March 4, 2010

Vacancy rates are the new neighborhood problem. The worst of the foreclosure crisis appears to be behind us.  Home prices are stabilizing and are, moderately, on the rise.  A recent report tracking home prices indicates fewer home sellers are cutting their prices.  The Case Schiller index, the authority on US home prices, has shown significant improvement in the last calendar quarter of 2009.  As the bottom of the housing collapse moves into the rear-view mirror, we are entering into a new phase where the housing crisis becomes a vacancy crisis.

While the storm of the housing crisis may have passed, neighborhoods are coming to grips with its aftermath.   The trend in homeowner vacancy rates tells the story.   Looking at data collected by the US Census Bureau, the recent collapse of the housing market has translated into record vacancy rates. 

Home vacancy rates have skyrocketed to record levels in the current economic recession.  Conservatively, a record 14 million homes are unoccupied in the US.  What is unique in this recession is the kind of neighborhoods affected by vacancy rates.  This recession is affecting vacancy rates in neighborhoods everywhere on the economic spectrum.  Homes priced above $500,000 have similar vacancy rates as those priced lower.   The vacancy rate for new homes, built after the year 2000, have 3 times the vacancy rates as the national norm. 

Combine these two facts into a new reality; neighborhoods that 5 years ago held the promise of high quality living are now littered with empty homes.   The first to feel the brunt of foreclosures were newly built, exurban communities.   Many of these communities were located in high foreclosure states, like California, where consumers stretched equity and went farther outside metro areas to obtain a home.  Another type of neighborhood feeling the impact is those  in transition.   During the housing boom, neighborhoods were being upgraded with new housing infrastructure, often increasing the price tier of the housing supply.   When the boom went bust, lots were left empty as builders stopped construction, old houses prepared for tear-down were left vacant, and new homes nearly finished were left that way.    My current neighborhood looks a lot like this.  When my family moved into our neighborhood several years ago, we found what many look for, nice neighbors and good schools.  Today, it is less populated than it was and has its fair share of homes gone bust.  One block over, there is a stretch of 3 homes which are vacant.  In one of those homes, anything not part of the foundation and the walls is gone, leaving a shell of what once was.  Stripping of foreclosed homes has become a common practice.  On another block, a vacant house has developed mold and is uninhabitable.  While the neighborhood remains a good place with more than a few white picket fences and the American dream intact, it will take us some time to get back where we once were.  This is the aftermath of the housing crisis.  According to Standard & Poor’s, high vacancy rates in the housing market will likely be with us for at least the next 3 years. 

In this timeframe, the foundation of the quality of life in these neighborhoods will be more fragile.  In his 1996 book, George Kelling outlined his now widely-known broken windows theory.  This theory asserts that small offenses such as litter, empty lots, and yes, broken windows, leads to an environment where more serious threats to quality of life can grow.  Although his work was focused on urban communities, the basic concepts hold anywhere, even in prosperous suburbia.   Some of the wealthiest neighborhoods in the US are not been immune.  Case in point is Winnetka, IL.  Winnetka is, by any measure, one of the wealthiest communities in the US.  With an average house price that tops $900,000, it’s inaccessible to most.  Winnetka’s vacancy rate is 3.5%, significantly above the national average.   Saratoga, California is another example.  Average house price is about the same with a vacancy above the national average of 3%. 

The foreclosure storm’s aftermath is resulting in communities working together.   The New York Times recently reported that several big cities are using tax dollars to purchase foreclosed properties in order to stem neighborhood decline.  Home owners in communities are pooling dollars to do the same.

Time will surely work through these issues.  Asset prices are becoming attractive once again.  Distressed properties will be purchased, restored, and sold.  Development will continue and quality of life will regain its solid footing.  In the meantime, neighborhood residents are uniting and working together to protect their communities.  Perhaps this is the silver lining in the vacancy crisis.  Neighbors will get to know each other better as they tackle a common problem and communities will strengthen as a result.

February 19, 2010

Wal-Mart, the retail giant that sits atop the industry in terms of size, released earnings for its fiscal fourth quarter on February 18.  The main headline was the decrease in same store sales located in the United States.  There is a first time for everything, and so it is with same store sales going down for Wal-Mart.  Taking a deeper look, findings from its quarterly financials release can be used as a barometer to figure out where the economy is headed and what strategies can be pursued for success in the current economic recovery.  

Wal-Mart’s decrease in US sales is a sign of shifting consumer behavior.  While price deflation was cited as the cause for the decline, other trends are likely afoot.  The company also noted that store traffic in US stores decreased.  Yet, total consumer spending in the US increased at an annual rate of 2% during roughly the same period. So consumers are showing up to buy, just not as much at the local Wal-Mart.  Just last year, these same Wal-Mart stores were growing sales greater than 2%.   In the depth of recession, Wal-Mart benefitted as consumers traded down by walking into Wal-Mart.  Many companies experienced significant shifts in demand to lower price-tiered products during this time. Now, with economic recovery appearing to take hold, consumers are moving once again.  Some analysts suggested that low-income, financial pressed consumers were at the root of the sales decrease.  A more compelling argument stems from consumers on the other end of the income spectrum.  So the other trend occurring here is that some, likely higher income, consumers are going back up the price ladder and trading up amidst the recovery.   Expect significant shifts in demand going forward as consumers behavior is on the move.

