0 comments on “Experimental Management”

Experimental Management

Meet Emil and Marc. Emil just signed a contract to work for Marc. This makes Emil an employee and Marc a manager. With his signature, Emil has agreed to follow the orders of Marc. Disobedience is an option, but it comes with the risks of being fired.

Marc the manager points Eric to chop a stack of wood. By doing this Marc is using the most basic form of a management practice, the direct order. Next day, Marc orders Eric to stack the firewood on a need pile in that corner over there. On the third day, Marc is late. Eric sees a stack of wood, and being human and not an automaton, starts to chop it, like on day one. Without knowing, Eric has developed a job description for himself: “My job is to chop wood and staple it”. The job description is another basic form of a management practice. It spares Marc the Manager the time and effort to direct Eric. Unlike a robot Eric the Employee is able to see the work and do it, without being ordered. Marc may continue to supervise Eric, but he might find a better use of his time in carting the firewood to the market and sell it.

One day, after a heavy rainfall, Eric sees that the roof of the shack, where the firewood is stored, needs repairs. Without being ordered, he fixes the roof. What Eric did is to use his judgment of Marc’s interest and decided to act autonomously. Marc has not directed Eric to do that, but Eric has developed a sense of purpose in his work, and chances are that he feels responsible for it. Marcs comes back later in the day and wonders that Eric has not produced his usual stack size of firewood, but he sees that the shack is repaired. Marc may tell off Eric for not making the numbers, but he decides to praise Eric for having taken the initiative and prioritizing repairing the shack over his chopping duties. Thereby Marc has embraced another two basic management practices: Feedback and Delegation. Eric is no longer just following orders but he is empowered to do other things necessary to keep up the production of firewood.

Why has Marc opted to praise Eric and accept his autonomous acting? Marc, hard pressed to make living out of his business, see’s those management practices as being efficient. In his mind, Eric has saved him a lot of trouble, as wet firewood doesn’t sell. Marc may not know it, but he has developed the performance hypothesis in his mind that Job Descriptions, Feedback, and Delegation produce better results, than just ordering Eric the Employee around. Marc the Manager benefits from adopting those Management practices. Eric the employee likes being responsible, too, which is part of why these management practices are working. But even if Marc didn’t give a damn about Eric, he knows he would hurt himself by not employing these practices.

Over time Marc might decide to adopt other management practices, like

  • a regular, weekly meeting to discuss issues
  • providing a budget to Marc that he can spend on axes or saws
  • a bonus scheme based on Erics productivity
  • job sharing, so that Eric is assisting Marc at the market from time to time, in order to get a larger picture of his duties and exposure to customers
  • Annual objective setting and performance review  to clarify high-level targets for Erics work

Marc the manager will introduce and maintain these management practices only if he expects that these contribute to the performance. Margins in the firewood business are so slim these days.

The Case for Constant Experimentation with Management Practices

Shouldn’t any company seek to emulate Marc’s way of working? Things like…

  • Adding new management practices if they work
  • Getting rid of those that don’t seem to work
  • Constantly adapting practices to the need of the business

In a business world that is ever-changing, why do we emphasize so much the need to act like a daring entrepreneur, who finds ever better problem-solution fits, but overwhelmingly fail to engage in experiments with the very ways we are working together? Instead of seeking to constantly improve our way of collaborating with one another, we focus hard on business models, productivity figures, financial performance.

Marc would see that fixation with direct business results as being silly. Results are important, yes, but they can not be enforced directly. Instead, they need to be approached obliquely, by working better together. If we can achieve that, results are not guaranteed, but they will come much more easily.

What is a business if not a sum of decisions taken at all levels of the company? If we can just increase the quality of decisions by some minuscule percentage point, isn’t a companies performance bound to increase? Better management practices result in better decisions result in better performance.

Management practices are like the underlying factors of a companies performance formula.

  • Company Performance = f (Strategy, Execution, Chance)
  • Strategy and Execution = f (Management Practices, Chance)

In other words management practices, the way work in done, influence a companies ability to come up with a good direction (strategy) and competent implementation (execution).

