build

If you were given one question you could ask a company to decide whether you should invest in it — or go work for it — what would it be?

Here’s mine.

“Can you give me two or three examples of how you stimulate innovation in your business and how you go about implementing it?”

The truth is many established businesses don’t do innovation. Though they’d tell you they do.

There’s a few good reasons for that.

The first is they are too busy. They have such a lot of work to do to meet all their urgent priorities that they don’t have time to devote to worrying about crackpot new schemes that won’t work. Indeed, they have their people working so hard they are reluctant to suggest anything new in case the task of pursuing it gets added to their workload. Galley slaves busy pulling oars tend not to point out other things they could help out with, like mopping the deck.

The second reason for institutional innovation inertia is many established businesses aren’t really trying to go anywhere new. They are trying to stay where they are which has been a good place to be and has delivered good rewards in the past. So they apply almost all their energy to defending their position, holding their ground, doing what they have always done, maintaining their market share and trying to squeeze a bit more profit out of it along the way. So it isn’t their priority, or they often think, even in their interest, to promote or embrace change. Why change a formula that has served you well and which is still paying the wage bill?

The third reason established businesses don’t innovate is they tend to have calcified their ways of operating. This is the way we do things round here. Anything new that comes in either has to fit into their existing systems or practices or it simply won’t be done because first there are no people to carry it out and second it will immediately grind to a halt if it goes against the grain of their established processes.

These are all good reasons of course: good reasons to be cautious about investing in businesses like this and good reasons to think very hard before joining them. They are also good reasons for other firms to be confident about competing with them.

There are plenty of other types of business after all for whom innovation is lifeblood.

Start-ups are built on ideas and the ones that survive understand they need flexibility and fluidity as they navigate their way to success.

Businesses which haven’t got to the top of the tree in their chosen field of operation also tend to welcome change because the way things are hasn’t yet delivered them the rewards they aspire to. The number two and three businesses in markets are often more innovative than the market leader for this reason. They are open. They want to back change, because they don’t have a satisfactory status quo to preserve.

Other enlightened well-established businesses embrace change because they recognise that standing still is a very dangerous thing to do, especially if customer expectations and needs are changing fast around them. Businesses who are prepared to reinvent their business models, tear them up if necessary, compete with their own traditional lines to ensure they continue to build tomorrow’s success in a muscular way rather than hope today’s results will repeat, they innovate too. That requires courage and intelligence to implement but those businesses are the ones that come through transitions as winners.

And of course there are some businesses that have been born in the new technological age and have had to carve new pathways for themselves from the outset. The now superannuated start-ups like Facebook, Google, Amazon and ebay and the next generation of Twitter and Pinterest et al have become successful through innovation and disruption and they therefore build themselves around innovation structures because they know nothing else and they appreciate that the day they stop innovating is the day they start to die.

It is also true that innovation itself is innovating. Twenty years ago an innovative company was one with a good R&D department and a suggestion box in reception. Ten years ago that had moved on to businesses trying to put some formality around internal idea generation: working parties, idea groups, flip charts, brainstorming sessions, prizes, rooms you could write on the walls.

At an accelerating pace in the last 10 years innovation has reinvented itself far beyond that to aim broader and deeper then ever before. New generation businesses reinvented that game and the best established businesses watched and learned from them. The a-ha moment for many was the realisation that innovation doesn’t have to come from within. Indeed it probably won’t if you are relying on an employee on a commuter train having a genius lightbulb moment one morning.

Truly innovative companies today are the ones that realise that business now has the opportunity and the communication tools to position itself within wide community networks to drive idea and development. The smart ones realise those wide networks are not limited to the people they know already: like their employees, customers and suppliers — but should also include those in circles beyond: contractor pools, customer prospects, independents working in the same field, or others from much further afield who bring different perspectives or learnings from other places.

Accessing their contributions and focusing their attention on issues of development is the first big step on the road to corporate reinvention but the giant leap comes not just from generating ideas but from positioning them structurally for real assessment and implementation in your business.

Only when business harnesses technology to build its processes around innovation will innovation truly transform. Look for just one example at how the pharmaceutical giant Lilly is now expanding its drug discovery network by building collaborative platforms with external drug investigators and integrating them formally into its internal evaluation structures and processes. openinnovation.lilly.com/dd/docs/oidd_executive_summary.pdf

Innovation is scaling and renewing. So if you want to invest in a business either financially or by going to work there, try asking first how they think and what they are doing about innovation.

