Forecasting, Pt 4

Forecasting’s ultimate goal is to accurately understand how your business will run

The chart below shows the input that a forecast has on any given business decision. As you can see it is only one of six possible inputs (although past market conditions may also be captured in the forecast). Tribal knowledge, gut feel and market conditions are also significant inputs into the decision.

For the purposes of this discussion it is important to define Tribal Knowledge and Gut Feel with regards to forecasting. Tribal Knowledge is the information known by workers of a company that is not captured in any database, qualitative or numerical format. Tribal Knowledge is best classified as the information critical to the function of any business that is simply known and un-captured.

Gut feel is the concept of “knowing” an answer. Any decision maker will hesitate on a decision that they are uncomfortable with. Humans are capable of capturing and processing information subconsciously which leads to the sense of making decisions without solid input. Most effective decision makers will “trust their gut” often enough that it will impact many critical decisions. This also happens to be one of the best error finding methods in model creation.



You will also notice the three inputs that go into the Revised Forecast Model. All three have the ability to be both good and bad. As we’ve discussed previously, past model performance is no indicator of future performance. There are many variables that could unbalance the tenuous nature of the interactions. Past performance does provide the main driver of model improvement as refinements are made to fine tune the variables actually in the model.

Past bad decisions is an important input to the model structure. Any good analyst will design their model to avoid past mistakes. The situations that led to those decisions will have specific avoidance mechanisms built-in. This is both good and bad. It’s always good to avoid past mistakes, just not at the expense of making new ones.

When modeling in past scenarios many analysts fall into the trap of over simplifying the causes of the past error which causes the model to detect the scenario in more situations than would actually be called for. To use a simple example, a modeler in the Northern US state may put in a mechanism that says rain in January will lead to frozen roads which leads to significantly reduced revenue because the model would predict fewer people driving. However, it is entirely possible to have a very mild month where rain either has no impact or positive impact (depending on the business and specific location).

On the other extreme is the analyst who overcomplicates the situation. To use the same example as above, that same modeler instead programs a situation that rain in January but only on Tuesday’s leads to frozen roads. This leads to six days being excluded from the situation. Neither situation leads to effective decision making.

The third input to the model setup is Forecaster Bias which is very similar to the Past Bad Decision input. Any modeler creating a new forecast will have their concept of what should be included or excluded. This will be modified slightly based on the input of others, but ultimately decided by the model-builder. They are in the position they are because they probably have enough experience on the topic to make good predictions of what will be necessary but they may also have blinders to other inputs.

Ultimately, a forecast model is no better than the people who create it, the time it has been used and revised over, the data input and the situations that are predicted to occur. This still leaves quite a large opportunity for any model to be wrong in many situations. For this reason it is important to reiterate that no model should have the final say in any given business decision.

Forecasting, Pt 3

Iterate regularly to test for variable sensitivity

Every model has the ability to be stress tested. Test them regularly to see how the result changes based on varying conditions. Test for sales dropping 10%. What if prices drop 5% and sales rise 10%? What if your entire logistics department is out sick for the month of October?

To go back to the role of forecasts in the economic downturn, most of the models used in financial houses had no capability to test for the possibility of an across the board housing price drop. Their inputs would not allow them to enter a negative number. It’s possible that those institutions wouldn’t be in the situation that they find themselves in if they could test the sensitivity of their outputs based on negative home price increases.

If your forecast model doesn’t allow you to test for a given condition change that could occur, it is time for a revision. Never let yourself be held hostage by the constraints of your overgrown spreadsheet. It is up to you to make decisions based on the criteria you feel you need to make them against.

A common question is “how do you test for sensitivity?” It surprises everyone who asks how simple it actually is: draw up five scenarios that could happen over the next forecast period (typically this will be high variable growth, medium variable growth, no change, medium variable decline and high variable decline). Use your imagination because it changes from business to business and period to period.

