
  • Balances the interests of shareholders
  • Forces responsibility, accountability, and transparency
  • Challenges management to achieve high performance
Agency Theory
Agency theory is one way of looking at the problem of controlling the performance and ethics that a business’s influence carries. In agency theory, there are two actors. One actor is a principal, which is thought of as a stakeholder (someone who is affected by an entity). The other actor is an agent, or someone managing the entity. It is often the case that the principal and the agent do not have the same goals. For example, although the principal may have a monetary stake in the entity and the agent is an employee of the entity, the principal and agent may not share the same work ethic for company success or the same notion of what appropriate risk is.

Given these differences in how the principal and agent think about an entity, it may be difficult for a principal to monitor the actions of the agent. When active monitoring does not take place, it is easy for the gap between a principal’s and an agent’s desires to grow wider and conflict. Corporate governance can help close this gap.

Who is Involved?
Although everyone should act responsibly, the board of directors has the explicit responsibility for overseeing corporate governance. The board is usually broken up into several committees who each have one or two main objectives. The responsibilities of the board of directors and its committees include:
  • Nominating other board members
  • Auditing and determining who performs the audits
  • Setting the tone for ethical behavior and high performance
  • Approving budgets
  • Ensuring availability of financial resources
  • Setting salaries and compensation for executives
  • Watches out for a “if it is legal, it is okay” attitude
  • Questions executive decisions
  • Allows the outside to see success
  • Looks out for shareholder equity
  • Balances stakeholder interests
Stakeholder Analysis
Being aware of all stakeholders that are affected by the company and balancing their needs can cover much of what corporate responsibility is meant to do. The following list outlines basic stakeholder analysis steps:
  • Identify all stakeholders and their relationship to the company
  • All stakeholder needs must be identified (time, quality, cost)
  • An organization must understand how well stakeholder needs are being met
  • Gaps in providing for needs must then be weighed and necessary changes made
Independence
The executives of a company are responsible for following guidelines and rules, but it is the board of directors that should have the last say in questionable matters. Given all the decision making and analytical power that the board possesses, an important caveat in structuring a board of directors is the degree to which they are independent. Independence in a board of directors will determine how easy it is for a company to become unethical or underperform.

The degree to which a board of directors is independent directly affects how equitable it is with shareholders as well as how it balances stakeholder needs. When a board is independent, it can act without bias. When a board is not independent, conflicts of interest arise. To help ensure the independence of board members, they must:
  • Not have any conflicts of interest
  • Not be afraid to speak out
  • Be trained to ask the right questions
Making sure that an annual meeting calendar with topics exists, and making a distinction about what decisions the board should make can help the board operate effectively.

Companies must pay the price to help ensure that conflicts of interest do not exist, that boards are independent, decisions are transparent, and that auditing is done correctly. If they do not, more regulations will be put in place and fewer overall benefits will be garnered by stakeholders.

Deciding in Light of Uncertainty and Risk 05 April, 2011

Decision making can be difficult because there are often many options to chose from, and varying levels of risk are built in to these options. Many times, when people talk of managing risk, they simply mean transferring the risk elsewhere. Decision and risk are necessary issues that must be dealt with, simply because business is a competitive environment. Conservatism can work for a period of time, but it opens the door for others to leapfrog a business that is unwilling to take some risks or make decisions involving uncertainty.

Risk and uncertainty often are the result of incomplete information, ambiguous information, or time constraints. Sometimes, they are a result of people interpreting the same information differently. A representative sample may be necessary from which to base a decision.

Another reason that this subject warrants attention is because common solutions for dealing with risk and uncertainty have become flawed. History is not an indicator of black swan events. Although using historical data to analyze current situations can be useful, it should probably be used as a last resort in many scenarios. The following set of generic and specific frameworks will help identify what a correct decision should be, regardless of the uncertainty level.

Decision Making Steps
  • Recognize the need for a decision
  • Generate alternatives
  • Assess alternatives
  • Choose among alternatives
  • Implement the chosen alternative
  • Learn from feedback

You may be able to narrow alternatives by removing those that are not:
  • Legal
  • Ethical
  • Economical
  • Practical

Risk Matrix

A risk matrix simply interpolates and visualizes what risk may be associated with familiarity of products/technology, as well as what risk may be associated
with familiarity of markets.


Reality Check
Simply asking the following questions can provide a person with a reality/sanity check and as an initial feasibility test. An entire Harvard Business Review article was written on this:
  • Is it real?
  • Can we win?
  • Is it worth doing?

