Pricing to create shared value by Marco Bertini and John Gourville, Harvard Business Review, June 2012

The June edition of Harvard Business Review has some excellent articles and this one combines two themes that we have been covering on our courses; Pricing and Value.  The authors - one a professor at London Business School and the other at Harvard - are critical of those companies who extract every cent they can out of customer transactions.  The airlines who charge more for extras come in for particular criticism and the authors point out that other airlines, who do not do this, have benefited in terms of customer loyalty.  I was not sure how this reconciles with Ryanair’s amazing profit growth when this company is the most prominent exponent of this sharp practice; nevertheless I read on with interest.

The authors argue that today’s consumers are not ‘passive price takers’ and point out how Bank of America’s debit card fee and Netflix’s 60% increase in DVD hire charges inflicted immense damage to their reputation and share price.  The financially driven approach of charging what the market will bear is no longer the best way, particularly where it is exploiting customer ignorance or confusion.

The alternative approach advocated by the article is to develop pricing strategies that are a win/win for supplier and customer; the customer gets an added value offer and the company gains more revenue, by the extra volume and loyalty that is generated.  The extra volume comes either from increasing the size of the market or taking share from suppliers who are not so enlightened.  The core principle is to say to customers ‘we value you as a person’ rather than ‘we value you as a wallet’.

The element that makes this article most interesting is the fact that the example of best practice that is quoted, is the London Olympics 2012.  Apparently this has been written up as a Harvard case study because it features five key principles of shared value pricing.  Those like me who have paid extortionate prices for tickets may find this hard to believe and it is difficult to see how a one-off event like the Olympics - with no need for continuing customer loyalty - can be a case study that illustrates general principles.

The five principles suggested as best practice are:

- Focus on relationships, not transactions

-  Be proactive

- Put a premium on flexibility

- Promote transparency

- Manage the market’s standards for fairness

I thought these principles to be sound, though nothing new; for instance MTP’s courses have been advocating proactivity as a key pricing skill for many years.  I also found the linking of each principle to the Olympics a bit of a stretch, particularly the last one.  Those who failed to get tickets and saw many going to corporate sponsors may not think that all was fair, though it has to be agreed that it was probably impossible to satisfy everyone who applied.  If demand exceeds supply and prices have already been determined, there is not much you can do.

The other examples of shared value pricing are more convincing.  The best is Amazon’s offer to waive delivery costs in return for an annual fee of $79; this move achieved two objectives, making the customer feel that they had a good deal and encouraging more volume.  Apparently this single innovation increased sales by 30%.  This simple offer is contrasted with the more complex deals offered by other sectors which only confuse and annoy the customer.  Banks and telecom are suggested as companies who deliberately avoid transparency and are seen by their customers as inflexible and unfair.

Overall, the article makes some good points which are food for thought.  I would have preferred less emphasis on the Olympics - whose links to the themes seem contrived - and more examples of good and bad practice.  It would also have been good to see some recognition that there are some companies like Ryanair who can and do get away with financially driven pricing because their competitive position and cost leadership are so strong.

Read the article in full here

‘Management in 10 words' by Terry Leahy, published by RH Business Books

This new book by the recently retired CEO of Tesco is worth reviewing because he is among the most
successful CEOs of his generation. As he tells us early on, Tesco was struggling to compete with more successful retailers like Marks & Spencer and Sainsbury’s when Leahy joined the Board; now it is the third biggest retailer in the world and, despite recent hiccups, by far the most successful UK retail business over the last fifteen years.

Despite his justified claim to have been part of this success, this book is not an ego trip for its author; he is clearly a modest man who is almost surprised by his extraordinary achievements. He makes it clear that he is not writing a biography and almost apologetically provides a pocket biography in the introduction. In it he tells us how he was initially rejected by Tesco and only got the job as second choice; he has certainly made up for that since.

