May 5, 2016

‘Size is the enemy of performance to a significant degree’.

This was Warren Buffett speaking (perhaps ruefully) at the Berkshire Hathaway shareholders’ meeting a few days ago in Nebraska.

We face many challenges as we increasingly become a knowledge economy with the need for more brains and less brawn. Our world is less certain owing to a number of factors.

Like price deflation. In 1980 a GE fridge cost the consumer in the States $1200, by 2000 it was down to $700 and today it’s around $500. Our world is being transformed by falling prices, increased competition and the difficulties of scaling businesses.

Like the challenges of sheer size. Just consider the headcount of some of the UK’s biggest companies and institutions: HSBC 266k; Tesco 476k; NHS (England) 1.4 million. Imagine trying to get your head around managing any of those.

Like big culture issues. Especially imagine managing the NHS where a negative culture has been embedded for a long time. Matthew Syed reflects on the challenges it faces in his book “Black Box Thinking” and compares it with the aviation industry where the safety records continue to improve. The legendary black box (actually it’s orange) has helped the industry scrutinise everything that goes wrong – jet hull loss rate has improved to one accident per 8.3 million flights in 2014. At the NHS in contrast there’s a history of cover up, denial and blame on bad luck rather than an admission of human error when things go wrong. Put it in tabloid terms – pilots admit fallibility; doctors claim infallibility.

Like the urge to cut cost (often with blunt tools). Huge businesses that don’t have “black boxes” often get to a certain giant size and then seem to get stuck into a spiral of cost cutting. Over the past 12 months cuts at HSBC, IBM, Ford, BA, British Gas and now BHS have hit the headlines.

Open warfare has been declared on cost with cost cutting strategies including:

  • Rewriting employee contracts

  • Outsourcing whole functions like HR and Finance

  • Offshoring to cheaper economies

  • Inshoring to Wales and the North East when offshoring gets too expensive

  • Zero based Budgeting – making every function justify every penny they want to spend on the basis they start with nothing

  • Arbitrary top down cutting

  • Using procurement to renegotiate all supplier terms (there’s a wonderful comment on procurement from the astronaut John Glenn: “As I hurtled through space, one thought kept crossing my mind: every part of this rocket was supplied by the lowest bidder“)

But isn’t the real role of business about growth and success and, if you can’t do that yourself, get someone else to do it? That’s what Warren Buffet thinks anyway… hence his alliance with 3G. When Berkshire Hathaway and 3G took over Heinz for $23 billion and then took over Kraft, putting the two together and creating the world’s 5th biggest food company, they embraced sheer scale.

But the concrete overcoats of cost will come home to make even them groan it as it always does to all big companies. Always. Because size is the enemy of performance and there are only two ways out of the fix – acquire or cut. Because by the time they’ve got really big the innovation flame seems to have gone out in big companies. And the trouble with cutting is you can only fire someone once.

The Goliath businesses of the past are struggling to cope as they’re currently structured. Because when you are looking for quiet conversations exploring possible solutions and flexing creative muscles the last thing you need is scale. Accenture, for instance, is in the brain business but with over 370k employees we don’t hear people calling it creative or subtle. It just gets things done. Specifically in the areas of discreet advice the need for profound experience and wisdom is a prized asset but even more valuable is the nimbleness and “turn-on-a-sixpenceness” that comes with a smaller, focused operator.

Creativity and guerrilla smartness tend not to be found in crowds. And that’s why adroit and nimble turns out to be the friend of performance to a significant degree when you need to move quickly and quietly.

October 12, 2015

The Luxury Market – marketing or reality?

Recently the Victoria and Albert Museum had an exhibition called “What is Luxury?”

This is what they said about it in their literature:

“It interrogates how luxury is made and understood. Luxury has a long history of controversy. More recently, the increase in prominence and growth of luxury brands against the backdrop of social inequality has raised new questions about what the term means to people today. Changes in culture and communication have also stimulated interest in less tangible forms of luxury, such as the desire for space and time.”