The other end of Wal-Mart’s revenue results were in international markets.  With US sales growth down almost 2%, it was growth elsewhere that enabled Wal-Mart to deliver company-wide sales growth of more than 4%.  While the company moderated its sales forecast for the US, it simultaneously shined a spotlight on China and Brazil as future growth sources.  Does this sound familiar?  The current economic cycle has accelerated the shift of the economic center of gravity away from the US and Europe and toward the BRIC countries, especially China and Brazil.   This is the other, larger trend visible in Wal-Mart’s results.  Companies used to view growth in BRIC markets as optional upside, but are now viewing growth in these markets as central to their strategies. 

Despite the revenue challenge in the US, Wal-Mart delivered a 22% profit increase.  While battling price deflation and a global slump, these results highlight just how good Wal-Mart is at executing the operations of the business.  Company management indicated that lower inventories led to a 21% increase in free cash flow.  That’s $2.5 billion dollars of inventory no longer sitting idle in the supply chain.  Of course, this is not the first time we have heard about Wal-Mart’s ability to tighten its supply chain (see a review of Wal-Mart’s Q12006 release).   The company has the ability to continue improving its supply chain, time after time, quarter after quarter.   The larger message here is that the competitive race in grocery retail will intensify with a heightened focus on supply chain.  Five years ago, coming out of the last global recession, the retail competition was about format, with a landscape split at the extremes between luxury and discount.  “Mass and Class” as it was sometimes called.  What no one could have predicted was the reemergence of the grocery chain.  The center channel revitalized itself and came back after being written off as obsolete.  No similar demonstrative change appears today on the horizon.  So now, the industry competitive race will be defined by companies that make their assets as lean as possible.  Supply chain is moving to the forefront.

After settling into recession, consumer behavior is on the move again.  Brazil and China are becoming the economic center of gravity.  Supply chain is moving to the forefront of retail.  In all these things, Wal-Mart is a barometer for the future.

February 4, 2009

I came across a survey recently published by The Global Supply Chain Council that caught my eye for its boldness.  The report contains survey results of 125 companies operating in China regarding their respective warehousing and transportation practices.  Here is what caught my eye; companies responding to the survey indicated their average logistics cost were 10% of sales.  With this newly reported number, the authors therefore conclude that logistics in the China market are now approaching new levels of efficiency.  This is an astonishing assertion. 

This number reported by companies sits in stark contrast with commonly held views.  In fact, efficiencies approaching levels seen in only the most mature economies.  Numerous sources report logistics costs greater than 16%.   Another reported metric to gauge logistics costs is as a percent of GDP.  Using that metric, the audit firm KPMG reports that China’s logistics costs are 18% of GDP, compared with 8% in the US and 7% in EU countries.  In these more common views, the difference between China’s logistics costs with the US and Europe is widely attributed to the state of infrastructure.  Developed markets not only benefit from better roads, but also improved integration between modes of transportation such as road and rail, and better information exchange through established IT assets. 

The difference between these two reported numbers, 10% and 18%, is huge, or, more precisely, about $1.7 Trillion.  So, what accounts for the difference?  Finding the answer is critical to anyone operating a supply chain designed to serve the Chinese consumer.  

The reason for the difference is geographical.  Reading through the plethora of published reports on the topic, a fundamental point seems to have gone unaddressed; that China is really, at its highest level, 2 distinct macro economies.  To understand China’s true supply chain picture, one must start by segmenting the country into two basic parts.  One part is the eastern one-third of the country.  It is this region that China’s economic success story took root and grew.  Its export-based economies of Shenzhen and Guangzhou are here.  So is the glittering world city of Shanghai, as well as the nation’s capital of Beijing.   This area has its own distinct characteristics.  These characteristics include a rising professional class and dense urban centers.  Its infrastructure, in many ways, not only matches but is moving beyond the rest of the world.  The other part is the western two-third’s of the country.  It this area of the country that is more diverse and has its own set of characteristics that contrast it with the east.  It’s more rural, more sparse, and dramatically poorer. 

This marked contrast between the eastern one-third and the west that accounts for the difference in reported logistics costs.  A closer look at the first survey, where individual companies reported a logistics cost of 10%, shows a majority of these companies operating within the eastern one-third of the country.  Their base of operations is localized around Shanghai and Shenzhen.  Other sources citing a higher logistics cost of around 16% use country-wide data that includes economic activity from every province.  