Brainstorm how those five scenarios would make the numbers look. Some data points will go up, others down. Use your best estimation abilities; accuracy is not vital since the scenario didn’t actually happen. Put the revised data into the model and see what the outcome is. Compare all five scenarios against what actually happened. You now have a possible range of outcomes that could have occurred.

This gives you a greater ability to understand the impact of shifting market conditions. If you believe that there is a 5% chance of high growth 15% chance of medium growth, 40% chance of no change and 40% chance of medium decline you can apply those probabilities to the outcomes to get a blended decision. You are essentially hedging against the possibilities that are likely to occur. You will be a better decision maker for this process.

Forecasting, Pt 2

Never, ever, over-trust the forecast output

Models are unintelligent. They have no means of deciding to leave out unnecessary information or retrieving information that they actually need. Unfortunately, there is a tendency to trust the outcome of previously successful models. The thought process goes: “It was right before, it will be right now.” Until suddenly it’s not; a market condition has changed leading to massive failure.

Flawed models are at the heart of the recent economic downturn. Every financial and rating institution was using the same flawed models. For more than five years the models worked with enormous success. Analysts would put in their data points, the model would return the likely outcome and the analyst would execute against that decision. A highly effective system…until it broke.

Once a model is discovered to be flawed, analysts often dive for cover under the excuse of “the model told me to.” This takes us back to the concept of trusting a model’s output. Don’t. Do not ever put too much faith in the outcome of a forecast (moving average, Monte Carlo, or anywhere in between).

Forecasting models are only tools in the digital toolbox of decision makers. The moment that they become elevated to a higher status is the moment that they should lose all credibility. Decision makers should be held responsible for their actions no matter their process for reaching the decision. Anything less leads to abuse of the system.

Forecasting, Pt 1

Forecasts are no more than a cog in a Prediction Process

Any process that ends in a decision involves forecasting the future. No decisions can be made that do not account for possible future actions. At their most basic level, forecasts are simply predictions of what will occur in the future.

Every C-level executive has a job that almost exclusively involves making numerous business decisions. Sometimes they use crude tools such as gut feel or personal preference and sometimes they use highly sophisticated, probabilistic models involving multitudes of disparate variables. The sophistication of a model does not necessarily make it better than its lower level brethren.

Moving Average forecasts are still around for a reason – they work. In environments not prone to sudden, dramatic changes a moving average forecast holds a lot of appeal: it adjusts fairly quickly to new conditions and it is easy to understand/fix. It will never predict future market condition changes but that’s understood when it is implemented.

Sophisticated Monte Carlo simulations that account for internal and external pressures are more likely to predict future condition changes. The issue with using this style model is that it is dependent on the variables it makes decisions on. Forecaster bias is a significant risk with complex forecasts. Forecaster bias is the condition where the forecaster includes only the variable he/she believes will impact the outcome. There is no way to include every possible variable and someone has to make the selection.

It's About the Experience, Not the Technology

Microsoft doesn't quite understand why Google is successful in search. Do you think the average surfer even knows how Google determines what order pages appear on your screen when you run a search? I can tell you right now that they don't care and they don't really want to know. So why do people choose Google over Microsoft if it isn't about the technology?

It's all about the experience. Google has a very clean homepage that is good for one thing - Search. That's it. If you want to do anything else with them you have to go looking for it. Live Search by Microsoft is moving in the right direction but still doesn't quite get there. The trick is to make it clear what users should use your site for - or your business - for.

How does this tie into your business? Keep your pitch simple. Don't offer too many choices, don't drop a menu on their lap and tell them to pick. Tell them what they need. Show them how you will help them. It's an easy to duplicate formula at the end of the day.

The reason Google is successful is that they were able to take their one product offering - Search - and leverage it into a profitable advertising company. They now make money off of nearly every search. If you are a marketing company, remember to first assist companies with their marketing. If you are a distribution center, remember that distribution is the only end result that matters to your customers. Make it fast, make it effective, make it run well but always keep in mind your one singular core priority.