What was most striking in the exhibition was its emphasis on craftsmanship and innovation. That aspiration normally associated with luxury marketing had, here, more to do with aspiring to excellence of production. Quite simply this was a view of luxury viewed through the watchmaker’s lens rather than through poring over the entrepreneur’s spreadsheet. This was about classical harmony not fashionable hip hop.

At their roots most luxury goods are worth what you pay for them because they are special, crafted, scarce and desirable. Luxury is consumed in sips and nibbles not like fast food. This especially applies to classic brands that always outlast the rollercoaster that is fashion.

Whilst the V&A exhibition displays some exotic products including a 17th century Venetian Chasuble, a Hermes saddle and beautiful combs made from human hair by Studio Swine it doesn’t answer the question it poses in a particularly useful way. Coco Chanel said luxury was not the opposite of poverty but the opposite of vulgarity which is better but in a commercial world luxury is unashamedly a descriptor that spells out premium pricing.

And this is especially the case in the USA where “de-luxe” was coined by Henry Ford. America is the birthplace of marketing and big, especially of big money; America where trends become unstoppable movements. In Europe as the V&A showed it’s how it’s made that matters; in America it’s how it’s marketed that counts.

The USA accounts for ¼ of the £223 billion global luxury goods market and is the driver for promoting it. Interestingly it’s the young millennials – there are over 5 million of them who are millionaires – who are shaping the style and content of this market. Not least they are driving the double digit growth the sector has enjoyed since the recession.

But if the long term future lies with Asia Pacific – despite a current slowdown in China – Europe remains the fashion heartland for quality luxury goods. Just look at the importance of France, Italy and the UK as luxury goods markets. Unsurprisingly LVMH, Hermes and Prada are the vast, iconic and European brands that dominate the global market.

The top markets for luxury goods are currently:

    1. USA
    2. Japan
    3. Italy
    4. France
    5. China
    6. UK

The most important characteristic of the market has been the power of the brand. Consider that astonishing ergonomically created saddle in the V&A Exhibition. What blew people away was 60% wonderment at the leather, stitching and design all of which were so extraordinary and 40% the lustre of the Hermes brand.

When people buy luxury brands, the brand itself provides a reassurance of history, provenance and quality but there’s something more complex than that. Owning a luxury brand shows other people that you can afford it and that you are a discriminating shopper. It defines you in a very positive way through associating you with that wonderful luxury word – “lustre”.

Increasingly more brands will strive to have the premium mark of luxury. Increasingly quality matters to anyone who can afford it – and more and more can. Not just products adorned with an ad man’s slick label but a quality mark which defines design, craftsmanship and a history of and a passion for excellence. And this trend is accelerated by the values of Generations Y and Z – the Millennials – who believe in owning less but owning better – this is the generation that is convinced one pair of Prada jeans beats three pairs from Levis.

So, returning to the question, what is luxury?

Luxury is why retailers are sourcing products made with brilliant craftsmanship which have a quality story to tell and a provenance that is exciting and authentic so they can then charge a premium for the experience of the brand narrative as well as the quality and craftsmanship that they are selling you.

Luxury is the profit future for the business world. But the “luxury label” itself is beginning to feel rather old fashioned. For “luxury” now read “top quality” and you get closer to where the modern consumer is gazing. This sector isn’t controversial. Its success is, however, inevitable.

March 16, 2015

“Judgement is not upon all occasions required but discretion always is.”

Thus said Lord Chesterfield Secretary of State for Ireland in the 18th century one senses with a glass of port in his hand. But I’m not sure that’s totally valid because judgement is always needed. Discretion in the age of selfies and social media has however become decreasingly prized. We have become a generation of show-offs.

It was Bob Woodruff CEO of Coca Cola nearly a century ago who warmed to the concept of not seeking praise for doing something for the corporation on the basis that success was not a personal thing. The ego then was not so well developed. Yet only those of who have the years of service and battle scarred experience or alternately those who are simply better at comprehending the needs of the service economy live in an ego-free world.