A look at infrastructure data from two different provinces illustrates the point.  The Jiangsu province, just inland from Shanghai, is a good example.  Jiangsu is comprised of over 71 million people and is home to Nanjing, China’s historical capital.  It is home to 6 major expressways, all built in the last twenty years.   Although far from the glittering lights of Shanghai, this province has enjoyed significant economic growth.  Yunnan, a province in the far Western part of the country, has a different profile.  Home to over 40 million, it has only 2 major expressways.  Roughly put, western Yunnan has 57% of Jiangsu’s population, but only a third of the major freeways.  The picture below, sourced from Wikipedia, offers a visual view of the disparity. It shows China’s freeway system, where the prosperous eastern one-third can be seen distinctly between the western two-thirds.  The contrast increases when you look at the colors.  The routes color coded in Blue are completed, but the freeways coded in Red are under construction.

To study the Chinese economy is to be awash in large numbers.  1.3 Billion people.  13 million cars sold last year (world’s largest).  185 million refrigerators sold last year (world’s largest).  Retail sales growth of 17%.  These large numbers can (and often do) create the impression that China’s 1.3 Billion consumers will be reached the same way with the same cost structure.  Don’t be tempted by that impression.  A supply chain system to fully serve the Chinese consumer will hold different models.  Designing these models will start by recognizing the disparity between a more prosperous east and the trailing west.

January 14, 2010

Note – After reading the post below, you can also view a 15 minute slidecast available here to explore this case study in more depth. 

Leading business change remains an inherently risky undertaking.  In today’s environment, business change leaders need every tool possible to confront the inevitable risks and challenges that must be faced and resolved.    

This post examines a change campaign in crisis and the tactics leaders used to prevail.  It is the story of a civil rights campaign under the leadership of Dr. King.  Following this examination are lessons available to business leaders championing change within their own organizations.  

A Case Study in Leadership Crisis – The Birmingham Change Campaign

In the spring of 1963, Dr. King and his team were paralyzed to act.  His organization was in Birmingham to obtain racial integration in downtown shopping areas.  Support for the campaign he initiated had yet to emerge and the movement was stalled.  Success in Birmingham, and King’s career reputation as a national leader, were at risk.  In this atmosphere of crisis, King called his leadership team together. 

Eight years had passed since the groundbreaking integration success in Montgomery, Alabama.  That campaign integrated city busing and raised King’s profile onto the national stage.  Since that time, his organization had searched for a new level of success that would elevate their objectives back into the national spotlight.  Racial integration in the city of Birmingham was targeted for this goal.  The strategy they employed was straightforward; force local, intransient economic leaders to negotiate racial integration through economic boycott, peaceful protest, and filling local jails beyond their capacity.   

King’s Challenges 

Despite a clear strategy and months of detailed planning, King and his organization faced multiple obstacles.  Their primary challenge was a shortage of volunteers willing to protest and risk jail time.  Only a few hundred people had stepped forward to volunteer, compared with a plan that required thousands.   

Support from essential constituencies was also lacking:    

• Established members of the local community favored a solution through the normal political process. 
• Fearing economic reprisal, the African-American business community offered only tepid support.  
• Federal government intervention was important to establish a path to negotiations.  But with international concerns dominating the national agenda, the presidential administration had little incentive to act.   
• National media attention was a source of leverage King used to encourage negotiation.  King’s power lessened in their absence. 

These issues struck at the core of King’s strategy and stood squarely between his current situation and success.   

The Road to Revitalization 

Dr. King first attempted to revitalize his campaign by making a very personal decision to protest and go to jail.  King believed that a public display of personal sacrifice would catalyze support and mobilize badly needed volunteers.   However, King left jail after nine days in solitary confinement with heightened morale in his organization, but little increase in the numbers of volunteers or the amount of press coverage. 

King was then immediately faced with a controversial change in tactics. King and his leadership team debated a decision to involve the community’s youth in peaceful protest.  This was a tumultuous decision given the prospect of damaging criticism.  Core constituency groups – local African-American leaders and the Kennedy Administration – strongly advised against their involvement.  Yet the youth of Birmingham shared the passion for his objectives, were rigorously trained in peaceful engagement, and were not burdened with the threat of economic reprisal like their more hesitant parents.   

King’s decision to involve them was the tipping point in his campaign. The peaceful demonstrations that followed were met with violent retribution by the local authorities.  Becoming national front-page news, photographs of police dogs attacking teenagers placed King’s objectives within the context of the conditions of the time.   

These events evoked a nationwide outcry that sparked a reluctant White House to act.  The local government, facing harsh criticism and filled jails, were left with limited choices beyond negotiation.  They entered into negotiations which led to racial integration.  King has his organization overcame their challenges and success came their way.    

Lessons Learned for the Change Leader 

Several lessons emerge from this story that are instructive for today’s business leaders: 

Conflict Can Be Constructive:  King effectively used conflict to bring reluctant parties into negotiation and catalyze progress.   

