Joseph Tainter’s book The Collapse of Complex Societies, provides an interesting explanation for the core mechanism behind the fall of complex societies, and, by extension, complex business models, as summarized by Clay Shirky in a recent blog post:

Brutal End

The conclusion that reform or transformation of  complex business models can occur only through sudden simplification seems to describe what is happening to old school (ie. XXth century) companies  as they confront the challenges of Web 2.0. But the apparent inevitability of the process it based on some unspoken assumptions:

Assumption (1): Business models are constantly built-up in complexity; that is how they have delivered rising profits in the past.

Assumption (2): Business models secrete the need to be defended, always beyond their reasonable lifespan – their executives are only human after all.

But do these assumptions really hold?

The core of Sun Tzi still applies

Indeed, there is the possibility that the Web 2.0 phenomenons who compete so differently and cheaply with established business models with high cost structures may carry within themselves the ability to regenerate in a way that avoids the Fall through sudden simplification that seems to threaten so many older models.

Old Chinese military wisdom teaches us that if our plans have no discernible form they cannot be detected and no preparations can be made against them. For the first time in history, it may be possible to devise value-creating business models and the structures that implement them, efficiently, quickly, so much so that they can also be disbanded once they have ceased to deliver their value,  precisely because the next business model idea to generate value can be implemented so swiftly.

The Web offers the opportunity to generate value through formless, unstructured networks of contributors who are not part of fixed organizations; who constantly connect, work for and learn from a variety of environments. Although a snapshot of the new arrangements that underpin value creation in this environments may reveal considerable complexity, they are not beset by the rigidity that is the source of so much anguish for companies such as old-school Media corps (TV, Print..). Flexibility is built into the heart of the new system. Flexibility through unprecedented connectivity and empowerment of participants makes new business models, but also makes scrapping them extraordinarily easy. The need to defend which is a key motivation for increasingly fruitless complexity is scrapped.

Which brings us to the parallel between Joseph Tainter’s  book and the fate of complex business business models. When he wrote the book, he could not imagine that, one day, a worldwide network would produce a frictionless way for people to associate, build, disperse and regroup that would eliminate much of the need for many high-cost value-creation structures. As a whole, the system should be more resilient. It encourages business people to think in terms of series of business models that constantly explore new profit niches, rather than established structures than necessarily become unsustainable. Immortality through permanent mutation – in a business sense -may be within reach for the first time.

It’s not just a product, it’s an ecosystem

Those who wanted Apple to produce a feature-packed piece of tech wizardry are misunderstanding Mr. Jobs’ marketing strategy. Apple is not a just a computer maker anymore. It’s not even just  a device maker. Apple is a creator of business ecosystems. The iPad’s features were carefully chosen to support the needs of the new ecosystem Apple aims to create.

“That’s right, it’s not a laptop. Get over it.” : or, a brief de-construction of iPad Product Strategy

Let’s say what the iPad is not:

It is not a high-end gaming machine

The display is too small and the graphics capabilities are insufficient to satisfy the needs of gaming enthusiasts. Does it mean that you can’t play games on it? Of course not. It is a good gaming platform for more casual games that do not require advanced peripherals (the connectors are absent…). Expect an army of established and indie developers to make downloadable games for the iPad just like they do for the iPhone. “So, for playing games, it’s just like an iPhone but it will cost $499 -$829?” No, the display is much nicer, and besides, just like in the case of the iPhone, playing games will be a secondary function, not the main usage model; otherwise, Apple would have launched a competitor to the PSP of the DS.

It’s not a graphics workstation.

The display is too small and the graphics capabilities are insufficient to satisfy the needs of serious digital content creators. Plus it has no webcam and no microphone which limits the way consumers can create rich content for social media for example. That does not mean that, especially when docked to its physical keyboard, the iPad will not be able to be used to create content, but that is not its primary purpose.

It’s not a business machine

Not only does a physical keyboard not come standard but there is no removable media (CD/DVD player) and no multitasking capability. Those choices, as much as any, point to what the iPad is actually designed for. Multitasking is powerful technology for busy people who do many things simultaneously to save time or because their personality drives them to operate that way whether at work or play. The iPad will do one thing at a time. Multiple tasks will be performed, well, serially. With no folding structure, it is more straightforward, less “cumbersome” than the traditional folding, screen-and-keyboard combo. Some people are already trying to see how they will use it to replace a laptop, but the iPad will only marginally be used as a laptop. It will not be used on one’s lap first of all, but probably held in one’s hands. The email function is so important that some people will want to be able to dock the iPad in its docking station and type sitting down at a table. But I suspect that most email will mostly be written in a more casual way, sitting on a sofa using the on-screen touch keyboard.

Is it really a mobile computing device?

I do not think so. It is too large to be carried on one’s person- large enough that it requires a briefcase or a backpack. And its features do not make it a road warrior’s rig. But, it is clearly an unwired device. If one already has an iPhone, and enjoys displaying and interacting with dense data on a palm-sized screen, this device may seem redundant. Those are the users that are inclined to criticize the iPad as being an over sized and overpriced iPhone, with nothing added – actually with less - there is no camera… But that’s choosing to ignore the obvious: the much larger, very crisp screen.

The iPad is not just a device: it’s a strategy

Commentary that is limited to product features is missing the point that the iPad, just like the iPod with iTunes, is destined to be the hardware pillar of a broad strategy. All the limitations that were reviewed above clearly point to the target users and the usage models that Mr. Jobs has in mind for the iPad.

