Friday, August 31, 2007

Your Business as Fashion

Last week I was interviewed in Sydney by the Australian Financial Review BOSS magazine.. One of the issues that interviewer Brad Hatch and I discussed was the fact that many leaders talk a good game about innovation, but in practice they do little to walk their talk. How can this problem be ameliorated? I pointed out that executives might do themselves a big favor by imagining their businesses as “fashion” businesses. I’m serious. Stay with me for a moment. The basic premises that any successful competitor in the fashion industry must hold are these: 1. Nothing lasts (including our products, even if they’re current hits; competition is relentless)2. Nothing is supposed to last (we don’t expect long product life cycles; that’s the reality in business today)3. It’s good that nothing lasts (because if it did last, we—i.e. everyone in the business—would copy each other blatantly and we’d all look the same and we’d all become complacent and we’d all lose our customers’ interest and our margins would go to hell)4. We’re making darn sure that nothing lasts (we’re always obsessively putting our time and talent into creating the next wave of new exciting products in order to build our brand, our market share and our income stream)Couldn't those four premises apply to your business? I would argue that whether you sell cosmetics, clothing, insurance, auto parts, telecom services, or whatever—thinking of your business as a “fashion” business is a very good practice. And let me reassure you, to be successful in the fashion business, you have to be scrupulously disciplined as well as continuously creative. Recently, the Australian Financial Review magazine also interviewed Yves Carcelle, the President of Louis Vuitton. As I’ve pointed out in my last book, Louis Vuitton is a remarkably profitable luxury products engine; the Review’s estimate is an impressive 45%, which means that while Louis Vuitton generates less than 20% of the sales of LVMH (the corporation it’s part of), it generates more than 60% of its profit. Here’s what Carcelle told the Review: “When you are in a business where creativity is key (my comment: and which business isn’t?) the process is very irrational at the beginning but if you don’t trust the people with the gut feelings—if you put in too many constraints—then you don’t get that creativity. But then you have to apply the principles of reality and profitability. I call it the ‘rationalised irrational’, the balance between being too logical—in which case, where’s the dream?—against being too dreamy, in which case, where’s the physicality of that dream and the profits?” Think about it. Couldn’t you do some wonderful things in your business if you approached it as a fashion business?

Thursday, August 23, 2007

Neptune Rules the Seas--Unfairly

In my August 3 blog, I wrote about the concept of “unfair” competitive advantage. Unfair competitive advantage occurs when a company can creatively develop, scrupulously monetize, and efficiently execute a product or service that significantly deviates from standard industry practice and truly matters to customers. I’m still in Australia, so it seems fitting that I choose an Aussie company to illustrate.Neptune Marine Services, based in the wild west coast city of Perth, provides engineering, maintenance and diving services in a wide variety of dredging, offshore and maritime markets. What gives Neptune a potentially huge unfair advantage are two things: First and foremost, the company has developed a proprietary and patented technology that not only breaks new ground, but actually changes the rules of the game—in this case, for underwater dry welding. This technology has potentially huge implications for businesses like oil rigging, underwater pipelines and shipping. Traditionally, if a big oil rig needs repairs, there are only two alternatives. The first is an emergency underwater wet weld. But because of moisture and salt, this is a band-aid measure that generally lasts for a few weeks at most. The second alternative is the time consuming and expensive dry dock weld. But Neptune’s new technology allows the welding to be done on site, underwater, while the rig is still operating, and the results are equivalent to a dry dock weld. Exclaims one analyst: “The potential is absolutely enormous and (Neptune) is only starting to scratch the surface.” In addition to this critical new technology, Neptune has done one other “unfair” thing: The company has taken its discrete (and increasingly commoditized) services like engineering, inspection, repair and maintenance and transformed them into a fully integrated value package of services that can be quickly customized for each individual customer—so much so that Neptune’s customers are now seeing value in outsourcing an entire set of all these activities (which traditionally have been kept in-house) right to Neptune. Small wonder that revenues of only $1.5 million in 2006 are expected to balloon to $27 million in 2007 and $70 million in 2008. One analyst reckons its 2008 price/earnings multiple will exceed 14, and that’s a conservative figure. The rewards of unfair advantage are rich. One last point. Every time one of my clients says “Well, it’s only the big, deep-pocketed companies that can do this stuff”, I wind up pointing to the research which says the opposite: that large, entrenched companies must continuously fight the dangers of complacency, rigidity, risk-aversion, and protection of the past, because very often, it’s the small, underfunded lunatic companies which lead the way, and then grow exponentially as a result. It’s easy to point to companies like Google and Whole Foods Market as exemplars, but out here in Australia, Neptune also makes the case.