This sounds like a no-brainer. But there are three caveats with this logic:

  1. Managers do not care too much about the performance of management practices
  2. Owners care about performance, but can’t really observe the impact of management practices on performance
  3. The empiric, scientific evidence of the link between management practices and company performance is weak

Manager’s Do Not Care so Much About Performant Management Practices

Marc the manager holds four distinct advantages over most other managers:

  1. Direct Feedback: The impact that the management practices he adopts have on Eric’s performance are very direct
  2. Underlying simplicity: The firewood business is simple. Causes and effects are directly visible
  3. Small numbers: It’s just Eric the employee, not a group of employees or a host of departments to coordinate. This spares Marc the manager from the otherwise inevitable power and social dynamics
  4. No agency problem: Marc is the owner and the manager. He is able to prioritize performance of the business very highly – his performance and the business’s performance are the same. Managers, who are not owners, quickly see their well being and the businesses well being as two separate things
  5. No ingrained, legacy practices: Most managers join companies that have a certain way to do things, a certain management culture. It’s much harder to experiment with management practices if social norms are already firmly entrenched

For a typical modern-day manager, it is not only much harder to see whether his way of managing works better than other ways. On top of that, an employed manager does not even share the same passion for performance than an owner. Risk minimization by not sticking out one’s neck, social conformity and self-optimization might be more important than performance optimization. The fact that the performance of one’s management practices employed can’t be measured easily compounds this agency problem.

The result is that performance becomes a secondary concern while selecting management practices. Control is much more important.

Owners Can’t Really Tell What Management Practices Work

Owners care about performant management practices, don’t they? After all, it is their money that is wasted. But even owners care for performant management practices is limited:

  • Ownership might be diluted. If an ownership share is sufficiently small, influence is very limited.
  • The Agency problem, again: Managers, who are in day to day contact with the business know a lot more about the business they are managing than owners. Owners might employ a few checks on managerial powers here and there, but finally, owners have no option, but to trust.
  • There are other factors easily observable, like those found in the P&L or balance sheet. By their very nature management practices do not lend themselves to be measured in hard numbers. Humankind is excellent at measuring financial systems, but we suck at measuring social systems

The point that I am making is not that no one is not concerned with the performance of organizations. Indeed, there are many people caring about profits and corporate outlooks. The point I am trying to make is:  Few people are making a major effort to influence the performance of an organization by virtue of its management practices.

Science found a bit of evidence, just a bit

Financial performance is a primary concern for any company. But it is usually tackled head-on by looking at market share, product portfolio, customer bases, competition, cost structures, distribution networks, business models etc. Management practices get into view only with hindsight: If a company is successful, it must have great management practices. Phil Rosenzweig, a professor at IMD in Lausanne,  has written a whole book about the ex-post sanctioning of management practices. He named this the “Halo Effect”. Huge business books bestsellers like Jim Collins “Good to Great” or its predecessor “Built to Last” or Robert Watermans “In Search of Excellence” fell for the Halo effect. Great stories, but no scientific value.

But there are a few recent studies that imply a link between good management practices and a companies performance. According to one of those (Bloom et al 2011)  management practices explain about 10% of the success of companies. And according to another study (Bloom, Mahajan, McKenzie 2011) that link is causal, i.e. management practices improved first, company results followed.

That is not overwhelmingly strong evidence. But this is only natural: We just can’t measure social matters with the same exactness as physics. Social systems are highly idiosyncratic things. Take for example the human invention of the stock market. The way prices on the stock market are determined is a result of the human social system, the value humans attach to the stocks listed. Despite hundreds of billions of investment, no one can predict stock values with any certainty. Great efforts are being made in analyzing stocks, but finally, all this effort is undermined because we suck at measuring social systems. It hard to predict human behavior with certainty. Social systems are even more complex than the individual human actor, so science is bound to fail. There are no social physics, no immutable rules. There are things that appear to work for a time, but that is no guarantee that those correlations will hold in the future.

Experimental Management

To sum up my argument:

  1. There is a clear logical link between management practice and a companies performance. The sum of all decisions of all employees should make a great deal of difference to a companies success.
  2. There is academic evidence of this link, but it is weak
  3. Owners and Managers prefer management practices that work over optimal management practices. All sing the hymn of performance, but asymmetrical information, the pure opacity of causes and effects in social systems and individual incentives let them focus on the observable, largely financial facts, instead of the underlying intangible social performance of the organization

My point is:

  • If we can’t say what management practice is really working, why are nearly all companies keeping their management practices static?
  • Do such companies suppose they already found the optimum?
  • Those companies implicitly assume that there is nothing to gain from experimenting with management practices
  • Is it not silly that Lean Start-ups, Entrepreneurial and Agile Movements all have a strong emphasis on experimentation, but experimentation with management practices are of a (at best) secondary concern for most companies trying to become fit for the Digital Age?

Therefore, I suggest Experimental Management. If we don’t know what works best at that time, we need to try things, observe the effects and tune and tune and tune our way of “doing things in a group”, of managing.