Resistance to business change is often manifested in prolonged decision making and calls for consensus.  These are the Achilles Heel of business change initiatives.  Faced with the prospect of delays that compromise commitments and erode morale, the change leader may need to escalate a conflict to catalyze dialogue, decision, and action.   

Public and Personal Sacrifice Has Limits:  Change Leaders believe strongly in their “personal” power.  Yet this example demonstrates that public examples of personal sacrifice have limits.  Personal sacrifice will help to bolster your own credibility and increase morale within the internal change organization.  Rarely will it have any material affect on any person or group outside of the organization you control. 

Dramatizing the Reality to Vision Gap is Vital:  King’s strategy focused on dramatizing present conditions in a way that built credibility for his cause.  Present-day realities are often viewed as less important than a future vision.  But the gap between the present situation and the intended change motivates action.  Placing a future vision within the context of the present demonstrates the degree of progress required, which is essential.   

Execution to Plan Supersedes Stakeholder Concerns and Desires:  In the case of the Birmingham campaign, King’s key constituencies demanded different tactics.  He would have failed if he catered to all of their demands.  King knew that the tradeoff between an supportive constituent and poor execution is no trade-off.  Decision-making based solely on constituency concerns becomes a “stakeholder trap” that compromises progress. 

After success in Birmingham, King went on to deliver the “I Have a Dream’ speech and then received the Nobel Peace Prize for his role in leading societal change.  It was King’s persistent application of these lessons that translated into his success, and can help executives successfully lead today’s change initiatives.

Note – some contents of this posting were originally published in the Wharton Leadership Digest by the same author

January 6, 2009

A key supply chain challenge in the coming decade will be serving the Chinese consumer.  For many companies, doing so effectively will enable companies to tap the next growth wave in the global economy.  

As the global economy stabilizes, eyes are turning to the Chinese consumer as an increased source for growth.  In the developed world, especially the US, debt-laden consumers are not expected to be the growth engine they once were.  In the past boom, consumer spending accounted for 2/3 of the US GDP, powering US growth and exports from abroad.  Yet, according to a recent column by Paul Krugman, US consumers are $11 trillion poorer compared with the start of the current recession.  The US consumer will likely be focused towards budget, not spending in the foreseeable future.  Just in time it seems, indications are that Chinese consumers are spending more.  This year, China may well pass the US as the largest consumer market.  The Chinese government recognizes the situation and its potential, viewing domestic consumers as the available source to replace waning export demand.   They are using numerous policies to support this transition.  Consumer lending by state-owned banks is increasing.  Tax incentives are being offered.   These steps are having an effect.  Retail sales growth in China was 17% this past year, as highlighted in a recent article in the New York Times.  And there is plenty of room for continued growth. A recent report by The McKinsey Global Institute highlights that consumption is only 36% of total China GDP, only half of US levels and 2/3 of levels in other developed economies.  This transition has been a trend for more than a few years, one that will accelerate and deepen as a new world order emerges with the economic recovery.   As these trends continue, the Chinese consumer will become the primary power underpinning next phase of global growth.

This emerging reality is not how current supply chains are designed.  Helped by a low exchange rate (some say artificially low) and US consumer spending, China became the source of supply as the first stop in a global supply chain.  The primary supply chain focus in China was tapping low labor costs to supply consumers elsewhere.  This will change.  The issues regarding Chinas’ fixed exchange rate will come to a head sooner rather than later.   Once they do, the supply chain model of using China primarily as a source of production in the global supply chain will end.  When it does,  supply chains will need to be reconfigured to serve the Chinese consumer and tap the next economic growth engine. 

This transition will be complex.  First is the transition to a new supply chain network itself.   Certainly, companies can benefit from a burgeoning third-party logistics sector, benefiting from foreign entry in 2006 in conjunction with China’s WTO membership.  Even with this accelerator, the number of new  processes to change and create represents significant business change.  There is more complexity on the horizon.  Funded by massive government spending, China is currently building out its infrastructure of road, rail, and shipping on an unprecedented scale (see The Other Stimulus).  The speed of build-out in each of these areas is at a magnitude not seen in history.   In the four years leading up to the latest, increased round of investment, over 600,000 km in new highways were built.  More high-speed rail has been put in the ground in the last four years than in the last 20 across all of Europe.  As networks transition to serve demand domestically, keeping up with the dizzying pace of change will be an added challenge.  

These two challenges are coupled with high risk factors.  AMR, a research institution, has called China the “world capital in supply chain risk.”   This is primarily due to fears of IP infringement and also the cost of corruption.  A recent government audit suggests corruption is a $35 Billion dollar problem, annually.   These challenges will be faced and solved by companies seeking to go where the growth is. 

The recent economic downturn, the most severe since the great depression of the 1930’s, has accelerated existing trends.  One of those trends is the emergence of the Chinese consumer class.  Supplying the demand for this emerging force will be one of the primary business challenges this decade.  Those who meet that challenge will be rewarded.

