All posts by Steve

Achievement, Challenge, Competition

Over Specialization

It seems as though business, or maybe more accurately organizations and the conduct of business, is at a crossroads. Like “process”, organizations seem to have drifted into the position that if a little bit of specialization (and process) is good, then a whole lot of specialization (and process) must be better, right? After all, if one man who is a four hundred meter specialist can run the distance in about forty five seconds, and four men who are hundred meter specialists can run the distance as a relay team in thirty six seconds, then forty men who are ten yard specialists should be able to do better than that, right? When does specialization run its course when it comes to creating an advantage?

I absolutely agree that some specialization can create a competitive advantage. As noted above, four one hundred yard sprinters working together will usually beat a single person running the distance alone. The focal point of this is the word “usually”.

Since 1920 the United States four hundred meter relay team has won the gold medal fifteen out of a possible twenty one Olympic games. One time they didn’t compete due to a boycott. So three out of every four Olympics they have run the race and won. The other twenty five percent of the time they either finished behind, or didn’t finish at all because of poor handoffs of the baton. The handoff either slowed them down, or they dropped the baton and did not finish all together.

On the surface this looks like a pretty good performance. From an Olympic standpoint there is no doubt. It is excellent. But what is our reaction if we translate this performance into business terms? What would you do if someone came up to you and said:

“I am going to quadruple your costs (going from one employee to four), improve your performance by just under twenty percent (reduce your time from forty five seconds to thirty six seconds), and introduce a one in four chance that you will not even finish the project (the baton gets dropped twenty five percent of the time). In return for these increased costs and risk, you will succeed three quarters of the time.”

Now admittedly I have stacked the deck here a little bit. The Olympics happen only once every four years. This rarity of opportunity has a tendency to breed a “Win at all costs / Win or go home” sort of mentality. It is indeed a high risk – high return mentality. But I think it helps to make my point.

Business on the other hand occurs every day. While there is competition, success is usually measured in relative terms. I think that the Sales role is the only one where there is a win – lose relationship with the competition. You either beat them, or you don’t get the customer order (“the gold”). After that everything is more of a “how well did you do” question as opposed to a “did you win” question.

What I think it also points out is that specialization does introduce incremental expense in the form of multiple specialized participants where in the past there may have been fewer potentially more generalized people. The idea here being that if you can grow the business to the point where you can break the increased work down into smaller more specialized roles that can be aggregated it can be more efficient. This brings up the next point.

How far can the work be efficiently broken down and aggregated? If four can do it faster than one, can eight do it faster than four? Can forty do it even faster than that? At what point do you spend more time passing the baton than actually running the race? If no one can ever accelerate to their potential ability (top speed) before they must pass the baton, will the relay team actually be faster in the total?

The final aspect of the added cost and complexity of over specialization is the risk it induces. If the best relay teams have three hand-offs of the baton (first leg-second leg, second leg-third leg, third leg-anchor), and manage to drop it one out of four races, what happens when more and more baton hand-offs are introduced. It is possible to theorize that there is a point where there are enough handoffs that it is statistically probable that there will always be at least one dropped transition, and no race (project) will ever be completed, at least without some secondary group to monitor the transitions and make sure that a final work project is in fact delivered.

I believe that this secondary group responsible for making sure that all business baton handoffs occur (amongst other process responsibilities) is usually called the “Quality” group, but that could just be my opinion. They are the group that is usually responsible to make sure everyone runs in their proper lane, and hands the baton off when they are supposed to.

Specialization is the logical extension of what is known as “Fordism” in the theory of production. As we all know Henry Ford was one of the first to recognize the values of specialization and the production line. Although Fordism was a method used to improve productivity in the automotive industry, the principle is thought to be able to be applied to any kind of manufacturing and by extension business process.

Fords major success is thought to have stemmed from a couple of major principles:
1. The standardization of the product (nothing hand-made: everything is made through machines and molds by unskilled workers)
2. The employment of assembly lines, which used special-purpose tools and/or equipment to allow unskilled workers to contribute to the finished product

I didn’t make that last bit up. I looked it up in my cyber wanderings regarding specialization.

Ford wasn’t the first to do this but he saw the value in breaking complex tasks down into component simpler ones in order to better utilize the available labor component. The point that I see here is that specialization was born from the need to get the most productivity possible from the predominantly unskilled labor force. Today we seem to be continuing to try and further apply these principles to a very skilled and in many cases knowledge based labor force.

I think some specialization does in fact produce returns that can be justified against the increases in complexity and added potential risk of a “missed hand-off”. I also believe that there is a point where the number of hand-offs and the added complexity of having tried to add too many runners into the relay race generates decreasing returns.

When a business gets to the point where it loses visibility of the overall delivery responsibility, it has probably decomposed its work products beyond its optimal granularity.

Most businesses today do not rely on unskilled labor. If fact most of the technology based organizations that are looked to as drivers of the new economy require not only college degrees as a minimum threshold for employment, but would prefer that employees come with previous experience for the job. In short, organizations are looking for smart people who already know how to do the job.

It is against this increasingly intelligent and skilled workforce requirement that organizations seem to be trying to reduce the skill and intelligence needed to do a job by ever reducing the scope of the job as it gets more and more specialized. Business in effect wants people who can do more, but wants them to be limited by specialization to doing fewer things – hopefully better.

In encouraging team members to focus on smaller and more specific roles instead of understanding and requiring more and broader capabilities, organizations run the risk of stifling future leaders. If team members are incited to only worry about their specific task, where will the next generation of leaders who will be responsible to the team’s performance of aggregated tasks come from?

Business leaders require a very good working knowledge of many different business disciplines in order to be successful: Sales, Finance, Marketing, Operations, and Service, just to name a few. A lack of knowledge in any of these areas, or an over dependence on any of these specific disciplines can weaken the leadership capability of the organization.

Even in the age of (over) specialization, the title of the “Worlds Best Athlete” still is bestowed upon the winner of the decathlon. The decathlon is the event where there are ten different aspects of the competition. The winner of the decathlon is not an expert in any one or two of these aspects. They don’t have to win all of them (or potentially any of them) but they must be very good in all of them.

Leadership today needs to recognize the trade-off between specialization in the drive for efficiency, and generalization in the need for a broader end to end view of business. Future leaders cannot be expected to easily move from a specialized discipline experience set to a generalized business leadership set, anymore than a sprinter should be expected to be able to effectively compete in the other nine aspects of the ten event decathlon. Nor does the decathlon allow for a passing of the baton between ten people, one for each event.

While business does depend on team work and the ability of the team, sometimes it is not a specialized relay race.

Accountability, Alignment, Character, Conflict Management, Leadership

Saying Yes

I have written a few times in the past about the requirement that leaders are obliged to present a dissenting opinion when they genuinely feel that there may be a better alternative solution. I have also noted that that the word “no” can be one of the most important and valuable words in the leader’s lexicon. Having a different or contrary opinion does not make anyone any less a member of the team. It makes them someone who continues to maintain a different perspective on the business knowing that the diversity of opinion is a key to business health.