We do not need big theories of Leadership and Management for this. We just need to experiment and watch. In other words, managers need to work empirically, not ideologically. Find out what works themselves and not following snake oil selling business book authors, leadership gurus or opinionated non-empirically focused consultants.

Liberation?

Experimental Management is a term that is slightly provocative to our cultural norms. First, we expect competent management that knows which practice works. Dabbling in management practices smells like incompetence. We want certainty. For certainty, we are ready to prefer the professional illusionist to the empirically driven realist.

Second, we shouldn’t subject humans to experiments. Manipulating humans is rightly abhorred. We value freedom and self-fulfillment.

My hunch is that experimenting with better ways to work, will lead to more freedom and more self-fulfillment in the workplace. Why? The only way to get better decisions is to employ the abilities and senses of all the people in an organization. And we can’t get that level of engagement without offering more freedom and self-fulfillment.

The arch-capitalist quest for performance might just end up liberating people. 

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Sources:

  • Rosenzweig, Phil “The Halo Effect”
  • Bloom et al “Mangement Practices Across Firms and Countries”
  • More information about research on the link between management practices and companies performance can be found on WorldManagementSurvey.org

 

1 comment on “The Startup Way by Eric Ries – Book review”

The Startup Way by Eric Ries – Book review

Want to know how to scale the “Startup Way” of doing business to conventional organizations? Want to know how to keep on perpetually innovating new products and processes? Then “The Startup Way- How Modern Companies Use Entrepreneurial Management to Transform Culture and Drive Long-Term Growth” should be for you. According to Eric Ries, it outlines nothing less than a “unified theory of management.”

Wow. What a claim. I was excited, as I admire Eric Ries last book, the “Lean-Startup” and many of its sister publications like “The Lean Enterprise.” And finding better ways to manage in the digital age is all that my work is about.

Spoiler Alert: I was bitterly disappointed.

How to transform a company to work like a start-up?

The recipe according to Eric Ries is to:

  1. Fully understand the Lean Start-up Model with its Minimal Viable Products, Experimentation, Pivots, Leap of Faith Assumptions, Iterations & Learning, etc.
  2. Gain top Management buy-in, so that they commit themselves fully to a big change management program that focusses on training more and more people in “Entrepreneurship.”
  3. Institutionalizing Entrepreneurship in a separate line function.  So Entrepreneurship become a department, such as HR, Finance, IT, Sales and Purchasing are. In contrast to the other departments, the “Entrepreneurship” unit has some matrix functions in the other line functions, such as training and coaching entrepreneurs and maintaining start-ups like funding and governance structures. Thereby the “Entrepreneurship Department” is mimicking external start-up functions internally inside a company.
  4. Continually change the processes of a company by experimentation and iteration to come up with just the right ones for your company. Do it scientifically, never stop experimenting and adapting and you will be fine for all time to come.

Eric’s “Unified Theory of Managment”

The new organization will be a combination of “general management practices” (see the left side of the graphic below) and “experimental management practices” (on the right side). Traditional management practices based on hierarchy and experimental, team-based, lean start-up practices are meant to coexist in every company:

Experimental Management is like a bolt on general management practices. IMG_6527.PNG

Nothing much changes in General Management practices. Eric describes experimental management – in a less than humble manner – as the “missing part of the lean manufacturing system,” known as Toyota Production System (TPS), the mother of all Lean and Agile movements. Lean Manufacturing (and its off spins like Six Sigma) have been all about efficiency (doing the things right). But they couldn’t help at all in effectiveness, i.e. determining what things are the right things to do. These “right things”  can only be identified by customer-centric experimentation. This is exactly what the lean startup method is there for.

And if these two pillars of the house of management are built on solid foundations, i.e., vision, purpose, a focus on people and long-term thinking, the house will stand. It will deliver excellence and continuous improvement if only the shared values of all people in the company embrace truth and discipline.

That’s it. That’s all there is. How stupid have we been not to see this future of management! Just bolt on experimental management and get the senior management team to sponsor vision, truth and discipline et voila: The Organization of the future.

Naivete galore!

It is so naive. So torpedos away.

Eric’s 4 step recipe for transforming a company is EXACTLY what a conventional change management program is all about since time immemorial. Get Management Buy-in, teach and motivate people, lead by example, devote time and attention, train-the-trainers, etc. This is business as usual in modern companies. It is just another top-down driven Change Program. There is nothing to assume that this program will be more efficient than any other change program is.

