The Future of Value Chain (II) - Emerging Markets

Did you know that:

• in 2009, the Emerging Markets achieved to be 50% of the Global Economy?
• by 2020 some 900 million people in Asia will enter the middle class (defined as US$5,000 per capita in purchasing parity (PPP) terms) - enough to have significant disposable income to activate a host of new non-life sustaining consumption?
• the number of companies of Emerging Markets in the Fortune Global 500 grew more that four times in 15 years?
• companies are experiencing declining growth in America and Europe (Developed Markets)?

Newly industrialized countries (Photo credit: Wikipedia)

In the future, the world will look more balanced mix of affluent consumers in emerging markets and developed markets. Companies are adapting their value chain footprint and features in order to seize the opportunities to increase market share. These two big types of markets will require differentiated strategies to conquer them. Some companies have failed miserably trying to use proven strategies in developed markets in the emerging markets.

 

A study from Accenture called "The Future of Consumer Goods: Moving from Analog to Digital" (http://goo.gl/EfGqde) explains that the business and operating model evolves in this world domined by globalization, as shown in the following figure:

Photocredit Accenture

 

The different business and operating models reflect the strategy of the companies to conquer the global market. Let´s describe briefly each one:

• Local: A loose federation of autonomous local operating companies. The customers are serviced by country, the supply chain is locally focused and local brands with a strong national appeal.
• Regional: Regional customers, hubs and brands. Consumers segments addressed regionally - gender, age, ethnicity, income, etc. -, manufacturing and supply chains assets consolidated regionally, logistic regionalized.
• Global: Growing global priority brands. Creation of global brands and global supply chain organizations with regional hubs.
• Super Global-Super Local: Enfranchising new consumers. Develop consumer archetypes to shape product development and engagement. Reconfiguration of supply chain assets and network to ensuring emerging market reach.
• Digital Disintermediation: Disintermediating the industry model and critical capabilities and implies the rise of new industry models and economics. Digital only retail channels, mega-segmentation, consumers begin to drive innovation and supply chain moves from a push to a pull model.

For example, Unilever can be considered in the Super Global-Super Local type of operating model. As described in its site (http://goo.gl/VUwwmi), Unilever has a very clear strategy in order to leverage the trends in emerging and developed markets:

• "We aim to be ‘first and fast’, not only in new markets, but also in new channels so 2013 saw a continued expansion into white spaces, with 32 of our global brands launched in new markets, including eight brands launched throughout Africa, where we continued to see growth opportunities even as other emerging markets showed some dampening effects from the global economic downturn."
• "Our ability to innovate, deliver quality products and roll out repeatable working models across countries more quickly is critical to our success in the market."
• "We have more than 100,000 suppliers and we deliver to more than 8 million stores. By working with these and other partners we can reach more consumers, develop new products, build new capacity, increase margins, and nurture sustainability."

The Unilever 2013 Annual Report states that "emerging markets now account for 57% of our business and have the potential to provide far greater growth in the future". Unilever has developed specific products to operationalize their value proposition for these markets:

• In Africa, margarines are fortified with several vitamins including Vitamin A. Africa contains 33% of the world´s Vitamin A-deficient children.
• Knorr´s Baking Bag has gained market share especially in Latin America.
• Cornetto saw strong top and bottom line growth in China in 2013, making China the biggest Cornetto market for the first time.
• Unilever makes its soaps and shampoos in China foamier that their Western equivalents because foamier is perceived as better.

As other examples, LG produces refrigerators and micro-waves tailored to the regional differences across India. In such a way, LG takes in account the prevailing local food culture. Also, Nike produces and all-enveloping athletic uniform to protect the modesty of Muslim women athletes.

The Future of the Value Chain (I) - Consumer Futures

The consumer is changing and will continue changing. In a study by "Forum of the Future" (http://www.forumforthefuture.org/project/consumer-futures-2020/overview) shows that we expect major changes in the consumer behavior by 2020. It implies that both producer and retailers have to adapt dramatically their value chains to fulfill their expectations.