Apple is targeting consumers who need an affordable and easy-to-use device that they will reach for to perform a specific function. For example, there are many consumers that want to quickly check a restaurant listing online, like checking printed yellow pages, without having a need to check email at the same time. They are just looking-up a restaurant. The iPad will cover this kind of quick look-up function nicely without having to wait for a laptop or desktop to boot-up, and without their associated complexity.

Pragmatists and laggards

Technology enthusiasts enjoy the advanced capabilities of a device even if they are overpowered for most of the functions they routinely perform. Pragmatists want the simplest and most inexpensive device that gets the job done, while laggards are intimidated by advanced gadgets but still want to enjoy the convenience of some of the new functionalities. Apple clearly decided to target the pragmatists and laggards, that is why the second most important aspect of the product after screen size and before battery life, is the very aggressive entry price: $499. How can Apple afford to do that? First because it has exercised discipline and restraint in the selection of features, second, because additional revenue is expected to come from the ecosystem.

What ecosystem?

To answer this question one has to look at the industries that  have not been able to harness the Internet but rather are suffering from the disruption it has brought to their business: Publishing (books, magazines, newspapers) Network Television, and Advertising (a close relative). The short of it is: fewer people read/watch traditional media (print and TV) because everyone is online, and, advertising revenue is down to the point that the survival of many media names is at stake. The iPad is to be the platform for the renewal of the business model of the Publishing and Advertising industries. The same as the iPod and iTunes allowed the music industry to at least slow the financial hemorrhage from peer-to-peer sharing of music by offering a way for consumers to download the songs they want for $1 each, the iPad will allow consumers to read the selection of content they want at a price that is attractive to them, AND, Publishing and Advertising will be able to at least slow the loss of ad revenue by selling ads that will appear along with the free content. Apple will certainly extract the value that befits its role in creating this entire environment, so Publishing and Advertising will have to yield a good portion of the profit pool. But, if all goes well with the iPad, it will sure beat the alternative.

Flash technology is out – so what happens to online ads?

As attractive as Flash sites may be, Flash is an Adobe technology that is known to use a lot of power, thus reducing battery time something which is anathema for a consumer-friendly device. Web designers often stay away from Flash because of display issues and problems with SEO. This being said, many online ads use Flash, so Apple’s decision not to support Flash is both an aggressive competitive move versus Adobe and a gamble that an alternative technology will be available to enable online ads on the iPad. That technology is HTML5 which seems to be supported by most big players today as a common standard for the Web. Many ads would have to be re-produced for HTML5 but that should not be a technical hurdle especially if overall production cost fall if a single format ends up working for all browsers/platforms.

New places to access data

A laptop placed in a kitchen to be used to look-up recipes always looks like a fish out of water. I cringe at the possibilities of ingredients falling in the keyboard. A presumably tightly closed iPad casing would look right at home on a kitchen counter. A coffee table device that is always there to read the news, send out a brief email while sitting on the couch, or play a simple game, with no frills and complexities could become as ubiquitous as iPods are now. That is why the name has been selected to be plain: so that it becomes ubiquitous. I can envision the device becoming as common as the phone book was in any home or business: a device that does a few things very well, very fast, very reliably, very easily, and that is broad conduit for advertising messages.

The iPad, the Internet, and Consumer Empowerment

Some are criticizing the fact that the iPad does not offer the ability to create content as much as to consume it;  that it cements inequality between producers and consumers of data. One of the great revolutions of Web 2.0 is that it makes consumers active participants in the relationship with companies whose products they buy, through forums, comments, social media etc.  The absence of the camera and of the microphone in the iPad seems to confirm that. But perhaps Apple is recognizing that even habitual content creators often engage in usage models that do not require the creation of content, and therefore that it was not necessary to build in content creation capabilities in the iPad.

There is an certain elitism of the technologically savvy segment of the market that looks down on a device that is manifestly aimed at more pedestrian online activities for people who want a worry-free, bullet-proof experience.  The same segment tends to be partisan of the Internet as a force of popular empowerment and of resistance to the oppression of large corporations. They may see these product design choices as some conspiracy against the public. It’s probably just segmentation.

First, one fact has been obvious for a while: Consumer spending is too high and must/will/is heading down. Some 70% of US GDP is represented by consumer spending. This in and of itself would not be a problem if it was not fueled so much by rising debt, and the current level of household debt is unsustainable. Extended uncertainty about the employment picture will continue to depress consumer demand. This virtually guarantees that the economy, which is so dependent on consumer spending, will recover at a very slow pace.

What does this mean in terms of marketing strategy?

Job losses in recessions since WWII

The first obvious consequence is that much of the retail business and the consumer goods manufacturing that is still based in the US will be severely affected.

A 5-point drop in consumer spending would be severe; a 10-point drop would be transformational. Strip malls full of small specialty shops started by new entrepreneurs  seeking to be their own boss will be hit hard by the contraction in consumer spending.

Look forward to a glut of retail commercial real estate i.e. a lot of empty windows at your neighborhood strip malls. The revenue numbers for  retail stores and chains, big and small, will continue to reflect the new reality long after the recession is officially over. This will probably sound the toll on the strategy to build a new Home Depot or Target every few miles. This is probably good news for the environment that will stop seeing farmland and wilderness paved over by urban sprawl. It also means that there will be a lot of inexpensive real estate available for the Next Wave – more on that later.