It is an exceedingly difficult line for a leader to walk. Many times a dissenting opinion can be confused with open opposition, which is something most managers cannot tolerate. Sometimes management doesn’t want to hear a differing opinion. Many times they can be quite content with a single perspective. What do you do when you have much to say to the contrary, but all that is desired of you is to hear you say “yes”?

I think we have all probably been in a situation like this from time to time. Most of the time situations like this are usually transient. Sometimes there is complete alignment on business topics. Occasionally there is divergence of opinions. Many times there are aspects of both alignment and divergence of opinions. This is what is known as a healthy business environment.

In this sort of business environment differing opinions are understood and accepted. The challenge is to the idea or the process, not the individual. The objective is to try and get to the best solution. As I said, this is in an ideal environment. Unfortunately individuals are prone to differing behaviors in the business environment.

Issues such as cultural differences, personalities, management styles and differing individual versus corporate objectives can come into play. Any one or more of these factors can contribute to a situation where the differences of perspective, opinion and approach are no longer the exception to the management alignment, but seem to become the standard.

In many instances there can also be “opinion drift”. If another manager sees that the alignment of opinion is better rewarded than the healthy discussion of alternatives, eventually a polarizing of positions and opinions can take place. It can fall more and more to the leader to make sure that the contrary is both heard and considered.

In time a situation can evolve where management is no longer looking for a specific or studied input on any new idea or direction. As more and more opinions drift into total alignment with management all that is desired is for all the various team members to align and say yes to each new process or direction and immediately get behind it. There can be a total breakdown in the structure of the healthy challenge business model. Contrary views and opinions in such an organization can begin to be viewed as oppositional and divisive.

Before leaping to specific conclusions along this line of thinking, as always it is best to take a step back to understand and assess the situation. Sometimes it only feels as though the stars are aligning and that everyone is aligning without due consideration. A complete management alignment along the lines described is a pretty rare event in my business experience.

On the other hand, I can hear the words my dad used to say in just about any situation that could even be remotely considered a parallel to this. His favorite was:

“Just because you are paranoid doesn’t mean that they are not out to get you.”

He would also say:

“Aim low because the bad guys* could be crawling.”

*Dad actually used a more colorful word for “bad guys” that also started with a “b”, but I know my mom occasionally reads this and she doesn’t like it when I use such colorful language.

Needless to say, you needed to take what dad said with a grain of salt.

Sometimes the best approach to a potential situation, particularly one that involves the input and behavior of others, is to not be in a hurry to resolve the perceived issue. This approach runs almost entirely contrary to everything we have seen, learned and thought about business leadership.

We have learned that those who recognize the issue first, are the first to take steps to resolve the issue and those that do in fact resolve the issues first are the ones usually rewarded. This approach does normally work when identifying and resolving business issues. However when the issues are not business or performance in nature and are more personality or management style related, an immediate and direct approach may be difficult.

It is best to remember that it always takes two to have a difference of opinion. In most instances no one sees themselves as being either wrong, or in the wrong. Sometimes a mismatch of this type can occur.

It is again at times like these that I think back to my dad and what he told me about these instances. He said:

“I may not always be right, but I am always boss”

I think that this was his way of telling me that while I was under his purview I was the one responsible for finding a way to rationalize our cultural or generational differences. Since he was the one paying the bills at that time, it did make a certain amount of sense.

However the parent offspring relationship is not the same as the leader team member relationship when it comes to differences of opinion. Leaders need to understand that differences of opinion, even prolonged ones, are something that should be expected. The recognition by the leader that opinion diversity needs to exist for the business to stay healthy is key. Differing opinions do not mean wrong opinions.

One of the best ways to establish a baseline for dealing with these management differences is to revisit past differences with an eye toward what the different positions were and what the eventual resolution of the difference was. Facts are normally everyone’s friends. The historical record has a funny way of refocusing the disagreement away from positions and more toward resolutions.

Business is about performance. Performance comes from taking the right positions and making the right choices. The historical record is always very clear along these lines. If the right positions are taken, contrary or aligned, the business performance will reflect this. If they weren’t then there are usually second and third “adjustments” that get made as the corrections are implemented.

I have found that members of teams that I have been leading are in many instances much closer to the specific issues at hand than I was. Because they have been closer they usually had a better vantage point from which to derive a solution. It has served me very well in the past to stop, even when I am so absolutely sure of the elegance, purity and accuracy of my solution, and truly understand why they are saying “no” when all I wanted to hear was “yes”.

In many instances I was fortunate to have done so. We can all be prone to having blind spots in our solutions when we are so sure of their accuracy. When someone wasn’t ready to go along with the desired solution, it usually was for a good reason, and that reason probably needed to be reviewed and possibly incorporated into the actual solution.

It almost always made for a stronger final solution.

All leaders will always want their teams to say yes, but will be open to addressing and incorporating differing or contrary opinions. This is how solutions are strengthened. Other managers may be less tolerant and accepting of differing positions with the resulting opinion drift I mentioned before.

Understanding which environment you are in will be a key in deciding how you can respond when someone is looking for you to say yes.

Character, Leadership, Planning, Relationship

When to Network

I think we have all seen the statistics that say when we are out looking for a new position that it will be the people you know that are going to be the most valuable resources when in comes to identifying and landing that new role. For those of you who may not have seen the statistics, they show that between seventy and eighty percent of all new positions are found via networking. With estimates of up to seventy percent of all positions no longer being advertized, whether you are currently in a role and looking to move, or are already between positions and are looking for your next assignment, it is going to be your business associates, friends and acquaintances that will probably be responsible for your next role. I think that this sort of information clearly demonstrates that while what you may know is important, it will be who you know that will help you identify your next position.

Most of us have a tendency to think about our networks only when it comes time for us to start looking for a new assignment. While this might be the necessary time to exercise a network, is it the optimum time to be exercising the network?

I personally have been through multiple business changes. My son thinks my biggest change probably occurred when the Chicxulub meteor struck and wiped out my first cretaceous network. That fact did not however dissuade him from asking for help with his physics home work last night.

Meteors notwithstanding, I have found that for me the best time to network is not when I am in a search mode but rather when other people are in a search mode. When others are in a search mode they are already reaching out. In any network there will be those that respond and those that for whatever reason (to busy, not interested, etc.) that will not. I have made it a policy to always respond. I have found that it not only puts me in touch with my own network, it puts me in touch with the networks of others.

Networking is about creating links with others that may be two or three times (or more) removed from our own spheres of relationships. We already know who we know. It is by helping them that we get connected to the people that they know. By helping someone you not only confirm an existing relationship directly with that person, you establish a relationship with all the other people that person knows.

My dad, who I seem to give an increasing amount of attributions to, used to tell me:

“Never miss an opportunity to put the universe in your debt.”