Friday, August 10, 2007

A Little Break

Those of you who follow my blog might be interested to know that over the past few years I've posted it from places around the world (amazing what the equation "globalization x technology" can do for communication). Sometimes I've been at work, sometimes on holiday. From reading my last blog, you know I'm in Australia right now. I'm heading into the Outback with my family, and frankly, the Outback is not particularly condusive to thoughtful ruminations about business and society. So with your permission, I'll sign off for a couple weeks and recharge my own batteries, as I hope you are recharging yours.

Friday, August 03, 2007

Unfair Competitive Advantage

I'm in Australia, where the big political news is about whether Dr. Mohamed Haneef (who practiced in Brisbane) was really connected to the other MD terrorists in England (personally, I think he's dirty, but there are many who disagree), and the big business news is former-Aussie-now-American-citizen Rupert Murdoch's purchase of The Wall St. Journal. I learned about the latter event at breakfast a couple days ago while reading The Australian--another Murdoch property, while simultaneously viewing the bridge collapse horror in Minneapolis on Sky TV--another Murdoch property. Hmmm....The other day, The Sydney Morning Herald cited three predictors of companies which make shareholders happy, and I think they are worth repeating here: 1. They operate in a large and growing market.2. They have an unfair competitive advantage.3. They have the business model needed to turn the first two criteria into sales and profits. Let me tackle #1 and #3 first with my own commentary. First, a good strategy should be focused on harnessing growing markets. Too often, companies (especially large, entrenched ones) focus their efforts on defending and protecting their familiar markets that used to be growing but which have since become mature or stagnant. It's their big Achilles Heel, which is why newer faster competitors (often from outside the industry, and often smaller) come in to grab market leadership by hitching their wagon to fast-growth opportunities--often in unchartered waters. Second, a great business idea, even if it capitalizes on growing markets, is only as good as the organization's capacity to monetize and execute it. I believe that the idea, the monetization, and the execution ought to be the three-legged stool of effective strategy, but unfortunately, too many executives focus their attentions primarily on the first one—and hope that their staff will somehow make the other two happen. Great leaders relentlessly focus heaps of their personal attentions on all three factors. Now, let’s go to #2-- this notion of “unfair competitive advantage”. I like that phrase. Here’s my take on it. If you define “unfair competitive advantage” in terms of collusion, price fixing, cronyism, government subsidies or protectionism—then “unfair” yields distortions in markets and a depression of both entrepreneurial activity and sustainable economic growth. This is a situation that I’ve seen in too many segments of the world, particularly in big pockets of Latin America and Africa, but every continent is afflicted. Companies that adhere to this definition of “unfair advantage” may prosper in the short run, but the national economies in which they operate stagnate. I suspect that this is not the definition of “unfair competition” that The Sydney Morning Herald had in mind.On the other hand, if “unfair competitive advantage” revolves around your company’s radically innovative, customer-pleasing technology, product, or service, then you can be sure that your competitors will scream “unfair!” because what you’ve done deviates from conventional wisdom and industry practice—and besides, it’s harder for them to copy you. Using this definition of “unfair competitive advantage”, that is precisely what your strategy ought to strive for. That’s the bar you want to set in your strategic planning meetings. Imagine a country’s economic growth if that’s the tax and legal bar that was set on a national basis. Good stuff from Australia. By the way, I also learned that good Aussie plumbers are in such demand that they can command up to $1500 a day. Are we in the wrong business?