Welcome to MentorNotes - Articles, comments, opinions and white papers from the MidasNation Mentors. These works encompass a broad spectrum of industries, sectors, subject matter and disciplines.
July 29, 2010 - Lou De Rose, CMC
Debasing the Meaning of Value Demeans the Common Good
- First is the explosive spread of technology in all areas of communication to the point that we are literally inundated with data, information, surveys, and polls, all purporting to present facts, but in reality expressing self-serving interests. Thus, whether it’s the Internet, TV, radio, or publishing medium, each promotes the concept of Value in loose and narrowly defined terms. Each relates the product, service, institution or interest to a value outcome. And with its pervasiveness, the medium becomes the message.
- Second is the pressure to innovate as a means of gaining competitive advantage. Whether we look at the automotive, appliance, electronics or other consumer industries, a common strategy is to introduce new or different designs, applications, or performance features, and to characterize these as Value or Value-added. And looking beyond these industries to financial services, we see the quest for innovation in the once-lauded, but now infamous, securitized financial products, collateralized debt obligations, and credit default swaps. The point is that the more innovation is promoted as a business strategy and facilitated through advanced technology, the less it is understood and evaluated diligently by all those less informed.
- And this suggests the third cause of our failure to differentiate Value from its illusion. The spread of popularist and activist movements and the “dumbing down” of their message has severely reduced our ability as a society to make deep and penetrating analysis of options and alternatives, and risk and reward consequences. We want quick and easy answers, and we want them now. So if issues like universal health care, immigration, education curriculum diversity, or financial reform can be expressed in terms of Value – promoting or discouraging it – let’s go for it.
- For buyers of goods and services, requirements and cost considerations must be seen from an internal perspective. By that I mean they must reflect the interests and concerns of those who pay a price in expectation of Value in return. It is those owners and users who must be satisfied, and who are accountable for cost results.
- For product and service developers, marketers, sales and general management, the concept of Value must be seen from an external perspective. The notions of requirement and cost are the mirror image reflection of those seen by Value buyers. They are concerns of customer satisfaction, customer service and support, customer cost, customer revenue and cash flow.
- For political representatives, those perspectives are both internal and external. Internally, they’re reflective of their constituency demands and interests. Externally, they reflect considerations of the greater common good reflected in the law, and the overall economy.
January 22, 2010 - Lou De Rose, CMC
Value and Cost in Medical Care
In an article appearing in the Harvard Business School’s Working Knowledge publication, Michael Porter, the School’s eminent authority on competitive strategy, contends that the root of the Health Care problem is that competition “occurs at the wrong level, over the wrong things, in the wrong geographical markets, and at the wrong time.” He states that the “locus of competition has to shift from ‘Who pays’ to ‘Who provides the best value.’” Porter goes on and suggests ways of making that shift, which include steps involving strategic reorientation and more specific steps involving pricing, billing, and insurance underwriting.
Let me illustrate what I mean by this statement. I recently visited a dermatologist for the removal of a common skin disorder, a sun-related actinic keratosis. I was given a full-body scan to determine whether other such disorders were present, and was zapped with liquid nitrogen for all that were found. As a younger sun-worshipper, I evidently accumulated quite a number of these disorders, because the number zapped came to 21. As an older, medically-insured patient, however, I was appalled by my bill. It was based on a fixed fee per zap for a procedure that took less than ten minutes to perform.
As a marketing and supply chain consultant, I naturally have to raise in my own mind the following questions:
Was I receiving value for what was charged? Granted, the treatment was paid by my insurer, but was that for value? Was it rather a price arbitrarily set by my insurer or some government agency?
Was the “cost” reflective of the time spent by the practitioner in providing the treatment? Yes, it seemed high, but did it accurately reflect all costs incurred such as those in running an office, nursing help, supplies, equipment, maintenance, liability insurance?
These questions need more analysis, and clearly more thinking outside the currently stereotyped model. I’m convinced that we have the technology and tools to address the problem of health care better. But to employ them effectively, we need the understanding and will to employ them effectively. A way to begin is to better understand the basics of value, cost, and price. I’d like to suggest some thoughts:
In a medical context, value is the satisfaction of health requirements at the lowest total cost of prevention, diagnosis, treatment, and rehabilitation. Clearly, this list of requirements can be expanded and fleshed out, but this is a start.
Cost I define as the expenditure of resources -- time, material, capital, information—necessary to provide value. Price is the dollar amount paid in providing those resources, but it is only one dimension of cost. Again, these suggestions can be expanded and spelled out in more detail.
