January 21, 2013

Considering Change? Don’t be a Netflix

Mary MahoneyBY Mary Mahoney

J. Robinson Group Blog

Developing and institutionalizing change management is a long-term process.

Rapid advances in technology, the evaporation of trade barriers and evolving consumer preferences are forcing businesses to re-evaluate their strategies – in some cases their fundamental business models – and implement changes in real time.

Change can be good. There’s even a formal discipline called change management devoted to it.  But the way your organization develops and implements change can mean the difference between continued profitability and bankruptcy.

Consider Netflix.  The Los Gatos, Calif.-based company got its start in 1998 by mailing DVD disks to customers’ homes.  Two years later, it changed from pay-per-movie rental model to a flat monthly fee that provided unlimited rentals without due dates, late fees or shipping and handling charges.

Customers and investors loved it.  Subscriptions skyrocketed from 857,000 in 2002 to 20 million in 2010.  The company went public in 2002 with an initial public offering of $15 a share, and the stock price hit $300 per share by the summer of 2010.

In 2007, Netflix began streaming movies and TV shows over the Internet, for which it charged an additional fee to its DVD subscribers.  Three years later, the company introduced streaming-only plans priced at $7.99 per month with DVDs available beginning at an extra $1.

The one-two punch of online and traditional mail-order rentals enabled Netflix to annihilate its competitors, notably Blockbuster, which declared bankruptcy in 2010, along with thousands of mom-and-pop movie rental stores.  It also spawned competition from Walmart and Amazon.

Then in July 2011, Netflix shocked the marketplace, first by announcing new rates that would cost existing subscribers 60 percent more for streaming, and second by splitting its DVD and online rental services into two companies that would require existing DVD customers to subscribe to a second service to continue streaming.

Enraged Netflix customers posted comments all over the Internet.  According to the Wall Street Journal, 800,000 members canceled their subscriptions during the third quarter of 2011. Investors followed suit. The price of Netflix stock price fell by 74 percent in a matter of days, reducing the company’s market capitalization from $16 billion to $4.6 billion.

Netflix Chief Executive Officer Reed Hastings subsequently apologized: “I messed up. There is a difference between moving quickly – which Netflix has done very well for years – and moving too fast, which is what we did in this case. In hindsight, I slid into arrogance based upon past success.”  Hastings later scrubbed plans to split the company into two, but he did not rescind the price hike.

A recent book by Gina Keating, Netflixed, attributes the fiasco to the engineering-focused culture developed by Hastings that paid more attention to optimizing algorithms than to customers.  In an interview with CNET, Keating said the company lost its consumer focus when its cofounder, Marc Randolph, was pushed out.

In contrast to the consumer-friendly “DNA” that prevailed when Randolph was at Netflix, Hastings has the “emotional IQ of zero” and “just doesn’t have any kind of empathy toward people in terms of consumers,” Keating said, attributing those observations to several of the people she interviewed for the book.

Luckily for Hastings and Netflix, the company was not destroyed, although its stock price remains depressed despite a rebound in subscriptions, which reportedly surpassed 30 million last year.

Such missteps are legend in the business world. Remember “New Coke?” Customer pressure forced Coca-Cola to restore its original soda formulation in 1985.  Packaging matters, too.  In early 2009, PepsiCo scrapped its redesigned Tropicana orange juice carton, just six weeks after rolling it out to great fanfare, after consumers gave it a big thumbs down. In 1999, traveler outrage led Delta Air Lines to drop a $2 surcharge on tickets not purchased on its website.

A March 2012 article titled Achieving Successful Strategic Transformation that appeared in the MIT-Sloan Management Review said companies attempting radical change fail more often than they succeed:

“Companies that are able to radically change their entrenched ways of doing things and then reclaim leading positions in their industries are the exception rather than the rule,” wrote authors Gerry Johnson, George S. Yip and Manuel Hensmans. “Even less common are companies able to anticipate a new set of requirements and mobilize the internal and external resources necessary to meet them.”

Some companies manage change more successfully than others.  When poor performance by Cadbury Schweppes’ U.S. confectionery business triggered a hostile takeover bid in 1987, then-chairman Dominic Cadbury reacted by divesting the company’s food and hygiene businesses and giving other executives “the opportunity to initiate exciting new developments,” the article said.