I think this is his spin on the older version of:

“What goes around comes around.”

The latter phrase has a decidedly negative connotation associated with revenge or retribution for a previous bad behavior done against someone, whereas the former phrase is more associated with doing the first good deed for someone in the expectation that future good deeds will be done for you. In other words the best networking can be done in a “pay it forward” sort of mode.

Such is the essence of networking. Doing the first good deed is an excellent way to get and keep your network engaged. It gets to the point where the consideration of future good deeds coming back your way becomes secondary. I personally am not the best at asking for help, but I try to be pretty good at offering it. If you only network when you need something from your network, then that is the type of behavior that will quickly become associated with you.

The value of a network comes from being able to access it. The best way to access it is to be bringing something to it. Passing along position leads to others, or potential candidates for positions to recruiters, or just responding to general questions and requests for information rapidly generates a good receptivity when it is “your turn” to ask for help. Not everyone will reciprocate. That is human nature. But there will be many who feel and operate the way you do who will respond.

I have read several articles where successful business leaders have looked at themselves as the stewards of their business. Not surprisingly many of the leaders that I have had the opportunity to network with have looked at their networks the same way. They focus on the value that they bring to the system by enabling others to connect.

I guess it is appropriate to note that the network does not owe you a new position. You have to earn that. That is where the “what you know” part of the adage comes into play. You should not impose on your network to provide you with a new position, but rather look at it as connecting you with the opportunity to compete for a new position, as there will undoubtedly be others who are also in the market for something new.

Jerry Goldstein, the former CEO at Scott’s Liquid Gold is attributed as the author of the quote:

“Good fortune is when preparation meets opportunity.”

An active network, or better, a network that you are active in is one of the best ways to get connected to or “meet” an opportunity. It is obviously up to us to be prepared for such an event.

Adversity, Change, Change Management, Decision Making, Expectations

A Soundtrack for Change

I got to thinking about change recently. I was concerned that it might be a little bit of a trite topic to discuss. There has already been an incredible amount written about change and I was concerned about what I might be able to add. Be that as it may, I still kept coming back around to it. I guess if there is already so much written about change then it won’t hurt if I decide to write a little more about it.

I did a quick search (gosh, things like this have become so simple thanks to Google) and found that there have been no less than one hundred and four songs written that have “change” in their title. This is by no means an exhaustive list. I did a quick scan and did not see “The Times They are a Changin’” by Bob Dylan. How could they leave that one out? I did however see “Things Have Changed” by Dylan. I have never actually heard that one. Guess I will have to head to YouTube after this to check that one out.

There were some interesting song titles in this list, as well as some rather unexpected artists, at least to my way of thinking. There were no less than eleven songs with just the word “Change” as a title, and another eight with just the word “Changes” as the title. The late David Bowie’s “Changes” was the only one out of these groups that I really recognized.

I thought about looking up all the songs that had change as part of their lyrics, but I decided that I really didn’t need to go to that level. There are a lot of songs written where change plays a major role. I haven’t even tried to approach all that has been written in the business world with respect to change. When I thought about it I decided it would be better to use music as the allegory instead of referring to all the business management change books. That way we can all have a song run through our collective heads whenever I try to make a point.

Besides, song writers are so much more “lyrical” in how they write.

What I got from looking back at all the changes that I have been through was that change in and of itself was usually neither good nor bad. It was whatever I expected it to be. Think about that. Change is usually what we make of it, not something inherently good or bad. It is probably impossible not to look at a change without some sort of concern. After all by its very definition change means that we will be doing something different than we have been doing.

Change: verb (used with object), changed, changing.
To make the form, nature, content, future course, etc., of (something) different from what it is or from what it would be if left alone

I think we have all been in roles where doing something different might have been preferable to continuing to do what we had been doing. There would be two ways to affect this type of change: Change what we had been doing in the role we have, or change the role we have.

About this time I have Sheryl Crow’s “A Change Would Do You Good” running through my head.

The idea here is that when we want to make a change we expect that change to improve things. We see what may be wrong with the current role or process we are in and we act to try and improve it. We expect it to get better and it invariably does, at least to our way of thinking. We either change the role we are in to improve it, or we change roles we have been in to a hopefully improved role.

My idea of expectations of outcomes is very similar to what the economist in me knows as “Expectancy Theory”. Expectancy Theory states that an individual will behave or act in a certain way because they are motivated to select a specific behavior over other behaviors due to what they expect the result of that selected behavior will be. Basically stated this theory explains peoples behaviors based on the rewards they expect to receive.

This is why sales people who are only commissioned on orders (volume) really won’t care much about the margin (profitability) on those orders. If you want to modify that behavior then you will need to add a profitability / margin factor to the sales compensation plan.

What I am saying about expectations of outcomes is that if you expect the outcome of change to be good, your behavior will be such that usually the desired good outcome can and will be realized. My point here is that how we approach things, including change, is a significant determining factor in the outcome of that change.

Brandon Flowers, the lead singer for the band “The Killers” has a solo project song out called “I Can Change” that has suddenly popped into my head.

On the other hand, many times we must go through a change that was not the result of our own action or decision. Someone else has made a decision or taken an action that has caused a change in our environment. Sometimes we don’t get to choose to change. Sometimes we just have to deal with it.

It may not be relevant how well we think we have been doing or the goals that we have achieved. We may or may not have been consulted regarding the change. Regardless of any contributing factors we will occasionally find ourselves reacting to a change stimulus instead of acting on one.

I am going back a little ways here, but I now find myself humming “A Change is Gonna Come” by Sam Cooke. I started hearing “Victim of Change” by Judas Priest, but I never really was a metal head and again that one doesn’t go along with my premise regarding expectations for success in change.

In many instances our normal reaction to an imposed change is to fight it. We want to see a justification or reason for it. It may not have been decided with any input from us. At that point in time it doesn’t matter.

It is at that point in time where I again believe in the expectation of outcomes having a significant contribution to how successfully an imposed change will be dealt with. Resistance and unhappiness will lead to a difficult and unpleasant change. Acceptance and alignment will almost always lead to a much more palatable transition.

That doesn’t mean give up. Sun Tzu in “The Art of War” wrote many times of when it was proper to engage in battle, and when it was not. Many times his objective was that it was just as important to “not lose” as it was to “win”. If he recognized that he could not win, he would not engage in battle, and therefore would not lose. When it comes to battling change, it is almost impossible not to lose.

Now I can’t seem to get REO Speedwagon’s “Roll With the Changes” out of my head. There is a really great keyboard solo in that one. I actually saw them perform it live in concert once, back when I was in college. By the way, this one was not on the “change” song list that I looked up either.

By accepting that sometimes we will have to change, whether we want to or not, we can identify a key to making a successful change. The positive approach that we can choose to take when making that change is one of the determining factors in how successful we will be in making the required change. Leaders need to infuse their teams with the ability to react and adapt to change, instead of resisting it.

