How Companies Win - an interview with Rick Kash
Interview by: Giles Metcalfe
Rick Kash is co-author of HOW COMPANIES WIN: Profiting from Demand-Driven Business Models No Matter What Business You’re In and is the founder and CEO of The Cambridge Group, one of the premier consulting firms in the United States.
He is also the author of The New Law of Demand and Supply, which was chosen by Amazon.com as one of the Best Books of 2002. An acknowledged expert on demand, Kash’s many clients include some of the world’s most successful businesses. Kash also serves on a number of boards of directors and is a frequent public speaker. He lives in Chicago. More at: http://www.howcompanieswin.com/
GM: Can you tell us about the background to your new book?
For the past twenty years, the growth formula for business has been to increase revenues by expanding product offerings and streamlining supply. But with the recent global recession, the world economy has changed forever. Now the old tools - most notably supply-chain management - are no longer enough. In a new digital age characterized by over-supply and too many product types in almost every market, the new challenge is to locate and capture the elusive pools of high-profit demand.
We believe we have the answer: a revolutionary, demand-driven model that has already proven successful for some of the world’s most admired companies. It is the product of more than a decade of work since we first identified the demand economy, and it has been tested in the crucible of real-life business in our work with scores of the world’s largest companies. It is a powerful new business model and an achievable vision for a new kind of winning company, one that uses sophisticated new tools and techniques to discover, characterize, and then serve these pools of high-profit demand - and in the process gain pricing power in that market.
Fundamentally, we wanted to share with business leaders around the world how they can take action and create a certainty that their companies will win in this new economy.
GM: What criteria did you use in choosing your featured case studies?
We sought case studies that clearly highlighted how companies, leveraging the full range of powerful demand-based tools, were winning in the demand economy. From that full range of potential case studies, we selected case studies that encompassed a wide-range of business sectors and business practices, both clients we had personally served as well as companies that stood out as clear leaders in their industries. Taken together, this range of case studies serve to show how all companies, regardless of the sector or part of the world your business operates in, can win in the new demand economy.
GM: Was there anything in your case studies that shocked or surprised you?
We are continually humbled and overwhelmed at the outstanding results that can be realized, even in these economically challenging times, by companies employing the principles of demand strategy in their business. From McDonald’s realizing a more than 42% jump in sales, and a 96% improvement in net income after hitting bottom, to Hershey’s generating cash flows in 2009, more than double the previous year or even Best Buy, continuing to grow revenue and profits significantly at a time when key competitors are going out of business. We are continually pleasantly surprised and amazed at the financial results realized by companies daring to employ demand strategy in their businesses.
GM: Which example of winning made the biggest impression on you – positive or negative, and why?
There are two winning companies that make a big positive impression on me. One is Anheuser-Busch, a company that has competed in the mature, US beer industry for over 150 years. Anheuser-Busch has about a 50% share of the US beer industry but they had not been growing for a period of over 5 years. By transitioning to a demand-based business model and driving successful new innovation, they have enjoyed three years of profitable growth. Another is Best Buy, which is the world’s largest electronics retailer. Despite the very difficult economy, Best Buy has gained four share points in the past two quarters and is growing same store sales. Whether you are in a mature, relatively stable industry like beer or a fast moving industry like electronics retailing, a demand-based business model can drive significant new opportunities for growth and profits.
GM: As Americans, do you feel that you have "winning" instilled in you from an early age, in sports, business, and life in general?
Certainly, it is generally held that Americans have been instilled with a philosophy of winning, especially as it relates to sports, but also in business and other contexts. One critical question I ask every client is how they define winning. Measuring market share is not enough; you also need to assess your share of profits. Winning should mean taking the actions required and building the plan to make your business as profitable as it can be, not just making it as big as it can be.
GM: British culture sees winning as somehow distasteful and holds being a "plucky loser" or a good sport in more esteem. Do you believe that coaching a winning mentality would benefit British business?
Again, it starts with defining what winning means to the business and determining how to get there. Once that strategy is in place, everyone in the organization should be encouraged to improve performance continuously. This will help to attain new and difficult milestones along the path to your ultimate goal. In so doing, your organization will continually improve and learn valuable lessons along the way, and will ultimately be rewarded by winning in the marketplace.
