"Innovation is CREATIVITY that ships" (Steve Jobs). Not a PowerPoint slidedeck.

Archive for September, 2013

(Re-)(Organizing) Best Buy for Resilience

Preview

The Z score of Best Buy is approximately 4.0. The Z score is a bankruptcy indicator of modern industrial corporations. Although Best Buy is currently in the safe zone, a Z score lower than 1.81 will cause it to be in the distress zone.

best buy z score

The skeptics have been the heralding the demise of brick and mortar stores due to trend in showrooming where customers come into physical stores to look at products they later intended to buy for less online. Rather than be discouraged by showrooming, Best Buy has already embraced the challenge of showrooming by beginning to price-match lower prices from all local competitors and major online retailers and making other structural changes to compete for the future.

In this strategic briefing, I will share a mashup of how I see this transformation unfolding. These thoughts are synergistic with Best Buy’s Renew Blue transformation agenda.

Strategy Briefing for Best Buy

Best Buy’s SWOT

To create a working frame of reference, below is a sketch of the strengths, weaknesses, opportunities and threats confronting Best Buy.

Best Buy SWOT

Marketbuster

Best Buy has an opportunity to incrementally refine its turnaround strategy by viewing the world with an outside-in focus through the lens of a customer in its journey towards resilience as well as increase its profit velocity.

A marketbuster is a move, sastisfying one or more of the following criteria, taken by the firm that changes the game to deliver markedly superior performance.

  • A 2% change (gain or loss) in market position (typically volume share) of an incumbent as a result of its move or the moves of another player.
  • Annual growth in sales of shipments of 10% or more over at least two years from a new entry by an innovator.
  • Annual sales or shipment growth 5% greater than the growth of the underlying market by an incumbent.

Retail Therapy and Service Innovation

Artistic Retail Therapy

To serve a customer is human. Surveys indicate that more than 50% of Americans shop to boost their moods and an increasing number of shoppers believe that retail therapy can boost their moods. Getting a compelling deal makes shoppers feel best when indulging in retail therapy. Under these circumstances, isn’t a sales associate in a retail store uniquely positioned to serve as a retail therapist rather than be an iconic “one click buy button” on an e-tailer’s website?

In 1986, Paul David wrote that “innovation has become a cherished child, doted upon by all concerned with maintaining competitiveness…whereas diffusion has fallen into the woeful role of Cindrella, a drudge like creature who tends to be overlooked when the summons arrive to attend the Technology Policy Ball.”

Best Buy brick-and-mortar retail stores are uniquely positioned as the last mile to the revenue-paying customer to manage the Venturesome Consumption of Technology Innovations (VCTI).

VCTI is a multi-vendor ecosystem where Best Buy has an opportunity to serve as as an orchestra conductor. Best Buy has already forged strategic alliances with Microsoft and Samsung (others to follow). These alliances have to be carefully nurtured in order for the VCTI ecosystem to be successful. By relentlessly focusing on VCTI, Best Buy can create value by driving the widest wedge between a customer’s willingness to pay and the supplier’s willingness to supply as well as enable the customers, both the technology enthusiasts and the laggards, cross the chasm.

The conventional wisdom among pure play online retailers is that the world is flat. In the omnichannel world, which includes Browse Online, Purchase in Store (BOPS), the online and offline channels are in the early stages of blurring. In the retail store, the sales associate has an opportunity to wear the hat as a “retail therapist” — this service innovation is not a one size fits all model (it is more of an art than a science). Furthermore, inside the retail store, the world is non-flat (spiky) despite the prevalence of technology to monitor the inventory and do a price compare. The game changer in this non-flat, omnichannel world is to therapeutically assist the customer in (1) navigating the shopping experience using a combination of logic and emotion and (2) providing a laboratory for accelerated technology adoption. A greater attention on retail therapy will minimize the CAGE distance between Best Buy and the customer as sketched in the figure below.

CAGE for Best Buy

Creating Differential Value

When a Best Buy associate pitches a product, (s)he should tailor the message with motivational fit. The buyer may either have an opportunity-focused (technology enthusiast) or have a prevention-focused mindset.

If the buyer is eager, optimistic and ready to take chances, the pitch should be gain framing so that the buyer feels that the expensive product is truly valuable for consumption — i.e., an eagerness strategy.

On the other hand, if the prospect is being careful and prefers being accurate with the selection and wants to avoid making mistakes, then the pitch should be loss framing so that the buyer is confident that the product is “right” and feels that (s)he should not miss out on getting energized from the product (and stay behind the innovation curve).

face to face play to win

It is very important for the sales associate to use the appropriate motivational language to appeal to different communities. For example, in the world of “busy moms,” a FTWOH mom (full-time work outside mom) who believes in CIO (cry it out) has a very different mindset than a SAHM (stay-at-home mom) who practices AP (attachment parenting). Talking to a mom about her technology needs as opposed to the technology needs of moms in general can be really powerful. In similar vein, the needs of tech fanatics, home theatre connoisseurs, family men and small-business customers should also be addressed so that the pitch can be delivered with appropriate motivational fit.