Sometimes we get to choose to make a change. Sometimes we are told we have to make a change. Either way, how we decide to make that change is up to us and that will be a significant contributing factor to our success in changing.

Communication, Excellence, Leadership, Management Style

Collaboration

There once was a time when my kids thought I knew everything. I did not try to dissuade them from this idea. My wife however has never for an instant thought this way. In any event there came a time when my kids entered a stage of life where they no longer believed that I knew everything. I think there was a question in their minds as to whether or not I knew anything, let alone everything. This time in their lives was what is commonly referred to as being a “teenager”.

Fortunately they began to grow out of this stage. Curiously as they got a little older they also grudgingly began to admit that maybe, possibly I did know something. While they would never again believe that I knew everything, they would concede that since I may have “been there and done that” I could be relied on to provide them input when they had a question, and maybe at least I knew something. They were then free to either utilize or disregard the input I provided them. Surprisingly for them, and my wife apparently, my input proved to be relatively valid and they actually used it to their benefit more often than not.

They had learned to collaborate.

They had learned that despite the fact that they no longer believed that I either knew everything or knew nothing, they were interested in my input on their topic of interest. The most important thing that they had learned was that they didn’t know everything either. No one does. This is a lesson that I hope stays with them throughout their lives.

I find it interesting that not everyone seems to believe in collaboration. This may be as a result of the genesis of the word itself which has resulted in two somewhat conflicting definitions for it – one with a positive connotation and one with a decidedly negative one:

noun: collaboration; plural noun: collaborations
1. The action of working with someone to produce or create something.
“He wrote on art and architecture in collaboration with John Betjeman”
o Something produced or created by collaboration.
“His recent opera was a collaboration with Lessing”
2. Traitorous cooperation with an enemy.
“He faces charges of collaboration”

“The action of working with someone to produce or create something”. I have often said that I don’t have all the good ideas. I have also often said that my wife whole heartedly agrees with this statement. I think I have some good ones, but I don’t have all of them. This fact also applies to business.

As leaders we may be expected to have experience and judgment based on our “been there done that” past. We shouldn’t be expected to have all the ideas required to run a business. As leaders we should be expected to use our experience and judgment to recognize and act on the good ideas of others. This is where that collaboration thing comes in.

Leaders must work with their teams, not expect their teams to just work for them. They must encourage the interchange of ideas, not expect the team to just follow orders. Leaders need to encourage and expect the challenge from their team in order “to produce or create something”.

Almost all businesses that I know of have a hierarchical organization structure. Simply put that means that someone is the manager and others report to him or her. In most instances the manager will be held responsible and accountable for the performance of the team. And many managers do not like to be held responsible for decisions and directions that are not their own. They seem to ascribe to that “Traitorous cooperation with the enemy” definition of collaboration.

Without a collaborative environment, only the manager will be able to make decisions and provide input. The input and value of the members of the team will be severely curtailed. The result will be a weaker overall performance which is probably the one thing the manager who is responsible for performance doesn’t want.

A good example of this poor performance hierarchical structure can be seen in the performance of Korean Airlines during the later part of the last century. Malcolm Gladwell in his book “Outliers: The Story of Success” touched on the cultural issues associated with a hierarchical structure and the catastrophic results that ensued when it was applied to flying a modern jet.

I have actually flown KAL several times in the past. I am pleased that I didn’t get a chance to read this story until well afterwards. In the past KAL had a pretty poor safety record. They’ve gotten better in recent years, but going back to the last part of the last century, they weren’t very good. Korean Air had more plane crashes than almost any other airline in the world for the period at the end of the 1990s.

Korean hierarchical culture is thought to be one of the primary causes of this issue. Korean society is very hierarchical and respectful, and a lot of the accidents have simply come down to copilots not wanting to question the decisions of captains, given that they would basically be “insulting” them. It was a cultural phenomena where the members of the team did not question the direction or decisions of the superior member of the team.

There was in fact a crash in Guam where it was recorded that the copilot actually recognized the failure that the pilot had made and still did not question or act on the information.

Think about that. Jets crashed because members of the team flying the jet wouldn’t, or couldn’t question the decisions of the captain.

Modern jets are designed to be flown by two peers that collaborate in flight. There is still a “pilot” and a “copilot” and the responsibilities accorded those relative hierarchical positions, but they work together to fly the jet. Modern jets are too complex to be flown by a single individual, but that was the cultural phenomenon for KAL. To their credit KAL have recognized this issue and taken many steps to assure that the issue is avoided. They now require a collaborative culture in the cockpit if you are to fly one of their jets.

Modern business is also reasonably complex undertaking. It is also not unreasonable to think that it would be difficult for a single individual to pilot a complex organization alone in today’s market. There are too many variables and factors impinging on an organization to expect one person to be able to know how to deal with them all.

It may sometimes be difficult for the leader of an organization to ask for input or accept suggestions from the team. It is not a sign of weakness or lack of understanding. More so it is the sign of acknowledging that the team is comprised of talented members who are knowledgeable, may be closer to the issues at hand and therefore the potential solutions that are needed.

Individuals may have ideas, but in business it is teams that create solutions. As I noted earlier, no one individual can be counted on for all the good ideas. It takes a diverse team to come up with good ideas and a leader who can and will collaborate and is willing and able to recognize those good ideas and act on them. Asking for inputs and reviews builds both a stronger team and a stronger solution, which as we noted earlier should always be the leader’s goal.

I am pleased that my kids have learned these lessons about collaboration in such a way that when they grow up they could safely be expected to fly Korean Airlines jets or lead a business organization. Now if I could just get my wife to acknowledge some of my more obviously good ideas.

Achievement, Culture, Data, Management, Objectives, Performance

Work and Effort

Wow, was it just me or did the last year and a fair chunk of the first month of this year just fly by? According to Einstein time is supposed to slow down the faster you go, but that doesn’t seem to be the case in business. It seems that the faster I try to go the faster time tries to go too. It’s interesting how in just about any race with time, time has a tendency to win. Go figure.

I think I may have touched on this topic in the past, but since we are at the relative start of a new year, I think I’ll spend a little more time on it. As we start out on a new year with new opportunities, new goals and new hope, we cannot forget that we must also reflect on the past year. This reflection is normally referred to as an annual review. Depending on how you did last year this reflection can either be a pleasant or unpleasant experience. I think most of mine for the most part have been reasonably pleasant experiences. I think that is because a learned early on the difference between work and effort.

I have mentioned in the past that I have an affinity for physics. This seems to serve me in good stead when my son brings home his high school physics assignments such as building a bridge out of paper or trying to construct a capability to disperse the force of a mass rolling down an incline plane. It’s kind of cool to be a go-to guy for your son. I just hope I got the equations right.

I also find that sometimes it relates directly to business as well. To a physicist work is done when a force that is applied to an object which moves that object. The work is calculated by multiplying the force by the amount of movement of an object (W = F x d).