The study shows four scenarios, based on different possible trends on the economy, demography, resources, etc.. The four scenarios as shown below:

 Let summarize each scenario:

"My Way" is a high tech world, with a prosperous and entrepreneurial economy dominated by community-based trade. Smart products promote patterns of consumption that use less energy and water and generate less CO2. Many fresh products come in smart packaging that keeps them refrigerated and changes color when they pass the use-by date. Some of the characteristics of this scenario are:

• Consumers buying patterns are unpredictable and volatile
• Their relationships with brands are short lived
• Supermarkets loyalty cards are thing of the past

"From my to you" is a world where communities, collaboration and innovative business models facilitate low-carbon lifestyles. The economy is subdued and uncertain and consumers feel business is falling to deliver on the challenges faced by society. Some of the characteristics of this scenario are: 

• Loyalty brand is low
• Popularity of processed flow has declined
• More people are asking for ingredients and components rather that the finished article
• Consumers seek to obtain their goods as locally as possible

"Sell it to me" is a personalized consumer world in a flourishing global economy which is dominated by brands. Innovative products provide personal health solutions, for example, clothes impregnated by vitamins, or shampoo lather that changes color to indicate mineral deficiencies. Some of the characteristics of this scenario are:

• Consumers are confident about trusted brands, and expect a lot with them.
• They are demanding, expecting the "very best" on every score
• Consumers expects highly personalized products, services and entertainment from the retail experience.

"I´m in your hands" is a tightly regulated world in which consumers trust brands to provide what´s best for them and for the environment. The economy is recovering from recession but growth is low and credit is tight. Consumers might be fitting their homes with entirely brand-sponsored bathrooms that provide with personalized supplies of branded toiletries on demand. Some of the characteristics of this scenario are:

• Consumers want to be looked after, they want to trust businesses and governments to provide what is best for them.
• Less interested in shopping as a leisure activity.
• They want the products they do buy to be effective and durable.

As you may perceive, such consumer scenarios are demanding and expect different and innovative things from producers and retailers. In my opinion, the near future will be more a combination of these different scenarios and they will appear depending on what part of the world, what city, or even what neighborhood are you referring to.

How the Process Model can help us to design an Operating Model?

Designing and building an Operating Model is not an easy endeavor. Even though the ideas behind the structure and relationships proposed can sound logical, is difficult to support the idea of changing the Operating Model if there is not a clear proposal of how it will work.

As we have described earlier in this blog, an Operating Model is  an abstract representation of how an organization operates across process, organization and technology domains in order to accomplish its function. The architecture of the Operating Model has to reflect the strategy and it should reflect how the value will be delivered to the client, and the strategic competitive advantages that it will bring to the company. As we mentioned, we proposed to design an Operating Model through the following steps (see this previous entry):

A first step in this sense is to correlate the Business Process Model with the entities created in the Operating Model. Let´s illustrate is with an example:

1) Let´s suppose that we design a Operating Model that has four entities: a Corporate function, Business Units, a Shared Services Center and a set of Centers of Excellence.

2) Our Process Model has a segment for example like this:

3) Our next step to create to correlate the to-be process architecture is to map every process into the defined entities, using criteria like: function seggregation, specialization, governance, client centricity, go-to-market, transaccionality, etc. We can do the mapping at the level we require, although to be feasible, I would recommend to get at least to level 4.

With these steps, it will be clear what is the role/responsibility of each Operating Model entity and how the end-to-end process is executed through the organization.

A path for defining a Transformational Structure

You can approach the design of a new organization through the definition of roles and profiles for every position, in other words, a bottom-up approach. However, this approach is far from being transformational. If the company wants to make a transformation, we suggest following these simple steps (see diagram at the end as a reference):


1) Understand the Business Strategy. The strategic definition must be clear enough to obtain strategic guidelines for the design. Use workshops with the C-Level to assure that you capture the intent of the business for the transformation. Have clear in your mind how the company should look like in the future.