December 9, 2009

Economic downturns often accelerate existing trends.  Strong companies gain share at the expense of weaker ones.  Industries consolidate.   New ways of operating emerge.  Jeff Immelt, CEO of General Electric, is has said on numerous occasions the current economic climate is an opportunity to “push the reset button.”   Fair enough.  The question before us then is what kinds of reset strategies, or buttons, are available to us.  There are two types.  As economic pressure is exerted, resourcefulness comes into play first.  People and organizations find ways to do more with less, leaning on emerging trends to squeeze the budget one dollar at a time.  Cost and efficiency are the drivers, or the reset button.  As economic growth returns, a new dynamic will emerge in 2010, leveraging emerging trends to exploit new opportunities.  In this upcoming phase, growth is the primary driver.  Yep, reset button.

Three paths will emerge in 2010 as viable strategies to “push the reset button.”

Social Networking goes Enterprise and Mainstream

Trial and error will give way to scale this coming year.  There are a few companies taking extraordinary action in social networking on the web.  They are increasing their brand equity, engaging in a deeper way with customers, and reaching new ones.  They have been the exceptions to date.  Other than a few, most of the enterprise market has dabbled and made mistakes in the Twitter and Facebook channels.   With the combination of leading adopters and trial and error, companies now have relevant examples of success and organizational learning to capitalize.  Both Wal-Mart and Honda are examples.  Honda recently launched a multi-channel campaign focused on community building.  Don’t you know someone who owns a Honda?  The company is banking that you not only answer “yes,” but are also willing to connect through Facebook and share that experience.  Early results of this campaign are promising. Since launch, fans of their Facebook page have risen dramatically.  This marketing campaign follows an earlier foray into the space that failed, and resulted in a shut-down of this first campaign.  They have learned and, early indications are, getting it better.  The same can be said of Wal-Mart.  After some early mis-steps in 2007, Wal-Mart recently launched a Facebook campaign that has, in the first early weeks, attracted about 200,000 fans.  

Honda and Wal-Mart are examples that will be increasingly common in 2010. With rare exception, companies did not get social networking campaigns right the first time, but are learning from these efforts and achieving success.

Free Agent Majority

The economic consensus appears to be that the US economic recovery will be characterized by slow growth.  A recent UCLA report underscores the modest recovery scenario.  With the millions of unemployed, a return to full-time  employment for many will therefore remain elusive.  At growth below 3%, it will take more than 3 years to reduce unemployment back to the pre-recession levels of 5%.   companies that are today hesitant to turn on the hiring tap will largely remain in this position. 

His recovery picture highlights the importance in the rise of temporary hiring.  The rise in temporary hiring has been one of the brightest recent trends in the jobs picture. In past recoveries, rise in temporary hiring has been a leading indicator to the return of robust full-time hiring.  Those precedents will not hold if the scenario of a more modest recovery comes to pass.  Instead, temporary hiring will become more permanent, and less transitory.  The rise in the virtual workplace, more executives being comfortable contracting out their services, and companies relying more on a variable cost labor force will all combine this coming year.  (For more detail, see a recent article in the Wall Street Journal on this trend).  In 2001, Daniel Pink published a widely read book titled Free Agent Nation.  In 2010, indeed it will be. 

Hold the Greens

The credit crisis has been a setback for the emerging green economy.  No doubt that it will arrive, but not in force in the coming year.  Renewable energy projects require a high percentage of upfront capital.  Debt financing is the fuel that powers renewable energy.  Yet the economy remains starved for credit.  Despite the recent signs of recovery, availability to credit and debt remains difficult.  Private equity investments are increasing in this area, but wide scale deployment of the green economy will be deferred to later years.  In 2010, the green economy will be somewhat on hold.  Some may mistake this area of the economy as a reset button, but it is really the pause button being looking at. 

In place of the green economy, look to good old physical infrastructure instead.  Certainly, China’s government has been and will continue to direct billions of investment in this area (see The Other Stimulus).  The US will likely continue to invest as well, upgrading its aging infrastructure.  

The reset button is a phrase that speaks to future ambition, using new technologies resourcefully to gain efficiency, and tapping new sources for economic growth.  As the recovery takes hold, leaders will seek out these opportunities that include the mainstreaming of social networking, increase in the free agent labor force, and delay of the green economy.

If you have shopped in a Costco store any time in the last few years, you have no doubt seen the flat screen televisions sold by Vizio. You can’t help but see them, positioned at the front of the store after immediately walking through the door. Multitudes have walked through those doors looking for bulk bananas and left with a large screen Vizio TV. Indeed, Vizio’s televisions have taken the market by storm the last few years, powered by the Costco channel. Some quick facts about the company; over $2 billion dollars in annual sales, market leader in LCD televisions, 87% year-on-year growth in unit shipments, founded in 2002 (7 years old). In the third quarter of this year, market share increased to approximately 16%. Catapulting from non-existence to number one has given the established category leaders like Sony and Panasonic fits. Vizio entered the category, took on established players, and is winning.