It’s just about the quickest and easiest way you can tell whether the enterprise you’re considering is truly proactive, or actually just the opposite.

Their answer will show you its future.

Wine Bar Theory is published by Phaidon. http://www.phaidon.com/winebartheory

Image

“If a hole needs digging and it takes three days to do it, you have a choice about how to go about it. You can have one man take three days to do it or three men can do it in one day. The second is faster. The cost is the same.” From Wine Bar Theory Rule 21.

How do you know how much resource to put to work in your business? It’s not an easy question but how you answer it will determine how well your business will grow.

The most basic response is governed by cash. If your business doesn’t have any spare cash that it can invest then maybe you don’t have much choice about the resources you can commit. If you spend more money than you have, you will go under. Simple and not good. But even at that most cash-strapped level it isn’t quite true to say you don’t have any choices. Maybe you do. Perhaps you could divert some money you are currently spending because you’re spending it on things which aren’t really felt or valued much by your customers and aren’t closely related to bringing in revenue. Maybe redeploying some of your resources to things like bringing in more sales, collecting customers’ payments more efficiently or promoting your product online more widely and at low cost might allow you to bring in more cash which you can then invest in your further growth. The spending choices you have made may not always be the right ones. Try revisiting them.

Organisations which are generating lots of free cash of course don’t have the simple excuse that they can’t afford to invest. For them the question is more nuanced. Should they pump in more resource, and if so where?  Businesses which want to grow have three choices about how to go about that, whether they’re focusing on doing something new or on finding new customers for what they already do. Or both.

Here’s their three options.

1) Work harder. They can simply decide that their existing resources (often people) can take on extra work. This is a popular choice for businesses which would describe themselves as ‘profit-centric’. By making their people work harder they believe they can bring in new revenues with little or no extra cost. Trouble is unless that business has previously been seriously under-employing its people they won’t have that much extra capacity. So unless someone smart explains how 100 can suddenly become 125 then they are unlikely to be sustainably successful by loading on additional burden. Bad things tend to happen when people over-work: mistakes occur; things get forgotten; quality drops; people make their own choices about what to focus on; no-one has time to stop, think or check; staff absence means some things go undone; service is adversely affected. There is no doubt that people are elastic and can sometimes just do more but there is a limit to how much you can stretch. Sooner or later the customer notices the impact of an over-strained business and they take their custom elsewhere. 

2) Stop doing some things. Businesses tend to be happier adding to their workload than subtracting from it. They worry about reducing effort on anything so instead they keep on adding things to their busy list and they get progressively busier over time. So the second way they can step up resources to address new opportunity is by finding ways to redeploy part of their existing resource. This requires clever analysis and a detailed investigation of how the business currently operates to see if there are things which are inefficiently carried out, duplicated, done unnecessarily. This might be for example lots of work going into an area or a product which isn’t actually very important to the success of the company because it makes little or no money and has no prospect of doing much better. Or perhaps it’s something the business has always done but hasn’t asked for a long time whether its customers really value it or would notice if it was no longer there. Or maybe it’s repetitive grinding work for people that could be automated by technology. You have to be very careful when you decide to stop doing something you’ve been doing a long time to be sure you aren’t taking out something your customers really like about what you do. But carefully done, redirecting resource toward more important and impactful activity is a great way to grow.

3) Add new resource. This is the popular choice for businesses which would call themselves ‘revenue-centric’ and who believe that to make something fly you should not starve it of resource. They would certainly put three men on the hole digging task. Businesses like this are committed to fuelling their growth, believing greater profits will flow eventually from expanding their activity. They aren’t frightened to invest but the danger they face is if they do this without addressing beforehand the possibilities of the first and second options they will find they add cost incrementally to their business. They will very likely grow their revenues but they may find their costs expanding at the same rate.

 

This is all about the relationship between efficiency and effectiveness. A business with too little resource can be efficient, but ineffective. It won’t grow beyond a certain level because it doesn’t invest properly into its own success. If it was a play it would be a tragedy. A business with too much resource can be effective, but inefficient. It will grow its sales but it will never make the profits it ought to. If it was a play it would be a comedy. (By the way, to extend the dramatic analogy just once more, an inefficient, ineffective business in the theatre would be a farce. They tend to have short runs.)

Finding the right resource levels and keeping them there dynamically makes you both effective and efficient. Effective and efficient businesses grow revenue and become progressively more profitable as they grow. They optimise themselves.