2) Map the Business Model. You can use a technique like “Business Model Canvas” to map the to-be Business Model (see http://bauzanotebook.blogspot.mx/2013/05/map-business-model-then-business_13.html). With the Business Model, you shall identify what will be the differentiating capabilities of the company, in order to provide value to its customers. The differentiating capabilities must support your competitive essence in the market (or your future competitive essence...).


3) Map the Capability/Process Model. At this point, you have identified what capabilities are important for the company and they should appear clearly and bold in the Capability Model (see http://bauzanotebook.blogspot.mx/2013/05/a-proposed-structure-for-business_2.html). If not, your design will not support the Business Model and hence, your Strategy. Make sure that the model support the Business Model and provide the value intended to the market.


4) Design the Operating Model. Having your inventory of capabilities and processes, you have to:



a. Classify the capabilities and processes. You can use tags like: Core, Non-Core, and Support. You may use a different classification, depending on the organization strategy. The classification will help you to understand what capabilities and processes can be outsourced or placed in a shared services center, for example (if a given capability is non-core, is a great candidate for outsourcing).



b. Localize the capabilities and processes. Define which capabilities and processes are Local, Regional, Global or Hybrid. This step will help you to understand where to locate these capabilities.



c. Prioritize. Define what should be attacked first, second, etc. It will help you to define a roadmap of implementation of the different capabilities.



In the Operating Model you define “where” is executed and “who” is responsible of executing specific processes. For example, you may define that the accounting processes will be executed in a Shared Services Center and the Demand Planning processes will be executed in a Centralized Center of Excellence. Also, you define the interrelations between the different elements of the Operating Model.



5) Based on your design of Operating Model, then define your different interrelated architectures. At this point you have already defined the capabilities and process inventory aligned to your strategy, so you can start to define you Process, Technological, Information and Organizational Architectures (or additional architectures you may need). Going back to the initial point of this blog, it is difficult to define an Organizational Architecture if you have not decided if you are going to implement a Shared Services Center, a Center of Excellence or a capability will be centralized in the Headquarters of the company. The Organizational Architecture must reflect that. If your Operating Model has a SSC, then you will need a box in your Org Chart to cover that need.

 

Are you selecting the right strategic indicators? I

One of the key decisions of the CEOs and boards is to select the right key financial indicators to manage the company. Tipically, companies select EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization), EVA (Economic Value Added), Enterprise Value, among others. Although companies do not select just one indicator, they tend to use one as the cornerstone for the management focus (and their respective bonuses!).

As always, making a selection has its consequences (and of course, also its advantages...). Most of the companies I have worked for use EBITDA and they have a strong focus in this indicator.

Let´s start understanding how EBITDA is calculated:

EBITDA = Revenue – Expenses (excluding interest, taxes, depreciation and amortization)

As represented in the formula, it is a measure of the current profitability of the company, not taking in account the effects of interest (from loans for example), taxes, depreciation (the decrease of value in assets) and amortization (the payment of debts, for example). In the following table, you can see the main pros and cons of using EBITDA as the main financial indicator:

So, what can happen if we choose this indicator as the reason for living? There are several things that may happen:

- Reduction of the Return on Assets (ROA) or Return on Invested Capital (ROIC) -or getting inflated in assets and working capital. Due that the fact you are focused on profitability, you may decide to use more assets (for example, buy plants) to produce more revenues, or to have more inventory (in order to have more things to sell). However, at the end, a shareholder can complain that the money he invested is not having the right margin, compared with other financial instruments.

- Because you are not taking in account the effects of depreciation and amortization, you may have a distorted vision of the cash generated by the company. Tax and amortization can erode the cash generated.

- For the shareholders, it is not enough to use EBITDA to make his/her investments decisions. It does not take a vision of the use of the assets or working capital, it does not show the company valuation or show a trend of the future of the company, so it is difficult  for him/her to decide if it is a good place to put the money in.

As a conclusion, even though is a very common indicator and is used widely to compare companies, it should not be used in isolation to manage the destiny of the company.