In this example “Work” would equate to the goal that was set for the individual or business at the beginning of the year, “Force” is the equivalent effort that someone expends in the pursuit of that goal and “d”, the movement is the equivalent of an almost unknown item which I’ll call an efficiency or “success rate”. So for business the equation for work would be Work = Effort x Success Rate, or W = E x SR.

What this means is that the effort expended and the achievement of the goal may or may not be positively linked. This would explain why some goals would seem to be easily attained with apparently little effort and some goals may be unobtainable regardless of the amount of effort expended.

This is something of a roundabout way of saying that just because you worked hard last year; it doesn’t mean you are entitled to a good year end review.

Everybody works hard these days. The exception might be “Wally” in the Dilbert comic strip (by Scott Adams), but by and large everyone puts forth the effort. Even Wally puts forth an effort in his quest to avoid work. Effort is good, but it is at this point table stakes.

“Work” as it is defined in the annual review is the measurement of the achievement that they effort generated. If you are in sales and you have a quota that means you have a numerical target, such as orders. You can put forth a great deal of effort but unless you actually get some orders, according to your compensation plan (and probably your sales manager) you didn’t really accomplish anything. So by these measurement criteria you in fact did no work.

Catch the difference here? Lots of effort does not mean you did any work.

I purposely try to create primarily quantitative objectives and goals for my teams. There will always be a certain amount of qualitative acknowledgement associated with them, but for the most part I want them to be numerical, and measurable in nature. By doing this you remove a great deal of the effort versus work type of discussion.

In business we keep score via the financial numbers. If you can’t create objectives and goals for any of the business functions that you may have, that somehow relate to or distill down to these types of financial numbers, then I might suggest that a review of the necessity of the function being measured might be in order. Again to simplify things: If you can’t create a viable metric for a function that relates to the achievement of one of the financial goals, you had better look at the viability of the function, goal and metric.

Numbers are finite. We all seemed to get a working knowledge of numbers dating back to approximately the second grade. We all know when one number is either larger or smaller than another number. It is usually not open to much interpretation. This concept usually leads to readily acknowledgeable annual reviews, regardless of the performance level.

Too many times we create “soft” goals that are somewhat open to management as well as staff interpretation. Any time there is an open interpretation of an objective you can be reasonably assured that there will be different interpretations of the achievement of the objective. This is the essence of the effort versus work example.

Non-quantifiable goals invite an effort based annual review. Quantifiable goals invite a work based review. Effort based reviews can lead to a basic inequality of reviews across an entire team. Instead of measuring progress and achievement you are instead measuring activity. Activity and progress are as different as effort and work. It is as different as splashing around in a pool (activity), and actually swimming across it (progress).

We all know that is possible to appear busy without actually accomplishing anything.

In looking back at the last year, and at last year’s goals it may be difficult to implement a quantifiable measurement scale, if the goals were not originally established with such a scale in mind. However, the other aspect of the early part of the year is that in addition to reviewing last year’s performance, it is the time and opportunity to set the goals and objectives for the coming year.

The beginning of the year provides leaders with the opportunity to modify the goals and objectives as well as the measurement scales and criteria so that they can be quantitatively based. By doing so the leader enables the team to focus on progress and achievement as opposed to activity, and work as opposed to effort. It enables the team to understand and make the distinction associated with knowing if they are doing something that will ultimately contribute to achieving an objective or if they are doing something that just keeps them busy.

The key point here is that when it comes time to review this year’s performance at the beginning of next year it would be to the benefit of all members of the team to have defined quantifiably goals, and a known scale by which they will be measured. It makes this time of the year a little easier for everyone involved.

Accountability, Empowerment, Implementation, Process

Taking a Step Back

Normally in business when we mention the phrase “taking a step back” people immediately think of accepting a position or assignment with a perceived lower title or lower set of responsibilities. That may well be the case, but that is not the step back that I want to discuss here.

In business we all have our areas of responsibility. These normally come in the form of job descriptions and objectives. Simply put these are the things we do and the targets we are supposed to achieve. We are provided directives and incentives associated with them. We are incited to focus only on our specific pieces and parts of the business. With all that focus it is very easy to become somewhat myopic with respect to the overall business or organizational picture.

Sometimes all of us need to take time out of our ever more hectic days, take a step back and look at the overall business picture and what our specific part or role in it is, to see if what we are doing or have done is still fully aligned with the greater good.

As an ever more refined and specific business process is viewed as the clear path to greater efficiency and more profits, the incentive for each participant in that process is the ever refine and narrow their focus to their specific role in that process. As this structure evolves, organizations end up trying to create integrated end to end customer solutions out of ever more discrete and individualized work components. As the number of hand-offs in the process increases, the disconnection between the solution components increases as well.

In the extreme you can end up with a number of disconnected groups performing discrete unrelated activities (all while following a “process”) that results in a final work product that may not meet any of the requirements that were initially assigned to it. Everyone may have done everything that they were responsible for doing, but the final result doesn’t meet the need.

I think that much of today’s process orientation has originated in the Project Management discipline. (I have gone through the Project Management Institute PMP (Project Management Professional) training and certification process and do have a PMP accreditation.)

Part of the process of managing a project is to create what is called a Work Breakdown Structure (WBS). Creating a WBS is the process of subdividing project deliverables and project work into smaller, more manageable components (A Guide to the Project Management Body of Knowledge (PMBOK Guide) 4th Ed., pg. 103). It is described as the decomposition of the work to be executed by the project team to accomplish the project objectives.

But isn’t that essentially what every process is? Isn’t every process a series of work components that at the end of the process are supposed to deliver a finished work product or solution?

So enough of the esoteric discussion of the similarities of projects and processes. Where does this all get us and what does it have to do with the position I have put forth about taking a step back?

In a project there is a project manager. That person is vested with the responsibility of managing that project from end to end. As Harry Truman would say: “The buck stops there”. It is the project manager’s responsibility to make sure that all work components are aligned and additive in the direction required to complete the project.

In today’s organizations where parts are globalized, parts are regionalized and other parts are verticalized, all in the name of greater efficiency, it is almost impossible for someone to call themselves the “owner” of a process that spans multiple organizational structures. Organizations and people within those organizations may own pieces of the process, but there are precious few with the purview of a project manager who can review the process from end to end.

Once the process has been decomposed into its smaller work components, and those components are distributed to different organizations and groups, it seems the overall end to end view of things gets lost. Responsible parties seem to focus only on their specific work component. They perform their task and pass it along to the next responsible group.

It has been shown that when dealing with a uniform process all tolerances or margins for error are more or less normalized out. What that means is that in a uniform environment there will normally be additive and subtractive variances. Estimates will normally be either a little high or a little low, but on the average they will cancel each other out. This is the model that is used when the process is created.