Oh, wait! Maybe there is: Entrepreneurship is an institution now. We are adding a new department to the company. Surely this will help! It will help exactly like installing a “Chief Digital” or a “Chief Innovation Officer” helps to promote those themes on the board. The name is different, but there is nothing that indicates why a “Chief Entrepreneur” should be more effective. Those Organisations will always be the “weak line”:  Organizations are dominated by those “strong lines” of the departments doing the real work, closer to the business. Hell, they ARE the business. Entrepreneurship is just another matrix function.

But wait again! The strong lines, the realm of General Management, will be all aligned with experimental management now, as they all share a vision and embrace truth and discipline now – as in the neat graphic above.

This degree of naivete leaves me speechless. There is nothing in this book and in the world that will indicate any more success with this as with all other Change management initiatives before.

Looking deeper into “Deep Processes.”

Eric Ries describes the deep processes, such as career and promotion, salary management or purchasing, as “Deep Processes.” Those are the final frontier to conquer once all the successful experiments produced such a momentum to do this in a company’s drive to everlasting change and improvement.

This is very shallow. These are not the deep processes of an organization. These processes are just the result of the management hierarchy coming up with rules and regulations, that minimize variation, seek security in control and assign people to jobs like cogs in a machine.

To really change the “deep processes” you need to change the “metaprocess” under which decisions about processes are made. These are things like giving people a voice, letting the people who are doing the work decide what is best, utilizing all their local knowledge and sensors to come up what is best, giving them leverage to experiment and learn by their own initiative and not by the initiative of an autocrat of the management hierarchy.

It requires flatter hierarchies. It needs more self-management. It requires more local autonomy, less fear, and less separation. But there is no reference to that in the Startup Way. None at all.

A House divided against itself can not stand: The insecurities brought about by experimental management and its rule-breaking nature collide fundamentally with the stability and predictability seeking hierarchy. 

Eric asserts that companies need to act more based on rigorous “scientific experiments,” for which Lean Start-up is the vehicle. In doing that, he is basically giving the same advice that Frederick Winslow Taylor gave in 1911 in his book “The Principles of Scientific Management.” While no one can argue with this benefits of putting more science in management by doing more experiments, the “Startup Way” adds nothing new. The problem is still: How to get the hierarchy to embrace uncertainty and unpredictability? There are no answers to this in his book.

Damm it, he even gets the reference to Taylor’s all-time classic book wrong. This book, one of the most important books ever in the realms of organization and management, has been published in 1911, not 1915 as Eric Rees claims on page 355. A small, insignificant error? I think this is a symptomatic error. Just skim through the list of sources, and you will find secondary sources taken for example from such “authoritative” sites like Quora.

What happened to Eric Ries?

I feel kind of personally injured by “The Startup Way.” Lean Start-up was a great book. So many fabulous ideas that inspired such a great movement and community.

But it appears that all the well earned success within the Corporate world, for example in his long commercial engagement with General Electric, all those speeches to deliver, left him with only minimal time for deep thinking and research.

It feels like Eric Ries is out of his (Start-up) waters in the corporate world. His intentions are good, but there are much more thoughtful and ultimately helpful books available on the future of management such as Fredericks Laloux’s “Reinventing Organizations,” Jurgen Appelo’s “Management 3.0” or even General Stanley McChrystal’s “Team of Teams.” Or this Blog 😉

The “Startup way” is a shallow book.

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This is what I think. What do you think?

 

0 comments on “How would an E-Commerce Company get into Retail? – Part 2”

How would an E-Commerce Company get into Retail? – Part 2

There are so many disastrous results of Companies going into Retail. It usually starts this way: How difficult can it be to sell Merchandise in Stores? Rent a proper sized Space at a good Location, arrange the Merchandise nicely, get some Processes for Payments and Logistics in place – et voila! Then repeat that multiple times by scaling the number of Stores and there you have it, your own Chain of Brick and Mortar Stores.

After all, Shops and Shopkeepers have been around since time immemorial, it’s not exactly Rocket Science, is it?

Doom follows. The new Chain is not turning out a Profit, as Customers do not show up in the store and if they do, they do not buy enough. So Companies start to tinker with the Store Design,  different Products, different Locations for certain Products inside the Store,  they vary the Assortment Size, the Number of Products in the Store, Sales Approaches,  Trainings, they exchange Leaders, they try different  Store Locations, new Marketing Initiatives etc.

While tinkering, come up with apparent Revelations, for example: Oh, if I increase the Assortment Size, I get more Revenue. Apparently, the Customer wants more choice! So they order even more Stuff, creating an Inventory Surpluses which increases the number of Items displayed per Square Meter in the Store as well as to clog up the whole Supply Chain, thereby, in turn, increasing Working Capital, decreasing Profits further.

