July 18, 2007 - Distribution Channel Commentary (DCC) # 100

 

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TOPICS:

1.      THEMATIC QUOTES.

2.      HOW MANY DISTRIBUTORS HAVE OUTSIDE BOARD MEMBERS?

3.      UNDERSTANDING, LEVERAGING THE 1% RULE (AND VARIATIONS).

4.      A “DISTINCTIVE SERVICE COMPANY” THAT HAPPENS TO SELL PRODUCTS.

5.      INNOVATION TYPES FOR MATURE INDUSTRIES.

6.      MAKING THE “SERVICE PROFIT CHAIN” WORK BETTER.

 

1.      THEMATIC QUOTES.

 

“No one wants advice – only corroboration.”     John Steinbeck (“The Winter of Our Discontent”)

 

“In June 2005, Wikipedia had a total of 68,682 contributors…1.8% of users have written more than 72% of all articles…50% of all Wikipedia edits are done by 0.7% of users.”     

                                                                             Jimmy Wales (Wikipedia founder) 

 

“Never doubt that a small group of thoughtful committed citizens (employees?) can change the world. Indeed, it is the only thing that ever has.”     Margaret Mead

 

"Give to the world the best that you have, and the best will come back to you."     Madeline Bridges

 

“Innovate or die.”

 

“People, service, profits”     FedEx motto (simplified form of “the service profit chain”)

 

2.      HOW MANY DISTRIBUTORS HAVE OUTSIDE BOARD MEMBERS?

Very few! In a 2006 survey by distribution consultant Brent Grover (http://www.evergreenconsultingllc.com/ , Brent found that: 40% of distributors have a board just as a legal formality; 33% have a board with only insiders; and 25% have an active board that includes outsiders. Are these results surprising? So what? How many of the companies with boards with active outsiders are really effective and why? What percent of “outside advisors” are just rubber-stamp-kind-of-political types who will go along with whatever the CEO (the boss, employer, pay master) wants to do? How should we: pick the best advisors; pay them; interact with them between how many meetings; and prepare productively for the meetings? Do most CEOs suffer from a shortage of good perspectives and honest reality checks: true or false?

 

For a few more answers to these types of questions check out the summary article at this link: http://www.mdm.com/stories/succplan3713.html and then for a lot more answers consider buying the CD of a 90 minute audio conference on the topic mentioned in the short article. As a board member for a number of companies over the years, I would be glad to offer my advice too!

 

3.      UNDERSTANDING, LEVERAGING THE 1% RULE (AND VARIATIONS).

 

Take a second look at the introductory quote about what percent of volunteers contributed what percent of the content at Wikipedia. Similar patterns have been found at other wiki-type communities whether they be public or private, in-house corporate communities.

 

Below is a blend of other anecdotal stories that I have found on the web and my own thoughts about variations on the “1% rule”:

 

·          User participation more or less follows a 90-9-1 rule: 90% of users are lurkers (i.e., read or observe, but don't contribute). 9% of users contribute from time to time, but other priorities dominate their time. And, 1% of users participate a lot and account for most contributions. It can seem as if they don't have lives because they often post just minutes after whatever event they're commenting on occurs.

·          If 1% of the users of Wikipedia generate about 70% of the content, then what percent of the 1% contribute the most value? Who are those people? Why do they do it? How could a company hire those types of employees or advisors and turn them on to generating and sharing knowledge that increases strategic value for customers? If we are in a knowledge economy in which all important employees should be wired, how can we create the most and best answers for our customers by deploying the high knowledge creation people?

·          There has always been a vocal minority in traditional media. For every person who writes a letter of praise or criticism to a company or the newspaper, there are suspected thousands who feel the same way, but just don’t have the energy to take the time to express it.

·          Less than 5% of the super-satisfied customers of a service firm will voluntarily tell other prospective customers that they should patronize the distinctive service firm (“evangelists”), but about 15% + of consumers are whiners who are looking for things to complain about to whomever will listen. If our firm crosses one of these folks, they will do a lot of bad-mouthing of our service capability (“terrorists”). How is our service culture tuned to maximize heroic acts for the evangelists and not cross the terrorists? If we do upset the terrorists, how do we give them an heroic recovery” to neutralize them. (http://www.merrifield.com/articles/3_5.asp) 

·          If these stats apply for company employees, then how might the company engage – for knowledge sharing – yet another 10% of the employees, so that at least 20% are engaged in knowledge creation and sharing? Regarding company cheerleaders (evangelists) and whiners, how can we tune our personnel policies so that we hire more cheerleaders (Southwest Airlines is big on this) and more quickly shape up or out the whiners whom we accidentally hire?