• Psychologically, this will be tough on the part of the nation that defines itself as “shoppers”, but realistically, that trend had run its course. A rediscovered sense of thrift is setting in that will result in: purchasing less frequently and focusing on quality (more like Europe), making purchases last longer with repairs, and doing things by oneself.
• Home improvement chains are seeing a surge of homeowners interested in growing backyard vegetable patches in an ironic twist that is not lost on those who remember that the disaster that was Soviet agriculture was offset by the produce grown in small private backyards.
• Those who are not affected by job loss, or who have the reserves to hold on to their homes will space out purchases of big ticket items such as furniture and cars, and in general make the home the center of attention. Those who cannot sustain the financial burden of home ownership because of unemployment or loss of income will return to renting in a reversal of a decades-long trend.

There are far-reaching consequences to this trend for the strategy of B-to-C companies:

• Respected consumer and entertainment brands can expect to do well if they focus on value for money: that is what the average consumer will be looking for. Price points may not necessarily go down, but purchase frequency will, which means that getting innovative about delivering more perceived value is what will maintain Customer Lifetime Value;
• Recognized no-frills brands should benefit from a downward shift in spending habits. Many consumers will resent the loss of status that comes from shopping at lower level retail outlets and buying lower-level brands. This aspect must be carefully managed to capitalize on the adjusted buying patterns of these erstwhile free-spending consumers;
• Second and third tier brands are in for a struggle: the budget available for experimenting with unknown extras will be much more limited;
• New brands will have an uphill battle to establish a name in this climate but some may be able to capitalize on the new mood with well targeted value propositions.

Second, a nation of consumers will (maybe) become more like the rest of the world: a nation of savers.

Households are now saving at a rate not seen in 15 years (5% and rising) not just for the sake of saving but mostly to build reserves to avoid home foreclosure in anticipation of further job losses. In the short term, this will slow economic recovery, but in the medium term, it means that there will be more money available for investment in new ventures, that is, after savings have been used to reduce outstanding debt…

The combination of a higher savings rate, the  lower spending that is its corollary and a weaker dollar spells trouble for overseas export-oriented economies that have counted on the American consumer for their economic growth and development. This chiefly concerns China and other export-oriented Asian “tigers”, and to a lesser extent Japan. It will adversely affect the volume of international trade in the short and medium term which will harm many developing nations that count on exports of raw materials and low-cost consumer goods to generate much needed foreign currency.

• The truth is that while China and other countries blame the US for the economic and financial crisis, and express worries about the future value of their dollar-denominated assets, they conveniently forget that they would have achieved very little economic growth without America’s willingness to spend.
• Their trade surplus is not just caused by the American consumer’s self-indulgence, it is compounded by their conscious strategy to encourage investment in export-oriented businesses through savings at the expense domestic consumption. That will come to haunt them now as their own consumer spending component of GDP will be insufficient to compensate for the pullback of US demand that had kept so many Chinese manufacturing facilities running at full capacity. Already, many new factories are being mothballed in China without ever having started production.

Here are the most important implications for the strategy of US companies:

The consumer will clearly not be leading the recovery. What will have to drive economic activity in the future is business investment, and a good part of that investment will have to be in export-oriented ventures.

Much of the corporate drive of the last two decades which presided over the outsourcing of consumer goods manufacturing and their domestic distribution will have to redirect itself towards the opportunities of the New Normal. They will represent the New Wave that will mobilize managerial expertise and harness technology to build the companies that create crucial value for other companies – and much less for consumers. These companies will take advantage of the longstanding strengths of the US business environment (relative lack of red tape, venture capital, labor flexibility, innovation capacity…) to launch highly competitive offerings that will help countries like China and India drive efficiencies and quality in their economies. In other words, the US will have to become a lot more like Germany, which generates trade surpluses with exports of high-grade machinery and industrial equipment, but with a different product mix. Key US exports will have a strong information technology and/or Internet component with an emphasis on high-quality services that allow companies across many industries to profitably serve large numbers of customers in big countries such as India and China. Additional household savings in the US should become available just in time to invest in these companies.

International Marketing will be more important than ever and a key to long term GDP growth. Fortunately, the US labor pool includes millions of immigrants who can serve as effective bridges to foreign markets. Combined with cutting edge innovations in new technologies such as: bio-tech, nano-tech, new fuels, agro-tech, info-tech, more US companies can become very competitive in international markets. Some big firms are leading the way: the likes of Google and Cisco have carved out large positions in China for example (that’s how the Chinese government has acquired extensive Internet “control” capabilities…). Many mid-size, innovative firms now need to look abroad for growth opportunities, now more than ever.

The responsibility for this New Wave will fall on the shoulders of US entrepreneurs and business leaders. Many are still hunkering down, waiting for the wind to turn. But when the wind does turn, its domestic component will only be moderate. To drive the next wave of growth, entrepreneurs must hatch new offerings and new business models that are tailored for these times. Never let a crisis go to waste!

Although the photovoltaic cells (PV) built from crystalline silicon have been around since the 70s,  electricity produced from the sun still represents a very small fraction of total electricity generation worldwide simply because solar can not compete with oil or coal, or nuclear for that matter. So, the challenge for solar energy companies of all types remains steep in spite of the enormous potential the field holds for the future. In recent years, new technologies for making solar cells have been developed setting the stage for a strategic struggle for the best competitive positions.

