Tuesday, August 18, 2009

Values Based Decision Making

True story: One day a manager came into the office of a VP in his corporation. The manager said they’d run into a problem with a deal in Latin America selling equipment to a local government department. It was a big deal and represented about 10% of annual sales, and because lots of overhead had already been covered by other sales, the deal represented 25% of annual profit. This was important to the performance results of the corporation.

The manager reported that he’d run into an unacceptable situation and while they would not contemplate acquiescing to the demands, he wanted the VP’s thoughts on the issue. The deal was priced at $10 million. It had been agreed to and contracts were drawn up. Then the local representative announced that they needed to re-price the deal up to $11 million, and pretend costs had gone up. Then the local representative would make sure that the extra million was ‘distributed’ appropriately. The local representative indicated that this was how all deals were done with the government in his country, it was ‘normal’.

The manager said that obviously they would not pay the additional $1 million in bribes. and thus they would not re-price the deal and would stick with the original offer. However the VP said ‘No, I think we cannot do that. Clearly everyone who does business with this government must know that on deals this big, you’re expected to distribute this additional money to grease the wheels. We know competitors who’ve landed contracts, and we also know competitors who were unsuccessful in landing deals. Both these groups must know about the payola. As a result, we must completely withdraw the offer. Moreover, we must let it be known that we will not be bidding on any future business with this government.

Surprised, the manager asked if that wasn’t a bit extreme. But the VP said “Here is the issue. Everyone knows of this practice. If we go back and win the deal with the original $10 million price tag, everyone will just assume we paid the bribe. Our reputation would be tarnished. Likewise, if we ever did business with this government people would just assume we paid off the necessary officials. Our reputation would be damaged. Thus, we can never do business with this government.

Who was this VP. It was Robert Galvin, who later took the helm of that company, Motorola, and steered it with full wind powering it sails for 30 years. It was a decade after Galvin left the company that it ran aground.

Saturday, August 8, 2009

Stockholders and Gamblers

At the PDMA breakfast this week we had a brief discussion around what drives management styles in companies. In the course of this conversation we talked about the difference between stockholders and speculators.

Speculator s buy a stock because they have a feeling that the stock will rise in price in the short run. Stockholders buy a stock because they believe that over the long term they’ll earn dividends and see a reasonable lift in the value of the stock over time.

I have always wondered why the leadership in companies feel compelled to give quarterly guidance, when that really focuses on the interests of speculators. I suppose it has something to do with institutional investors who can buy and sell large blocks of stock, and use their voting power to, influence CEO’s. But catering to them is weird since speculators are just going to sell as soon as the price reaches the threshold, and then they’re no longer investors. At any rate, the behavior focuses management on the short term, when it is better for the health of the company to be more focused on the long term.

We decided at the PDMA that the whole thing needs an overhaul. The voting rights that go along with stocks should be withheld until the stock has been held by the same owner for a longer period of time – say two years. That way speculators can go along for the ride, without compromising the long term viability of the company, and management can focus on the whole future of the company, not preoccupied with the quarterly results.

Perhaps it should go further and hold dividends in escrow for stocks that have been held less than a year. In order to earn the dividends and then enjoy subsequent dividends, you have to hold the stock for one year. Otherwise you forfeit the dividend and it goes into retained earnings.

Thursday, August 6, 2009

It is still not too late to innovate

At the Product Development and Management Association (PDMA) breakfast meeting this morning we talked about how this recession might impact how we measure R&D investments.

One of the attendees pointed out that we pull out of a recession when innovative new products incite people to start buying again. The impact on companies is that if you are not coming to market with innovative products soon, you may be bypassed by new competitors as we go into recovery.

Research suggests that in prior recessions the vast majority of companies who fail to prepare innovations during the latter part of the recession, disappear within a few years of the recovery. Their products lose their ability to attract customers and market share disappears.

But this recession is a little different from prior recessions. Because banks are the cause of the recession, the breadth of this recession is unusually broad. Job creation is what economists tell us will pull us out of this recession.

That could cause the innovation bubble to be pushed further into the future. It will still happen, but perhaps later than in prior recoveries.
That is good news for companies who’ve done nothing but hunker-down over the past few months. There is still time to get organized to innovate.

Wednesday, August 5, 2009

Listening to what customers don’t tell you.

Successful innovation hinges on getting the problem accurately defined. Lots of marketing experts will tell you to ‘listen to customers’. The trouble is, sometimes what customers say and what is the truth are not the same.

Getting to the truth some other way is sometimes the best solution. This morning we were talking about how companies are using the Web and this topic came up.

An online brokerage firm offered different investment alternatives to its clients from time to time. As part of registering a client on the site, they ask the client to describe his or her risk profile – conservative, moderate risk taker, or adventurous.

But the brokerage does not rely on that answer. Instead they serve up three investment alternatives at a time – one conservative, one moderate, and one higher risk. Then, then over time, they track which ones the client clicks on to eventually determine what the client’s real appetite for risk is. What they found is that often clients either don’t really know what kind of risk appetite they have, or they lie about it.

Once they have the clients real risk appetite pinpointed, then they can offer more appropriate and appealing investment alternatives.

Finding ways to listen to customers without listening to what they say can sometimes provide the competitive insight that gives you the edge. Be ingenious.