There's a Problem With Consulting

Consulting has become a game that most everyone plays the same. Most consulting firms are set up in the same fashion, hire the same type of people and go after the same types of clients. Really, is one Harvard MBA different than another? Does having 15 of them as Senior Managers make you a better, smarter, more competitive company? Once every company has adopted the same model it won't be long until they can only compete on price. After you become a commodity it's a long, hard road.

This is the trap that most industries fall into after a certain period of time. The best way to categorize it is "Group Think." Once everyone is trained the same way, they work on the same types of projects, then begin to fall into a certain silo of specialty and you can't expect them to actually see the world through a different shade of lens. Out of all this comes your typical consultants that spout buzzwords like it's going out of style and offer generic solution after generic solution to every problem that they see.

Any consultant that you get out of the typical top firm is going to be out of this mold. They certainly have their strengths which usually include sales, client relations, asking the right questions, creating informative presentations and spotting trouble spots in an organization. The problem becomes their weaknesses. Traditional MBA programs are designed to train a certain style of thinking and decision process. That process is typically financially driven and risk averse. It leads to the natural selection of a low risk solution that creates good net present value, internal rate of return and acceptable payback period. This is all great if all you want is to be average.

Great companies all assume some element of risk. Great solutions require people to think outside the box. Great value requires a project manager not just thinking about how to get the next sale. I won't sit here and say that we here at Integrated Strategies don't ever look for the next sale, but I will tell you why we're different. We think our next sale is in the implementation of our recommendation. We'll take more consulting work but what we're really in this business for is to implement our ideas, make them work and then make them successful. Next time you get a consultant in for a meeting ask him if his firm will personally do construction management and implementation of their plan. I'll bet that they won't.

The trick to changing consulting is getting the answer from people who will do the work after they show you their solution. Consulting firms that hand you the solution and walk away accept no responsibility for your success. Wouldn't you rather have a partner than some abstract adviser?

Cutting Edge of Communication

Want to know a secret? Email is not a key source of communication anymore. I get more good information via snail-mail now than through my email box. People are on the move so often now that email is a burden for sending and receiving detailed information. It's great for passing along meeting notices though.

The artificial limitations built into email make it difficult to manage for a large number of users. Too many places limit the amount of storage space you can use. Another common issue is the size of files that can fit through the filters. Good information anymore is larger than 5MB. A good picture is larger than 5MB!

Email creates a way for trackable communication. If you need a timestamp to identify when you sent something then email is absolutely the way to go. For every other type of non-marketing communication email simply is not the best route anymore. FTPs create a simple way for safe file transfer or even a free website where you can upload files for someone to download. Need to share pictures use something like Flickr online which allows you to do more than simply view the pictures.

Information is more than 1 dimensional. Remember that the next time you are typing up that long email with lots of files. Think about if there's a better way to control the flow of what you need to share. New communication methods only make things easier for others, not harder.

The Carbon Neutral Smoke Screen

It is all the rage for companies to strive for carbon neutrality. A system has been set up to trade carbon credits on the open market where carbon neutrality can be bought at a price. No longer are companies applauded for simply reducing their footprint, it requires an additional outside investment in, usually, a non-profit carbon harvesting plan.

True carbon neutrality is impossible to achieve using even the most modern technologies. It is the marketing and advertising arms of large companies have convinced them that carbon neutrality is still achievable. It is one thing to be able to make the claim that you've reduced your carbon impact on the environment by 45%. It's another to say that you have no impact on the environment. This leads down the messy path towards carbon positive companies which I can only imagine is not far down the road due to typical corporate one-upmanship.

There is a better way to achieve carbon neutrality as a company that will put those additional dollars at least partially toward the bottom line: invest in carbon reduction technologies for your suppliers and customers. You make the investment for them and claim the carbon savings for yourself. Any agreement with them would be for them to pass along operational savings to your costs as well.