·          About 3% of all companies in mature industries are able to continually perpetuate so that they continue to grow much faster and more profitably than the rest of their competitors. These “gazelles” can contribute as much as 80% of the future profit growth for would be suppliers. How do we identify and super-focus on our gazelle customer in order to successfully partner them so that they will grow us? How do we change our firm’s culture and leadership to become a gazelle that continues to innovate distinctive service value that can earn us the right to partner our gazelle customers?

·          I have a client who does special career planning and training efforts for only the top 10% of their employees; they believe that they are getting a minimum of 1000% ROI on these incremental personnel investments.

 

Forget Pareto’s 20/80 rule, the 1 to 10% rules are far more powerful. 

 

4.      A “DISTINCTIVE SERVICE COMPANY” THAT HAPPENS TO SELL PRODUCTS.

 

Want an inspirational example of a fast-growing service firm that happens to sell a given product line and does it all on word-of-mouth marketing to which I will now contribute to the cause? Check out the story of Zappos.com which happened to start out selling shoes on-line.

 

How did I, a non-customer so far, hear about Zappos? A great lady friend of mine has aging boomer feet problems and hasn’t been able –before Zappos – to find attractive, affordable shoes that meet her needs. She heard about Zappos from a friend and ordered 8 pairs of shoes one weekday evening at 8 PM; they were delivered the next day. She will keep 3 pairs that are 110% guaranteed and will return the other 5 pairs within 365 days and is generally thrilled with both the service and three pairs she will keep. She raved about their database selection system to find the specific shoes that a customer might need. You start with about 3 million pairs of shoes to select from, but punch in size, style, color, price ranges, etc. to get down to the needles in the haystack. Then you can look at six different angled pictures of the show with zoom in capability to look at construction details. (They now sell luggage, belts and some other accessories.)

 

For more information on Zappos, check out the “neutral point of view” entry at Wikipedia and the coverage at Inc.com. (links below) Zappos has been an Inc Magazine fastest growing 500 company for the past few years. Sales were almost zero in ’99, but have had a compounded growth rate from 2004-2006 of 948% to reach $597mm. Their projected sales for 2007 are $800mm all with zero advertising!

What can any business that retails or wholesales mature (commodity) products learn from Zappos? First, stop thinking that we need to identify ourselves by the products we sell and do product-selling better. Instead, pick one best niche of customers we currently sell and take our understanding of what is best total service value for that niche a few levels higher to better define, measure, achieve and sell distinctive service value that wraps around the commodities that we sell. Second, realize that to innovate on service value we are going to have to rethink our: customer segmentation strategy and research; service systems; and our personnel recruiting, training, measurement and incentives. We have to unweave and reweave our entire “kinetic chain” (http://www.merrifield.com/exhibits/Kinetic_Chain_Ex_16.pdf )

If you want a total education, training solution for achieving Zappos service excellence for your business in your particular product channel, consider buying our “High Performance Distribution Ideas for All” program. All you need to know about it is behind the links in the center of our web site homepage. It has a 30 day return guarantee, and we can ship you one right away.  

 

Here are some links to more information about Zappos’ stunning service excellence success story:

 

http://en.wikipedia.org/wiki/Zappos

 

http://www.inc.com/magazine/20060901/hidi-hsieh.html

  

5.      INNOVATION TYPES FOR MATURE INDUSTRIES.

 

Innovate or die is old news, the problem is that most companies in mature industries can only fine-tune their past and are slowly dying, although most don’t know it.

 

One problem with the emerging “science” of “innovation management” is that because there are so many different types of innovation and every company’s total competitive context is unique, there is no one-size-fits-all set of recipes for effective innovation practices. But, Geoffrey Moore’s latest book (he has written some great ones starting with Crossing the Chasm) provides a great taxonomy for appropriate types of innovation depending upon where a given company’s solutions are along the life cycle curve.