Yes, the Sun is the source of almost everything, and its free (well, not quite)

The sun is THE quintessential source of energy: both inexhaustible and clean, it is the source of all other energy sources. Many ancients civilizations, most notably the Egyptians, had the right intuition when they deified the sun and made it an object of worship: the sun grows all vegetation and therefore directly or indirectly feeds all animal life (almost – see oceanic life around black smokers). What the Ancients did not know is that the sun is also the origin of fossil fuels such as coal and oil (decayed plant life), and that suns that go supernova produced the uranium that fuel nuclear reactors.

So if the sun powers the most important biological and cosmic processes in our world, why isn’t the use of solar technology for energy generation more widespread?

It turns out that this is a pretty tough nut to crack, and has been for some time. Today, massive investments poured into solar power technology in various incarnations suggests that many rational investors believe that solar energy is finally about to have… its day in the sun.

Enter thin-film PV…

The main basis for these bets is a new technology for building solar cell called thin-film PV. While solar panels based on silicon wafers account for a slowly growing portion of total electricity production , they remain expensive to manufacture and expensive to install, and their conversion efficiency is low (around 10%). They have been widely used in space and military applications – fields where spending is less subject to the ROI imperative. Silicon-based solar cells can also be quite ugly. A field of solar panels installed in the Nevada desert that power Nellis Air Force Base may not need to win beauty contests, but when perched on top of a house in the average suburb, they are an eye-sore. The promise of thin-film photovoltaics is that they would be cheaper, their conversion efficiency much higher ( 20% or maybe even more) and that their inherent flexibility would make them easy to seamlessly integrate in architectural designs. If they fulfill their potential in terms of cost, they may make utility scale (i.e. 500MW+) power plants viable.

The sky is the limit

Many venture-backed start-ups in thin-film PV are seeking to gain a foothold in a market that promises to be nothing short of immense.

But this is a space with many moving parts and rising complexity:

1. There is a plethora of actors in the field, some with very deep pockets such as Sanyo and Honda, some much smaller like NanoSolar;
2. The field is quite regulated to the point that some see red tape as a main obstacle to growth;
3. Solar technology is global in nature because many countries are interested in the long term strategic value of solar power, not least of which is energy independence;
4. As a result, it is the object of national subsidies both to encourage the creation of solar technology/solar power companies and to support the installation of solar power generation capacity by businesses  and individuals;
5. Of course, traditional suppliers of fossil-fuels have had, and will continue to cast a forbidding shadow on the adoption curve of solar power technologies;
6. Once produced in large plants built on cheap land (i.e. far away from cities), solar power still has to be transmitted to the place of consumption, which remains very expensive;
7. There is some criticism that the net energy impact of thin-film solar cell plants is not favorable due to the high energy use of the sophisticated manufacturing process;
8. The solar cell is not the only thing: it needs to be installed and this balance-of-system cost has traditionally made solar power uncompetitive.

The road to success…

For a small innovator in the field of solar cell technology, the paths to success are many. The intrinsic risk/reward profile of each path is difficult to assess and is becoming more so because of the increased attention and money that recent breakthroughs have brought to the field. Opportunity now stalks what was for a long time a slowly evolving space. Like salmon running up a river, solar power start-ups are picking different channels to make it upstream. This has the making of a fascinating strategic marketing challenge.

It turns out that there is no shortage of technologies to make electric current from photons. The problem lies elsewhere, in the mass manufacture of the cells. Solar cells based on silicon have the advantage of leveraging the processes and tools developed for the semi-conductor industry. The tools are available but they are extremely expensive which implies that a high-volume operation is required to justify the investment. The cost structure of crystalline silicon-based based solar cells has not been able to compete with fossil-fuel electricity generation (although that is changing fast- more later), the result is the slow growth pattern in solar experienced until recently.

…leads to the swamp of manufacturing challenges

The dream is that a thin film of atoms could be cheaply applied to a substrate that would result in an inexpensive and highly efficient solar cell. That’s the dream, and industry will get there at some point in the future. In the meanwhile the problem is that the tools required to apply the film (there are a few different methods) do not yet exist for the most part, and the manufacturing processes corresponding to each technology (i.e. different types of atomic elements used to generate current from sunlight) in large part still need to be refined. This forces the innovative solar technology start-ups to delve deeply into the development of highly specialized tools and sophisticated industrial processes. These are very expensive endeavors that require the kind of R & D and manufacturing prowess displayed over the last 20 years by the likes of Intel and Applied Materials.  When combined with the need to achieve economies of scale to compete with the cost of electricity from fossil-fuels -which benefits from almost a century of investment, the result is a highly capital intensive exercise. What compounds the risk of the investments is that no one is sure whose process will achieve the best combination of $/Watt of power generated, vs. conversion efficiency the fastest, and who will achieve the scale to satisfy market demand at a competitive price.

One thin-film solar cell manufacturer is out of the gate early with cells using Cadmium Telluride: First Solar. They are scaling fast and must give the jitters to other thin-film start-ups. First Solar has recently made announcements relative to their ability to drive economies of scale. How far can they continue to drop marginal costs? Will their conversion efficiency hit a wall? The group of contenders that aims to produce cells based on a layer of CIGS (Copper, Indium, Gallium, Selenide) are chaffing at the bit to get into the race although as of yet only two out of more than ten have managed to deliver product.