Smart businesses know when trying to decide on optimal resourcing that they can’t rely on asking their own people what they should do. There is for example no instance in recorded history of a sales manager responding to the question “Do you think you have enough resource to maximise sales?” with the answer “No'”. The reason for that is sales people are simple folk driven by their own remuneration opportunity and they think extra sales people might share the sales they would have made anyway and so spread their commission more thinly. That’s also the reason no salesman has ever said “Let’s put our prices up!” because higher prices might be a barrier to some sales and that could mean less commission. It’s the way they think. So someone else has to make these type of decisions for the business and be prepared to measure the effectiveness of the new resources they commit to them.

Every additional resource request in a business should be met with the same question: “If we do this will we make more money or less money over time?” 

In other words will we gain new revenues as a result of this new cost or are we just reducing our profits because we are spending a bit more? If your new resource lets you add quality the customer will appreciate; lets you sell more product; gives you time, space and energy to focus on something you believe will fuel the future of your company then the cost of adding the resource will be dwarfed by the new revenues and benefits that flow from it. You will get a handsome return on your investment and it should be a multiple of the new cost you added. 

Of course, the new resource might not necessarily do all those good things directly by itself, it might instead take on lower grade, less visible work which releases other high quality resource which is currently too busy to do them. Direct and indirect benefits both count as a return on investment when you consider adding new resource.

So if you can’t see immediately how requested new resource is going to drive tangible, measurable success for your business then maybe you should think how it might and what specific behaviours would actually need to change to make it do so. Be prepared to think laterally to ensure you secure the benefit of growth.

If when you’ve done that thinking you still can’t see it, it’s probably because it isn’t there. So don’t do it.

 

Wine Bar Theory is published by Phaidon. http://www.phaidon.com/winebartheory.

 

 

 

fleetwood mac

I went to see the fabulous Fleetwood Mac rolling back the years at London’s 02 centre last week. Beg, steal or borrow tickets to go see them.

Not quite their last encore on the evening (though it so should have been) was their timeless upbeat classic Don’t stop thinking about tomorrow. “Don’t stop thinking about tomorrow. Don’t stop it’ll soon be here. It’ll be, better than before. Yesterday’s gone, yesterday’s gone.”

That song should be the national anthem of business.

From the inception of any business, the future sustainability of what it does has to be front of mind for the people in it. Not only shouldn’t you start a business that can’t sustain itself because it can’t successfully meet customers’ needs repeatedly but you also need to ensure you don’t do things in the conduct of it which disables or reduces its ability to continue. So don’t abuse your customers, don’t price them greedily away from you, don’t fail to promote what you do properly, don’t sabotage your own product or its sales in haste to make more profits in the short run, don’t fail to adapt.

The other aspect of thinking about tomorrow that really matters is ensuring at all times you’ve a clear sense of where you want to get to. Don’t think of your business as arrived, static at a destination: think of it as travelling, on a journey into the future, towards a goal of a bigger, brighter, better place. Don’t stop fuelling today to benefit tomorrow.

Always that means spending more money today to benefit the future. That sticks in some people’s throats: people who are trying to maximise the moment. Beware those who point out that not investing progressively leaves you with more money today. Yes it does, but it may also leave you with less, or none at all, tomorrow.

Last, don’t think that gathering information about all your business’s yesterdays and its todays is enough. Yesterday is gone, remember. How you performed then and today are really only important for what they can tell you about how you will perform tomorrow and what you need to do to ensure you grow and develop effectively. It’s amazing how much time and effort organisations devote to producing historic information. The past is only of academic interest, like an old photo album, if you don’t extract from it the essence that helps you predict and build a better future.

The song has it right. Don’t stop thinking about tomorrow. Ever.

Wine Bar Theory is published by Phaidon. You can find it here: http://www.phaidon.com/winebartheory

15

He takes risks.

Do you want him in your team?

Select from the following options: 1, 2 or 3.

1) No thanks
2) Yes please
3) Maybe

Which did you go for?

It’s actually an unfair question. There isn’t enough data in it for you to know for sure. The best answer to it has to be: it depends which ones. So give yourself a small reward if you went for number three.

You could also say it rather depends what type of work you do, doesn’t it? If you’re in brain surgery or bomb disposal maybe you don’t want someone who takes risks anywhere near your place of employment.

Actually you do. A brain surgeon who won’t take risks will never pick up a cranial saw; a bomb disposal expert who won’t take them will avoid unexploded devices.