Even in the trinket flaunting world of professional football it’s the team result that matters. And reflecting on this world where the midfielders are drifting perfectly weighted passes to strikers it’s the players, like Ryan Giggs and the recently departed Dave McKay, who are the match winners or rather the facilitators of victory. Not unsung but not lionised either.

Daniel Kahneman the Nobel winning thinker and writer of “Thinking Fast and Slow” reflected on getting results and human beings’ tendency to focus on one solution when in reality, depending on how one judged a problem, there were nearly always a series of solutions. Where discretion most potently informs judgement is in checking out which solution will be not the right one but the one that can be made to work. In a situation like making a deal or finalising a negotiation that discretion informed judgement becomes vital.

Winning in an M&A or in buy or sell position of any kind the ability to listen, but not just listen, to hear and to understand as well, is the quality that matters.  But the listener, this victory facilitator, needs to have one other characteristic too. And that’s something that others feel about them not think about them. Jack Welch a few years ago got it right when he presciently said:

“Stop worrying about technology and start worrying about who trusts you.”

Without being trusted however good your judgement, your money or your discretion, success will be denied you when it counts.

November 25, 2014

“Successful enterprises are built from the ground up. You can’t assemble them with a bunch of acquisitions”

Louis V. Gerstner (one time Chairman and CEO of IBM)

Louis Gerstner did a great job for IBM leading up to the Millennium and this assertion is partly right. Partly right in saying many M&A’s are fatally flawed, fatally flawed in their execution and in their conception. But Martin Sorrell at WPP is living proof that a successful enterprise can be built with a bunch of acquisitions. And the name few dare mention, the Voldemort of banking, Fred Goodwin was described as the “master of integration” by the Harvard Business Review after the acquisition of NatWest by RBS.

Yet the world is littered with the corpses of failed M&A’s either in making them happen or in having made them happen, in making them work. Here’s a recent list of aborted transactions:

Europa blog pic 1

The stories in the Quaker/Snapple acquisition, the Daimler/Chrysler merger or the HP/Compaq merger are of value destruction. In all cases the loss in market capitalisation was remarkable and the key problem was nearly always either a cultural misfit or the inability of leadership to overcome the warfare or to impose a new culture. But there are some great stories – in Daimler Chrysler as the German influence grew there was a joke circulating in Detroit:

Q. “How do you pronounce Daimler Chrysler?”

A. “Daimler. The Chrysler is silent.”

In Quaker they simply thought that the Snapple integration was going to be like their successful acquisition of Gatorade. It wasn’t. The trouble was Snapple was a cult drink with little going for it except a Jabberwocky of a name and Leonard Cohen attitude to life. Oil and water don’t mix.

Yet here is where we part company with Mr Gerstner. Successful M&A’s can be done. Try looking at Diageo; try Jaguar Land Rover/Tata; try P&G and Gillette. They all succeeded because the corporate culture was not allowed to destroy the idea of a good deal.  Any successful merger starts with an understanding that this is a new entity in which history takes second place. Hard as it is, people have to forget about egos and focus instead on a clean sheet of paper – personal interests can’t come first.

That apart in any M&A there are three key issues:

  1. Are the simple fundamentals right? The answer is never likely to be submerged in the data. It’ll be there, like as not, in plain sight.
  2. Can the inevitable cultural clash be managed or circumvented creatively?
  3. Can you create a “momentum team” amongst the key influencers in the business? You have to hit the ground winning not retreating.

And there’s one other absolute constructional RSJ to any successful M&A and that’s this. Have advisors who’ve been there and done this many times before. Experience beats frenzy and data overload, understanding people is more important than understanding spreadsheets and thoughtfulness wins against machismo.

The pundits say half the M&A’s fail. But that means half succeed. Better be in the right half.

October 20, 2014

“Money is not the most important thing in the world. Love is. Fortunately, I love money.”

So said Jackie Mason the American stand-up comedian, although in the scheme of things a lot of economists could equally well be judged as comedians given some recent efforts to untangle global trends. Why do Mr Mason’s words strike a chord?