Those developments included a joint venture with Coca-Cola, relocating the beverages headquarters from England to the United States and the refocusing the confectionery division. Cadbury, the last family member to head the company, retired in 2000, and the company later was sold to Kraft Foods Inc.

“If companies are to sustain high performance and transform their strategies, they need to foster alternative management coalitions and value constructive tension and challenges to the status quo,” the article said. Johnson, Yip and Hensmans make eight recommendations for integrating those principles into an organization.

  • Build on history: Building on history requires managers to reflect on the evolution of their organization and the legacy they can draw on. Doing this involves asking what traditions are present, and which ones are absent. Based on the answer, management should consider new steps to take.
  • Select and develop a new generation of leaders: Good companies carry out succession and talent planning, but often their succession planning merely maintains the current strategy. Instead, a true transformation requires succession planning that will yield different capabilities, with new leaders that are groomed and encouraged to develop alternative coalitions and business models. To make it happen, current leaders must nurture replacements who will question, modify or even be willing to reject the company’s heritage.
  • Accept and encourage constructive mobility: Instead of always appointing the most predictable successors, companies should cultivate internal talent, fostering alternative coalitions that welcome challenge and encourage divergent perspectives. Managers should identify leaders who respect the past but have a distinctively different view of the future.
  • Ensure that decision-making allows for dissent: There’s a fundamental difference between an organization built to maintain consensus around a dominant logic and one where managers naturally challenge it. A decision-making process that allows for dissent and challenge works only among people who can live with and welcome challenge.
  • Create enabling structures that encourage tension: Creative tension between opposing views can also be fostered structurally. Such changes alone will not guarantee that alternative views will be heard and taken seriously, but changing the structure can make a difference in how people see ideas internally.
  • Expect everyone to get behind decisions once they are made: Although constructive confrontation, contestation and experimentation are essential, there needs to be a point when leadership makes decisions and the different parties fall in line. The authors found that failures tend to happen when management mishandles the internal debate by stifling it, cutting it short or failing to build management teams with enough confidence to overcome doubts.
  • Develop an overarching rationale: Managers need to develop clear positions concerning “what we are about.” Dominic Cadbury, for example, noted that the starting point is the company’s values: “These do not happen by chance, and they can’t drift either. There has to be some management there.” Values also need to be more than words; they should be believable and evident in top managers’ behavior. 
  • Beware of market size and dominance: Each of the successful companies that Johnson, Yip and Hensmans studied had developed some of their characteristics while competing against dominant players in their industries, at a time when they saw themselves as being seriously threatened. This raises an important question: when once-threatened companies become industry leaders, will management lose sight of the very qualities that helped create their success?

Developing and institutionalizing change management is a long-term process. Executives today would do well to consider the proactive moves taken by the likes of Dominic Cadbury and the missteps of firms like Netflix and Coca Cola.

January 7, 2013

Extending Brand Values to Partners

Mary MahoneyBY Mary Mahoney

J. Robinson Group Blog

Global brands believe that the ingredients and components vendors supply are critical to ensuring the integrity and quality of the final product.

If you’re a vendor and want to sell to major brands the likes of McDonald’s, Becton, Dickinson and Company, Adidas and Coca-Cola, plan to take a marriage vow.  Major companies today expect suppliers to help them reinforce their brand values.

The principle is clear: Global brands believe that the ingredients and components vendors supply are critical to ensuring the integrity and quality of the final product. Suppliers are expected to own the responsibility for their part of the product.

Moreover, vendors are expected to align their values and operating practices with these major customers. It gets back to the saying that “a chain is only as strong as its weakest link,” and major brands expect to be held accountable for any misdeeds by their suppliers.

McDonald’s requires each of its suppliers to sign a binding code of conduct that spells out the company’s expectations of suppliers regarding compliance with laws and industry standards, employment practices and facility inspections. Here’s the rationale:

“McDonald’s recognizes that its suppliers are independent businesses. Indeed, it honors that very independence because it provides strength to the relationship. Nonetheless, actions by those with whom McDonald’s does business are sometimes attributed to McDonald’s itself, affecting its reputation and the goodwill it has with its customers and others. It is only natural then that McDonald’s expects its partners in business to act with the same level of honesty and integrity.”