Businesses swim in a sea of risks. Environmental risks, credit risks, currency risks, supply chain risks, political risks, technology risks, investment risks, people risks, liability risks, regulatory risks, deal risks. The list goes on. Risk management has become a big business in its own right. Risk is now a big employer. Public companies are required to make lists of all the risks they have and share it every year with their investors. People are employed full time to monitor the risks on these lists and try to think of new ones too. It’s a worthy exercise because clearly risk awareness must be better than risk ignorance but no business will ever be risk free and some of the risks you run you can’t really see till they hit you. Corporate risk registers in 2002 for example suddenly tended to have ‘International Terrorism’ at the very top when it hadn’t noticeably been there before. Tsunamis and volcanic ash clouds which disrupt air traffic snuck into many of those lists after more recent events. “Sudden total closure of the debt markets after a collapse of the global banking industry” was straight in at number one in the corporate risk parade in 2009. Risks are easy to see in hindsight.

The insurance industry has of course profited enormously from this rise in the risk business. It’s job is persuading people to pay a relatively small amount of money every year to give them comfort against something bad happening. They’ve been at it a long time. In the 1940’s they persuaded the American actress Betty Grable to pay $40,000 to insure her legs for $1,000,000, presumably against the risk of them falling off*. Insurers tend to focus on providing cover for unfortunate things that are unlikely to happen. Unfortunate things that are likely to occur are rather hard to insure, as you’ve probably found.

What all this does though is suggest something which isn’t true. It suggests risks are only bad things that will hurt you if they occur. It suggests risks are the enemy of business. They aren’t. Sure some risks are to do with threats but others are to do with opportunity. Businesses need to embrace both. The acceptance of risk is what makes businesses work and it’s what makes them grow. How well they do that is a key differentiator between them. That difference is to do with courage: corporate and personal. Some businesses; some people, are brave, others aren’t. Brave businesses succeed because they know what bravery is. Here’s an analogy to spell it out.

A tentative person doesn’t cross the road because he might get run over. A reckless person crosses the road regardless of the traffic. A brave person reads the traffic and crosses when it’s safe to do so.

Businesses which are fearful of embracing risk in a changing world and try instead just to maintain their position end up going backwards because the world moves on and they don’t.
Firms which are cavalier in their approach to risk and dive into them in hope rather than in belief get hit, hard.
Businesses which know their job is to assess every day which new risks they should accept and which they should reject are active managers of their own future. They research, they believe in data. They acquire the basis for decisions and then they act. They are decisive. If they see they’ve got it wrong they adapt quickly. They are not afraid to fail but they don’t make the same mistake twice. They understand that business is about decisions. Those companies also recognise importantly that trying to take no risks is the biggest risk a business can run. You can run but you can’t hide.

So do you want the guy who takes risks in your team? You bet you do, as long as he’s brave.

How brave are you?

*It was Betty Grable’s film studio 20th Century Fox which took out that insurance policy and it was actually a brilliant piece of marketing, not risk management at all. She was billed thereafter as “the girl with the million dollar legs” and became immortal. They made that premium back many times over.

Wine Bar Theory is published by Phaidon. You can find it here: http://www.phaidon.com/winebartheory. It is illustrated by Bill Butcher http://www.billbutcher.com.

hiring

Why is hiring well so difficult?

If you could analyse it, what’s been your real success rate in recruiting  over time? What percentage of the people you’ve brought in yourself or seen come into your firm via applications and interviews turned out to be stars and stayed? What proportion didn’t work out at all?

It’s not easy to find aggregated academic data on this and part of the reason for that is it’s hard to define what recruitment success really means. Given that companies want to prosper and grow, my definition of a hiring success would the acquisition of someone who can do the job at least as well, and preferably better, than the recruiter hoped. That’s a person who can help expand the business, not just maintain it, and can progress within the business as it grows.

Where would you put that percentage in your firm?

Here’s my (generous) estimate from the companies I’ve worked with over 35 years: 50%. In other words the same result you’d get by tossing a coin. Not great given how much time, money and effort goes into the recruitment process in organisations every year.

Some enlightened firms I am sure regularly beat that score, others I know consistently undershoot it. But how do you raise your average?

Before we go there though ask yourself one more question. What percentage of the internal promotions you’ve made or seen have worked out?

I’d expect your answer to be at least 20 points higher than your new recruit success rate. My answer would be nearly all. I’d go as high as 80-90%. Not so surprising really since you typically promote proven successful people you know and you recruit people you hope prove successful but don’t know.