When the process is decomposed into its component functions and then distributed into different and somewhat unrelated organizations, it can no longer be looked upon as a uniform process. It is probably more accurately defined as a “Random Variable” process. This is a process that is not uniform and where the variation in one group performing a work component has no effect on the performance of another group performing a different work component.

Okay, so what does this mean?

What is means is that when a process is no longer uniform the variances associated with the various work components no longer have the tendency to cancel each other out. They have a tendency to add together to create ever larger variances.

The net result is the creation of a process that by its very nature will not deliver a desired solution. Each group that is responsible for a work component can and will provide an acceptable output, but the sum of these outputs will invariably not be an acceptable solution.

A good example of this phenomenon can be seen in the creation of cost structures. In a project that is controlled by a single project manager, some costs will be estimated high, and some will be estimated low, but on the whole the costs will balance out. In a cost process where there is no single owner and multiple groups and disciplines involved, all costs will be estimated high (in an effort to make sure that all individual contingencies are covered) with the final cost estimate being unacceptable to the customer.

As I noted, in a project environment the project manager has oversight and control of the costs and processes associated with the project. Costs and activities must all fit within the overall envelop associated with the project and the project’s profitability. Variances within any specific group are then viewed from the point of the overall project. This ownership and oversight does not usually exist within the decomposed process. It is due to this comparative lack of oversight that a uniform process can devolve into a random variable process over time.

It is due to this sort of inertial force associated with process decomposition that we all need to periodically (read “frequently”) take a step back and review our roles and deliverables. In a greater scheme of things all that we do can be viewed as part of the ongoing business process. There are pieces that we can control and pieces that we must rely on others for. We need to make sure that we are in fact maintaining our alignment with the overall organizational goals and not just maximizing our specific work products.

It may sound a little counter intuitive. The idea should be that if we all maximize our work products, then the final deliverable should be maximized. In theory it should work. However when the goal is to minimize, or reduce or drive greater efficiency, sometimes maximizing does not work as well or drive the desired solution.

Take a step back and think about it.

Change Management, Leadership. Communication, Reacting, Reorganization

An Acquired Taste

Chances are that if you work long enough for companies in the public domain you are going to get to participate in either the acquiring of another company, or the being acquired by another company. Acquisitions and divestitures are a fact of life in the business world today. Companies continue to grow and change and acquisition and divestiture are one of the fastest ways to rapidly remake an organization. Having already been through a few of these types of management and organizational changes in past lives, it is very clear that both the change itself, and the time anticipating and leading up to the change can be a challenge to your leadership capabilities, not to mention your sanity to try and get through.

There are all sorts of trite adages and sayings regarding change that can be inserted here. I’ll leave to everyone to insert the one that they are most comfortable with. The bottom line here is that when there is an acquisition, you truly have a change.

No matter how much due diligence the acquiring company has done, they cannot be aware of all the capabilities and the people that make up the organization that they are acquiring. And no matter how much communication the acquired organization provides its staff, and no matter how much research has been done on the acquiring organization, no one can be fully prepared for the new management philosophy and new management structure that will be imposed after the acquisition.

Divestitures and acquisitions are interesting phenomena in that there are a disproportionately large number of people being affected by the change, with only a disproportionately very few who actually have any sort of input to or affect on the change itself. So, everybody ends up worrying about the coming change, but there are very few, if any who actually can do anything about it. The fact that they can’t do anything about the change doesn’t stop people from focusing on it almost to the point of total distraction.

Reinhold Niebuhr seems to be the source of the quote that everyone uses in times like these. Oddly enough it is known as the “Serenity Prayer” and it goes:

God, grant me the serenity to accept the things I cannot change,
The courage to change the things I can,
And the wisdom to know the difference.

I actually like this starting point, so I’m going to look at it in application to a business acquisition or divestiture.

Unless your organizational title begins with the word “Chief” and ends with word “Officer” chances are that you are probably not going to be consulted about any corporate acquisition or divestiture. It may be hard to believe but it seems that there are any number of individuals within an organization that feel this is truly some sort of mistake or oversight.

It’s not.

Unless an individual has the wherewithal to rapidly assemble another, competing acquisition or divestiture bid from another corporate entity or capital fund, this is the way it is going to stay. They are not going to ask for everyone’s, or possibly anyone’s opinion. The acquisition or divestiture is not going to be changed. This is where that “Serenity” portion of the prayer comes into play.

As difficult as it sounds, leaders cannot afford to spend time (read: waste time) worrying about the outcome of the acquisition. They need to remain focused on the achievement of their and the teams goals. At this point the team’s responsibility isn’t changing. Further the leader needs to keep the team as a whole, as well as the specific individuals within the team focused on their objectives as well. It is not an entirely easy thing to do.

This is where the “Courage” portion of the prayer comes into play.

As part of any acquisition or divestiture, decisions regarding who will be a leader in the resulting new organization and who will not, are going to be made. It is somewhat frustrating to all involved in that again a relative very few will be making decisions for the relative very many on these topics. As uncomfortable as that may sound, that is the way it is going to be. However, all is not left entirely to chance.

One of the key aspects that will be weighed and taken into account with these leadership decisions is going to be performance. It probably won’t be the only aspect reviewed, but it will be a key one.

Individual and team performance are items that can be changed. Leaders must have the courage to change their own and their team’s performance. They can probably change it for the worse by worrying about the acquisition or divestiture, or they can change it for the better by maintaining the focus on the business goals at hand. While it may be impossible to ignore the pending business change, it is probably best to acknowledge as an event that cannot be changed and move on to the topics and goals that can be changed.

There is a great disclaimer in just about every financial investment prospectus document that I have ever read. It goes (and there are several variations of it available):

“Past performance does not necessarily predict future results”

We have probably all seen it. It is a US Government Securities and Exchange Commission (SEC) mandate that it be included in every investment prospectus.

So what do we do? We go and look at the investments that have done the best over some period of time, and select those to invest in anyway.

If they have done well in the past, we expect them to continue to do well in the future. What else do we have to go on? Are we really going to select those investments that have underperformed in the past in the expectation that they have obviously learned from those mistakes and they will henceforth only do better in the future?

I don’t think so.

My point here is that when the business organizational change is done and the decisions regarding positions and leaders are being made, one of the very few items that a leader can affect is their performance. And despite what the “disclaimer” may say, I think it is probably safe to position that past performance in business and leadership roles is a good predictor of future results.

It may not be the only input taken into account, but it is one of the very few that an individual can change.

That doesn’t seem to stop people from worrying about the outcomes of any acquisition or divestiture based changes though. I guess this is only natural. When there is uncertainty, people will have a tendency to focus on those uncertain aspects. This is also where that “wisdom” portion of the prayer comes into play for a leader.

A leader cannot deny or ignore the uncertainty that their team members or peers for that matter will feel with the pending organizational changes. To do so would only exacerbate the issue and create different forums for these concerns to be aired. That will not be a constructive situation for anyone involved.