Becton, Dickinson and Company, a medical technology company based in New Jersey, presents prospective suppliers with a seven-page manual of expectations covering a broad range of issues including social responsibility, environmental stewardship, ethical practices and governance.

“BD strongly believes in balancing the ‘triple bottom line:’ achieving strong economic performance, promoting environmental stewardship and advancing social responsibility,” the manual says.  “BD wants to develop relationships with suppliers who follow the expectations set forth in this document.”

The Adidas Group’s  “Expectation of Suppliers,” says, in part, “We strive to become the leading organization in the industry by establishing an adaptive supply network which excels in speed, innovation, agility and connectivity. This could not happen without the support and commitment of our product suppliers. Thus this is essential for them to share the same values and principles so as to drive the success of the supply chain as a whole.”

Adidas spells out exactly what it seeks from suppliers in terms of overall competence, risk management, business culture, customer focus and cost efficiency. The company expects its vendors to share the Adidas vision and values while demonstrating advanced technical capability, leadership, financial stability and good workplace standards and ethics.

“With a vision to become the leading organization in the industry through establishing an adaptive supply network which excels in speed, innovation, agility and connectivity, we expect our suppliers to share this vision, and participate proactively in developing these core capabilities and contribute to the overall supply chain,” the company says.

The Coca-Cola Company’s “Supplier Expectations” brochure frames the importance of vendor performance saying, “More than 1 billion times every day, consumers choose our beverages for refreshment, and they expect top quality every time. Achieving this requires flawless execution across the entire supply chain, and as a supplier to the Coca-Cola system, you play a vital role in ensuring the quality and integrity of our beverages.”

Coca-Cola begins by describing its own commitment to food safety, product integrity, corporate citizenship, communications, honesty and integrity. Then it lists supplier performance criteria including adherence to recognized manufacturing and laboratory practices and equipment design.

Beyond that, suppliers are expected to meet the same standards imposed on Coca-Cola employees, notably to obey all laws and “act ethically in all matters.”

Those suppliers fortunate enough to win McDonald’s trust are rewarded with more than a contract; their client celebrates them. McDonald’s goes so far as to post their stories on its website under the heading, “Meeting Our Suppliers.”  There you can watch videos about Frank Martinez and Jenn Bunger, Washington potato growers; Steve Vogleson, who raises cattle; and Dirk Giannini, a lettuce farmer.

Failure to align supplier and brand values can prove damaging, as Apple Inc. discovered earlier this year when The New York Times investigated Foxconn, the Taiwanese company that manufactures iPhones and iPads, and revealed harsh and dangerous working conditions inside its plants in China.

“Employees work excessive overtime, in some cases seven days a week, and live in crowded dorms,” The Times reported. “Some say they stand so long that their legs swell until they can hardly walk. Underage workers have helped build Apple’s products, and the company’s suppliers have improperly disposed of hazardous waste and falsified records.”

The Times also reported that workers at an Apple supplier in eastern China were injured when they were ordered to use a poisonous chemical to clean iPhone screens and that two explosions at iPad factories in 2011 killed four people and injured 11.

Following the disclosures, Apple CEO Tim Cook told his employees that the company never turned a “blind eye to the problems in our supply chain” and denied that it does not care about Foxconn’s Chinese workers. He did, however, ask the Fair Labor Association, an outside agency, to audit conditions inside suppliers’ factories.

The integration of suppliers into their clients’ culture is a natural extension of the “boundaryless company” envisioned by Jack Welch, the former General Electric CEO, who proposed an organizational model “where we knock down the walls that separate us from each other on the inside and from our key constituencies on the outside.”

While the ideal of a boundaryless company has proved difficult to implement, according to the Harvard Business Review, companies like McDonald’s, Adidas and Coca-Cola have demonstrated that it is possible to integrate suppliers into a corporate culture and make them accountable for meeting specific expectations.

January 2, 2013

Turning Suppliers Into Business Partners

Mary MahoneyBY Mary Mahoney

J. Robinson Group Blog

Whatever happened to those friendly sales reps who used to pop for lunch, a round of golf and – if you were a particularly valuable client – tickets to major league sports event?  They still exist, but they’re a dying breed.

In the old world of manufacturing, relationships and cost and were the principal criteria for selecting vendors and subcontractors.  Bids were solicited, and contracts were awarded.  Supplier-purchaser relationships began on the effective date and ended when the contract terms were satisfied.