Ok.  Now, guess how many employees Vizio has?  About 200. That’s right. About 200 employees. In 2007, they obtained 13% market share with 7 employees. By contrast, Panasonic’s US division has 13,000 employees. Despite Panasonic’s larger footprint, the difference is striking…..almost mind boggling. Much has been written about Vizio and its success, but a significant point bears more emphasis – that a variable cost, virtual model was a key to success and growth.

You can probably guess where this is going. Vizio outsources and uses partner companies for practically every activity under its roof. Well, virtual roof. Design and marketing leadership are in-house. Everything else lies outside, with core functions executed by long-term, closely held partnerships. Vizio doesn’t even really do the design. They specify product performance specifications and engineers for other companies do the rest. The company’s primary contract manufacturer, AmTran, is also an equity investor, linking success of the two companies together. They truly leverage a network of third parties that gives them significant advantage.

Vizio’s founder and current CEO is William Wang. In 2002, Mr. Wang combined two ideas in the formation of the company. First, components for making LCD TVs were becoming widely available through Taiwan-based contract manufacturers, and second, that bringing the price down for these products would significantly increase their demand and move them into the mainstream.  He was, of course, right on the money. By using existing contacts through contract manufacturers, company founders designed their first LCD TV that sold at a retail price about half of current market offerings. With that, the company was born.

As the company grows, it is resisting the temptation of making large capital investments today that will become tomorrow’s legacy, stranded assets. Such assets and legacy costs slowed Vizio’s competitors in the market transition to digital. That’s the way the market works these days. In the old mindset, hard assets were nurtured into advantage. Today, in a horizontal, “flat” world, these same assets can become weights that slow speed to market and obscure market-based realities.

A related example are developments in the cell phone industry. Back a few years ago, Nokia dominated and simply seemed unbeatable. Their core strength was their supply chain. They offered pretty good phones that consumers wanted, all built on standard platforms. Using their supply chain as a cost weapon, Nokia attained profit margins the envy of the industry and beat everyone to market through line extensions of their platforms. Two events occurred that turned this strength on its head. First, new companies emerged that became private label houses for cell phone design. Everyone then had access to the building blocks of cell phone design. With that step, the commodity side of the market was lost. The second big event was Steve Jobs. Led by great design and innovation, a partner configured supply chain became the machine that supplied the market. Nokia’s strength in supply chain and standardization quickly turned from strength to liability. Today’s mobile phone market is dramatically different in structure. Motorola is betting its future not on in-house designed software, but instead on Google’s Android platform, as one example.

In 1999, John Hagel and Marc Singer published a groundbreaking and widely acclaimed HBR article Unbundling the Corporation. In it, the authors outlined a new framework for how companies would be structured in the new realities of the internet and outsourcing. With communication costs plummeting, it just makes less and less sense to put everything under one roof. That ground has now been broken repeatedly. I’m not sure Hagel and Singer imagined at the time the degree by which their concept would be applied, with a group of 200 beating an army of 13,000. With the recent economic downtown, these concepts are picking up speed. Companies that remain vertically integrated are being left behind.

November 11, 2009

In most of our pursuits, it used to be that a small group of elites would convene and decide how things were to be done.  Entering a new market, investing in a new technology, and how the staff spends their time were often decided upon by these small groups of the chosen.  Increasingly, our world is moving towards a different model where these decisions are distributed and more grass roots.

The growing use of the phrase “Built from the Ground Up” is a good illustration of the shift going on in our global culture.  This phrase emerged in the early part of the last century.  At the time, it was used to describe something exceptional.  A rare event.  It’s a phrase that is now commonplace.  A quick Google search shows its origins in 1910, but only mentioned twice in that decade.  There is only a single reference in the entire decade of the 1920’s.  That started to change dramatically during the 1980’s as use of the phrase became more common and used increasingly up to today. 

Mobilization at the grass roots level has always been the impetus for significant social progress (see – The Power of 11/9).  Think about any large social movement – American civil rights, Indian independence – and the power of grass roots is recalled as the determinant lever.  This week marks the 20^th anniversary of the Berlin wall’s downfall.  There is no better example of a grassroots movement prevailing. 

Today, this dynamic – building success from the ground up – is moving across the fabric of our culture. Any new idea in the world of business is increasingly vetted at the grass roots level.  Most venture capitalists value ideas coming through their door by breaking them down to their most basic level.  “Tell me how this idea works at the individual level, demonstrate how it is new, and then prove that it can scale.”  Philanthropy has moved in this direction as well.  The rise of micro-financing, perhaps the biggest trend in the use of philanthropic funds, is a direct assault on top-down grant making and its perceived failures.  Look at successful organizations like the Acumen Fund as an example of how the world of charity is being increasingly dominated by a ground up, grass roots view of the world.  Increasingly, government’s credibility faces new threats from the grass roots.  Think about the Iranian government’s challenges in controlling opinion of the recent election in that country.  The easiest step taken to control opinion and dissent was to revoke the visas of all visiting journalists.  Then they tried to stifle communications by shutting down access to YouTube and Twitter.   They did not succeed on this count.   Individuals far away from Iran set up proxy servers that thwarted the Iranian government’s actions, allowing Iranians continued access to the outside world.  The web 2.0, bottom-up world put the Iranian government on its heels.  In markets, think about Microsoft’s dominant power, and the challenges it faced in protecting its market position.  It hasn’t been easy for the global heavyweight to keep up with a few college students who invented the browser more than a decade ago.  Mark Zuckerberg, the student who invented Facebook years later, is another example.  