Retailers should invest in improved manufacturing processes for their suppliers. Manufacturers should invest in improved transportation modes from producers of raw goods. Real Estate companies should invest in the infrastructure of leasable buildings. Restaurants and grocery stores should invest in the growth of local agriculture.

The pay-back for reduced item costs is a bonus on top of the ability to claim multi-year carbon neutrality. The good will it will generate also has a value. Sure your competitors will benefit as well, but why should their good fortune keep you from making a wise business move? Is it really better to put your money into some carbon farm that has no financial benefit to your company other than the claim for one year of carbon neutrality?

Happy Pi Day!

I'm a numbers guy and pi is one of the ultimate numbers. Today just happens to be 3/14 so at 1:59 everyone should just stop and reflect on how this number effects everything you do....or just use it as a reason to stop working for a minute. Have a great Friday all!

US Manufacturing Should Embrace Green

With all the talk of recession lately I've been thinking about the new green economy that is being developed and what it could mean for the US manufacturing industry. There has been the lingering fear of manufacturing jobs eventually disappearing from US soil as they are slowly off-shored to cheaper labor markets. Sustainability dictates that the trend will reverse.

Sustainability principles put more weight on carbon than on price; regionally procured products are even one of the points available for LEED certified projects. As the market for green products grows, there will necessarily be a corresponding growth in regionally operated factories. There is a premium inside of sustainability for products produced and warehoused within 500 miles of the purchasing location. This also would mean a reemergence for the local mom & pop brick and mortar stores.

Whenever things seem to be going one way, there is usually a light at the end of the tunnel. In the short term sustainable practices offers higher prices and new ways of doing things. Long-term there is a potential for a rebirth of the good old days.

The Myth of Continuous Improvement

Continuous improvement is thrown around as the best way to stay ahead of the competition in business. It's used as a talking point for consultants, senior management, engineers and a wide range of others who have responsibility over a process. Six sigma is the king of continuous improvement still today. Take a documented process and set up metrics and means to improve it incrementally. By definition the process is known to be below standard.

Focusing on continual incremental improvements reduces the flexibility to implement the big changes that could take a process to the next level. Measuring against improvement gives managers a reason to never achieve optimal. If you know that you have to perform 5% better next year, you're going to make sure that you have enough capacity in the system to achieve that performance. The question becomes if you can't fix what you don't measure, how should you actually measure improvement?

Improvement is a relative term. Continuous improvement methods oversimplify the concept. Within business terminology improvement can mean anything from reduced costs, increased profits, better customer service, higher performance accuracy or quicker turn around time. Measuring performance should therefore take into account all the important metrics associated with that process.

The example I always look at is a department of 10 people that is in charge of customer sales:

Year 1: they set the performance baseline that everything will be measured against.
Year 2: department grows to 13 people. Productivity per person goes down, but profitability goes up.
Year 3: department grows to 15 people. Productivity per person goes back to Year 1 levels, revenue per person goes up and profitability stays flat.
Year 4: staff stays at 15 people. Productivity and all other metrics show improvement.

If you choose one metric to judge this department against there would be a down year at some point: productivity went down year 2, profitability didn't improve year 3. That doesn't mean it wasn't successful as a group, only that the situation was such that they improved in varying and changing areas.

Be open with your concept of improvement and make sure that overall things are directionally heading in the right direction. Just because one metric goes down does not mean that everything did. There may be a reason for the decline that will mean when it improves back to the baseline everything should rise proportionally with it.

Consulting Language (aka Buzzwords)

Buzzwords seem to be the stuff that consultants live off of. If they can they'll throw the words into every sentence they utter whether they are talking to a client or just simple everyday talk. It's at the point where all someone needs to do to instantly identify themselves as a consultant is start talking in buzzword circles.