If you are not segmenting, you are not thinking.

 

Actually,it is a phrase stolen from a conversation with a client, but it is completely true. The problems we try to solve in business are not as simple to attack with a one silver bullet. Let me illustrate with several situations:





- If you are dealing with a inventory rationalization problem, you should segment the products that you would like to attack using a segmentation like this:

 

In this case, you shall define different solution strategy for every segment of this problem. You solution will be different for "Non-Productive Stock" to the "Excesive Coverage".

 

- If you are priotizing initiatives that you want to implement, you can use a matrix with two main variables (complexity and benefits) to help you clasify them and establish a different strategy for each quadrant, as shown:

 

 

 

There are innumerable methodologies to this "divide and conquer" approach. Some of them are well known, others not so much:

 

- The Boston Matrix (for deciding in which business units to invest)

- The Ansoff Matrix (to understand the risk of different options)

- The Kepner-Tregoe Matrix (a decision making aide based in the classification and prioritization of information)

... and so forth.

 

You can take a look to different segmentations tools in "The Decision Book": http://www.amazon.com/The-Decision-Book-Strategic-Thinking/dp/0393079619/ref=sr_1_1?ie=UTF8&qid=1376097474&sr=8-1&keywords=The+Decision+Book

 

However, you can create your own "matrix", "segmentation" or even "hiper-cube" to solve your complex problem. I would recommend the following steps to create them:

 

- Frame the problem. To achieve this, formulate a powerful and specific question that you want to solve. Work hard in defining the right question.

 

- Select the criteria of segmentation. Be careful in defining them. The criteria should be "orthogonal", it means, a criteria can not dependent one from the another.

 

- Map your problem. Locate the different options in your matrix. Analize and classify them. Do the analytics to locate them.

 

- Define a differentiated strategy for the solution of each quadrant (or cube).

 

Using this approach, you will find that the problem can be separated in pieces, and you will feel confident in defining a better solution for each case.





 

 

 

The Power of the Words in Business.

“Words are, of course, the most powerful drug used by mankind.” 
― Rudyard Kipling

I have seen a common problem in different businesses, and that problem is the lack of a common understanding of the terms used for the business strategy and execution, and in other cases, terms used in a wrong way. Although is not necessary that all employees have a thesaurus in their heads, it is important to select and have a common understanding of the key words for the business.

Key words are those that we have to guarantee that employees understand in the same way. These key words are important in the business strategy definition and in its implementation. Also, I have found that when a business uses properly a term and the variations of such term, tends to have a better framing of the opportunities they have.

I work mostly in Supply Chain and BPM projects, so we guarantee that everybody understand quite well what "inventory" and "process" mean, as an example. If we look for the definition of "inventory" we may find that is:

"The raw materials, work-in-process goods and completely finished goods that are considered to be the portion of a business's assets that are ready or will be ready for sale."(1)

However, if we look at the APICS dictionary, we may find 137 terms related to the word: safety stock, base stock, make-to-stock, pipeline stock, etc. We can get lost in this amount of terms, so in an initial stage, we need to have a selection of key words for the business.

We can face this problem in different ways. Some of the recommendations are:

- Use clear and unambiguos words in the Vision and Mission declaration statements. Make them short and easy to remember.

- Select the key words for your business. Link them to the business strategy and the key operations outcomes you want to achieve.

- When initiating a project, execute a training on basics and key concepts before starting the core work. Make sure everybody in the project understand the same. Use certification or exams to calibrate the understanding of the concepts.

- Use training as a tool to gain maturity. For example, Accenture has a set of on-line academies used extensively and massively to gain momentum in business concepts and practices.

- Measure maturity growth periodically.

More information:

http://www.accenture.com/us-en/Pages/service-accenture-academy.aspx
http://www.accenture.com/SiteCollectionDocuments/PDF/Accenture_Supply_Chain_Academy_height.pdf
http://newsroom.accenture.com/article_display.cfm?article_id=4182


Sources:(1) http://www.investopedia.com/terms/i/inventory.asp