Previously in Part 1 and Part 2, we discussed the possibility of Jack Welch acquiring The Boston Globe. We’ve discussed several things Jack might do, if the deal goes through. All of which, has to do with the Profit Tree model, which is below:
We know that the Globe’s circulation recently dropped by as much as 25%. I introduced the idea of Root Cause Analysis to find the drivers for the drop in circulation. This is important because, as can be seen above, circulation is the main driver for Ad Rates, which then drives Revenue.
In this post, I just want to introduce one basic framework and suggest some market research to identify why circulation might have dropped.
In business, there are basic frameworks that are pragmatic and helpful. The Profit Tree is one (see above). Another one, that might be helpful for this case is the what is known as the 3 C’s, developed by Kenichi Ohmae, a Japanese Strategist. The 3 C’s stands for the following: Company, Competition, Customer.
The firm aims to maximize its strengths relative to the competition in the functional areas that are critical to success in the industry. Broken down, it helps to think of the Company in the following ways:
- Selectivity and sequencing: In order to win the corporation does not need to have a clear lead in every function from sourcing to functioning. If it can gain a decisive edge in one key function, it will eventually be able to pull ahead of the competition in other functions that may now be no better than mediocre.
- A case of make or buy: In case of rapidly rising wage costs, it becomes a critical decision for a company to subcontract a major share of its assembly operations. Its competitors may not be able to shift production so rapidly to subcontractors and vendors, and the resulting difference in cost structure and/or in the company’s ability to cope with demand fluctuations could have have significant strategic implications.
- Improving cost-effectiveness: This can be done in three basic methods. The first is by reducing basic costs much more effectively than the competition. The second method is simply to exercise greater selectivity in terms of orders accepted, product offered, or functions to be performed which means cherry-picking the high-impact operations so that as others are eliminated, functional costs will drop faster than sales revenues. The third method is to share a certain key function among the corporation’s other businesses or even with other companies. Experience indicates that there are many situations in which sharing resources in one or more basic sub-functions of marketing can be advantageous.
According to Kenichi Ohmae, proper analysis of the firm can be constructed by looking at possible sources of differentiation in functions ranging from purchasing, design, and engineering to sales and servicing.
- The power of an image: Both Sony and Honda outsell their competitors as they invested more heavily in public relations and promotion and managed these functions more carefully than did their competitors. When product performance and mode of distribution are very difficult to differentiate, image may be the only source of positive differentiation. But as the case of the Swiss watch industry reminds us, a strategy built on image can be risky and must be monitored constantly.
- Capitalizing on (profit/cost-structure) differences: Firstly, the difference in source of profit might be exploited, for e.g. profit from new product sales, profit from services etc. Secondly, a difference in the ratio of fixed cost to variable cost might also be exploited strategically for e.g. a company with a lower fixed cost ratio can lower prices in a sluggish market and win market share. This hurts the company with a higher fixed cost ratio as the market price is too low to justify its high-fixed-cost-low-volume operation.
- Tactics for flyweights: If such a company chooses to compete in mass-media advertising or massive R&D efforts, the additional fixed costs will absorb such a large portion of its revenue that its giant competitors will inevitably win. It could though calculate its incentives on a graduated percentage basis rather than on absolute volume, thus making the incentives variable by guaranteeing the dealer a larger percentage of each extra unit sold. The Big Three, of course, cannot afford to offer such high percentages across the board to their respective franchised stores; their profitability would soon be eroded if they did.
- Hito-Kane-Mono: A favorite phrase of Japanese business planners is hito-kane-mono, or people, money, and things (fixed assets). They believe that streamlined corporate management is achieved when these three critical resources are in balance without any superfluity or waste. For example cash over and beyond what competent people can intelligently expend is wasted. Again too many managers without enough money will exhaust their energies and involve their colleagues in time-wasting paper warfare over the allocation of the limited funds. Of the three critical resources, funds should be allocated last. Based on the available mono-plant, machinery, technology, process know-how, functional strengths and so on-the corporation should first allocate management talent. Once these hito have developed creative, imaginative ideas to capture the business’s upward potential, the kane, or money, should be allocated to the specific ideas and programs generated by individual managers.
Ohmae once said that “There is no doubt that a corporation’s foremost concern ought to be the interest of its customers rather than that of its stockholders and other parties. In the long run, the corporation that is genuinely interested in its customers is the one that will be interesting to investors”. This is a very Japanese statement to make — in the world of Lean Manufacturing, which I fully endorse, it is about the customer and the thinking is very long-term, not short-term gain thinking, which most American companies are apt to do. Ohmae argued the following in regards to the Customer:
- Segmenting by objectives: Here, the differentiation is done in terms of the different ways different customers use the product. Take coffee, for example. Some people drink it to wakeup or keep alert, while others view coffee as a way to relax or socialize (coffee breaks).
- Segmenting by customer coverage: This type of strategic segmentation normally emerges from a trade-off study of marketing costs versus market coverage. There appears always to be a point of diminishing returns in the cost-versus-coverage relationship. The corporation’s task, therefore, is to optimize its range of market coverage, be it geographical or channel, so that its cost of marketing will be advantageous relative to the competition.
- Resegmenting the market: In a fiercely competitive market, the corporation and its head-on competitors are likely to be dissecting the market in similar ways. Over an extended period of time, therefore the effectiveness of a given initial strategic segmentation will tend to decline. In such a situation it often pays to pick a small group of key customers and reexamine what it is that they are really looking for.
- Changes in customer mix: Such a market segment change occurs where the forces at work are altering the distribution of the user-mix over time by influencing demography, distribution channels, customer size, etc. This kind of change calls for shifting the allocation of corporate resources and/or changing the absolute level of resources committed in the business, failing which severe losses in the market share can occur.
The framework above is very helpful. Most likely, if done sufficiently well — it doesn’t have to be done perfectly, but sufficiently well — some critical insights will come from the analysis and action items that will help the firm improve can be generated, structured, and planned.
Five or so years ago, I worked as a software engineer and database marketing analyst for a Chicago firm. One of our clients was the Chicago Tribune. We were tasked to learn more about the general demographics of the Tribune and their cross media partners (TV Stations and Radio) — basic market awareness and also buying or subscription behavior from the database. One item that came from that study was a general segmentation of the subscribers. This segmentation was done through analyzing the data in the very large subscription datastore as well as through a survey instrument. Using both helped our team “bucketize” (not a technical term, but descriptive) or segment the customers based on helpful factors.
Once we had a helpful segementation available, we then suggested very targeted means at marketing to each segment — with specific and targeted messaging that will speak to that segment, not generically, but very specific. Results? Revenue increased by 30% several months after implementing the targeted marketing messaging.
I have no idea what Jack might if The Boston Globe gets acquired. But, this has been a fun excercise in turnaround and basic business frameworks. No doubt, If Jack does acquire the Globe, he will probably cut costs using Six Sigma and Lean Manufacturing methodologies, as he has done at GE. Business frameworks such as the ones discuess in this series are easy to understand, somewhat easy to implement, but will undoubtedly help the firm become better, more competetive, and more customer-centric.
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