Gen Y has an opinion of consultants (for better or worse it's there) and it comes from the movies. Office Space gave us the Bob's. That's who consultants are to us and sadly most consultants seem more than happy to fill that stereotype. It doesn't help that words and phrases such as:

synergy, rightsize, six sigma, lean, lean six sigma, efficiency, optimal processes, inventory rationalization, sourcing, paradigm shifts, strategic leveling of resources, knowledge management, process integration, disruptive innovation, value added anything, leveragable mindshare, extensible, uCommerce, iCommerce, accountability management, goal alignment, and don't forget the entire list of new environmental buzzwords

Sure these words all have a meaning and some can even be understood by a layman, but do they add any value to a conversation? The quick answer is no. The fastest way to lose a client is to speak over their head. Anyone who is knowledgeable about their field doesn't need to hear buzzwords and anyone who isn't knowledgeable won't understand the buzzwords.

Buzzwords came about because they are perceived to be quick ways to explain a complicated concept. Let's look at rightsize - the meaning of the word is to resize a process or area to match the actual operation requirements. Is it that much harder to say the sentence versus the word? It proves you understand the concept and aren't just throwing out words and also differentiates you from other consultants. If all of your competitors are using the buzzwords and you aren't that can be a competitive advantage over them. At the end of the day that could be the difference between you getting hired and them.

Another reason to avoid buzzwords when possible is because they create confusion. Buzzwords are meant to be vague and cover a wide array of options. Overuse of them can lead to confusion and conflicting opinions of what has been promised or what the scope of work is. Consultants are often seen as over-promising and under-delivering. Part of that is a lack of clarity in the language. Let's look at some examples of what they say/what they mean:

Say: Rightsize inventory through a rationalization project to optimize levels.
Mean: Set on-hand requirement levels to reduce inventory.

Say: Find synergies between groups by leveraging resources, processes and goals.
Mean: Find and eliminate unnecessary job duplication.

Say: Use six sigma process to value engineer the customer-facing processes of the call center.
Mean: Setup a process to eliminate errors that customers experience with the call center.

The list can go on and on but the result is always the same - there are easier ways to state a thought that doesn't include the use of buzzwords. When you are faced with someone determined to use buzzwords, let them know that you want them to state things a different way. If they aren't able to restate the thought then they probably don't know what they are saying to begin with. If they are able to then you'll probably have a more productive conversation.

Common Sense Forgotten

How many times have you come across a situation where there is a process and set of procedures in place that seem to run completely opposite of common sense? It happens far too often in business that good intentions run awry. Tracing backward in time it is easy to find the events and rational decisions that led to the situation. Every action was justified at the time and made perfect sense. However times have changed but the process hasn't.

Well run companies don't make rules that are not necessary. Employees are given the responsibility to solve problems the way the judge best. The more unnecessary rules that are in place, the more likely there are some that get in the way of efficiency and progress. Anyone worth keeping notices the obstacles to their success and either work to get rid of those obstacles or find a way around them (which sometimes means them leaving to have a better shot at moving up).

Remember to take the time and review the day-to-day requirements that you put upon the people beneath and around you. Every process should be reviewed regularly and everything should be kept up to date. If you have time to make them, you have time to keep up with them.

Giving Away Your Thoughts

One of the biggest arguments people make against company blogs is that it seems like the equivalent of giving away our intellectual advantage. If we tell people what we think and how we do things what is to keep them from simply doing it themselves? It's a valid question that is worth deeper examination. It's a question that goes to a deeper argument about giving away services or products in hope of selling additional or other services and products.

The argument against giving away knowledge makes a few assumptions that I don't believe are entirely valid. To be specific, the two assumptions I disagree with most are 1) people can completely grasp and execute the topics being discussed and 2) people have the time to do the work themselves. This isn't to say that most people who read this blog don't or can't understand what I'm talking about, it's that they probably don't see and understand the nuances that go beyond the high-level theory. Execution of an idea will bring up every exception, variance and incorrect assumption that cannot be covered in a one page article. It's one thing to talk about warehouse design but until you've done it 3, 20 or 50 times there are aspects you simply won't pick-up on.

