Archive for category Finance
Creating and Selling Value
Posted by Bruce in Books, Business Development, Finance, Product Development on March 10th, 2009
| “Value Merchants” is all about defining, measuring, creating and selling value in business to business transactions. Almost all other discussions of value in marketing are focused on separating consumers from their money by telling them that thin, curvy, and shiny are more valuable and desirable. The emotional decision process used in many consumer purchase decisions rarely applies in a business situation. Most business purchases are reviewed by committees or higher levels of management and any emotional excitement generated by a smooth presentation is lost in translation.
Most of us know by now that features are not benefits. The buttons and lights and nifty tools of the trade with which we are familiar and have built our careers on do not often appear to be beneficial or useful to our customers. In answer to this we have been taught to list benefits. Unfortunately when selling to a business we are held to an even higher standard. While it may be easy to attract an engineer or mid level manager with a fancy interface and promises of benefits he will be shot down by his boss if he doesn’t have a solid cost justification. The benefits need to be translated to dollars to close the deal. Value Merchants is the best book I’ve read on defining, creating, measuring, and marketing and selling business to business environment using hard dollar value statements in place of empty value claims or lists of unquantified benefits. A primary premise is that value (when selling to businesses) must be measured in money and in the customer’s terms. Value is measured by identifying value elements which may come from benefits lists, brainstorming, customer visits, and other sources then quantifying the value to the customer. Value is typically benchmarked against one or two primary competitors. In many cases the competition may be your customer’s in house capability. The fundamental equation is Value(f)-price(f) > Value(a)-Price(a) where (f) is our firms offering and (a) is the next best alternative. The difference between Value and Price is the customer’s incentive to purchase. We assume of course that the incentive to buy our offering is greater than the incentive to choose the competition. Value Merchants covers a range of marketing and product management issues including defining high value offerings, pruning low value options, training sales people, and most importantly selling on value instead of price. Anyone selling to a business can benefit from the principles and examples in this book. A value proposition which documents a strong incentive to purchase is extremely compelling. |
IT requirement to serve business needs
Posted by Bruce in Finance, IT and Networking on March 7th, 2009
Inspired by a tweet Is it time to rename “Information technology” to “Information fabric”? Less about technology, more about access, relevance.. clearly the intent is to make the name more relevant, but i am driven back to requirements again. The name Information Fabric is too much wrapped up in itself. IT exists within a business framework and in many organizations began as a data processing department under Finance- another department which loses sight of its purpose.
Looking at the business requirements which create a need (and budget) for IT let’s call it Business Electronic Support Infrastructure. BESI (the department formerly known as IT) exists to electronically automate business processes and data storage, processing, retrieval, and analysis. It is not some Fabric or Cloud or other independent entity which gets to buy nifty expensive hardware just because us tech geeks like the blinky lights. BESI, like all other departments, exists to support the thing of value we create and for which customers want to pay.
Starting at the top BESI should enhance the business’s ability to make money. It does this by supporting the business’s value creation stream and any required ancillary functions including accounting, transaction processing, communications, etc. I suppose if you follow the tree to a low level of detail you might be able to show a business benefit from some type of cross referenced fabric, but I would name the department for its highest level requirement not a low level technical detail of implementation.
I’m also not convinced that we are close to a coherent fabric and tend to see the internet as a Noise Network rather than an Information Network, but that is another subject.
Information Display
Posted by Bruce in Books, Finance, IT and Networking, Problem Solving and Decision Making on March 5th, 2009
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"Information Dashboard Design" is an excellent resource for any type of communication- dashboards, webpages, proposals, powerpoint. The book draws heavily on behavioral and perceptual science and frequently quotes the work of Edward Tufte. Unlike Tufte, this book gives clear examples and prescriptive advice on how best to layout any kind of presentation to quickly and effectively communicate. There are many guiding principles which are clearly illustrated with examples of both good and bad designs. Key principles include: Borders, pictures, and excessive use of color and bold draw the eye and usually distract from the message. White space is an excellent separator. Table borders and legends on graphs are often more visually ‘heavy’ than the data they present. Gimmicks like gauges are usually more distracting than informative. The more shiny, 3d and detailed they are the more they obscure your message. Although directed at dashboard design I find this book helpful for proposals, PowerPoint, and Excel layout. The concept of putting data out front where it will be the first thing your reader sees is universal and grows increasingly important as we become more overloaded with sensory input. |
Cost Sensitivity
Posted by Bruce in Business Development, Finance, Lean Principles, Problem Solving and Decision Making on March 3rd, 2009
Teams making decisions are often somewhat jaded when it comes to costs. Large numbers thrown around day after day reduce sensitivity to costs. I recall one manager who liked the phrase “lost in the noise.” When a team was debating a $5-10,o00 dollar subassembly he’d walk in and say, “Go for it. $10k is lost in the noise.”
Unfortunately the product was about $2M and the business was running less than 5% net profit. With profit on a sale around $100k the extra $10k cost reprents a 10% drop in profit. Expressing the cost as a 10% reduction in profit clearly expresses the impact on the bottom line and puts more pressure on the cost decision.
Although it is equally accurate to describe the cost as 1/2% of the system price this clearly makes it easier emotionally to disregard the cost. 0.5% doesn’t sound like a significant change.
Effect on net profit as a basis for decisions and cost analysis can help prevent cavalier decisions which will damage the business.
Accounting should be a core competence
Posted by Bruce in Finance, Operations and Manufacturing on February 21st, 2009
I continue to encounter accounting which almost insures expensive errors in decision making. I thought ABC and TCM were accepted and that technology- computers, barcodes, and RFID- had made it relatively painless, but I find old-school accounting still driving decisions.
When direct labor was most of the cost of manufacturing (circa 1900) indirect costs were less significant. Accounting was done on paper making calculation and allocation of overhead truly tedious. The use of simplifying assumptions and simple ratios to allocate costs did not result in significant errors and did represent a significant accounting labor savings.
Many businesses still use simple allocation to determine standard costs. An example of this is a large machining operation which allocates costs of cutting tools as overhead. While it is difficult to track exactly on which parts a specific cutter was used the cutter consumaable costs can range from 1% to 50% of the part cost resulting in large potential errors.
For a manufacturer considering outsourcing parts the errors in costing pretty much guarantee unexpected increases in cost as a result of outsourcing. When supplier bids are compared with internal costs those parts that are high consumers of allocated costs will appear cheaper to make in house. Suppliers’ bids will be high because they will have correctly estimated the higher costs. Conversely bids for parts that do not consume indirect costs will appear to be very low. Internal costs will be inflated due to allocation. Even if the supplier bids are high the outsourced parts will still appear to be a much better deal than the overburdened in-house parts.
An outsourcing decision based on poorly allocated costs will always outsource the over burdened ‘easy parts’ and retain the underestimated ‘dificult parts.’ At the end of the year costs will likely increase as a result of an outsourcing exercise to reduce cost. The costs which were truly a result of the retained parts will not go away and the prices negotiated on the outsourced parts, while lower than the internal estimate, are likely to be higher than the actual internal cost.
I’ve seen cases where the teams making decision knew the numbers didn’t make sense, but could not make decisions which contradicted the numbers. The 20-40% potential cost error can easily destroy any hope of profitability in most companies. There are always ways to estimate to reduce the error and minimize risks. Best knowledge and assumptions should be used for decision making and not simply what is easiest to calculate.