The early bird gets the worm but the second mouse gets the cheese!

Some recent moves by big players show how dynamic a strategic playing field solar technology has become. BP has long been committed to solar technology, and that wasn’t just R & D but included a full manufacturing facility in Spain, until this April that is, when BP decided to close the plant and outsource cells from First Solar.

Shell had run a large PR campaign on the basis of its investment in alternative energy sources, including solar. Shell, which  has always been a technology leader among big oil companies, said it would just concentrate on biofuels from now on (last March).

These moves could  indicate that the drop in the price of oil no longer makes it urgent for oil companies to invest aggressively in alternative energy, including solar. It may also signal that the investment and know-how required to get in the thin-film game has become too high, too risky and too remote from their core business to justify continuing in this direction considering the caliber and scale of specialized competitors.

To make things more complicated,  the price of crystalline silicon is now dropping rapidly from $350/kg until last October to $80/kg and still heading down, making the price-per-Watt of the actual cells reach $1.1-$1.2. First Solar, the low cost leader for thin-film cells claims a sub-$1 cost/Watt. It may be that the drop in the cost of crystalline silicon cells will be only temporary as demand for semi-conductors for the electronics industry is expected to rebound. If the world economy settles in a long-term slow growth pattern, silicon cells may yet a give a serious run for its money to new thin-film technology. Major silicon-based solar cell manufacturers are based in Asia with a cost-structure made even more competitive by low local labor costs, made even lower by the recession. Interestingly, the cost of Cadmium, Telluride, Copper, Indium (by-product of Zinc processing), Gallium (by-product of Aluminum processing) and Selenide does not seem to be a major cost factor for thin-film competitors (compared to equipment and R & D costs.)

Where to from here?

The price of oil has fallen off from its peak of over $140/barrel last year, although it has been creeping back up quite worryingly in spite of historically low demand. It is now back at a level ($70) that was considered unsustainable a few years ago when the world economy was used to $20-30/barrel oil. A combination of speculation based on the structural shortage of production capacity to easily satisfy the needs of emerging economies such as India and China (when they are running at full tilt), and the successful restriction of oil production by OPEC countries is behind the rise in prices. This is probably good news for the thin-solar field.

The recession has seriously affected the construction industry, a major possible outlet for solar cells, because of the combined drop in economic activity and the financial meltdown. Both events also affect the availability of capital for solar technologies, as  much as the demand side of the solar equation. Considering how capital-intensive thin-film solar is, this alone may weed out competitors that cannot raise more financing to stay in the R & D game.

The new administration has put infrastructure projects and alternative energy sources on the front burner of the federal government’s agenda. The recent passage in the House of Representatives of the cap-and-trade bill (Waxman-Markey climate bill – or – American Clean Energy and Security Act of 2009) will encourage the providers of alternative energy technologies, if it passes in the Senate. Some of this would undoubtedly trickle down to the thin-film start-ups, which in no way alleviates the need to score significant wins in the process engineering and manufacturing scale battle.

Picking which segments to serve when manufacturing is up, with what partners, and at what price point and features, will probably determine which of the current thin-film technology start-ups make it to the next round of this rapidly accelerating competitive situation. These are both exhilarating and trying times for all the players.

Compute Customer Lifetime Value Now

If your company does not go through the formal exercise of determining CLV, now is the time to start doing so.  It provides a no-nonsense view of which customers are  worth spending time and effort on to retain. Here are key areas to cover:

Identify your best customers with a few key metrics

If you suspect that your customers’ lifetime value has changed because of the economic situation, it may be wise to supplement CLV with other metrics. Regularly computing tenure, recency, frequency for all your customers represents a time commitment especially if you run a transactional business with many small customers. But it is a surefire way to filter out customers who may be the cornerstone of your growth in the future. They may be your high CLV customers but also may be…

• Long tenure customers that are the very loyal and that keep coming back. They are a great source of referrals and testimonials for the company.
• High frequency customers. If their purchases are small they can represent a significant drain on your Sales and Support resources. Properly managed they can be steady source of profits.
• Customers that have been recently acquired. They  need to be carefully examined for the very best ones that will be earmarked for special service and attention from everyone that touches customers in the company.

These customer categories have tried and hopefully appreciated your value proposition.  Design low cost but well timed programs to amplify their pre-existing propensity to buy your products, especially for seasonally based purchases.

If you go the extra mile for them now, they will remember it

Challenging times offer a unique opportunity to be helpful to customers and thus build goodwill in a way that is difficult to replicate in normal times. Dell created a lot of goodwill by dropping prices after 9/11. Home Depot has special plans to make sure the supply of critical items is replenished in emergencies such as hurricanes. Helping customers by delivering the right value during difficult times is an excellent way to build long-term value in the relationship which should translates into higher CLV.

Put in place automatic customer vulnerability alerts

If you have been mapping and managing your customer experience across the company, you already have a good view of all your customer touch points. Now is the time to leverage that process by combining customer service discussions, sales feedback, web activity, ad hoc online customer surveys, comments on the company blog, channel feedback to paint a picture of the vulnerability of your best customers. Not integrating critical data across functions is an obstacle to early detection of upcoming customer defection. It’s also time to (over-)communicate with customers in some relevant way to understand their circumstances and detect significant shifts in the climate of consideration for your offering.