Cynefin Framework
A decision is categorized into one of four levels of order/organization, and then dealt with accordingly:
  • Simple - Clear cause and effects -> Use best practices
  • Complicated - Multiple right answers exist -> Use expertise
  • Complex - No visibly right answer -> Look for patterns
  • Chaos - No right answer, no pattern -> Establish order

Uncertainty Framework
Three academics (Courtney, Kirkland, and Viguerie) established a model for identifying levels of uncertainty and dealing with them.
  • Level 1 - Basic uncertainty -> Learn the required information
  • Level 2 - A few possible outcomes exist -> Use a decision tree
  • Level 3 - No discrete number of outcomes -> Use scenario planning
  • Level 4 - Even variables are discrete or unknown -> Use analogies to simplify

Decision Styles
Subordinates are all on a spectrum of needed supervision. When others cannot or will not decide, you decide for them. Otherwise, responsive, intellectual, and participative decision styles should be used.

Decision Trees
If a few requirements are met in a given scenario, it is possible and useful to use decision trees to narrow down and grasp options. The following steps outline how to create and use a decision tree:

Prerequisite - You must know all the alternatives, be able to assign probabilities to them, and have clear objectives.
  1. State your decision
  2. Draw branches for any intermediate results that could occur
  3. Draw branches any decisions that should be made at that stage
  4. Repeat steps 1 & 2 until no more intermediate results or decision points exist
  5. End each final branch with a outcome result ($ for example)
  6. Multiply probabilities and outcome values where it makes sense
  7. Based on all probabilities and final objectives, choose the best outcome

Example Decision Tree

Avoiding Decision Making Pitfalls
  • Don't form an immovable hypothesis from the piece first information you get
  • Don't justify decisions simply from historical data
  • Don't use the status quo as a benchmark for success
  • Get an outside point of view
  • Phrase the problem differently to see other sides
  • Be mindful of over emphasis by individual sources
  • Watch out for assumption padding on multiple levels
One of the most important things that can be done to improve decision making abilities is to receive quick and clear feedback after a decision has been made and results are available.

Leadership vs Management

Leadership vs Management

The words management and leadership both describe ways of dealing with people, but they underscore two very different ideals. At a high level, management deals with complexity by breaking up work. Leadership deals with change by applying a vision to everyone’s work.

A higher level of leadership would normally be found in the executive ranks of organizations. A higher level of management is usually found in the middle ranks of an organization. Finding the best mix of management and leadership for a person is extremely important. One reason for this is that the amount of supervision needed theoretically changes as you look higher towards C-suite positions. When less supervision is needed, there exists in subordinates attributes needed to make decisions. They need to be led more than they need to be managed.

Peter Drucker said “There is nothing more wasteful than becoming highly efficient at doing the wrong thing”. I would add that “There is nothing more frustrating than knowing you are on the right path, but getting nowhere”. Management is doing a thing right. Leadership is doing the right thing.

Although managing complexity can be hard, changing can be harder. John Kotter outlines an eight step change process that can help:
  • Create urgency
  • Form a group of advocates
  • Get the vision right
  • Communicate to get buy in
  • Empower action
  • Create short term wins
  • Don’t give up
  • Make change stick

Here is a comparison of leadership and management goals:


Can anyone be a leader?

Kouzes and Posner say that a leader must be able to:
  • Find your voice (your words must be consistent with your actions)
  • Affirm your values (what you care about – determined by how you spend your time)
  • Express yourself in your own way (others follow authenticity)
  • Challenge the process (experiment and grow)
  • Enable others to act
  • Encourage optimism

Formally, there are several academic frameworks for understanding leadership

Trait approach
This approach goes in and out of style every few years. It says that there are specific traits that define whether or not a person is a leader. Research shows that most of these traits can be learned. These traits drive decision making and generally include:
  • Drive
  • Extraversion
  • Integrity
  • Self-confidence
  • Knowledge of the business
  • The ability to read others

Behavioral approach
This approach is simply to focus on both project goals as well as team relationships. Finding the right balance of these two items determines the effectiveness of the leader. This approach can be seen in many aspects of the situational approach.

Situational approach
This approach to leadership says that universal leadership traits and behaviors don’t exist and you must look at the situation before deciding what to do.

Three popular situational models include the Vroom model, Fiedler analysis, and the Hersey/Blanchard theory.

1 - The Vroom model looks at situational attributes such as decision significance and where subjet matter experts are, assigning each one a status of high or low. A funnel method is then used to narrow down how the decision should be made (on a spectrum of autocratic to democratic). If more than one option seems to fit, use the one that will take the least amount of time.