Some Companies even to scale out of the Profitability Gap by adding more Stores. Economies of Scale to the rescue! Thereby the problem is compounded – if you scale a Store Format that is not performing you end up with a nonperforming Chain of Stores. Your Problems just increase. If you scale Shit you are going to end up with an even greater Pile of it.

What is so difficult about building up a Retail Chain?

Retail is different

Building an attractive, profitable Store is hard.

Scaling – the process of adding Stores and thereby Expenditure en Masse – is even harder, as the Entrepreneur has to learn to rely on Processes and Standards. The owner simply can’t be everywhere at the same time.

For a Company that originated in E-Commerce, this can be hard. After all, the Transparency of the Online Store is hard to replicate in a chain of Brick and Mortar Stores. People and Processes are notoriously harder to change than coding on a Web-site.

So how should an E-Commerce Company strive to build up Retail Stores?

The one unifying Concept

A Business should be more than the sum of its Parts. Each Part should strengthen the other part. Each Part does not need to be unique, but the Combination of all Characteristics of a Company has unique value to the Customer.

ruc.png

Let’s have a look at an Example which is based on a real live Retailer. I have modified its business model in several key aspects for the sake of privacy.

wwwrrr.png

First, comes the Choice of which Market to enter. In the words of Harvard Professor Clayton Christensen, the challenge is to find out the job to be done.

Let’s explore the example Workwear Retailer above. The unifying Concept could be described as follows:

With the rise of the Service Economy,  the Self-Awareness Craftsmen in small Businesses changed. These Professionals are knowledgeable, dynamic and proud Individuals. They seek not only function in the Things they are wearing, they seek some Style too, above the gray and black Work Suits of the Past. That is the Job to be done: To offer passionate Craftsman style which is not only serving their self-esteem but is perceived by their Customers to be professional looking, too.

Everything else follows from that:

  • The Product: Fashionable Workwear
  • Customer Experience: Function, Fashion & Nudges to buy other Merchandise (e.g. that Elite hand tool everyone hold in awe) displayed in curated Environments for limited times only
  • Sales: Dynamic, open, personal and honest communication of the Sales Staff to Customer
  • Store Design: Big enough to allow some Space to be set-aside for “Gigs”, i.e. limited time displays of Merchandise in visual attractive Spaces, but small enough to allow the Sales Representative to be close to the Customer
  • Real Estate: Relatively inexpensive Locations on the Periphery of Cities, yet on the Traffic Arteries that are passed by Craftsmen every morning and evening on their way into and out of the city
  • Logistics: Able to handle own Merchandise, 3rd party Deliveries and to organise “Gigs”
  • Sourcing: Always on the look-out for the better and new on the Market. No own branded Merchandise, but the promise to provide the Best of the Best Merchandise that is available on the Market- always
  • HR: Focus on hiring Craftsman to do the Sales, in order to share the Clients Language and Culture
  • Finance: The Financial model is dominated by Curation, allowing inventories not to be held by the Retailer, but by its Suppliers. The Business thrives on the improved return on Capital, not so much on margin, as the Target Demography remains price sensitive

The Hedgehog Concept

This focus on a simple, unifying Concept is the key Requirement of any successful Business. Jim Collins has named this, in the classic book from 2001 “From Good to Great“, the Hedgehog concept. 

Focus on one simple, unifying concept. Everything else is irrelevant.

A Hedgehog is inferior to a Fox in so many aspects. But he does one thing well, which makes him unbeatable.

hhog.png

To find the Pillars of Success, to orchestrate them in a way that all those Pillars support one another is key to any Business, not just Retail. Let’s take a harder look at Retail next.

The heart of Retail: Excellence of Execution

After finding out, what the unifying, “Hedgehog”, Concept of the Retail Business will be, the next Task is to turn the Concept into Reality.  A Reality that is physical: There are Stores, there are lots of part-time Workers, there are logistic Operations with a lot of Concrete Buildings and Automation Equipment, there is the never-ending task of Store refurbishment.