Select for special retention actions the most vulnerable on the list that you believe have a future. They may fall in various categories: unsatisfied, not quite in the target market, one-time customers : estimate what modification of the offering, the messaging, the channel, would keep them while keeping an eye on incremental marketing investment vs. incremental gross margin. Taking a portfolio approach to allocating marketing budget to different customer categories can give you a framework for reducing the overall risk of your retention efforts.

Conduct loss analysis to thoroughly understand why you are losing top customers

It is sometimes hard for management to obtain systematic and detailed information on the reason why certain sales were lost. It is critical to do so at times like this  especially with good customers. You may be losing sales from your best customers because competitors resort to radical discounting in tough times. That requires a different response than if you discover that your value proposition has become somehow less relevant to your customers.

Provide something “free” and valuable that helps in tough times

If business is slower and you have not downsized to the point where there are no internal resources available, it’s a good time to beef up services for the customers that are the bedrock of your long term success. That means offering a better quality response on everything from customer service, tech support  to free consulting during the sales process.  Providing valuable information on industry trends and solutions can make a difference and position you as an authority in your field.

You can also turn your best customers into evangelists with a well-designed loyalty program that rewards referring other customers to you: it may be the best way to reward them and grow revenue.

Choose to support select customers in trouble

This is a strategic decision and obviously depends on each company’s financial situation. You may have some customers that are “too important to be allowed to fail” or some customers that are partners in a crucial new product launch. These situations are often delicate to manage. Hopefully, this co-dependency will be a profitable one in the long run.

In most technology industries, the prevailing culture emphasizes a product-focused discussion between the company, its partners and its customers. While that may be to a large extend natural, letting a product focus monopolize all internal creative and problem-solving abilities is sure to leave many profitable opportunities unexplored.

So, when do your products cut you off from your customers?…

1. When product managers can list a plethora of product features but struggle to clearly articulate benefits for customers.
2. When company executives mostly describe the company’s wins in terms of products rather than citing the customer successes enabled by the company.
3. When there is only a handful of customers whose stories of using your product matches the stated value proposition.
4. When customer experience issues are being ignored because they cannot be addressed by more product features, only with a more fleshed-out offering.
5. When the R & D budget dwarfs the market research budget.
6. When management rarely meets customers face-to-face.
7. When there is recurring evidence that customers use very few of the features designed in the product.
8. When customer research is designed to produce a validation of the accepted internal view of what the company’s products should be.
9. When the technical function is on quasi-autopilot adding features to products and extending product lines with limited analysis of which customer segments will benefit and how.
10. When advertising entails many bullet points that most customers cannot relate to what they need to get done.
11. When no one in the history of the company has ever been “embedded” with a customer for a reasonably long period of time.
12. When the failure rate of the product upon arrival at the customer’s location is the only measure of the customer experience.
13. When Sales people spend too much time becoming technical experts instead of honing they ability to be empathetic problem-solvers and persuaders.
14. When product innovation does not involve functions that touch the customer: Technical Support, Sales, Customer Service, Marketing, even Finance.
15. When Marketing is about product advertising and promotion, with limited or no opportunity (time, budget, mandate, executive support) to be the voice of the customer.
16. When the preference for hiring product managers goes to people with limited customer “empathy” skills.
17. When competitive comparisons prepared by product managers mostly involve making point-by-point comparisons of spec sheets.
18. When customer advisory councils are just social affairs meant as a reward to top customers instead of being a serious way to involve them as partners.
19. When suppliers determine the product you will design and sell, irrespective of the company’s customers’ requirements.
20. When new products are the only news that excite current investors with very few of them asking for serious evidence of the product’s real value to customers.
21. When the CEO’s deeply held view of the company’s mission is that it is about moving products, not about identifying and solving customer problems.

Like most lists of this type, your mileage will vary depending on your industry and company. Feel free to add more to the list in the comments.

What is your strategy for dealing with increased price competition?

While credit was easy and spending by businesses and individuals was uninhibited, it was relatively easy for companies with approximate strategies to remain profitable. In a recession, buyers cut back and low-cost leaders have a serious advantage: they set lower prices  to maintain market share which puts pressure on all other competitors. If your firm is not the low-cost leader, what is your plan going forward?

• Are your customers increasingly seeing your “value” as a nice-to-have they cannot afford?
• How will you face a possible migration of customers towards lower priced offerings?
• Do you expect these buying habits to change permanently?

Some experts predict that this will  indeed be the case at least in many industries driven by consumer spending such as: consumer electronics, home furnishings, home appliances, apparel, toys, even automobiles.

Now is the time to define more rigorously and more clearly the basis on which the company competes, and that includes examining the relevance of cost-based strategies.

The case of high-value strategies: Differentiation & Vertical Focus

These correspond to the  sections on the right side of the triangle. They include, among others, (a)  upper right (green-blue): innovative companies that offer a highly differentiated solution packaged to solve the problems of certain verticals, or (b) lower right (blue-green): vertical experts with a differentiated offering that endeavor to address the needs of a vertical through specialization. Low-cost is usually not the focus of these strategies; cost-control is just practiced as a matter of sound management.