Web 2.0 technologies are clearly accelerating this shift with an infrastructure that will solidify a more decentralized culture.  Web 2.0 technologies allow for an individual idea to enter the collective conscious as quickly as it can be posted on YouTube.  In 2008, Analysis from Technorati, a blog indexing web site, showed 133 million blog records alive on the internet, 7.4 million of those posted in just 120 days prior to the analysis.  It is tough to comprehend how many ideas, how many innovations, how many new ways of doing things are out there to be recognized and tapped. Small groups that previously made the decisions and yielded the influence are now running to keep up. 

Think of this shift to a bottom up world as the new operating system for our culture.  In this new era, effective leadership will change its emphasis towards findings ways to leverage the new operating system.  P&G’s Connect and Develop R&D model is an excellent example of how companies are trying to tap into it.   Through this effort, P&G seeks to leverage a grassroots innovation network that is dispersed and organic, rather than dictating innovation from within.  As another example, Google has become well-known for its self organizing development teams.  Effective leadership in this new world means creating new ways for society and organizations to tap into ideas that start at a grass roots level.   Leverage the network.   It’s a bottom-up world.

Most times I read brochure ware or hear a speaker on the topic of demand and supply chain integration, there are way too many flow charts, power point diagrams, and acronyms to draw many insights. As I try to sort through all of this, the fundamental premise of demand and supply integration seems to be the use of end-point demand as the primary source of forecasting product movement through the entire supply chain.

Demand and supply chain often is used in the context of manufacturers working more tightly with downstream partners to gain efficiencies in the ordering and flow of product. End-point demand is a far better source of distribution and capacity planning. As point of consumption demand becomes more prevalent, gains in this type of integration are starting to happen. Product is placed more efficiently, which has the dual benefit of reducing the total product across the chain, reducing costs, and having more product where it is needed. This has the effect of raising sales at a lower per unit cost. It’s simply a matter of time before this information flow becomes seamless and more of a standard operating model.

Now events in the marketplace are happening that will spawn a rethink of how we define demand and supply chain integration. In the future, the definition will broaden from using consumer (or end-point) demand to improve the supply chain at large to a system organized around creating and supplying demand to each individual consumer. The rise of social networking will be the catalyst to spur this rethink. Social networking is a phenomenon that impacts everything, supply chain included. Facebook has experienced the largest share of global online usage in the last 3 years. Youtube is second (to see the detail of this, check out Mary Meeker’s recent presentation at the Web 2.0 Conference). Meanwhile, Apple has redefined the mobile experience and extending these platforms from the PC to the device formerly known as the wireless phone. There are now about 60,000 iPhone applications, depending upon how you count them. There will surely be more to come that will change how we think about our daily lives. No one really knows where this is going. Let’s call where we are now the “Experimentation phase.” Through use of these emerging technologies, companies are going to innovate new ways to connect with consumers and increase mindshare and revenue. The supply chain will have to keep up.

Let’s take an example. Kraft has a cool iPhone app. Since its launch last November, iFood Assistant has experienced more than one million downloads and has established a precedent for how companies use this technology. The application contains more than 7,000 recipes for the busy shopper, videos to help with preparation, functionality to translate recipes into shopping lists, and handy directions to your nearest grocery store. Wow. What a great, convenient – dare I say – entrepreneurial, idea to build mindshare with consumers and increase sales. It’s a unique innovation that has the potential to drive true, incremental demand. In case you haven’t noticed, grocery stores are driven by the coupon. Every aspect of the operations in a store from their interactions with manufacturers is defined by it. Yet one of the shortcomings in using coupons and other “on deal” events is that they don’t drive a lot of new demand. Instead, demand just gets moved around. For instance, consumers buy more than they normally would, in essence, pulling demand forward, but not creating it. But with the iFood Assistant application, new uses for products are created and literally “served up” to consumers (apologies for the pun).

It’s all good. One small exception. What if a user gets to the store and they are out of the product on the list? Unfortunately, it’s a common problem. A range of industry surveys suggest grocery store products are out of stock around 8% of the time. This percentage increases significantly if the item is included in the Sunday newspaper advertisement. So, what happens? The consumer going into the grocery store will be disappointed. Their excitement level and increased “equity” built through use of the application will decrease. Consumers will undoubtedly substitute products from another manufacturer, decreasing the revenue Kraft derives. In some cases, they could be inclined to “turn off” the application. Such are the issues with execution and bridging a demand creator with the realities of the supply chain.