Given the maths though isn’t it remarkable how reluctant many organisations are to promote? So many tend to find it easier to say even of their brightest and best: “she’s good but she’s not ready” or “he’s never done that big a job” to justify overlooking internal candidates in favour of an external hire. They think they’re making a safer call but they’re actually putting their money on the longer odds. They’re backing the outsider.

I bought a business from a guy for $200m once that he’d started up from nothing. His hiring philosophy was very simple: always recruit the tea boy. He tried whenever a vacancy arose within his business to move someone up to it and hire in at the lowest level he could. He kept all his best people. He also recognised that if you don’t promote your best, most ambitious people they leave. Not good that if you’re trying to get on.

So maybe that’s the first tip for better hiring? Don’t do it at all without looking where you can promote first.

Some of the other ways I’d recommend after many years of trying to find and bring in great people are these.

• Take time to scope the job clearly and ambitiously and be able to explain it and enthuse its potential. If it doesn’t excite you, why would anyone any good want it?

• Decide the 3-4 attributes the person really needs to have to do it well. Get them on a post-it note before you even advertise the role.

• Don’t get hung up on the job title. If you do, you will give it to someone who happens to have that title now somewhere else but may not be what you need at all.

• Look at all the applications yourself. Don’t delegate that task to an administrator who doesn’t know the job. Their filter is not the same as yours.

• In an interview don’t over-talk. You will end up giving yourself the job if you do.

• Don’t let the interviewee over talk either. Ask them for evidence of the attributes you are looking for. Push them for instances, numbers, and data where they have shown them. Facts not poetry. Take notes.

• Psychometric tests are easy, cheap and effective. They will tell you who the person really is. “They didn’t fit in” is no longer an excuse for recruitment failure. You can know that in advance.

• Look for people who are bigger than the role and will expand it rather than someone smaller who will be happy to get it and stay within it. Don’t ever reject someone who wants the job on the grounds they are “over-qualified”. What does that even mean?

• Be prepared to work flexibly to get someone talented.

• Never settle for someone who is quite good unless that’s what you aspire to be. 

• Back specialists over generalists. Quite good at several things is not better than very good at something if the something is what you really need. 

 

Final word. Don’t think of recruitment as time consuming. Hiring the right person saves you time. It’s hiring the wrong one that costs you the age.

Wine Bar Theory is published this month by Phaidon. It is available here http://www.phaidon.com/winebartheory. It is illustrated by Bill Butcher http://www.billbutcher.com.

WBT cover

A sad day in the life of many a young company is the day it has to hire its first Human Resources professional.

Before that day the business was invariably run by people. Some of them were bosses, some of them were ordinary folk. They all expected to know each other and worked out that if they wanted to get something done or changed it would involve relationships and talking to one another.

The decision to hire the first HR professional is usually an expression of defeat, exasperation or laziness which managers feel entitled to make once their business has reached a certain size. It is always an unnecessary mistake if there are fewer than 80 people in the business. It is made when managers decide they are spending “too much time” on people issues and think they can lay that stuff off to someone else who is “trained in it” and must be good at it. Then they can do something easier instead.

If you are not very careful that’s the day the wall goes up. In that moment the business starts to think of the people who work there as ‘human resources’. Other resources are things like bits of machinery, the office or the shop itself and money. These are the human ones.

Smithers, who had previously been, or at least considered himself, one of the team, a member of staff, an employee or even a worker becomes, formally, a human resource. The HR professional from then on puts in place the procedures that will govern the company’s dealings with Smithers and all the other resources like him.

The arrival of the HR manager and the ethos of human resources also tends to be taken as absolving the leadership of the business from having to know people’s names any more and from troubling themselves too much with people’s performance, their problems and their little foibles. That can all be an HR matter now.”Phew that’s a load off my plate! I was never very good at it anyway.”

Delegating, relegating, responsibility for people issues to HR professionals is a disaster and a cop-out. People are the lifeblood of your company. The culture of the business will determine how it develops and thrives: it is set by the people who work in it and their teams. People who know the job, do the real work. Teach, coach, collaborate.

HR people are sometimes very nice. They can be capable administrators. They have learned something about employment law. They maintain good filing systems. Some are good with people, others are hopeless. EQ is not any more a consistent trait of individuals within that specialism than it is of any other — though the businesses that hire them assume it must be and that it comes automatically with the territory. It doesn’t.