The book is about his view of management, as expressed in the ten words that are his chapter titles. He recounts many examples of his experience at Tesco to make his points and, while these are generally interesting, they are mainly about the business issues rather than his personal challenges within the unique Tesco culture. His few descriptions of the attitudes he faced when he tried to introduce change - the insults and the contempt for his ideas as shown by a bullying top management - made me want to hear more of this type of challenge. (I was particularly interested because I ran some finance seminars for the Tesco Board at around this time and experienced some of what he describes)

The structure of 10 words and chapters works well, even if you are moving from one time period to another and this is sometimes difficult to follow. The ten words are Truth (which he later suggests as number one on his list) Loyalty, Courage, Values, Act, Balance, Simple, Lean, Compete and Trust.

There is not space to comment on each chapter so I will just mention a few highlights to give an impression of his approach and the issues that arise:

TRUTH; his view is that organisations tend not to confront the truth and to continue with strategies that are clearly not working. As I read this I started thinking of Tesco’s American venture which, though Leahy claims it can still work out, is generally regarded by analysts as a major mistake that should have been divested years ago. After reading Leahy’s justification in a later chapter, I came to the conclusion that a failure to confront the truth and cut their losses was precisely the problem.

LOYALTY; I found it interesting that Leahy holds the view that the introduction of their loyalty card was the single biggest factor in their successful period starting in the mid-nineties, both for the information it provides and for the customer loyalty that it promotes and rewards. He also talks about employee loyalty but it is customer loyalty that is his obsession and which he sees as key to successful retailing.

BALANCE; It is nice to know that the concepts that we cover on our courses are sometimes implemented successfully. Though we were running courses for Tesco in the mid-nineties, I am not sure that our coverage of the Balanced Scorecard was the trigger but Leahy mentions this concept as the driving force of the ‘Tesco Steering Wheel’ which has become the basis of their strategic planning and performance management. This has now turned full circle as we currently cover the Steering Wheel framework on our courses for Tesco’s suppliers.

COMPETE; Leahy is a great believer in the free market economy and the positive forces of competition, rejecting the criticism that Tesco’s puts small firms out of business. He is also a great believer in learning from competitors, for instance the move into convenience stores was driven by information that well run small stores were still thriving, despite the competition of the big supermarkets. He also stresses the importance of assessing potential new competitors, quoting his forecasting of Amazon’s likely growth outside the book market as a big factor in the rapid enhancement of Tesco’s on-line sales facility.

TRUST; His view is that good leaders need trust and must show it to their teams. He is fond of quoting military heroes, Field Marshals Slim and Montgomery from the Second World War are among his favourites; he clearly sees leadership as transferrable from one organisational context to another, though I was not entirely convinced.

This book is worth reading, though not as entertaining as it might have been if it had been a more conventional biography. But we should be willing to learn from someone who is among the top few business leaders in this century so far.

Buy the book

‘Captain Planet’ by Adi Ignatius, Harvard Business Review, June 2012

This is quite an unusual contribution for HBR, an interview by Adi Ignatius (HBR’s Editor in Chief) with Paul Polman, CEO of Unilever. Its Q & A format is more typical of what you might expect to see in a national newspaper, rather than the world’s most prestigious business magazine. It is in reality, an excellent public relations communication, explaining in some depth Unilever’s strategy, in particular the emphasis on environment and sustainability.

It is nevertheless a highly informative article, largely because the questions asked by Ignatius are penetrating, and Polman’s responses are open and informative. The calibre of the interviewer became obvious to me as, while reading through the article, I kept saying - 'why doesn’t he ask him about that?' – and this was soon followed by that very question.

The article is particularly revealing about the risks of Unilever’s strategy and it is to Polman’s credit that he is highly open about these, accepting that he is ploughing new furrows and learning along the way.

It is surprising to find that Polman – who still seems a new appointment - is already in year four of his tenure and that this is getting close to the average lifespan of CEOs in top companies. There is, throughout the article, a clear commitment to the long term and a belief that he will be there to see it through; otherwise he would be content with the shorter term earnings targets of most other CEOs. There are however no references to other CEOs taking the same long term route, which confirms how far his strategic approach is ground breaking and how he is prepared to stand out from the crowd. He has already shown his ability to challenge existing practice by abolishing quarterly reporting and earnings forecasts but this strong emphasis on environmental goals is a much bigger step.