There are people that grasp it, have done it in some form and could do it again. Here is where assumption 2 comes in. Those people already have a job that they are expected to perform at a certain level and that job has likely been already balanced to fill a 40 or more hour work week. It's hard to simply divert the attention of these people onto a new task. Their plate is already full.

Here's where the value of giving away the knowledge comes in handy though. If someone understands the value of a certain job and decides that they need it they typically go through some sort of RFP or interview process to decide who can best execute and meet their expectations. If you've been explaining your thoughts on the subject through a blog or newsletter then they have a way to become comfortable with you and your methodology. Especially if their internal experts look at it and approve of it. Assuming that prices are similar, or separated only by some level of tolerance, a company is going to contract someone they trust and feel comfortable with most of the time. In that perspective a blog becomes a means of relationship management and trust building.

Anyone with the time and desire to do what we do themselves can find the articles, whitepapers and processes online for free somewhere. Between Google, Wikipedia and the other millions and millions of websites it is possible to find anything that you want. You could do a search and find thousands of opinions contradicting mine on this topic if you wanted. It comes down to believability, trust and relationship. The same concepts that any strong business is built on. The same traits that most employees are held to. The same words that most people try to live by.

I wouldn't hold back information from a friend just so that I could try and sell him my services and make some extra money. I also don't think anyone who reads this blog would be dumb enough to stick around if I were simply selling my company and making everything we do sound impossible to execute without us. Good businessmen realize that there are always other options for people to hire, products to purchase and opinions on an issue. We want to help everyone that we can with their real estate issues and that may be by simply sharing our opinion on a topic, giving out some free advise or getting hired to do that thorough evaluation that we are good at.

Time Makes All Things Better

I've recently been buried in project work and have not had the time to update this blog as regularly as I'd promised myself that I would. A funny thing has happened in the time that I've been away though. Traffic has actually increased since I've been gone. Organic hits from Google, Yahoo and AOL have actually been keeping traffic to the site growing even with a lack of posting on my part. We have gained subscribers to the email update as well.

I'd been growing a little disenchanted at the time it takes to make these regular updates but it looks like it actually does pay off as time goes along. It seems like we are striking the right cord with the audience at large and they want to hear what we are talking about in the industry.

Going back through some of the keyword searches that drive people to this site it seems like it's primarily warehouse and industrially focused. That could be in part because that's the focus I tend to have and it reflects posts I put more thought into but regardless I believe that is the direction I'm going to continue to lean towards moving forward.

Thank you to everyone who has stuck around this far. It looks like we're going to be back in business because it does actually work. I think it's safe to say it won't be a post everyday necessarily, but a few posts a week should be about right. Remember to invite your friends to read, invite coworkers and lets get some conversation going on the site.

The purpose of this medium is to provide an avenue for deeper thoughts on the subjects presented here. There are too many small business owners buried in the long-term operations to see that they may not be doing right on the day-to-day. There are too many operators who don't have the time to keep up with the latest trends in their industry. There are too many people who don't fully understand supply chain and logistics. Hopefully we can continue to educate and improve the state of business Supply Chains.

Environmental Outlook

The environment is one of those issues that has been around since earliest memory. Recently it has been given elevated status in the view of the world. It is now important to be environmentally conscious no matter who you are, what business you are in or what you sell. Utility companies have increased demand for green energy because individuals have begun to take it upon themselves to lead more environmentally focused lives. Businesses promote their environmental policies and progress on the front pages of newspapers and magazines. In every product category there is now an environmentally friendly option.

This has elevated beyond the realm of simple social trend. Being environmentally friendly is now an issue that every person and company has an obligation to face together. That's not to say that everyone has the same opinion of how to go about that or why it is the case, but it is to the point that everyone is taking notice. Car companies advertise efficient cars more often than SUVs now. Grocery stores provide better positioning for green products. Schools devote special lesson plans for how to be more friendly to the earth.