Because:

1. We are facing significant inequality issues in the western world right now
2. Mason’s words raise the Old Testament rune about love of money being the root of all evil (1Timothy6:10)
3. Because the serious conversation is about what money can do and what lack of it can impede

In the late 1990s the Royal Opera House was rebuilt. It was a curious time of querulousness in Britain and despite the squabbles over unions, governance and budgets the end result has been a world class triumph of which all involved should be proud. At the time what history will regard as a trivial overspend filled the headlines. Yet it’s doubtful if anyone would wish their legacy or inscription on their tombstone to be “they came in on budget”.

Money provides us with choices and the ability to make our world a better, more comfortable and more exciting place.

The 2012 Olympics’ original budget was £2.4 billion but this was increased almost fourfold to about £9.3 billion in 2007 to the dismay of the naysayers. By the end of 2012 not a naysayer could be heard or found. The event and its spinoffs have met with universal applause. Not a word about that busted budget.

Lesson: if you’re spending large sums of money make sure it pays off. The Dome came in on budget. Remember that?

What money provides is the space and nutrition for new ideas to grow, it funds growth, allows survival and most important of all creates choice. Ask many teenagers their dream and it might be to win the lottery. Their dream is usually not of a Bentley Mulsanne but a list of “do-good” projects. They would love the choice of generosity not acquisition.

Choice brings its own stress. What to leave out? Opponents of the Coalition’s so called “austerity programme” or what in my younger days we’d simply call “the Budget”, miss this point. We cannot afford everything, nor should we try. In an ageing society no one here or in any other country is facing up to the reality that there won’t be enough money to cope unless bold new plans are undertaken.

Love what money can do if spent well, if the “right” choices are made. The examples of the Royal Opera Company and the Olympics can help us. Usually we spend just enough to get by. We whitewash the wall rather than prepare it, render it, put on an undercoat and then two layers of good paint. We don’t invest, we make do.

It’s the big, bold, imaginative expenditure that creates a legacy of success and something for the future generations to admire and use. Money spent and money invested are two separate things.

Because the most important thing is neither love or money. It’s the future.

October 2, 2014

“Change is the law of life”

This was John Kennedy and he added “those who only look to the past or the present are certain to miss the future”.

Not much to argue with here. We all happily accept this as well as the squads of change managers who fill corporations today. We have leaders who announce they’re ‘change agents’ with the same relish we heard from Albert Pierrepoint who was Britain’s longest serving hangman up to the mid 1950’s, with over 400 people to whom he was a decisive agent of change.

Do I sound a little cynical? If so it’s because even if change is the law of life it’s a really tricky law to enact. CEOs talk the talk on change well enough but getting change right isn’t easy.

The further down an organisation the more resistant people are to change. Don’t accuse a warehouseman of lacking imagination when he fails to embrace change with the same enthusiasm of a young graduate on the way up.

McKinsey – the most radical change agents of our life time – acted on the premise that constant reorganisation and downsizing in a relentless quest for greater productivity was their law of nature and of their own revenue generation.

The downsides of change, like inept pruning by a poor gardener, are things don’t work out as you’d hoped. Recently a senior executive in an insurance company said to me that it seemed to him the greater the change the greater the concomitant cock-ups. Change got wrong was demonstrated in the film “Margin Call” as following the bloodbath in a Wall Street Bank when the Risk Manager terminated, phone switched off and his existence expunged from history is desperately sought as his work on volatility is suddenly realised as key to the bank’s survival.

So change without meticulous execution to detail and scenario planning leads to those cock-ups. Yet excellence of execution at a NHS or Ministry of Defence tends to be what is missing as each embarks on a drastic programme of change. The architects of change are very often big picture not detail people but it’s nearly always the detail that scuppers the project.

The change programmes that seem to work best are those conceived and carried through in the face of a crisis like with Apple in 1997 and possibly Tesco today. And especially programmes which are bought into at every level of an organisation. When Tata took over Jaguar/Land Rover in 2008 they embarked on a change programme or rather they charged the team to do this. They provided the investment historically always lacking and the results are paying off. In 2012, 2013 and 2014 the company was rated the Number one car brand in the world by J.D. Powers (the voice of customer satisfaction and quality authority).