Managing the VCTI ecosystem is a relentless campaign for Best Buy. The ultimate goal of a sales associate in a Best Buy retail store is the co-creation and realization of a moment of truth with the buyer in order to enhance the experienced value of a product because of motivational fit.

Artistic Retail Therapy enables people to connect with others for advice about purchase; in other words social shopping using the recommendations of a curator. Humanizing ecommerce, similar to an approach pioneered by Rakuten (a Japanese company), creates a more personal shopping experience in a “showroom” setting.

Re-examining the Consumption Chain

consumption chain

monopolize trigger event

The Yellow Brick Road towards Resilience

FRT best buy

empowering sales associate

organizational resilience

ADDING Value Scorecard for Best Buy

Imagine a world where the blurring of the brand becomes as invisible as a figure of speech such as “best buy” (lowercase). This would be really cool.

References

Heidi Grant Halvorson and E. Tory Higgins. Focus: Use Different Ways of Seeing the World to Power Success and Influence. Hudson Street Press, 2013.

Documented by Last Mile Resource

Restructuring FTE Debt: The Role of Activism in a Firm

Pixar Pitch

Once upon a time, Microsoft was a republic consisting of independently run profitable business divisions. Along the way, it lost the founder’s touch and succumbed to complacency. As a result, it was outflanked and left flat-footed by more nimble competitors in conceiving game changing product innovations in Internet search, social media and mobile operating systems. And every day it tried to plough ahead incrementally to grab market share in product areas where it had lost ground — however, it proved to be tough going to achieve second mover advantage. ValueAct Capital, a prominent hedge fund investor challenged the status quo and, in true Kellogg spirit, campaigned that a business needs to Think Bravely. Until one day it became clear to the board of directors that they need to reboot the organizational culture with a dose of activism. And because of that they granted ValueAct Capital a board seat. And because of that the CFO began to enjoy an expanded relationship with the company’s board of directors and external stakeholders. As a result, the CFO was strategically positioned to become the Activist CFO of the firm — i.e., an alter ego of the board of the directors and senior management team, not only supporting the business with information and analyses, but also ensuring that the entire enterprise delivers on its commitments. The team of hedge fund activism and the Activist CFO played synergistically to reinvent the FTE role and incubate and nurture a collaborative culture of digitally minded leaders adept at (and committed to) leading with both head and heart. Until finally the firm’s strategy was clear, differentiated, and well-articulated with demonstrated resilience to achieve market success. And from that day forward, the journey “onwards and upwards” towards the brand promise of “Your Potential, Our Passion” became authentic to all the stakeholders and established a competitive groove of differentiation.

Preview

The computed Altman’s Z-score for Microsoft is around 4.8. This corporate finance metric is considered the assessment of the distress of industrial corporations.

z score msft quarterly

Although Microsoft is not exactly in financial distress, we believe that it is good to revive the entrepreneurial instinct and start with a clean slate by vividly acknowledging that the Z-score has shown a downward spiral over the last few years. A lower Z-score proportionately increases the Financial debt (F) of the firm.

Value creation can only be realized by the collective talent pool who design and deliver innovations. The talent pool may be inside or outside the firm (employee, partner, customer). While conceiving or enhancing systems, designers accumulate Technical debt (T) as systems evolve and create obligations that must be “repaid” in order to make changes to a system.

The traditional lens of cost accounting has a bias for denominator-based management, which is an euphemism for headcount reduction. When the talent pool’s emotional bank account is depleted, their Emotional debt (E) increases.

For brevity we label the collective debt as FTE (pun intended). The premise of this paper is that restructuring the FTE debt provides the opportunity zone for routinizing imagination and corporate renewal.

The Managerial Trap of the Corporate Savior

Professor Rakesh Khurana of Harvard Business School (HBS) insightfully observed:

“A corporate savior riding in on a white horse is ill-suited to changing the company’s internal culture, yet it is that culture that exerts a far greater influence in the company’s business.”
[..]
“And unless its long-term strategy and internal culture change, Microsoft under the its next CEO won’t be all that different than it has been Mr Ballmer’s leadership.”
(Wall Street Journal, 8/31/2013)

Furthermore, the classic conundrum between operating as a whole vs individual parts can cause undesirable effects (UDEs) such as redundant activities, competing agendas and turf wars, intermediate layers of oversight, dilution of accountability and shareholder value destruction. This is a leadership challenge that cannot be easily punted to a corporate savior.

microsoft_tension_map

Hedge Fund Activism

The recent inclusion of to ValueAct Capital to the Microsoft board of directors is a tipping point for operationalizing Moneyball and Hedge Fund Activism. This nurtures a compelling, not-to-miss opportunity to enhance activism in the firm, spur greater innovation and right the ship.