Without doubt, we have the medical competence to develop realistic criteria for identifying and evaluating the elements of “medical requirements.” We also have the economic and financial know-how to distinguish price from cost, and to establish criteria for determining reasonableness of cost. And, surely, we have the information technology to facilitate the design of systems and data flow to make these a reality. What are we waiting for?
November 23, 2009 - Lou De Rose, CMC
Strategy, Tactics, and Small Business
A common criticism of small and not-so-small size companies is that their managements fail to think strategically. It’s claimed that they are so immersed in day-to-day tactical considerations, that they fail to develop longer-term strategies, and the tactics, which logically would flow from those strategies. Some may dispute the criticism, but my years of consulting experience in electronics and related industries, where small to medium sized companies prevail, confirms its validity.
To some degree, the failure to accept this criticism may result from a failure to recognize the difference between strategy and tactics. If that’s the case, let’s clarify the distinction. Both terms – strategy and tactics – stem from military usage. Thus, strategy is the process of planning and directing large-scale operations, as distinguished from tactics, which are the maneuvering of forces into the most advantageous positions prior to actual engagement with the enemy. Putting this into a business context, the distinction lies in the development of longer-term, broadly-based plans (i.e. strategy), as against more current, operational policies, practices, and actions (i.e. tactics). More specifically, that means managements must first set technology, product, market, and competitive objectives. Once those objectives are set, they can then develop and implement effective financing, sales, and pricing measures.
I submit that the global meltdown we have been experiencing over the past 18 to 24 months makes it imperative that managements think more strategically. The consequences of this meltdown are enormous, and likely to impact most dramatically small and midsize companies. This is particularly true for the semiconductor and electronic connectivity industries, where small and medium size companies prevail. According to recently published data, these industries are in the biggest slump in their 50 year history, with revenues falling by more than 20% in this year alone. These problems stem from two developments:
First is the fact that, increasingly, more products and applications now employ embedded microchips. This means that despite the downturn, companies must still expand or reconfigure capacity to meet this changing and exploding demand. Unfortunately, to do so means spending considerable amounts upfront, well before investments can realize profitable returns. And tactical measures cannot address this problem.
Second, and the flip side development, is that these industries have come to depend, increasingly, on how the rest of the economy fares. And given the current economic environment, and particularly, its consumer goods dimension, prospects are not good. To compete in depressed, yet changing markets, consumer goods producers must go, increasingly, “digital”. Microchips now find their way into everything from toasters and time pieces to hearing aids and hand-held computers. This rapidly changing technology increases the need for upfront investment, while multiplying the risks of volatile consumer demand.
Third, globalization is here, and it’s here to stay. This means that the impact of digitalization and volatile consumer demand is compounded. No longer can producers rely primarily on focus group readings of the “market”, reflecting wants, needs, and preferences of domestic buyers, they must understand and correctly assess those factors globally. Without this focus, notions of competition, product mix, pricing, and inventory management, are woefully distorted.
So what are the strategic implications of these developments? It’s clear that there will be more industry consolidation, resulting in fewer companies, specializing more in product design, while outsourcing manufacturing, packaging, and testing operations. Additionally, it’s clear that these industries will be dominated by Asian-based companies. For small and not-so-small American companies, I would suggest the following strategic and tactical objectives:
- Identify the technologies and market offerings in which you excel, and match them to current and prospective customers with growth potential. Concentrate on companies with design capabilities in leading-edge technology. Don’t try to be all things to all people. Reassess and focus on customers who make the greatest contribution to revenue and profit, and gradually weed out those who don’t pay their way. It’s incredible to me how little time and resources are spent determining how customers rank in terms of short and long-term revenue and profit contribution. In too many cases, poor contributors are bleeding away time, talent, and resources that could be profitably expended elsewhere.
- Once you have established objectives for technology specialization, determining preferred customer mix, bases for competing more effectively, be it globally, regionally, or by industry and application, you are now able to develop tactics. These would address setting financial and budgetary priorities, policies and practices for sourcing, marketing, and pricing, promotional programs, identifying and exploiting opportunities. For dealing with competition from Asian suppliers, address firmly the issues of increasing costs of transportation, documentation, currency fluctuations, difficulty of communication, problems inherent in distance management and oversight. Specifically, understand and sell your advantages in total cost to the customer, other than merely price.
- Lastly and most importantly, diligently seek out and promote prospects for moving up from a small or medium size enterprise to a larger, more diversified or specialized source. Consider merger acquisition, or partnerships. The prospects for surviving, let alone profiting as a small business, are not great. An economic environment of rapid technological change involves, increasingly, demands for large upfront capital investment, with high risk of failure to recoup that investment in the foreseeable future.
This is not a friendly environment for small and not-so-small companies.