Change works if done meticulously, done strategically and supported by team willpower. It’s a lesson we should all pay attention to. And ironically it’s Tesco that gets this key thought right in their slogan:

“Every little helps”

September 23, 2014

I am a destruction maniac

“I am a destruction maniac.”

“Thriving on Chaos” was a book written by Tom Peters, ex McKinsey and a renowned management guru 26 years ago. Tom believed in ‘creative destruction’ and became an apostle of doom – good doom, the sort of doom that contains opportunities – like finding valuable debris on the beach after a mighty storm. “Revel in the mess “- he said – “because the mess has a message” which is “destroy and rebuild”.

He quotes General Shinseki (who was Chief of Staff in the US Army in the years around the millennium):-

“If you don’t like change you’re going to like irrelevance even less”

Tom, who’s 72 and cooling down somewhat after this blasting period of rage, predicted a revolution some two decades before it finally dawned on most people that the tsunami of change was actually here. Quite simply what he said, a quarter of a century ago, seems even more right now than it did then to masochistic CEOs who just seemed to enjoy the lash of vitriolic criticism.

So we’ve had and survived a banking crisis. Survived? We’ll see.

We’re on the brink of an oil and gas crisis as Russia and the West stare unblinking at each other. ‘Ukraine? You crane your neck if you want to I’m staring straight ahead.’ (This said with apologies to Margaret Thatcher’s memory).

Scotland’s referendum has been a triumph for democracy – at last a decent turnout – but raises a multitude of unresolved constitutional issues within Britain. This is quicksand, not just new territory.

The EU is staggering into its next crisis – more quicksand – the story here is getting worse….have you been to France recently?

And ISIS is scaring everyone to death – if you haven’t been virtually strip searched by security as you go through a gun-wielding corridor of Special Service Operatives on a trip out of Gatwick Airport, well feel lucky.

The USA and its deepening crisis over inequality…. an election in horrible prospect and nobody in a position to govern. This is not so much a system of checks and balances as a system of quick-setting cement. No wonder Obama plays so much golf.

Asia is cooling and struggling to control its own social changes. The Tiger has a toothache.

Mess? Well I’d say so.

Tom, what’s to do?

I guess Tom would say just three things.

  1. To survive, destroy the past that hinders the way forward.
  2. All change brings great opportunities.
  3. Put your money on women, youth and open-minded intelligence.

Because the changes we face – in Scotland potentially alone – open up the greatest opportunities for a long time if we can release ourselves emotionally from the shackles of history.

Imagine a new silicon valley – imagine all those Scottish young people (educated free) being persuaded to stay in their country and develop new businesses in media or professional services – just imagine NEW.

Imagine an exciting future.

 

 

 

 

August 20, 2014

“Any intelligent fool can make things bigger, more complex, and more violent.”

“Any intelligent fool can make things bigger, more complex, and more violent.”

(E.F. Schumacher)

I think he’s telling us that big is not a strategy. That’s interesting because I’ve been hearing arguments that size matters recently. That’s why China is now tipped by the Economist to overtake the USA as the world’s biggest economy by the end of this year.

It was (apparently) why the Astra Zeneca takeover by Pfizer made so much sense.  But I got a bit confused by all this. Apparently the most significant recent breakthroughs by pharmaceutical companies have actually been achieved by smaller and midsized companies not big ones.

The fact is too many big mergers have been disasters for us to have assumed this one would have worked.

But my biggest concern was this. The Pfizer/Astra Zeneca story is about innovation and learning. Logically tiny academic institutions like Oxford, Cambridge and Harvard with student populations of just 22,000, 18,000 and 21,000 respectively should struggle when there are mighty organisations like the Indira Ghandi University (3.5 million and number one in the world); the Payane Noor University, Tehran (800,000 and number 8) and the Modern University for the Humanities in Moscow at 48th in the league table has 100,000 students.

So the theorists would say innovation and excellence go with size.

I’ll say that again so you can fully appreciate how absurd the equation of scale with excellence is.

Innovation and excellence go with size.