The article also reveals that there has been some good progress so far; the percentage of materials sourced sustainably has already increased from 10% to 24%. The interviewer follows up by asking how this has benefited shareholders and the reply here is interesting and less convincing than some of the other responses; 'It’s clear that if companies build this thinking into their business models, it will accelerate growth'. This begs the question as to whether this applies to one company, working in isolation, or whether it needs a critical mass; if it is the latter, it would have been more convincing to hear of others following suit. When asked why more CEOs have not followed, he blames the short average tenure of 3-5 years, which encourages them to do no more than 'hunker down'.

He clearly has the confidence that he will stay for the long term and has the advantage of relatively good operational and share price performance so far. There are some interesting revelations about the culture that Polman is creating, which may have even more impact than the sustainability strategy. For instance 'We’re creating a culture where it’s OK to take risks and OK if some of them don’t work out.' This is very different from the Unilever that we have seen in the twenty plus years of MTP involvement. The other striking comment is 'you get what you measure'; the plan is to hold people accountable for delivery, to make even the environmental targets 'hard-wired' into the business.

There is a lot in the article that is impressive at the personal level; the fact that he has frozen his own salary for six years and that bonuses are fully transparent and payable for long term performance, with high level targets. It was also interesting to hear that he started business life as a maintenance man in P&G’s Cincinnati HQ while taking night-school classes, before rising in P&G, moving to Nestle and finally ending up at the top of Unilever. His advice on career success is to create opportunities, select one and 'go for it'.

As I read the article, I was struck by the similarity to managing football clubs; Polman clearly hopes to be the Alex Ferguson of international business, staying longer than all those who go for short-term fixes. He would probably prefer this label to the name given him in the author’s title and headline - 'Captain Planet'. Sounds more like Disney than HBR.

Read the article
http://hbr.org/2012/06/captain-planet/ar/1

Listen to the article

http://blogs.hbr.org/ideacast/2012/05/unilevers-ceo-on-making-respon.html

http://itunes.apple.com/podcast/hbr-ideacast/id152022135?mt=2

‘Is L & D engaged in projects?’ by Abdu Naser Shubb, Training Journal, May 2012

I have often been critical of the Training Journal because so many of its articles are written by freelance consultants who are selling their latest concept or programme. Therefore I was attracted to this article because it is written by someone from Saudi Aramco, the major oil company of Saudi. I thought that here we would see a practical rather than theoretical article, and I was also attracted by the emphasis on projects, which is an increasingly important issue for many major companies in international markets.

The article starts off well, addressing the important issue of how best to engage employees in training activities. The point is well made that this engagement often fails to take place because the request comes at short notice, is poorly specified, or is suggested at times when there are other pressures. The author then suggests that some research and analysis is needed to assess whether the engagement is at the right level.

So far, so good. But then the article takes the most bizarre turn that made me wonder whether, if it had been the April rather than May edition, it was an April Fool contribution. The transition from interesting and practical to complex and theoretical starts with a step by step 'methodology' that seemed OK until we got to step 6 which was 'use hypothesis testing to prove the problem'. I don’t know many MTP clients who are attracted by hypotheses so I began to wonder if this is my sort of article

My concern deepened when the author argued that 'statistical hypotheses testing' should be used to accept or reject the claim that training professionals are fully engaged in projects. I still had some interest but this was soon challenged when the equations started appearing. I am probably more numerate than most but I do recall that statistics was not my strong point during accountancy exams; and I was certainly challenged by the equations that now came thick and fast; my word processing package is not capable of sharing the complex formulae which included square roots and a number of signs that I had not seen since my statistics examination days. It was ironical that these were preceded with the author’s comment that these were not real numbers but were made up figures 'for simplicity'.

This extraordinary burst of equations then ended abruptly and the author returned to show the complete questionnaire with a genuinely simple five point scoring system (from strongly agree to strongly disagree) and ten interesting questions that would be useful for anyone who wants to assess the levels of engagement in training activities. So the article finished well, just as it started well, and I was left puzzled by the incomprehensible burst of complexity in the middle. It seemed to be a lost opportunity.

I would be interested to know if anyone out there disagrees with me or understands why a potentially interesting article has been drowned in such a sea of complexity.

Read the article
http://www.trainingjournal.com/feature/2012-05-01-is-ld-engaged-in-projects/