For companies with these “premium” strategies, it maybe time to consider a much greater focus on cost, with all the consequences that entails internally on resource allocation and externally on the brand. To be successful, this transformation requires an across-the-board change in “footprint” for many functions and a change in the value proposition, not just a few tactical promotion-based price drops. The change can include:

• reduced features in products – some products may be over-designed anyway.
• more performance-based compensation programs for Sales – it’s severe but necessary in more competitive times;
• reconfiguration and re-allocation of Customer Service – focusing service toward customers with the highest CLV;
• strict ROI-based review of all demand generation programs – cost per lead, cost per contact etc
• adjusted brand-building activities – always keep building the brand especially in difficult times when customers feel uncertain and can be impressed by a company’s response to the situation;

The transition from the right to the left of the triangle cannot be uncoordinated because of the obvious risk of ending-up in the undefined middle where there is no competitive advantage of any kind. Good execution is key as always.

Value rather than low-price still works in some cases but it really has to deliver

There is a range of companies for which the high-value, highly differentiated offering strategy will continue to be successful even with the downturn. Those are the companies that drive efficiencies and cost savings on substantial portions of companies’ expenses and investments. These differentiated offerings can resist the movement to lower prices because they maximize ROI or save cost: examples include software that maximizes the effectiveness on IT investments (eg. many SaaS solutions), systems that reduce operational inefficiencies (ERP), cut the cost of Sales (CRM), automate demand generation (Marketing automation software) etc. Of course, some reconfiguration of packages and price points may be required to facilitate customer acquisition in this climate.

Going for Cost leadership

This is a much more radical re-alignment, one that cannot be implemented in a few quarters. Companies with real cost leadership have been working at it for years. It is a class of competitive advantage that permeates all aspects of  the company and aligns with a long term view of what the brand stands for. We can think of the likes of Dell in its heyday and Toyota to this day. Cost leadership is a long term goal that needs to be implemented over time through shorter term initiatives in all aspects of the company.

To go low or not to go low? Know the competition

The decision to alter the strategy or not will highly depend on the nature of the competition. Some situations may not require any re-alignments. A group of companies surviving well in the undefined middle may not want to change anything. Michael Porter famously coined the expression “stuck in the middle” for those companies that have not resolutely chosen any specific strategy. The only time you may want to be “stuck in the middle” is when everyone else is stuck there too, and you are making money. But that is increasingly rare when the size of the pie is shrinking.

Accelerating the strategic shift

If the company has been prudent enough to accumulate some cash during the boom, a well timed and affordable acquisition can be the way to operate a strategic transition. Second tier cost-based competitors may be likely targets if they have been too aggressive about scaling to capture market share or penetrate other verticals during the good times.

“Give to Caesar what belongs to Caesar…”

Porter fans will certainly have noticed that the triangular presentation above uses the generic strategies suggested by Michael Porter in his seminal diagram decades ago.

Michael Porter’s landmark insight was that there are two generic strategies that define how firms can compete: differentiation and cost advantage. He suggested adding an industry focus to either one, leading to this well-known representation. (labeling in the original may differ)

Notes: Corner cases: what are they for?

Note that the “corner cases” are appropriately rare. They correspond to pure plays with few real world examples. Pure cost leaders may exist for some commodities that are totally undifferentiated and with entirely horizontal appeal. Pure vertical plays with no differentiation and no cost advantage correspond to isolated (monopolistic?) situations. Pure differentiation strategies with no cost advantage and no vertical sensitivity at all correspond to those rare killer apps that take the world by storm on the basis of their sole uniqueness and where cost does not matter – because some of them are free (Internet browsers…)!

Diagram key:

Vertical dimension: Modalities of failure to deliver the right offering.

Horizontal dimension:  Unbalanced focus:  excessively internal or external.

Technology drives the company

In highly inward focused companies that deliver a overly complex product, one often finds a dominating passion for technology. The management, usually characterized by a heavy technical leaning, believes in the future of a product on the basis of the technology that powers it. When the technology is unique and corresponds to a real market need, success is in the air. When it’s the proverbial solution in search of a problem, things can get ugly.

What makes this situation hard to solve is that most technologies condemned to never achieving any widespread appeal do get some customers. Most of them are highly supportive and very enthusiastic although they have a limited budget. They provide just enough hope to make it difficult for the company to try to rethink its strategy, and in this way contribute to keeping the company pointed toward a dead-end. Finding a home for a technology can be very challenging for a host of reasons including the possibility that the world may not yet be ready for it. An excessive inward focus exacerbates the challenge.

Company ignores markets requirements

The market is in need of better solutions but the company does not step up to deliver either by choice or because of myopia. Sometimes, that decision may be wise but that presupposes that the opportunities were carefully assessed. Actually, in many cases the company does not detect the opportunities at all simply because it is dedicating most of its efforts focusing on its everyday tasks and internal problems. In other cases, management is not temperamentally or intellectually attracted by the nature of the opportunity. Management is uncertain about the direction the company will take if it commits to adapting its competencies  and processes to meet a more complex or different market. Therefore things are kept the way they are. The fear of change acts as a powerful motivation to persist in an inward focus.

Company can’t read the market

The company under serves or does not serve one or more accessible markets but it can’t seem to dedicate sufficient focus to make a success out of any one of them. The direction keeps changing usually due to the fact that there is a short term need to close sales with new prospects. The Sales team often plays a central role here enabled by a short term outlook in the product design function.  A weak or non-existing formal marketing function can cause this situation to persist through lack of adequate research and/or market insight that leads to a whack-a-mole approach.