My company is driving towards an internal goal of having an environmental aspect to every project that we work on. That's not to say that we are an environmentally focused company, it is to say that we believe it is important enough for a mention in every project that comes through our door. Most of what we do is project management and strategy consulting business. Our clients are typically financially focused and have large issues occupying their attention from the little steps they could be taking at the same time.

We don't sell a tangible product that anyone can touch and feel. What we do is advise companies on how to do better with the people they have, the real estate they occupy and the money they spend. One of the ways that we do that is by recommending environmentally friendly solutions. It is surprising how many buildings don't even use or plan for high efficiency lighting. On the consulting side we are able to provide the environmental impact of transportation options. Reducing transportation costs means that you are driving fewer miles and causing less pollution all while saving money.

Imagine the impact if every company considered the environmental impact of every project that they undertake. Simply by having it in mind when making a decision typically will produce a better solution with almost no extra cost and probably some long term savings involved. It's the little steps that are going to get us to a goal of environmental improvement. It's taking it into account for problems that don't seem related that will be part of the solution.

Market Share versus Profit Motivations

Techdirt recently ran a comment on an article critiquing an article called "Wharton Prof Debunks Market Share Myth." The comment and article got me thinking about the way different companies approach development and strategy of new products.

I think the focus of the article is more on the R&D side of the business as opposed to the marketing once the products were on the shelf. Nintendo went in with the intention of creating a system that was profitable Day 1 with no loss per device sold. Microsoft and Sony went into development trying to capture a % of the existing market through upgraded systems. It was the focus at this stage on profit vs. market that made the long-term difference.

One of the catches of innovation is that market share does not necessarily come with it. It was because Nintendo decided to be innovative that they also had to be profit focused. Similarly, when Apple first release the iPod it was an innovative product but priced for profit and not market share. Both companies, Nintendo and Apple, went in trying to make money off of an innovative product and wound up gaining market share as a by-product. The key third ingredient now becomes innovation.

Innovation alone does not guarantee success which is why the profit motive becomes so important. Any successful product now becomes a driver for more innovation because the profits can be reinvested to allow a company to overcome poor performances in other products. Microsoft and Sony have put themselves in a situation where they have no profit-center for their lines if failure occurs. Nintendo would have had the ability to start again since they were not invested in the inventory in the market with the Wii.

The question becomes how does your company approach new products or services? If you are the market leader are you simply creating products that will retain your position or are you out there striving to be bigger and better? If you aren't at the top of the pile are you simply trying to pick up market share or are you trying to thrive where you are and pick profit by doing things better than the big boys? There are important distinctions between the two though processes that can either help you succeed or cause you to fail.

The Joys of Risk

Taking risks is one of those things in life that can really get the adrenaline flowing and make big things happen. There is a surprisingly high number of people afraid of risks that like to follow the proven paths until they reach the end. The issue becomes that success takes risk. Anyone who avoids risk can never really find success.

Any large project will require decisions to be made without knowing all of the information. The risk avoidance method is to wait for more information before making a decision. Not making that decision is a decision in itself though. The opportunity cost of the decision timing is often the difference between success and mediocrity. A project that comes in two weeks ahead of schedule and 10% under-budget is a success. A project on-time and at budget is expected. Sure, the risk is that every assumption made for the early decision is incorrect resulting in more delays or costs but those can be mediated down the road to offset and get back to the expected result.

Decisions come down to statistics in the end. You can wait until you are 95% sure to make a decision or you can make it with only 70% certainty. The difference is an evaluation of the opportunity cost for development of the 25% separation. Strategy decisions usually will never even reach the 70% mark. Evaluating the alternatives and roads to success is a skill that certain people develop because they respect risk and are not afraid of it.