Optimal Execution is about setting Standards, fostering Discipline and creating a sense of Responsibility in all parts of the Business. But,  more and more in our digital Age:

  • some old Truth remain valid, e.g. the Product must be excellent
  • some Truths get even more true, e.g. the Customer has always been key, but now there are even more ways to serve a Customer than ever before
  • and there are new Truths, e.g. Customers are not limited to maintain a Relationship to the Seller, modern Media enables Customers to get engaged with other Customers very easily

The Consultancy Boxwood has put that very nicely in a small Model:

box.png

  • Leadership: Great Leadership has been visionary already in the days of Caesar or Napoleon. But with Digital Technologies, engaging has been made much easier and there are new Ways to engage up to a level that Employees can be empowered with Autonomy, never known to salaried Workers before
  • Operating Model: Focus has always been the Hallmark of a successful Company. But with the options of Companies vastly expanding and the Rate of Change ever increasing, a Company needs to stay capable of coping  with the Complexities of, for example, Omnichannel while at the same time preventing  Processes to get so varied and improvised, that Efficiency will never allow the Company to create a Profit. The Ability to translate Insights gained by Data Analysis into Action is a vast Game Changer
  • Change capability: Changing is dangerous. There are Uncertainties and Costs associated with any attempt to deviate from an existing Practice. Retailers scrutinize and Test every move they make in Detail, before exposing their whole Network of Stores to it. Trying one thing in a limited number of Stores, while trying something else in others, is even more important in the Digital Age. The new Truth in all of this is, that the Speed and the Number of Tests need to increase considerably, compared to the old, hierarchical way of initiating Change. There is a Trick to learn from Agile Organisations here.

 

The future of Retailing

Moving into Retail from E-commerce needs

  • very deep Thought on the one unifying Concept in order to come up with…
  • a Business Model that can be tested before…
  • scaling the number of Retail Store with execution excellence

All the “new Truths” in the Boxwood Model point toward e-Commerce Companies having an advantage over traditional Retailers. After all, the Nature of E-Commerce businesses is Agile, is Data-centric, the Work Culture is more empowering and dealing with user communities via social media or affiliates is daily Business.

But it is no home run. The old Truth of Retailing remain true and even more true than ever. There is no faking in Retail: 10 years rental contracts, physical refurbishment, huge workforces etc. are for real. Scale too early and with inferior operational Skill and Disaster will follow.

Few E-Commerce Companies do venture into Retailing, yet. Amazon seems to be gearing up (How would an E-Commerce Company get into Retail? Part 1/2) and the Gig-Economy is on the rise.

Chances are, that Technology will be a lever that E-Commerce Companies will use not only to go into Brick & Mortar but to disrupt it for Good

Like this one:

 

 

 

 

1 comment on “How would an E-Commerce Company get into Retail? Part 1/2”

How would an E-Commerce Company get into Retail? Part 1/2

Up to now, only a few pure online Shops dared to venture into Brick and Mortar Retail. But there is increasing Evidence for this long-expected Move:

  • Amazon continues to invest heavily into In- Store Technologies. With the opening of the first Amazon Go Concept Store on 7th Avenue, Seattle and numerous Stores still to be opened, Amazon is aiming at the 92% of Retail Volume still sold through Brick and Mortar Stores

E-Commerce and Brick and Mortar are blending into one. The Customer does not seek a “Sales Channel Experience” – she seeks a superior brand experience, instead.

The Clumsy Moves of Brick and Mortar Retailers

Brick and Mortar Retailers have been venturing into E-Commerce for Years, on the whole rather clumsily. They build up independent E-Com Organisations, treated E-Com as “just another store”:

  • Allocate Merchandise, give someone Responsibility for the Sales and everything else will follow
  • Hire a Host of Fulfillment Service Providers to handle those nasty Aspects as Accounts Payable in a Business to Customer  Setting, Single Item Ordering and Returns
  • Manage e-Com as a Sales Channel, but effectively treat it as a Store for all operational Purposes

The Results? Mediocre.

  • Revenue growth has underperformed overall E-commerce Growth
  • Profits have been negligible
  • Customers find it hard to understand why she can not return Goods bought online in stores or vice versa. They wonder about difference in price, discounts and assortment. Thereby the credibility of the brand itself is undermined

All Brick and Mortar Stores try to improve. Every Chain is hastening to roll-out “Click to Collect”, “Return anywhere” or “Order from Store” Service Offerings to the Customer. But these services are mostly build on hastily developed, flimsy Processes and Systems.

The quality of Services is usually pretty low, as Organisations and Systems are not set-up for such Models. The Sales Channel is what dominates the internal Structure of a Retailer. Not the Customer. All Organisational, Process and Logistics are based on the premise to serve a Sales Channel. The Customer is all but an Afterthought.

How an E-Commerce Pure Play approaches Business

E-Com Pure Play and Brick and Mortar retailers have a very different outlook on their business of selling merchandise.

ecomret.png

Mindset: Explorational

These differences stem largely from the Point of Sales. E-Commerce Companies have the luxury of having a lot of data available in real time in their shop system.With this data, the all important visit and Conversion Rates can be scrutinised in every Detail: Where did Customers come from? How long have they been on the Site? What did they View? What kind of Customer is it – or even better who exactly has been the Customer?