As I noted above, team and individual concerns regarding the organizational and structural changes need to be acknowledged. They are real. There may not be much that anyone can do about them, but they do need to be acknowledged. Once the concerns are identified, the leader needs to walk the team through the known information and structure and restate what is currently unknown.

By identifying the unknown aspects of the pending changes, they are in essence then contained, and a brief discussion as to what the team and its individual members can do about them will be in order. The key here is the public acknowledgement of the concern and the discussion about what can be done to correct the situation.

This in turn will drive the team and individual acknowledgement that there probably isn’t much that they can do to address these topics. Neither the information nor the ability to modify these concerns resides in the organization. The team focus can then be shifted back to those topics and concerns that the team can affect and address which primarily are their objectives and performance against those objectives.

Acquisitions and divestitures of organizations are the business equivalent of tectonic shifts. They are truly events that are only dealt with and responded to as there are very few things that organizations can do to plan for and work on to address them. By their very nature, these sorts of changes and agreements are kept from the public eyes for all sorts of legal and competitive reasons. It is always this type of required secrecy that generates concern and disruption in all the organizations involved.

The fear of the unknown and the uncertainty that it generates regarding the future can be debilitating to an organization going through an acquisition or divestiture. In times when this has occurred it is the leader’s responsibility to have the wisdom to keep the team focused on the aspects of the business that the team can change, as well as the courage to acknowledge and address the concerns associated with items that cannot be changed.

I am not so sure that anyone gets to have any serenity in times of pending organizational change, but demonstrating wisdom and courage will probably get the team through.

Alignment, Analysis, Markets, Strategy

Clouds

I’m having a little trouble getting started on this topic. With the number of articles already written about clouds in the various business publications, it seemed that it would be only a matter of time before I got around to talking about it. I am now paraphrasing a speech by Winston Churchill in that it appears: “Never has so much been written by so many and understood by so few”.

Churchill was of course referring to the RAF and the Battle of Briton early in World War Two, but this variation also seems somewhat apropos for the market battles looming for the hearts, minds and most importantly pocketbooks of corporate customers now as well as in the future.

I went out and tried to find the simplest definitions for clouds that I could. I did this for two reasons. The first is that there is already an incredible amount already written on these topics (as I noted above) and the second is that I am just the tiniest bit lazy and don’t want to have to rewrite all of it. You will notice this trend throughout this article. Here is what I came up with for “Clouds”:

1. The second studio album by Canadian singer-songwriter Joni Mitchell, released on May 1, 1969.
2. A visible mass of liquid droplets or frozen crystals made of water or various chemicals suspended in the atmosphere above the surface of a planetary body.
3. A service with any resource that is provided over the Internet. The most common cloud service resources are Software as a Service (SaaS), Platform as a Service (PaaS) and Infrastructure as a Service (IaaS).

I’ll skip the first two definitions for now, and focus in on the third one.

I think the evolution of the name “Cloud Services” actually came from the fact that it was difficult for technology companies to draw a “network” when using the early iterations of the Microsoft PowerPoint application for presentations. The simplest ClipArt icon that conveyed the idea of a network without having to draw in all the complexity was a “cloud”. That was what was used in all network related presentations. We all became familiar with it. Hence the cloud became synonymous with describing a network and cloud services have become synonymous with services delivered over the network.

The power of PowerPoint. If early iterations of the presentation application had contained interesting representations of multi-sided geometric shapes instead of clouds, it is possible that we might all be discussing “Polygonal Services” instead of “Cloud Services”.

Getting back to Cloud Services. Software as a Service (SaaS) is a software distribution model in which applications are hosted by a vendor or service provider and made available to customers over a network, typically the Internet. Platform as a Service (PaaS) refers to the delivery of operating systems and associated services over the Internet without downloads or installation. Infrastructure as a Service (IaaS) involves outsourcing the equipment used to support operations, including storage, hardware, servers and networking components, all of which are made accessible over a network.

The question that initially came to my mind when looking at all of these items “as a Service” was why would anyone want to do all of this over the network instead of buying the stuff and doing it the way that it had been done?

The answer seems to lie in the potential efficiencies that may be gained. Moving to “the cloud” focuses on maximizing the effectiveness of the shared resources. In the past each company and its associated users, had to purchase its own dedicated resources, whether it was software, computing or network infrastructure. Cloud resources are usually not only shared by multiple users but are also dynamically reallocated per demand. This can work for allocating resources to users across a single company, or multiple companies.

The claim is that moving to the cloud allows companies to avoid upfront infrastructure costs, and focus on projects that differentiate their businesses instead of on infrastructure. It is also claimed that the cloud allows enterprises to get their applications up and running faster, with improved manageability and less maintenance and enables Information Technology (IT) organizations to more rapidly adjust resources to meet fluctuating and unpredictable business demand.

Cloud computing is viewed as having become the vanguard offer for cloud services in that it can provide a highly demanded service or utility with the advantages of high computing power, cheap cost of services, high performance, scalability, accessibility as well as availability. Cloud vendors are claiming to be experiencing growth rates of up to 50% per year in this area. Cloud services are provided to an organization by moving away from a traditional CAPEX model (buy the dedicated hardware and depreciate it over a period of time) to the OPEX model (use a shared cloud infrastructure and pay as one uses it).

So, if the computing piece of corporate infrastructure seems to work in a “cloud” environment, then every piece of corporate infrastructure ought to work in a cloud environment, right?

I suppose this could be the case, but when I look at it a little more closely it seems that cloud based services are best applied to those capabilities that could almost be considered a commodity. In the case of cloud computing it is the basic amount of computing power and memory that are commoditized. In buying a cloud based computing service you purchase an amount of memory and a number of processing units, both of which could be considered commodities at this point.

By extension, there seems to be groups that are trying to commoditize other customer infrastructure aspects in an attempt, or in preparation for them becoming a cloud based service. If we think of routing as a commodity we end up with a number of bits (megabits, gigabits, etc.) routed per second. The same sort of approach would be applicable to switching. Pretty soon you may be able to take everything down to a function, instead of a platform or piece of equipment, and provide it as a service.

The question is when will companies and businesses be ready to look at their infrastructures, platforms and software in this way?

The most recent market analysis that I could find (from 2014 I think) shows that the total data processing market is approximately $115 Billion in annual revenue, while the Hosted / Cloud services portion of it is about $13 Billion (or a little over 11%) annually. While the portion of the computing market being served by cloud based solutions is a significant amount of money, it is still a relatively small but growing amount of the available market.

It is widely thought that computing services are the lead capability driving cloud services. That would indicate that other platforms, applications and pieces of infrastructure have not taken root in the cloud based structure and grown to the extent that cloud based computing has. That doesn’t mean that they won’t. It just means that they haven’t yet.