Innovation is a risk driven process. People afraid of risk will not be as innovative and creative. New ideas are always clouded with uncertainty. The margin for error can be quite small and the risk/reward ratios are daunting. However, every well respected management magazine, website or writer will tell anyone who listens the necessity to innovate and evolve as time goes along.

Growth is a risk decision. It is possible to grow without changing the business or branching out, but growth without change is a limiting alternative. With growth comes the need for expanded responsibility, complementary product/service lines, additional product variations or research and development.

Risk should be embraced as part of a business culture. Not blatant jump and guess risks, but the thoughtful decisions with an effective reward potential. If you are not taking risks as a company or individual, you are probably not reaching your potential.


Technorati Tags: risk, consulting, statistics

Happy Thanksgiving

I know I'm a day early but I think it's appropriate since quite a few people won't be sitting at their computer over the next few days. I want to take this chance and say thank you to everyone who is reading this blog. The past two months that I've been writing here have been a wonderful learning experience for both myself and our company. Moving a consulting company into the digital arena has brought its share of challenges both internally and externally. There are always people who question big leaps forward especially when it looks like we're giving away part of our intellectual advantage. To everyone that has assisted in making this blog a success so far, thank you again.

The plan is to still be writing come next Thanksgiving (hopefully for a much bigger audience). Fingers crossed that the blog success continues and that there is always enough time in the week to write (or someone else to fill in).

David

Evaluating A Product Release

Amazon.com just came out with a new device called the "AmazonKindle." The device is supposed to be the iPod of books but I really have to wonder about the thought process that went into the design and price structure of the Kindle. The $399 price tag can be justifiable if the baseline content and overall technology is at a very high level. Technically speaking, everything is there: long battery life, free wireless connection, high capacity storage (several hundred books if you use an SD card) and no back light. Unfortunately the content doesn't seem to match the cost.

There is very little free content for the device. From my first look it appears like you can get wikipedia.org for free and a built-in dictionary. You can't even read blogs on the Kindle for free. It doesn't come with any partner content for free. The Wall Street Journal costs $9.99 per month. Sure that's less than actually buying a hard copy of the paper everyday, but you would think they could have partnered with CNN.com or any other other free online news papers for free content.

Even the books aren't cheap. The Nine: Inside the Secret World of the Supreme Court has a print cost of $27.97. Amazon sells it for $16.77 and advertises it for $9.99 on Kindle and say that it is a 60% savings! I'm not great at math, but it seems to me that it is less than 50%. Closer to about 40%. A public domain book costs $1.99. This is what is driving many of the reviews I've read today regarding this product. Amazon seems to be using two pricing structures at the same time which turns people off quickly.

This isn't a review of Kindle or whether it is a good/bad/indifferent product. This is about the importance of factoring in the on-going consumer costs versus the alternatives. You have to have a really special product to charge for something consumers can get free somewhere else in the same or better quality. If the initial cost was lower or the on-going costs were lower I believe there would be less initial negative reaction to the product on the review pages. Those review pages will affect whether many people buy the product or not. If you are launching an innovative product to the mass public and currently has no competition, you sure had better get some good reviews and not alienate many people right out of the gate.

Products like this typically come about from a completely internal development process with unconnected decision makers. They probably tested the product extensively with consumers but do you think they tested the price structure simultaneously? A product is only as good as its cost/value ratio to individual consumers. How do you test products before release? What differences are there between your successful releases and products that didn't do well? Do you anticipate negative reviews and have a strategy for dealing with them if they occur?

I doubt that Amazon predicted the reactions to the Kindle. They probably do not consider the iPod a direct competitor for this product. Consumers seem to be thinking that it is. They want more features and they want to put anything they want onto it, not just Amazon provided material. Why shouldn't the Kindle have a built-in web browser? Why should consumers be forced to pay for content that has never had a price before (public domain books and blogs). Dealing with unexpected reactions to a product is an important part of development. Make sure you anticipate all of the possibilities surrounding your release.


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