2 - Fiedler analysis asks three questions and uses a funnel model similar to that of Vroom’s to determine if a leader’s decision should favor project goals or personal relationship maintenance. The three questions include the following:
Is the leader to other relationship good?
Is the task understood?
Does the leader have power?

3 - The Hersey/Blanchard theory looks at the maturity of individuals involved and decides whether to focus on project goals or personal relationship maintenance. It simply states that if a person or group has a low or high maturity, a focus should be placed on project goals. If, however, the person or group is of moderate maturity, a decision should focus on personal relationship maintenance.

With knowledge workers, helping everyone to exemplify a shared leadership is critical. It is often difficult to do everything by oneself. After all is said and done, I think one of the easiest ways to act is based on a statement I once heard “Help others fall into the pit of success”. Although oversimplified, this very well may sum up the way managers and leaders should act.

What most people call the 'org chart' 30 March, 2011

Organizational design describes how an organization is configured. It helps assign tasks and roles to people. It also allows people to integrate ideas and communicate. A few main components of organizational design are:
  • Reporting relationships
  • Reward systems
  • Rules and procedures
  • Communication methods
  • Job specialization
  • Decision making methods
  • Learning
  • Distribution of authority
One way to organize and setup these components is to follow the “Structure should follow strategy” mantra. Look at what the strategy is, and design the previous components accordingly. When many people think of organizational design, they think of the structure component (the “org chart”). This may be due to the difficulty in thinking through many of the organizational design components. Instead of customizing the level of each component to a strategy, many people use a canned or popular default organizational structure. Default structures help determine how organizational components are designed.

Before describing popular organizational structures, it should be noted that all organizational structures can fall within a spectrum. One end of this spectrum is labeled ‘Mechanistic’, and the other end is labeled ‘Organic’. Mechanistic organizations are considered to be closed to their environment because they cannot adapt or deal with complexity. Organic organizations on the other hand, are considered to be open to their environments because they can adapt and deal with complexity.

Typically, mechanistic structures have the following characteristics:
  • Many levels of management
  • Centralized decision making
  • Many processes and procedures
Mechanistic structures are the most common because the first enterprises were patterned after the Army which had a very strict chain of command.

Organic structures usually have these characteristics:
  • Few levels of management
  • Decentralized decision making
  • Few formal processes and procedures
Here is where each of the following default structures lie on the mechanistic-organic spectrum.

Simple:
This is generally used by small businesses or startups. Although they can be quick to respond, adaptations come in small iterations. They cannot handle complexity and usually bottleneck when coordinating with ‘the boss’.

Functional (Unitary-Form):

This form organizes people based on their skills. It can deal with more complexity than simple organizations because of the specialization groups that employees are in. Each department however, has a hard time seeing the big picture which involves the other departments and their concerns. Processes are usually required to facilitate or force coordination between departments. This is generally the most common. This structure promotes centralization.

Conglomerate (Holding-Form):
A conglomerate is a set of unrelated businesses and based on departmentalization. Each of these businesses could be further categorized.

Divisional (Multidivisional-Form):

Instead of creating departments based on skill, departments are created based on geographical regions, customer groups, or product groups. Customer needs can be better met with this type of structure. Divisional structures are scalable and do not force employees to specialize. Administrative costs rise because each department could be a miniature functional company. Divisional structures can adapt and deal with complexity better than functional structures because a divide and conquer approach is present. These organizations start sharing resources.

Matrix:

A matrix structure tries to get the best of both worlds by superimposing a functional structure on top of a divisional structure. High levels of communication and coordination are present, but this comes at a higher cost. Less time is spent supervising, but decisions may take longer because consensus from a diverse group will be harder to achieve.There are also usually two bosses which can cause confusion. This structure takes full advantage of its human resources.

Project/Team:

Like matrix structures, team organizations are hybrid structures, but with only one boss per person. They adapt well, and can handle complexity well. They are very costly to operate. There is often forced collaboration because teams are made up of multiple skill sets. People can easily move from project to project when they are needed, and this transient behavior helps transfer information throughout the company.

Network:

The network organization is one which is almost exclusively made up of partnerships and outsourcing. These partnerships and outsourcing contracts can easily be renewed, replaced, or removed. Sometimes called a virtual corporation, it can be accommodating but can also be a communications nightmare. Many online companies take this form.