E-Commerce Companies invest a lot of time in analysing Data.  As a Result of this they are experimenting by constantly, changing their Site to conduct A/B Testing, offer different Landing Pages, tweaking the Recommendation Engine, tweaking check-out and check-in Processes etc. Change is constant and everything happens in Real Time.

Brick and Mortar Retailers, on the other Hand, experience much less Change. A Store Location is fixed, internal refurbishments are costly and should be done not for one but for all Stores for the sake of Standardisation, Scale, Manageability and -finally- efficiency. The Time Horizon is the Interval, the daily Sales Report in the morning.

The physical Structure of the store determines the mental Agility needed by the Organization. Once a good set of reliable KPI’s has been found there is no need to revisit these again and again. These are fixed and stable.

For a traditional Retailer Data Analytics is Routine Work.

For E-Commerce Pureplays it is Exploration. 

This is an extreme inherent disadvantage in the mindset of a Brick and Mortar Retailer.

 Growth, Sales and Marketing: It is the Customer, stupid

An E-Commerce Pure Play is not inhibited by physical Stores as a go-between between the Company and Customers. Its communicates directly with the Customer via the Web Shop, not via Sales Representatives. Sales Representatives are influencing any Message that a Retailer wants to get to a Customer. It is not difficult to see, that this Message is changed via this relay, especially in an Environment of lots of temporary and part-time Workers.

Marketing is done in Ways to seek Conversations with Customers directly – where else Brick and Mortar Retailers are limited to anonymous Mass Marketing Channels.

Growth in a store can be influenced directly by Marketing and to a lesser extent by an increase in the Assortment. In a store, the physical location of a store limits the amount of what Marketing can achieve: No matter how much Money is spend, if the Store is too far away for a customer, she will not come.

In addition to that, Assortment Sizes can’t be increased indefinitely: There is only so much physical Space available in a Store. The Relationship between Sales and the Number of Items per Square Meter of a Retail Store follows a Bell Curve. If there is too much Stuff, the Customer won’t find the Things she needs.

Purchasing and Fulfilment: Where Mind and Matter collides

Let’s take a look at the Balance Sheet of a traditional Retailer: Usually, the Costs of Goods Sold (COGS) of a Retailer amount to 40 to 60% of Sales of a Fashion Retailer, for a Food Retailer this number is usually at 70 to 85 %. This Block  far outweighs all other Costs: Personal Costs should be at 20 to 25% for a Fashion Retailer, at 5 to 15 % for a Food Retailer, closely followed by Rental costs.

The basic Profit Proposition of a traditional Retailer is to sell high and buy low. And if Sales are more or less fixed because of the physical Configuration of Stores, Profits are to made from squeezing Suppliers. This is exactly what traditional retailers did for Decades, Centuries and Millennia.

E-Commerce companies think different. The Purchasing Price still needs to be good, but in a global Marketplace with global Sourcing, this is only a modest Challenge. Good Craftsmanship in Purchasing will suffice. Globalisation means that there is a Buyers Market out there – Suppliers, on the other hand, are abundant. Purchasing must be done well, but getting the attention of the Customer to come to your Site and convert him to buy  is the main Challenge.

E-Com Pure Plays think Traffic & Conversion – Retailers think Purchasing.

That is where Mindsets collide.

Physical Matter is obstructing the move of traditional Retailers to eCommerce, as Processes, Systems and Warehouses have been set-up to serve the Store Network with scheduled Supply Runs. Business to Customer, Single Item Delivery in Real Time has never been foreseen in the evolved, rigid while efficient Supply Chains of Brick and Mortar Retailers.

In contrast: E-Commerce Pure Plays have everything in their physical arrangement of Process, Systems, and Warehouses arranged for the Customer.

Retailers have arranged every Supply Chain Process for the Retail Store.

E-Commerce companies have arranged it for the Customer.

Beware of the Market Entrant, Retailer!

If every factor is weighed, I come to the conclusion that to expand from E-Commerce to Brick and Mortar Stores should be much less difficult to do than going from Brick and Mortar Retail to E-Commerce.

While traditional Retailers still need to re-build their Organisations, Processes, Systems and (most important) Mindsets to put the Customer first in every operational Aspect of their Doings – not just the usual Customer centric Gibberish uttered by CXO’s – E-Commerce Companies are already there. They “just” need to learn a new trick, handling physical Stores.  Of course, they need to adapt Organisations, Processes, Systems and Warehouses, too.  But they are starting from a much better starting Position. In their Business, the Customer is already the central Element of everything that they are doing.