 

The latest book is entitled: Dealing with Darwin: How Great Companies Innovate at every phase of their evolution. And, true to the spirit of the book, it has an innovative supporting web site at which you can review much of the book’s content and more. As an experiment, go to this link:

http://dealingwithdarwin.com/theBook/ideasInAction.php#

 

Then, do the following steps:

·          Click on “ideas in action”;

·          Then, click on “enhancement innovation”; and,

·          Then, think about these questions:

·          1) If smart, consulting-capable, company honchos (or advisors) visited the top 5 most profitable customers within our company’s number one niche (defined in a strategically helpful way) could they do a fruitful, “deep audit”?

·          2) If these “consultants” stapled themselves to both the product and paperwork that we send to these customers, could they get new insights into how and why customers buy, store, use and handle both product and paper?

·          3) Could we find new, “enhanced” (inter-business process) ways to sell our solution(s) to and through that customer in order to significantly: reduce their total procurement cost; reduce their product-related downtime; and/or improve their service effectiveness to their customers or job productivity?

·          4) If we made special service changes to deliver new benefits to one or more of the already-super-big-and-profitable customers, would that help us retain and perhaps grow those accounts?

·          5) How much?

·          6) If they grow (“more to the core”), how much of the incremental margin dollars will flow to the profit line? (Hint: if we sell more old products to same customers on a larger average order size basis, then about 50% of the margin dollars flow through to the bottom line. No operational solution - with the exception of just raising prices and not losing any business - grows distributor bottom lines faster.)

·          7) What if one or more of these “supply-chain, inter-business process re-engineering” service enhancements could be generalized and offered to 5 more core accounts and the 5 most important target (gazelle) accounts within that number one niche?

 

In summary, one of the most powerful operational improvement solutions that a distribution company can do is to figure out how to do a few “enhancement innovations” for three sets of 5 accounts within a company’s #1 niche of customers: core accounts; target (gazelle) accounts; and biggest losing accounts. For more on 5-5-5 marketing download the entire 30+ page “kit” at our web site at this link:

http://www.merrifield.com/exhibits/Ex44555kit.pdf

 

6.      MAKING THE “SERVICE PROFIT CHAIN” WORK BETTER.

 

The Service Profit Chain is a phrase which is also a title of a book published in 1997. The authors were Harvard Business School professors of mine, and I have been innovating with their pioneer, cause-and-effect chain of “people, service, profits” thinking in distribution business turnarounds since graduating from HBS in ’74. Implementing the wisdom behind the service profit chain is bank, there is stuff on “high-performance, service management” all over my site.

 

I was stunned to see an article in the Financial Times (June 13, 2007; “In Pursuit of Happiness”) that reported a British, “business ethics” professor’s research which had concluded that there was no correlation between “happy employees and happy customers” and thereby questioning the “cause-and-effect relationship between employee loyalty, productivity and customer satisfaction”.

 

The research, IMHO, was a naïve, simplistic look at the “service profit chain”. What’s missing?

First, the understanding of the cause-and-effect, service chain of events is too simplistic. If you cross-relate “people-service-profits” with the 7 steps in my kinetic chain of profit power, you will notice that “hiring good, right people for each job niche” is step 4 of the kinetic chain. “Leadership” (step 1), “strategy” (2) and “systems” (3) all come before “people” (4). Running around meeting employee needs so that they are happier and stay longer doesn’t tell a company strategically:

·          What is their #1 historically most profitable niche of customers.

·          Which customers are most profitable in that niche.

·          How those customers will define and reward exceptional service value; and,

·          How to change all systems - including personnel, training and incentives - to be able to achieve and deliver exceptional service metrics consistently.

 

In a more general sense, all “best practice” studies and advice are useless in a leadership (step 1) and strategy (step 2) vacuum. If, for example, a company achieves a “high performance” level for cycle count accuracy for inventory items by following “best practice guidelines”, what’s that suggest? Better housekeeping discipline does have its operational efficiency benefits, and some project leader was able to execute. But, it won’t guarantee that the company has the right inventory items in the right quantities to provide the best one-stop-shop selection with the highest competitive, in-stock fill rates for a target niche of customers; there will be no improvement in strategic effectiveness. In a similar way, best practices to improve a “Happy employees” score is no substitute for a laser-focused strategy or great leadership that must both create and execute that great strategy.

 

If we want high-performance service economics for all four of our stakeholder groups – employees, customers, shareholders and suppliers – then think about blending the service profit chain with the kinetic chain with the catalytic factor being a clear, measurable definition of what “exceptional, best value” is for each target niche of customers that we want to pursue. It works!

 

Bruce Merrifield

 

bruce@merrifield.com