Research data from at least 78 activist investments has revealed that hedge fund-led activist investments have outperformed passive investments by earning 20% over two months, 3.8% greater returns and, over two years, they earn 18.4% greater returns. The following are the different types of hedge fund activism that ensure that a firm is run in the interest of its owners:

  • Board room activism
  • Business strategy activism
  • Mergers and acquisitions activism
  • Sales activism
  • Capital structure activism
  • Governance activism

hedge-fund-activist-investor-mindset

It has been shown that a firm with stronger shareholder rights has higher corporate performance (higher firm value, higher sales growth, higher profits, lower capital expenditures). Developed by Professor Gompers of HBS, the governance index (G) is a cherry picked set of governance provisions, spread across 5 subindices, that proxies for the strength of shareholder rights of a firm. G has a possible range from 1 to 24 and captures what is important about corporate culture and governance-related issues.

governance index

CFO Activism

Finance activism is defined as the Finance team being well-positioned in a role beyond controllership and decision support in order for the Finance team to become more closely engaged with the board of directors via an expanded relationship. Aside from being a business partner to the CEO, providing information and analyses, the Activist CFO is an alter ego to the senior management team to really influence the entire enterprise and deliver on its strategy and commitments.

The nature of activism is not a PowerPoint presentation nor is it the “flavor of the month.” As a first step, it is prudent to assess the firm’s fit for growth agenda and objectively score the firm’s strategic clarity and coherence, investments in differentiating capabilities and its organizational culture. Specifically:

  • To what extent are we strategically adrift or distracted?
  • To what extent are we in the game?
  • To what extent are we ready for growth?

Rather the improvisation as an Activist CFO is a Think Bravely play whose span is sketched in the figure below:

activist CFO

execution maestros

growth navigators

turnaround surgeons

business model transformers

Technical Debt

Design capital encompasses internal systems and processes that enable business capabilities. New designs are fundamentally options with associated economic option value. Designers accumulate technical debt as systems evolve and create obligations that must be “repaid” in order to make changes to a system. The value of a firm’s design capital is enhanced in the presence of high option value and low technical debt.

technical debt

The Disciplined Agile Delivery (DAD) “decision process framework is a people-first, learning-oriented hybrid agile approach to IT solution delivery” and provides a number of comprehensive strategies for managing technical debt.

The following are key insights based on an analysis of real-world systems:

  • Under option-constrained design capital and resource scarcity, a firm’s design moves will tend to increase the technical debt of its design capital.
  • Under option-constrained design capital and resource abundance, a firm’s design moves will tend to create design options in its design capital.
  • Under debt-constrained design capital and resource scarcity, a firm’s design moves will tend to abandon design options.
  • Under debt-constrained design capital and resource abundance, a firm’s design moves will tend to reduce its technical debt.
  • Under low-quality design capital and resource abundance, a firm’s design moves will tend to reduce technical debt if the technical capability of the firm is high.
  • Under low-quality design capital and resource abundance, a firm’s design moves will tend to create design options if the technical capability of the firm is low.
  • Under high-quality design capital and resource scarcity, a firm’s design moves will tend to increase technical debt if the firm’s ability to transfer technical debt to other members of its ecosystem is high.
  • Under high-quality design capital and resource scarcity, a firm’s design moves will tend to abandon design options if its ability to transfer technical debt to other members of its ecosystem is low.

Emotional Debt

Prior to the digital era, the traditional marketing approach consisted of place, promotion, product and price (4Ps). Empowered customers are reshaping the firm in the digital era. In the customer-focused enterprise, the key marketing drivers are product systems, public engagement, revenue model and access and availability.

Research has shown that business success depends on integrating strategy and design in order to forge deep, emotional connections with customers. Therefore, in every business process interaction, whether it is inward or customer facing, relationships between players in the value chain can become resilient only when everyone learns to listen and understand each other authentically at an emotional level.

emotional_connection

Competing for the future in a connected economy requires instilling the values of Lean In across the firm. The (mythological) Hero’s Journey accounts for the hesitation, doubts and trials that go along with embracing something new and the satisfaction of conquering new trials. When the customer is unable to travel or complete the Hero’s Journey, it leads to the depletion of emotional bank accounts. This in turn causes emotional debt to accumulate in the value chain. Why are emotions important to the firm? The potential of talent can be harnessed only by being sensitive to each other’s feelings and walking in another person’s shoes.

The Activist CFO spearheads the charge to audit every touchpoint in every strategic business process and evaluate how to minimize emotional debt and achieve first-connector advantage.

Heros Journey

Send Off

Whether it is “software and services” or “devices and services,” the world is all DIGITAL at Microsoft. The (new) FTE adopts a digital leadership mindset in order to dynamically balance the tension between “operating as a whole” and “operating as individual parts.” A digitally minded leader is adept at leading with both head and heart.

microsoft_tension_map_FTE

digital leadership

The clarion call is that activism is a relentless campaign for any firm. Restructuring the FTE debt provides the opportunity zone for corporate renewal. In this paper we have presented that the activist hedge fund investor and the Activist CFO need a synergistic working relationship to effect culture change and enhance shareholder value.

Using the insight of Joseph Paris of Xonitek, we illustrate the circuitry of a resilient organization.

operational excellence by design

The previous expansion of FTE as Full Time Equivalent has to be deprecated. Rather there is an urgent need to develop a new cadre of talent called Activist Turnaround Manager (ATM). The intent is less about “riding a white horse” to rescue a firm. We need to anchor an understanding that authentic leadership is an art of struggle to routinize imagination and compete for the future.

References

This is a living document authored by Last Mile Resource