If you have it at all, HR should be kept within tight parameters. Limit its role. It should be advisory. That’s all. It is there to help people get on, not substitute for them. It can help make sure the business stays on the right side of the law and that proper records are kept. In doing those things it can also act informally as a conscience pricker for the managers in the business to ensure that they continue to pay proper attention to the people relationships in their teams. But make no mistake, HR is no more an effective substitute for those relationships than a fish is for a bike.

Here’s three other tips.

Don’t allow HR to communicate directly in writing with the business. They write the language of procedure and that formalises distance and alienation. Think how you react to officialdom. It’s not helpful in a business. It confirms there is a wall in the middle of your office, factory, hospital or shop and that the bosses and HR are sitting on the other side of it.

Keep the HR team small. If you don’t they will find other things to do. They are good at being busy.

Don’t delegate recruitment to HR. Unless you think the selection of people for your team doesn’t matter. If you don’t think it does, by the way, you’re in the wrong job. Why would an HR person be a good recruiter for what you need?

Don’t even think you can devolve people matters to HR. People are too important for that.

Wine Bar Theory will be published by Phaidon on September 2, 2013. It can be ordered here: http://www.phaidon.com/winebartheory.

guess

Here’s an idea.

How would you like a telephone you can carry in your pocket all the time?

Ask just about anyone, anywhere in the world, that question today and chances are the answer will be “sure and what other stuff will it let me do?”

If you’d have asked people that same question in 1990 they would have either said just “no” or looked over your shoulder to locate the healthcare worker you must have somehow momentarily eluded. A telephone was a big fixed object which sat on a table with wires which attached it to a wall. When it rang you answered it and almost always the person on the other end of the line actually knew who you were and had legitimate reason to be calling.

So different today of course.

The story illustrates how careful you have to be when asking people questions you hope will confirm or deny your new big idea. Asking people in 1990 “will a mobile phone succeed?” would have produced a resounding “no” as an answer. Consumer views of the time were anchored around what a phone was, not what it might be. The business who relied on that piece of market research would have missed the biggest and most transformational technological development of our age. It was a resounding “yes”, not a “no”. Not only were people uniquely empowered by it, but countries, regions, the global economy itself.

Henry Ford found himself at a similar watershed 100 years earlier. Faced with a world of wheeled transport entirely dominated by horses he would have missed the most dramatic consumer development of the industrial age if he had invited people to pre-approve his Model T car.  If he’d asked the drivers of horse-drawn buggies what they wanted, he observed in his seminal quotation of the era, “they would have said faster horses”.

Their view of a better product for the next generation would have been incremental not transformational. It is ever thus.

So be very careful when you ask people to comment on whether your new idea will work. They may well give you the wrong answer whether it’s thumbs up or a thumbs down. It isn’t what they think you want to know.

If you ask them that you can’t trust their view either way. Don’t ask people for their opinion about a new product. It’s worthless, random, if they have never seen it or can’t imagine it. You can’t rely on it.

Instead to judge something really new and ground breaking you have to rely on something different: on your own conviction and belief in the product. You need your own well founded reasons to believe in the real need that it will meet. This is one occasion when you can’t ask the audience and expect the right answer. Life is not a game show.

The only time the audience will be reliable in this context, and happily here it always is, is if you ask them to choose between two things they already know. Red or black, square or round, large or small?

If you ask enough people questions about how they will behave when presented with choices between known and fully understood alternatives you will get reliable answers you can bank on.

Never ask people to guess. Guessers don’t know the answer.

 

Wine Bar Theory will be published by Phaidon in September 2013. You can pre-order it here http://www.phaidon.com/winebartheory. Wine Bar Theory is illustrated by Bill Butcher http://www.billbutcher.com.

11

What’s the least understood function in your business?

Everyone agrees what production is all about. They know what sales people do. They get IT, finance and customer services. 

But what’s Marketing? 

Less sure.

Part of the problem is marketing is a label which covers such a broad range of activities it means many different things to different people. It lacks a single agreed definition. That’s a weakness. Unhelpfully too some of the jobs people do in its name and which some companies continue to think are useful are actually a waste of time.  

Some marketing people for example spend quality time choosing between pantones for pretty brochures (tip: as long as it’s legible it makes no difference what colour it is); organising parties (tip: great fun, just don’t expect any financial return); diligently spending out promotional budgets (tip: unless you can measure the results of spending don’t do it) and ordering chocolates with company logos on the wrappers (tip: if you want someone to remember who you are don’t put your details on something they’re going to eat).