While competitive bidding can control cost, it does not necessarily ensure product quality and consistency. Because contracts were awarded to the lowest bids, vendors had more incentive to keep costs low than to emphasize quality.  Suppliers could change with each round of bidding, underscoring the short-term nature of the supplier-purchaser relationship.

The advent of total quality management – or TQM – and just-in-time delivery brought that old world to an end.  TQM is founded upon strict specifications and absolute consistency. Just-in-time delivery, which eliminates costly inventories, warehousing and redundant handling, requires close coordination between manufacturers and suppliers, honed over the long term.

In order to maximize the benefit of TQM and just-in-time delivery, manufacturers developed a stable of regular and backup suppliers that pledged to fulfill quality and delivery standards.  These suppliers still are expected bid for contracts, but bidding is restricted to those suppliers with an ongoing relationship with the manufacturer based on shared values.

Dell Inc., the computer manufacturer, recognized the benefits of collaborative supply-chain relationships when it developed its famed Dell-Direct Model in 1995.  A 2011 case study entitled Developing Collaborative Supplier Partnerships published by The Supply Chain Resource Cooperative describes the impact and how the Dell-Direct Model was implemented:

“This innovative model of efficiency included something the computer industry had never experienced: a high-velocity, low-cost distribution system with direct customer relationships and build–to–order manufacturing. By instituting collaborative supplier relationships, Dell was able to achieve significant cost savings and maintain a competitive advantage for several years.

“To accomplish this, Dell first pared down its supplier companies from 204 to 47. Then, in order to operate on a just–in–time inventory basis, these suppliers warehoused their components only 15 minutes from the Dell factory.

“This inventory system decreased inventory costs and led to a 6 percent profit advantage in components which was passed along to consumers while reducing inventory from 30 to 13 days, much better than the then-industry average of 75 to 100 days.”

Large companies outside the manufacturing sector took note of the approach and adopted it for their vendors, too. Suppliers increasingly became viewed as partners by organizations of all types including hospitals and other health-care providers.

In fact, improved relationships between hospitals and suppliers now are essential to ensuring patient safety, according to Dr. Charles Denham, the founder and chairman of the Texas Medical Institute of Technology, who explored this dynamic in an article entitled Patient Safety and Quality Heathcare, published by Patient Safety & Quality Healthcare.

“Providers need to put less energy into playing off suppliers against one another over price for a given solution and more energy into comparing the care performance that is delivered by these solutions,” he said.  “Suppliers need to put less energy in making a sale and more energy in assuring that the performance implied by the solution they pitch actually is delivered.

“We have to emphasize that the reliability of the entire hospital enterprise is a function of interdependent systems that are enabled by products and technologies. Only when we work with our suppliers as performance partners can we develop the best strategy for accelerating our progress down the road of safety.”

Gregory P. Smith, president and founder of Chart Your Course International and the author of professional development programs for major global organizations, said supplier-purchaser partnerships are founded on the premise that both parties win if the relationship is successful and both stand to lose if it fails.

In an article entitled Partnering With Suppliers, Smith offers these four perquisites to success:

  • Needs/Capabilities Match: There must be a match between what a supplier can (and will) do and what the customer needs and expects. This requires a lot of open-ended questioning and investigation. This courtship should continue until a trusting relationship can be developed; and once the decision is reached, it needs to be a total company commitment.
  • Long-Term Relationships. As the number of suppliers is reduced, partnerships will be built on long-term relationships. The process is difficult and time consuming; and multiyear agreements are necessary to justify the efforts and resources required by both parties.
  • Capable Sales Team. The customer will look at the salesperson as a non-paid, problem-solving consultant, available and able to do whatever needs to be done. Continuity of personnel has been the most common cause of failed partnerships, and a variety of support people may be involved in the team from time to time.
  • Shared values. There must be a supplier and a customer with common goals and shared values. Problems need to be solved with win-win attitudes. Suppliers must consider themselves a part of the customer’s system and take responsibility for it.

J. Robinson Group can help you turn vendors into partners by evaluating your existing supplier relationships and suggesting ways to improve performance and reliability. Visit our website at www.jrobinsongroup.com or contact us by clicking HERE.

 

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