The Information Edge

Information is Power, But Only if it is Used.

A Newsletter from Custom Decision Support Inc. & Lieb Associates Vol. 6, Summer 2001

 Business growth and new business development drive the economy. These are key issues from a strategic planning perspective and reflect the need for on-going marketing research. This issue of our newsletter discusses these key issues from the perceptive of our clients.

"The Death Spiral"

With the slowing of the U.S. economy, we again here of words of doom, firms are perceived to be on "Death Spirals." This is a description of firms whose long term prospects are in doubt usually with corresponding disappointing stock price performance. The Death Spiral is a metaphor from celestial mechanics where planets and stars inevitably spiral into "black holes" to their doom. As with their heavenly counterparts, these firms, often with prestigious histories, appear to be stuck in the grasp of some irresistible force driving them to their doom irrespective of whatever they appear to do. Despite new management and even with acceptable annual earnings, these firms continue to stagnate.

While we tend to view these situations as unusual; they are really the norm. All businesses face a imperative of growing or dying. It is a "rat race" where forces act to reduce margins and the loss existing customers. Firms must run just to remain at the present position. It is more surprising that so many firms are able to sustain growth over decades.

A healthy firm must have two things working for it: (1) a successful business model, which allows it to make earnings and (2) an effective growth model that allows it to continue to be healthy into the future. The recent history of the "dot.coms" has shown the importance of having an effective business model. Money is critical. However, while current profitability is necessary, it is not sufficient for success. It is also critical that firms utilize those funds to maintain growth.

Radical actions to improves short term earnings may adversely effect the long term prospects for growth. Cutting costs may generate earnings at the expense of new business development. While cost cutting may act to provide an image of a healthy firm, it may, in fact, make the decline inevitable. By cutting the very means for long term growth, the firm assures that it will not meet shareholder expectations.

Organic Growth

It is useful to think of corporate growth in terms of: (1) organic activities which are native to the existing businesses and (2) ventures and initiatives which are new to the firm. Historically most growth in large firms has been organic to their existing businesses. This type of growth for manufactured products tends to follow a standard pattern. This pattern starts with growths of more than 200% annually but declines steadily to approximately 8%. This pattern is shown below.

Organic business growth may continue for 100 years or more or it may terminate in as short as 6 years for single applications. However, all businesses, at some point, mature. Organic growth slows, terminates and even declines at some period as competition strengthens.

New Business Growth

As such, long term growth of firms can not indefinitely depend on organic growth. A "gap" typically exists between the businesses that can be generated by organic growth and that which is desired and expected by investors. Major firms, such as Eastman Kodak, were able to sustain corporate expansion over many decades based solely on organic growth, but it no longer can. New ventures now need to be undertaken.

These new ventures are usually divided between those within the existing business model and those that are truly new to the firm. Both of these undertakings carry risk. New ventures requiring new manufacturing facilities typically do not provide cash to the firm for at least ten years as new investment exceeds earnings. However, these ventures often become the basis for long term profits and organic growth. New ventures outside of the business model can be highly risky and usually are best undertaken by acquisition or merger.

In either case, the health of the business depends on effective growth models. Growth models need to be carefully reviewed. It is unwise to assume that an effective business model without a focused growth model will be sufficient. It is also unwise to assume that past growth models will continue to be effective.

The Strategic Edge

New and Old Technologies

In our high technology forecasting assessment studies, we have observed that some technologies that are identified as "emerging" have long histories. While the adoption of some technologies are meteoritic, others take decades to develop and find commercial applications. Some of the most attractive "new" electro-optical technologies, for example, had been demonstrated over 20 years ago. Similar examples are available in materials technologies and pharmaceutical research. There are, at least, four factors that inhibit the adoption of these technologies. Understanding these can lead to earlier adoption and informed choices for new business development. The factors are:

These all appear to be necessary conditions. When these conditions are met, the technology seems to progress directly into implementation. If one or more of these conditions are not in place, development time is required. Even the most "valuable" technology will not be implemented if the infrastructure is not available for its implementation..