Companies that have that sort of marketing activity typically class marketing as a cost centre: a service department. They give it a budget and warn them not to over-spend it. Others regard them jealously as people who get to spend their money. That in turn tends to keep marketing away from the top table where the big decisions are made. It also makes it vulnerable. When things get tough and the business needs to make savings, where easier and better to find them? Cut the money they spend.

That’s a very good and overdue idea if they shouldn’t have been spending that money in the first place. It’s a disaster if they should. 

Done properly, marketing makes you more money than it costs. It is a revenue centre, not a cost centre at all. If it is effective you actually want it to spend more money, not less. If its work is making $10 for each $5 it spends you want it to do more, not the same or less.

Smart marketing defines and locates the people who are prospective buyers of your products. It engages with them increasingly effectively and at reducing cost via digital communications. It tests systematically their preferences and priorities by putting different offers in front of them and analysing the different rates of response. It finds winning formulas to attract buying interest and win orders and it repeats them until those formulas become ineffective. It identifies quickly things that don’t work and changes them. It turns the lights on for sales by showing them the types of people who will buy the product: what they look like, where they live, what their names are. It makes prospective customers come to you.

Smart Marketing learns. It asks questions so it can reach conclusions. It informs the rest of the business with insight and intelligence: what people like about the product and what they don’t, what other needs or wants the customers have that the business could potentially meet as well; what prices people will pay for what you do; what your customers really think of you and what you do…

And it does all this through data. Acquiring it, analysing it, measuring it. Relentlessly. Not guessing results. But establishing and controlling them. Through the appliance of science.

Sales-led companies can add business; marketing-led businesses can multiply it. The revenue they bring in is a multiple of their costs. They analyse their own performance dynamically and can demonstrate whether every element of what they do is making money or costing money and respond accordingly.

Here’s the real truth. Whisper it. The best-led businesses today are marketing-led. 

 

 

 

 

 

 

WBT cover

What’s unique about the Spanish national anthem and what do domesticated parrots do that wild ones don’t?

Those were two questions to the panel at a filming of the TV show QI I went to see a few years ago. The answers were: it’s the only one without any words and mimic. (Parrots don’t imitate anything in the wild, they have their own distinct voice.)

QI is a programme full of quite interesting bits of information. So are most businesses. They often have it coming out of their ears. Many businesses spend so long digesting and producing information that it’s surprising they have any time left to do what they’re supposed to do. They mistake producing information and poring over it for proper work.

Here’s my definition of business information: something quite interesting you have no idea what to do with.

Here’s my definition of business intelligence: an insight which suggests action.

Business generally is very long on the former, often clogged up with it indeed; and very short of the latter.

Here’s an illustration of what I mean in the form of a little football report.

“Rovers and Rangers fought out a pulsating 4-4 draw last night. Each side gained and lost the lead twice and plucky Rovers were within seconds of clinching a famous victory when the Rangers captain Buggins popped up to nod in a dramatic last ditch equaliser for the visitors.”

Information. 

All the four goals which Rovers conceded were headers resulting from high crosses into their penalty area.

Intelligence.

The information version describes, quite interestingly, aspects of what happened but suggests nothing at all for the future. The intelligence, shorter, highlights that Rovers have a problem they need to solve.

Business people too often content themselves with generating information, like our sports report, about what took place yesterday. Instead their focus should be to identify and distil trends in what they are doing, looking for patterns and assessing changes, highlighting significance to help them predict the future and enable a response to it. In today’s world of rich data more and more factual information is being generated but less reliably is it anyone’s job to ask questions of that data and come up with firm answers from it: conclusions.

What does this actually mean? What does it tell us? What am I supposed to do differently now I know this? What’s the takeout?

Finance people are particularly culpable here. They like to produce huge amounts of management information in great big monthly packs, as they have been trained professionally to do, so that businesses can look back in some detail at where they have just been. Unfortunately you can’t drive a car successfully or for long by sitting in the back seat peering out of the rear window.

It’s not only a Finance phenomenon though. Marketing if poorly led will tell you at great length what it has done rather than how it has done and what it has learned from it. Sales, if you let them, love to tell you stories: colourful, specific and unconnected anecdotes which present the salesman in heroic light but tell you little about how your products are being received in the wider market. These are contributions to business information, they don’t make business any smarter or equip it to progress.