Unless you mean “go” in the sense of “disappear, are absent from and destroyed by”.

The reality is, as we should by now have learned, scale fails. Creativity is killed by size.

Any of you who are thinking of setting up Goliath Advertising Inc. forget it.  The hot agencies in the UK right now are I’m told Adam and Eve, Weiden Kennedy, Droga5 and the Corner. None are big and although Adam and Eve was bought by Omnicom it is still aggressively independent. More start-ups like the Counter are happening.

If the aim is to achieve creative excellence then then think smaller and look for great teams of great people.

Big is not a strategy as my doctor said when I got on the scales. He’s right.

“Change the world. Build a business. Have fun.”

“Change the world. Build a business. Have fun.”

(Evan Williams co-founder Twitter)

Recently a piece of research compiled for the National Citizen Service shows teenagers are the most driven to succeed that they’ve been for a century. Nearly 4 in 5 of them say their career is important and they are, as a cohort, showing more enterprise and energy than many who preceded them. Many of them start working when still at school and the urge to succeed is much the same for girls and boys.

Most of the young people I talk to have a resentment-free attitude to zero hours contracts and short career horizons – if your contract runs out after six months you’ll find something else won’t you? So get over it.

But there’s one thing they strive for. It’s not money. It’s real job satisfaction. They yearn for a job which has a tribal intensity and zest for growth, those things that matter when over 40% of your waking week is spent working. You need to be inspired by the projects you do and feel valued. Most of all you expect to learn.

There’s never been a worse time to run a command and control business. In London some people in advertising tell me that their agency is a rather dull sweat-shop (how can advertising ever be dull? It’s like saying sex is dull. It just isn’t).

Companies at their peak like Mother, HBO (the Time Warner subsidiary), Lewis Silkin, Pixar, Nespresso and Patagonia have been conceived in passion and driven by a committed and excited team. Apple should be on that to that list but their world is changing. The brilliant Lucy Kellaway (who decorates the pages of the FT) says the company that had an “impressive way with words – almost certainly part of its success” has reverted in its job advertising to stuff like this “the successful candidate must identify integration points with other teams and drive high-resolution of cross-functional issues”.

The appetite to work with and help create the sort of liberated and creative business that would be the envy of your friends, be it a law firm, accountancy business or advertising agency has bitten deep.

And if the current crop of big companies go the way of Apple and start speaking droid as opposed to conversational English the brightest young talent will leave and start something themselves.

In fact my prediction is we are on the verge of an era of brilliant start-ups to rival those of the 1930s or 1960s.

“I have lied in good faith”

“I have lied in good faith”

(Bernard Tapie)

Language matters to me, so remarks like M. Tapies fill me with a sense of joy. But when it comes branding I treat words very carefully. Which is one of my problems with Twitter.

You see it’s hard to tweet a brand – so blame my inability to cope with just 140 characters and the new sparse language of today. Twitter and I know each other, of course, but we exchange just curt nods and then move on.

I read their advice to me and feel rather excluded and grumpy.

“Rules of grammar and punctuation fly out the window when you send a Tweet. Abbreviate with to w/, turn people into ppl, and even make for or four into 4. You can make your messages deep and philosophical, clever, funny, informational, educational, a question, an answer, or what you had on your bagel for breakfast this morning.”

So I was a Twitter philistine. A heretic. A fashion atheist. And then the Omnicom/Publicis ad agency merger collapsed a month or so back and here are just three of the tweets I saw:

“Damn. Omnipube was best name ever.”

“Omnicom rolls over, blinks, stares perplexedly into the sleeping face of Publicis, thinks: My head! Where am I? I remember Champagne…”

“This whole failed Publicis Omnicom merger was like two magnets with the same polarity trying to attract each other.

Humour always wins and when Twitter sounds like this I’m up there with rest drinking my Sumac Martini and eating Peruvian, a cool if slightly rusty player in the media scene.

I think Bernard Tapie would be great on Twitter. A renaissance man like he is would have lots to say …  his CV says “French businessmanpolitician and occasional actorsinger”. As Twitter might put it “sacre bleu.”