To solve this specific issue, a manufacturer needs to have visibility into their product inventory downstream in the delivery chain. Claiming this opportunity is one of the next big challenges for the consumer supply chain. Once this happens, communications at an individual consumer level are possible. Going back to our example, the iFood Assistant can take the shopping list and recommend the nearest grocery store where that list is completely in-stock. This example could be extended one-step if you consider an online grocery retailer like Peapod. Once an iFood Assistant user (who also has an account with Peapod) selects a recipe and obtains a shopping list, they could be presented with an order page and a promise to deliver the necessary groceries in just in time for meal preparation.
This example – a scenario for the future – illustrates a deeper level of demand and supply chain integration. A scenario focused on the individual consumer. In this definition, supply capabilities can be matched with innovative, new marketing programs tailored to and targeting the individual.

It’s going to happen sooner than we think.

October 14, 2009

Gary Slutkin would not consider himself an entrepreneur.  He likely is not familiar with the term “social entrepreneurship.”   That is exactly what he is though.   A medical doctor by training, Dr. Slutkin found himself moving home to Chicago more than 13 years ago.  A veteran of successfully fighting the AIDS infection rate in parts of Africa, he did not wait long to find a new disease to fight.  That disease – as he thinks about it – is youth homicide. 

Long before the media lights currently shining on this problem in Chicago, Dr. Slutkin looked out of place walking the streets of gang infested neighborhoods thinking differently.  What if we thought about murder as a disease?  Would that allow us to innovate a solution?

Like the horrible epidemics and subsequent public health victories past, Dr. Slutkin believes the root of stemming homicide rates in the inner city starts with stopping behavior before it spreads like a virus.  Think about gang violence in this way.  Gang member A steps into Gang B territory.  Gang member A is shot and killed.  Gang B retaliates, in the process killing an innocent bystander.  Relatives of innocent bystander feel motivated to take matters into their own hands.  Etc.  Dr. Slutkin’s premise is that, if you can position the right antidote early in the sequence, then you can break the chain of violence that often seems inevitable…..and save lives.   For you business types, think of it as Malcolm Gladwell meets the gun.  Gang violence and youth homicide spreads virally, born like many of the lifestyle trends spoken about by Mr. Gladwell.  It has passed the “tipping point,” in which new antidotes are required to tip the scales in the other direction.

Enter Ceasefire.  Founded in 1995, Dr. Slutkin gained his seed capital from the University of Illinois Chicago, who believed in a new approach to combat inner city homicide.   There are 4 components to the basic operating model.  Ceasefire targets a specific neighborhood for homicide reduction.  Then they find their messengers.  These messengers, called “violence interrupters,” are typically ex-gang members themselves who have contacts and are weaved into the network of the neighborhood.  They know those who need to be influenced.  Those people are trained in the tools of conflict avoidance and sent out into the streets.  They are out there each night, listening for hints of potential violence.  When gun shots ring, they are on the scene and intercede in ways law enforcement often cannot, to calm tensions, re-route anger, and defuse thoughts of retaliation.  This model has been proven out and received national attention for its results.  A New York Times magazine cover story and profiles in Time magazine being just a few, compelling examples.  

Chicago has recently been the center of awful news concerning violent teen beatings.  Gang violence continues to take an enormous toll from the city.  This year alone, more than 36 Chicago public school students have been murdered.  Perhaps it’s not a shocking number because it seems so unreal.

In the Ceasefire campaign, we have something that works.  Not the whole solution, but part of the portfolio to be sure.  So here is the issue – funding.  Innovation on the delivery model has not equaled innovation on the model to supply the funds.  This is a classic problem in the non-profit sector.  Government cutbacks are commonplace.   Twice in the last four years, Ceasefire has scaled back its operations and the neighborhoods it serves, only to have its funding restored.   Why must an organization like this rely solely on the taxpayer?  There should be a better way.

A recent article in The Stanford Social Innovation Review recently laid out ten standard funding models for the non-profit enterprise.  It’s a good description of existing models, but is scarce in addressing how traditionally non-profit organizations might further integrate with private corporations.  By integration, I mean partnerships that go beyond the non-profit seeking funds through the foundation arms of private companies, but joining forces in ways that benefit the private company’s economic mission and the social mission of the non-profit.

Whole Foods is an example of one company where this integration is possible.  “Buy groceries on Tuesday, and we’ll allocate a portion of your purchase towards saving lives in Chicago.”  Such a campaign would boost their demand and make upscale shoppers feel good about shelling out more disgressionary income.   It’s not just Whole Foods of course.  The upscale retailer these days, to be sure, is looking for new ways to deliver its brand promise and drive more traffic through the door. 

That’s one idea.  Any other ideas?