The market growth rate forecasts and estimates for Infrastructure as a Service (IaaS – computing, and other infrastructure capabilities) are reasonable, or at least it seems so to me. But when IaaS represents only 11% of the market, even a 50% growth as claimed by some suppliers only takes it to 15% of the market. Such is the next layer down analysis that must be done when such large percentage growth claims are made. Even at these growth rates and assuming there will be no slow down in its adoption, it appears that full Cloud Services market acceptance and utilization may still be a little ways off.

In other words, it seems that it is very wise to be aware of and prepared for cloud based services, but in the mean time it also appears that for at least the next few years the current capital based equipment solutions and services market systems will still be the majority market approach for business infrastructure, platforms and software. Cloud based services for these capabilities, for at least the shorter term will probably be a smaller, but potentially growing part of the market.

As Joni Mitchell said in the song “Both Sides, Now” on her 1969 Clouds album:

“I’ve looked at clouds from both sides now
From up and down, and still somehow
It’s cloud illusions I recall
I really don’t know clouds at all”

Wow. She wrote that forty six years ago. I’d say that’s pretty good but then I always liked Joni Mitchell.

Analysis, Differentiators, Leadership, Performance

Cost Plus

Do customers really care what it costs a company to provide a good or service to them? We have all heard that the vendor – customer relationship is supposed to be more like a partnership these days, but does it really? How much more would a customer be willing to pay to have that partnership? Do we really care what the cost of the car is that we decide to buy, and by extension how much that automobile manufacturer makes on each car we buy? I don’t think so. Do we really want to have a “partnership” with that automotive manufacturer, or do we just want to buy a car? I think people, and companies are more concerned about the price they pay and the value they receive for the good or service, more so than the cost the provider bears to provide the good or service.

I think this is a pretty interesting distinction. Customers are concerned with a supplier’s price, not with the supplier’s costs. Customers are concerned with the value they perceive they will get from the good or service, not the profit (or possibly lack thereof) that the supplier will recognize from the sale. In short, costs and associated profitability are an internal supplier issue, and prices are an external customer issue. In short it seems that it is the customer’s decision on whether or not they make the purchase decision, and it is the supplier’s decision on whether or not they stay in business.

I will look at a couple of examples to illustrate this point. People do not seem to care how much Apple makes on its iPhones or Macs or any of its other products. Apple is hugely profitable. They make an incredible amount of money on every product unit they sell, yet every year we see people line up (or even more unexplainably, camp out) in order to get the next new iteration of Apple’s products. They willingly spend the money. They don’t care how much Apple is making. They perceive the value and make the purchase. And every year Apple creates a new iteration of the product to feed this cycle.

On the other end of the spectrum, people did not perceive the value proposition of the products being produced by Studebaker, American Motors, Chrysler and General Motors at various times in the past. They didn’t care that these companies were not making enough margin on their products to remain in business. They did not like the designs, the quality or the prices enough to pay what the manufacturers needed to stay in business. Studebaker and American motors are long gone. Chrysler and General Motors would also have departed were it not for governmental intervention.

Economics teaches that the market sets the relative price for all readily substitutable goods and services. This price point is usually referred to as the intersection of the “supply” and “demand” curves. Unless you can influence or control the supply curve, you are pretty much at the mercy of the market when it comes to the price of the good or service.

Aha! You should be pointing to the fact that Apple does not control the supply of smart phones into the mobile phone market. As such, how can they set their price so high and make so much money? The answer here is that Apple does not in fact control the mobile smart phone market. Apple controls the supply of iPhones in the mobile smart phone market, and it has been shown that more than forty two percent of people buying smart phones want an iPhone.

While other manufacturers might like to try and convince the market that their product is a readily substitutable alternative to the iPhone, it looks like they have not been entirely successful there.

While on the other side of the example, it has been shown that one manufacturer’s car can be substituted for another’s. We have seen this in the branding and segmenting that goes on in the automobile market. Segmenting is a process where a very large market is in essence broken down into several smaller market segments. That is why we have “economy” cars all the way up market to “luxury” cars.

It may not be logical to expect that a Hyundai is readily substitutable for a Mercedes-Benz, but it could be expected that a BMW, Audi or possibly a Cadillac, could suffice. It has been shown that there are certain brand loyalties in the various automotive segments, but as market trends, automotive designs and prices move, these can be overcome and new loyalties established.

However the point remains the same. Customers are not so much concerned with the cost of the Hyundai, Mercedes, BMW, Audi or Cadillac. They are concerned with the price. And even more specifically the relative price and the relative perceived value. A person looking for a “luxury” car could buy a cheaper “economy” car for a lower price, but would not receive the perceived value they want. Conversely an economy car patron might want a luxury car, but can’t afford it.

So now the question that this leads to is:

If customers do not care what the supplier’s cost for a good or service is, why do so many suppliers create their customer market pricing based on their internal costs associated with their good or service?

This is known as “Cost Plus” pricing.

If it is the market price, or the relative competitive market price that is of primary concern to a customer, why would a supplier base their prices on their costs, which are irrelevant to the market? If you are a low cost supplier and use this method you could undershoot the competitive market price and forego significant revenue and margin. You can bet that Apple did not make this mistake, judging by their revenues and earnings reports. They saw the price the market would bear and adjusted their price upwards accordingly. They are letting the other suppliers try to compete on price.

On the other hand, if you are not the low cost supplier, but rather a less efficient higher cost supplier, basing your prices on your costs could bring you in well above the market price. While Apple may be able to sell its products at a premium, I’m not aware of too many other suppliers that enjoy a similar market position. You can ask the extinct Studebaker or American Motors how that higher cost versus the market price thing worked out for them.

I guess Oracle might be another company that tries and somewhat succeeds it setting its own market price. Larry Ellison, the CEO at Oracle has always done things his own way. But then again, he likes to build yachts to race in the America’s Cup (a really expensive pastime) and he does own his own Hawaiian island (Lanai) so he must have figured something out.

The major difference between Apple and Oracle is that I am not aware of anybody that “likes” Oracle the way the like Apple (they are rarely, if ever mentioned in the same breath), and I have never seen anyone line up in the street to be the first to buy the latest iteration of Oracle’s database systems and applications.

“Cost plus” pricing assumes that a supplier has a competitively based cost structure. This may or may not be the case. Regardless, the market doesn’t really care. What the market (and the associated specific customers) cares about is the price and the relative perceived value that is derived from the good or service.

Those goods and services where there is a perceived high value and not a readily substitutable alternative can and do charge a premium in the market regardless of their cost structures. Those goods and services where there is a perceived readily substitutable alternative, regardless of the market value, can only command the market price, also regardless of their cost structures.

It seems that the only times that cost plus pricing can be used is if the supplier has a competitive cost structure (which will be difficult to ascertain since suppliers rarely share such information), or if the supplier controls the supply of the desired good or service, in which case the supplier can price in any manner they choose include cost plus methods.

In most other cases suppliers need to be cognizant of the prevailing market prices and trends, and strive to keep their costs reduced so as to retain their profitability at those market pricing levels.