Key customers drive the company

This is a somewhat less ugly trap. The company has a few good customers that support some growth. Unfortunately, in many cases that growth is insufficient. The features and improvements are useful for these key customers but are superfluous for almost anyone else. The company does a good job being attentive to these customers, but every one of their requests draws the company further away from being able to score a real hit in a broader market. The trap, which is more of a dilemma, can be sidestepped by careful account management and diligently executing a plan of resource diversion toward a different strategic option.

Turning the tables

On the positive side, each one of these traps can be skillfully turned into a source of success. The vertical and horizontal dimensions here represent what seemed to be a strategic bias before the company’s vision was proved to be correct.

The difficulty lies in correctly identifying when you are stuck in the trap and having the courage to confront the cul-de-sac.

Those who have accumulated some early knowledge about Social Media Marketing (SMM) bemoan the number of self-proclaimed experts that crowd this new  field. Indeed, thousands of Internet professionals are trying to capitalize on the spectacularly successful platform for marketing purposes. It is also true that much of the “expertise” out there is pretty generic and that the myriad blogs and comments often add little original insight.  For independent marketing professionals who want to make a business out of SMM, the frustration of not being able to preserve an early lead and differentiate their value is understandable. But it is all part of the new way the game is played. Much of it has to do with the fact that there is just so much more information available online. Here are a few musings from a non-expert…

1. The glut of so-called experts is due to the fact that barriers to entry are relatively low for marketing services. As a result, SMM is experiencing this gold rush-type craze.
2. This field is very new, so almost anyone can call themselves an expert. Of course, there are very few real experts. Customers themselves have very limited experience on how to select an SMM professional that can add real value to their  business. This lack of clarity encourages more people to enter the field.
3. Right now, Social Media is all about learning how this new communication platform works. There is a good deal of experimentation taking place even within the confine’s of today’s cramped marketing budgets. That is actually good. It is the process by which a minority will discover the best recipes to make Social Media work for Marketing.
4. Those who find the best learning opportunities and learn the fastest will establish strong competitive positions, which means that when the field matures, differences in expertise will become clearly apparent and fewer “experts” will remain.

It’s not just that there is more knowledge being shared publicly. There is a parallel phenomenon at work in that the paradigm of knowledge creation itself is changing. A good fraction of the body of knowledge for new fields like SMM now seems to be actually created in public through an unstructured collective process in blogs, online comments, podcasts, twits, webinars, etc all of which amounts to one big Wiki, thus empowering many people to enter the field armed with way more than just the basics. As usual, the truly valuable insights will be revealed  only to paying clients; much of the rest is teaser material. But what is openly available is empowering many more people than ever before.

The question then becomes: who can market the new tools the best and apply them in the most effective way to deliver financiallly tangible results for clients. The talent and hard work required to make that happen remains pretty much the same as it ever was.

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The litany of stories

Even so, there is no question that there is a difference in intellectual approach.  These days, with the advent of internet-based tools,  Marketing teams strive to build programs rooted in data analysis. They remain highly conscious of the brand and weave image-building in with more tactical concerns. Sales teams are in it for the kill, the quicker the better, which is what they are paid for. Managing the two sides to achieve company goals is somewhat like encouraging romance between the proverbial porcupines: it must be done carefully.

So what are the issues to keep in mind when trying to turn some of the natural tension between Sales and Marketing into more revenue?

1. Understand the psychology of the protagonists.
   Some marketing people may be closed, reflective types, but most are not. As for Sales, an outgoing personality “comes standard”. Of course, too many extroverts in the room creates friction unless the situation is adequately managed. That requires understanding what motivates, what excites, what creates concern in each group.
2. Turn the different conceptions of time into an advantage
   Salespeople invariably consider a lead as a line to a customer that can be closed “soon”. Marketing is usually not as heavily compensated on immediate results and therefore is more keen on lead nurturing. It is important to have each team, or at least each team’s leaders, understand this nuance so as not to continuously generate frustration in both groups regarding the other side’s approach.
3. Make the “Funnel” transparent
   The operational framework  that underpins the interaction between Marketing and Sales is the conversion funnel. Both teams must clearly understand the nature and the number of prospects in each level of the funnel.  The status of a lead should be clear at the hand-off point between Marketing and Sales. Transparency creates accountability and that can motivate each team to excel on their respective side of the funnel.
4. Understand the differences in the types of customer data
   Sales people have an instinct for retaining important information that will help them close ASAP. Marketing relies on systematic data collection in the field to improve targeting, messaging, and conversion rates all along the funnel. Customer knowledge is so fundamental to any business that this dichotomy must be successfully resolved. Sales should be motivated to collect critical information through compensation or programs tailored to elicit the required behavior. Marketing is responsible for structuring the data collection and for showing the ROI on this investment in time through more and better quality leads.
5. Balance the promotional with the brand-building
   Sales teams love to see promotions that drive customers to them. Marketing teams want to make sure that the groundwork for success has been created by building up the brand. Of course, Sales teams love to work with a powerful brand, but when times get tough, they tend to view branding activities as disconnected from immediate revenue concerns. Depending on the situation, the balance between the two can be modulated, but no side can be favored at the expense of the other for any significant length of time.

Much of the difference lies in a more short-term focus for Sales and a longer-term focus for Marketing. Ideally, the two views coexist harmoniously in that a well executed Marketing strategy that by nature has a somewhat longer term perspective will yield results that are continuously harvested by Sales in the here and now. Managers on both sides have a responsibility to have the porcupines practice  a friendly form of coopetition to make the best of each side’s talents.

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