The flip side to the problems that these technologies pose, is the opportunities they represent. Technologies that had once been rejected in the past, for any of these reasons, may now be appropriate. Like fine wines, technology may need time to mature.

Techno -Tips

Marketing Research on the Web

The Techno-Tip column consists of suggestions and comments for data analysis. It is intended to help analysts and managers directly involved in the analysis of business data.

Marketing research survey studies are increasingly being fielded on the Internet. Such web executed studies have tended to be lower cost and provide an effective means of including graphic descriptions. Several vendors supply automated tools for the preparation of on-line surveys, making the process fairly straight forward.

Until recently, the use of these surveys were targeted to e:commerce applications or for internal studies run over company Intranets. Sampling bias for these applications is probably minimal since the samples usually reflect the population of interest. However, there is a major effort today to use on-line surveys to sample mass population, both for industrial and consumer products. This may introduce unintentional bias.

Willing on-line respondents may be very different from the rest of the world. Below is a comparison of the results of personality profiles based on a volunteer on-line study and the expected results from the general population.

The Myers-Briggs inventory is a standard personality profile tool. Notice the significant differences. These differences may or may not effect the outcome of surveys. However, it should give us pause to reflect on the implication.


Being a Good Client --

Over the past several years, I have commented on the characteristics of being a "good" strategic and marketing consultant. These comments had focused on the responsibility of consultants to focus on the interests of their clients. While many clients make that easy, some clients do not.. This usually results in higher costs and disappointed clients and suppliers.

A heavy degree of trust is required for optimum relations between clients and suppliers in general and with consultants, in particular. However, gaining trust is always a two-way street. Clients must act to deserve that trust just as suppliers strive to develop it. While this may sound like a revolutionary concept, it really is not. It is the basis of all long term relationships.

There is a reciprocity between clients and suppliers. If clients wish to get the most out of analysts, they must provide information that is needed in the analysis. Over the past several years we have been developing pricing models based on marketing research data. These models are intended to estimate the prices that would maximize the firm's earnings. However, that is based not only on purchases by the market but on the costs of goods sold. While many of our clients readily give us their best estimates of those costs, some refuse which makes it difficult to provide the best tools.

Another example is with costs and fees. It is only reasonable since clients wish to have low fees, they should try to reduce the suppliers' cost. More precisely, clients should aim at reducing suppliers' unproductive effort. This is the basis of Total Quality Management, but unfortunately it is often overlooked in consultant relationships.

This is not always the fault of the clients. Many suppliers unwisely prefer not to limit the projects and activities that they accept whether or not they are cost effective vendors for those services. In other cases, clients insist on "pulling supplier's chain" by requesting proposals on projects that they have no desire to accept. Other examples of induced supplier costs are late and erratic payments that add to the administrative costs. All of these things together contribute to reduced trust and effectiveness and to eventually increase costs that must be passed on to the clients.

What's New

I'm still recovering from a badly broken leg. This is going to be a very long recovery process. However, I'm back doing consulting work full time and teaching at Drexel and Villanova Universities. During the past couple of years we have been doing more pricing research work, particularly in markets outside North America. This has provided us an opportunity to test procedures in very different markets with mixed results. Not all techniques appear to work equally well everywhere. We have found advanced techniques less reliable with "naive" respondents, who have not been exposed to survey research. We suspect a huge "Hawthorn Effect," where customers respond positively to any new idea just because their opinion is being solicited.

Over the past several years, we have been compiling technical notes on strategic planning and marketing research methods. To date, seven chapters of these notes have been published on our web site. These notes are being periodically revised and updated. Feel free to review these technical notes.

I appreciate any comments on this proposal and contributions from you. You can get in touch with me at Custom Decision Support, Inc.,