The following factors can help determine how mechanistic or organic an organization should be:
  • Stability of the industry
  • The pace of industry innovation
  • Number of products
  • Number of competitors
  • Number of external partners
  • Number of employees
  • Number of clients
  • Internationalization
  • Company culture

If a company wants to change its structure to fit its strategy, the company culture will probably determine whether the effort will succeed or fail. Often the level to which an organization can be organic will be determined by the self-motivation of its people and their ability to understand each other.

Getting What You Want: Negotiating 27 January, 2011

Getting what you want is an important skill. However, it is shadowed by the skill of conceding only what you must while keeping relationships in tact. Winning really means satisfying interest. Much of what follows is based on the work of Roger Fisher and William Ury, although I have tuned much of it to be what I feel is relevant. Lets begin by defining negotiation.

Negotiation:
  • Dealing with differences and needs
  • Getting more
  • Satisfying a need you cannot get on your own
  • Building relationships that benefit all parties (debatable by some)

There are two main schools of thought when it comes to negotiating. The first, and most common, is bargaining. Academically, it is referred to as positional negotiating. In this kind of negotiation, parties believe that there is a fixed amount of value that can be claimed. Each party tries to get as much value as possible. The second kind of negotiation is sometimes referred to as integrative. In this second kind of negotiation, parties believe that it is possible to create new value in addition to what is up for negotiation and then have parties claim the parts that are important to them.

A classic example of the difference in these two negotiation styles is two children that both want an orange. In distributive negotiation it would be fair to cut the orange in half. Integrative negotiation however, would look to the interests of the two children to discover that one child wanted to make orange juice from the fruit, and the other child wanted to use the rind to make a cake. Here on child would get the entire peel and the other child would get the entire fruit, with both children being better off than the standard bargaining and fairness models.

There are hybrid models of course, where one party bargains and the other tries to create value. Most research suggests that when one party sticks to value creating negotiation, the other party can be convinced to do the same. Some authors like Jim Camp, argue that trying to attain a win-win situation brings in too much emotion and allows you to be taken advantage of. If the parties remove irrational emotion from the equation and really focus on what is going on.

Differences in belief, or even different interpretations of a fact make deals possible (eg: buying and selling stocks). To understand these differences pre-negotiation preparation and during-negotiation preparation is a key. Lack of preparation is the biggest problem in negotiating. Having said this, keep in mind that the amount of prep required should be proportional to what is at stake.

Planning Steps
  • Know the other group's culture and beliefs
  • Determine interests and good outcomes for each party
  • Identify differences and opportunities for trade
  • Identify each party's best alternative to the negotiation
  • improve your best alternative before and during the negotiation
  • Negotiate with those who can make the decision
  • Be patient
  • Acquire external standards for top and alternate possibilities

The Negotiation
  • Distinguish personalities from the problem
  • Focus on interests
  • Explain your interests as they explain theirs
  • Generate more options
  • Listen carefully, expressing empathy when needed
  • If your best alternative is weak, don't divulge it

Tactics
  • Recognize malicious tactics and call them out
  • Present interests first, then the proposal
  • Praise for something still under way makes a person want to keep doing it
  • If you think the other party can improve their alternatives, put an expiration on the offer

If Things are not Progressing
Ask "How might the other side be criticized if they made the negotiation?".

If Your Ability to Trust is Questioned
Try something like "I don't think it is a question of trust, I think it is a question of making sure we are on the same page".
Also, "It is not about trust, it's about everyone feeling like there is a fair deal".

Making it Easy to Say Yes Without Sounding Like a Threat
Attribute the statement to standards or established facts. Be careful of the phrasing and bring up the importance of the relationship between the two parties.

You Need More Information
Silence can be powerful and act as a smooth rejection of what was just said. It can also make the other party feel like they need to back up what was just said with more information. Talking specifically to people who have less authority to make decisions and are not as worried about keeping quiet on certain topics can bring you more information.

The Negotiation's Initial Direction is a Problem
Statistically, the first offer correlates with the final agreement. Putting the first offer on the table can help drive the whole discussion but you must be able to back it up. If another party makes a proposal first, bring in standards that are in your favor, bring up interests, and then put your offer on the table.

Things to Keep in Mind
Along with general negotiating practices and tactics, there are several ideas whose diversity keeps them from being categorized. Even though they may be smaller, individual ideas, they should not be underestimated. For exanple: Don't attack or defend. The more you can remove irrational emotion from the negotiation, the better chance you will have of being able to concentrate on satisfying both parties.

Make yourself open to correction. Remember that those with whom you are negotiating are people and have the same basic human needs that you do. People do not like to be threatened, told they are wrong, or insulted. Also, don't assume that your worst nightmare is the other party's top priority. Thinking in this way only allows value to be claimed, not created.