So is it just a “Craft” that E-Commerce Companies need to learn? The Craft of Handling Stores? And think there is more to it..

How should an E-Commerce Company enter into Brick and Mortar Retail?

The optimal approach for an E-Commerce Company should evolve along the following considerations:

  • Experimentation: Maybe traditional Retailing, with its intense needs of capital and rigid physical Store Network is more and more a thing of the past. While the physical proximity of Goods and Services to Customers remains important, there might be other ways to fulfil this need, e.g. Temporary, rented “Pop-up” Stores or Brand Centers focused on the Goods Experience without Stocks while Delivery is done directly to Customers Homes.
    In any Case, Experimentation of Formats should be done excessively
  • From Zero to One: How should an optimal single Store look like? Size, location, layout, supporting processes. How should the Customer be served and Sales be done?
  • Self-reinforcing Feedback Loops: How can each Element of the Design be set up in such a way to support the other Elements? No Parameter of Store Design is independent of another: Square Meters, Assortment Size, Personal Customer, Customer Experience, Capital needs are all interconnected
  • Scaling: To scale reliably and efficiently is not a Skill that most E-commerce Organisations are accustomed to, esp. not if the Element to be scaled is physical Infrastructures, whose build-up involves Rental Contracts over 10 and more years in costly Locations. Planning and Standardisation over a long time horizon are key. This is a Challenge experienced by a lot of former Start-ups, too, eg. Tesla or Apple. Some “old economy” Skills are to be integrated into the Culture

Let’s explore the question how the enter into Brick and Mortar Retail in a second post in detail, especially the notion of self-reinforcing feedback loops.

 

 

 

0 comments on “What Google Inc. has to teach about Management”

What Google Inc. has to teach about Management

Larry Page and Sergey Brin took a look at management theory and were not impressed: Too much hearsay, too little data. There’s got to be a better way to manage companies. So google made their own rules.

Now, with 548 Billion$ market capitalization, 18 years since its founding, most people still think of Google as bold, entrepreneurial, unconventional and smart. It seems that there is something to learn from Google about management.

0 comments on “The Doom Loop of Strategic Inaptitude”

The Doom Loop of Strategic Inaptitude

The bullet is coming. It is coming straight at your company. Everyone can see it. Meetings are set-up  and action plans are conceived to prevent the bullet from hitting. There are endless presentations about the bullets velocity, force and trajectory.  Till the last minute everyone stands and stares at the approaching bullet. People are even bored by talking about the bullet. Then it hits.

Is your company seeing the bullet and is still not acting, just talking? Digital technology will disrupt your business, too, eventually. Lets explore some real case studies and explore this phenomenon.

0 comments on “Sources of Strategic Inaptitude”

Sources of Strategic Inaptitude

Most companies do not have a strategy. There is consensus in management literature  about this fact. Why do most executives fail their companies in the realm of strategy?

jack welch.jpg

Let’s see what leading economists, managers and social scientists found out and what to do about it: Does a company really need a strategy?

0 comments on “7 Signs of Ethical Failure: Good and Bad organizational Politics”

7 Signs of Ethical Failure: Good and Bad organizational Politics

No politics! Politics is perceived to be a shady, back-room dealing, mischievous activity which should have no place in an organization. Everyone should speak honest and truthfully and promote the best interests of an organization: “We do not need politics here!”

This is silly. At least, its way to simple. Politics is “The process of making uniform decisions applying to all members of a group” – this could be a definition for management, too. But it is the official definition of the term “politics”. All organizations are political – by definition.

1 comment on “Exponential Organizations – a way forward for traditional companies?”

Exponential Organizations – a way forward for traditional companies?

An “exponential organization” as defined by Salim Ismael is a business model that is poised to take advantage from the digital revolution. It leverages the abundant nature of information goods to transform business models of any sector, even physical, manufacturing or brick & mortar based sectors.

Even traditional companies can harness the power of the digital revolution, change their direction and tweak their organizational structures in order to propel their business forward – instead of viewing the digital revolution as a threat, a head wind.
They can use it by changing their organization, their course and flexible exploring where customer value is – they can harness the power of the digital storm and sail.

Here is how.

0 comments on “Abundance will transform the world”

Abundance will transform the world

If the classical models of organization are not sufficient to withstand the challenges of a more digital, faster and uncertain world: Which organizational model is? Imitating silicon valley may do the trick for software companies, but which model should a company choose in other sectors? One option is to transform into an “exponential organization”.