Intelligence helps you drive forward. It shows you the things that you need to change to improve. To look for real intelligence and surface it requires a skill and an attitude of mind. Smart businesses don’t produce documents to fill filing cabinets; they don’t accept reports which describe a lot but don’t prescribe anything.

Next time you see one of those or you’re sitting in a meeting doing exactly that, try asking politely: so what?

Quite Interesting is great for entertainment when you go home or to give you stuff you can tell your friends in the pub.

Too much of it is death for lean, responsive business.

Wine Bar Theory will be published by Phaidon in September 2013. You can pre-order it here: http://www.phaidon.com/winebartheory

value

There’s a company I know that hasn’t put its prices up for 10 years. It’s run by an economist. It’s done very well, become very profitable, increased its sales a lot in that time.

Are those things connected? I’m sure the clever economist has given that a lot of thought. Has keeping his prices the same been the key to growing the business and making it successful?

Before we get there, let’s make one observation. In truth he hasn’t really kept things the same at all has he? By charging the same amount today he did 10 years ago his business’ products have become progressively cheaper, relatively speaking. The economist would be able to tell you by exactly how much. But let’s call it 30% over a decade. 

That company’s pricing position has therefore actually moved materially over the years. It hasn’t stayed the same. It charges 30% less in real terms now than it did when it started. Is that smart? Or has it left money on the table?

The answer is: it depends. I’ll come back to that.

How much should you charge? It’s a challenging question for most businesses. Let’s have a go at answering it.

Prices that result in repeatable transactions are related closely to value. Value is that intangible thing which customers try to assess in advance when they consider buying something and judge after they’ve bought it.

The amount of value you deliver to customers is determined by several things. Here’s three questions you might like to ask if you’d like to know how much.

• How different is what you do from what others do? 

• How important is the benefit your customers get from what you do?

• How hard is it for them to get that benefit some other way?

If your answer to any of those three is “Not very” then “Not very much” is what you will be able to charge, sustainably. If you ignore that and try to charge a lot then only a few people will buy what you do once and they won’t come back.

If your honest answer to all those three questions on the other hand is “Very”. You should be charging appropriately.

To decide how much that is actually worth you need to think about each of the three questions a little more. 

• First, how different are you really? What’s the nature of your difference? How easy would it be for others to copy it once they work out that’s why you are successful?

• Second, how important is the benefit you give the people who buy what you do? In what way and how much does it enrich them? If the benefit is really important because it makes them feel great, saves them lots of time or effort or actually earns them money then they will value it highly. If what you do only falls into the “quite nice” category then they won’t .

• Last, can your customers get your benefit some other ways? If they can, then those alternatives are your real competition and the prices they sell at will determine how much you can safely charge even if there is no-one else out there who does exactly what you do. 

If when you’ve answered those questions you still have reason to believe your difference is important (to your customers, not to you); that others can’t readily match it and that your customers can’t easily get it, or something roughly equivalent, somewhere else then you are in a happy place. This is what it’s called.

Premium pricing territory. 

To decide what that means to you in dollar terms, have a go at quantifying your answer to the second question.  Put some numbers on it.

• How much will people pay if what you do makes them feel great and they can’t really get that elsewhere? Think Jimmy Choo shoes or a hotel overlooking Lake Como.

• How much will people pay if you save them huge amounts of time and effort? Think a meal in a good restaurant or a tank of fuel for the car.

• How much will people pay if what they buy from you actually helps them to make money? Think how much money they can make out of what you provide in one year and try charging them a modest percentage of that.

Our economist friend would call all that Return on Investment. Work out a way to calculate what your customers get out of what you do. What’s their ‘return’ on what they invest in your product? How would they measure and quantify it if you asked them? What would they compare it with? The answer to what you can charge sustainably is in there. 

What’s very important to recognise is what you can charge is nothing at all to do with how much it costs you to do it. The value your customers get from it is the only thing that matters. 

Remember some of Jimmy Choo’s shoes are just a sliver of leather and two straps.

So, back to the economist who didn’t put his prices up for 10 years. Was he right?

He was only right if he needed to lower his prices in real terms because his important difference was eroding; the benefit his customers got from him was reducing and their alternatives were increasing.

 If none of those things were happening he left money on the table.

 

Wine Bar Theory will be published by Phaidon in September 2013. You can pre-order it here http://www.phaidon.com/winebartheory. Wine Bar Theory is illustrated by Bill Butcher http://www.billbutcher.com.