When comparing two options or one option to a standard, it is important to have some value associated with the differences. The benefit of having a defined point at which you will walk away is debatable. Some critics argue that it impedes new option generation, while the other side claims that you leave yourself open to an end result that is less desirable than if you had not negotiated. If you do subscribe to having a reservation price, it can be determined by looking at your best alternative and then adding the value of any extras.

There is a difference in knowing what consessions to make and when to make them. When getting ready to make a consession, make sure it is really worth it. if you are unsure about the concession and it is a big deal, you can always take a break to think. If the other side is making a concession, keep in mind that bigger concessions show that a party is more flexible while smaller concessions show that a party is less flexible.

Overcoming Cultural Differences
Geert Hofstede created five scales that help determine the attributes of a person. Although thoroughly understanding everything about someone's personality is probably not your objective, some important observations can be made (eg: is the person more fact oriented or relationship oriented).

The following is a list of the five scales and a brief description of each:
  • Power distance: Are all people equal in authority?
  • Individualism: The preference of individuals or groups
  • Uncertainty avoidance: The resistance to change
  • Masculinity: Assertiveness or dependence
  • Long term orientation: Long vs short term

Even though you can't give the other side a personality test to fill out, you can identify some of these elements based on geographical averages and organizational culture. By looking at jargon, dress code, rituals, ceremony, layout, and values (Hofstede helps here) you can tell what is important to that person. From this you can get a better picture about what they are willing to do and trade.

Negotiating is a useful art that takes practice to master. Understanding these elements will help guide that mastery as you run into opportunities to practice.

Time & Money: Best Friends or Worst Enemies 06 January, 2011

If the most powerful force in the world is compound interest as Albert Einstein once said, it should probably be a factor in investment decisions. Understanding the way in which time and rates of return affect money and projects will significantly help when determining whether or not to pursue a project or which project to choose.

Because this area of valuation is critical, it has been refined quite a bit. We need to start with some definitions in order to keep straight how everything interacts and how this valuation happens.
  • Annuity - A set of fixed payments that happen over a period of time (loan, lease, etc.)
  • Present Value (PV) - The present value of future cash
  • Future Value (FV) - The future value of present cash
  • Discount rate - a rate used to find the present value of future cash
  • Net Present Value (NPV) - the difference between what something costs, and what it provides when discounted to PV
  • Discounted Cash Flow (DCF) Analysis - calculating cashflows and determining if their NPV > 0

Why do we care about discounting money to present values? Because projects and investments do not instantaneously finish and mature; They do so over different periods of time. Because of this, we must adjust them for the time value of money.

Here are the most important formulas used when dealing with PV, FV, and annuities.

PV / FV Formula
Ordinary annuity formulas
r = the interest rate / 100 (6.5% = .065)
n = the number of periods (months, years, etc.)
c = total payment
Annuity PV/FV = total principal


In practice, people generally use something like Excel rather than the formulas to compute these values. Excel does have these built in and labels the functions pv, fv, and pmt.

The discount rate, used as the rate (r) parameter in the preceding formulas, can be arbitrarily set to some required rate. The most commonly used discount rate is the cost of capital, specifically the Weighted Average Cost of Capital (WACC). The WACC is made up of the weighted cost of debt and equity or in other words, what currently satisfies debtors and shareholders.

These formulas can be used to put money at different times on the same playing field and allows for true comparison. The annuity formulas are also useful for everyday calculations such as mortgage payments.

Tracking Sustainability 03 January, 2011

The end goal of finance and accounting is to keep records, and make sure activities are sustainable for some given period. This happens when costs are examined and budgets are created.

Some methods for cost analysis are the following:
  • Process Costing - Assigning unit costs to items created with a process that does not stop when part of a single unit is completed
  • Variable Costing - Segregating fixed costs and variable costs on a per unit basis
  • Activity Based Costing (ABC) - Another alternative method of tracking costs in order to see how profitable a product or customer is. All activities are assigned a cost. A percentage of each activity used to create a product or service can then be summed for an overall cost.
Budgets are used to regulate work done and money spent. Budgets are also where most assumptions that are made come into play. The two main goals of any budget are planning and control (goals and satisfying goals).

A general master budget can be broken up into many smaller budgets. This helps organize the task and ensure its correctness.


Example Master Budget System


Example Sales Budget

An additional step that is often used when creating a budget is that of flexible budgets. A flexible budget is a budget based on activity ranges. Instead of creating one possible sales figure, or production figure, a few range or checkpoint numbers are chosen and a budget line is created for each of these.