GM: What are the biggest barriers to winning, and how can they be surmounted?
I’d argue today that one of the biggest barriers to winning is failing to recognize the changes that are so considerable. Some companies refuse to recognize the changes that are all around them and fall victim to what I call, "the tyranny of success". These businesses fail because they refuse to adapt the business model that drove their past successes to the realities of current and emerging demand. I think of businesses such as Woolworth’s in retail, DEC in IT , Zenith in electronics and Keds in footwear that were strong businesses that would not or could not adapt their business models.
The global economy has undergone a fundamental shift such that supply now far outpaces demand. Further, we believe we are in the earliest stages of the Third Industrial Revolution because the same factors that drove the first and second Industrial Revolutions are also shaping today’s global economy. These include an expansion in markets, a surge in productivity, an increase in entrepreneurship and a change in both where and how work is done. Businesses that fail to recognize changes on this scale will be fundamentally misaligned with market demand.
GM: You major strongly on your idea of three levels of demand – "current, latent, and emerging". Do you think that analysing demand is a purely reactive process?
No, I actually think that analyzing demand should be a very proactive process. In today’s global and rapidly changing economy, current demand is an ante to play in the game. Winners in the future will have an equally intense focus on latent and emerging demand. I would argue that uncovering this latent and emerging demand is a highly proactive process. You are seeking to determine the demand that consumers have, but have been unable to express and/or does not yet exist but which observant companies may already see indicators of. Staying ahead of this demand game, as it were, will enable demand-driven companies to win.
GM: What are the best tools for predicting demand, discounting augury?
Our belief is that the key to success is to develop a hypothesis about the future of demand while it is still forming. That is, while your competitors are asking questions about present demand, companies that win are trying to determine where demand will be tomorrow, next year, and five years from now. They do so by:
- Using macroeconomics to look across multiple markets, to draw lessons to apply in their own markets.
- Looking at customer and consumer trends (lifestyle, work style, demographics), to anticipate how to interact with emerging trends.
- Looking at analogous categories, to see what they can learn from best practices, successes, and failures from businesses similar to their own and businesses that are quite different but hold analogous learning.
- Looking at the most profitable segments of their own customers, to detect even small variations in their behaviour and buying patterns.
- Taking advantage of the real-time ability to monitor buzz on the Internet, to get an over-the-horizon view of emerging opportunities.
Leveraging new techniques such as crowdsourcing not only to help them gather timely knowledge about demand, but also to enlist their most desirable customers in the design of the product itself
The sum total of all of these investigations enables these demand-oriented companies to formulate new hypotheses about where this demand is going, and to make these hypotheses more insightful and more future oriented than anything they could derive from merely "asking the customers."
GM: You suggest, "A state of demand contraction and flattening cannot last forever" as "demand is beginning to return to some markets and business categories". Are you hopeful about the future of the global economy post-2008 to 2009 contraction?
Certainly, we continue to see contraction in key global markets and industry sectors even today. Witness the issues with Ireland’s financial sector just this week. Or the continuing issues related to the US housing market and the overall "jobless recovery" in the US.
For the foreseeable future, we will experience flat to contracting demand, especially in developed economies. Once that period ends, however, we believe that significant new demand will be created in some of today’s developing economies. This new demand will usher in a "golden age" of business with significant new opportunities.
GM: Your notion of "total innovation" is an interesting one – to me, akin to the Dutch notion of Total Football in sport – a revolutionary paradigm shift. Can you expand on this idea for us?
Real innovation is total innovation. That is, it begins, like all new products or services, with the unsatisfied demand you are going to fulfil. But innovation should not be limited to new products alone. Innovations can and should occur throughout the business model, from sourcing innovations through the manufacturing process, packaging, distribution, retail, consumption, and even beyond, through that product’s or service’s entire life span.
Innovation should be thought of as a portfolio of opportunities across the business model as well as in terms of impact and timeframe. In other words, you want a portfolio of smaller ideas as well as really big ideas. Ideas that can be implemented tomorrow and those that will require several months or years to bring to market. In a world of oversupply and flattening demand, this is the only strategy that assures that all of the potential profit is realized from the process, and that the product or service itself is precisely aligned with the most important demand profit pools. The number of ways that total innovation can be applied to a particular product or service is astounding.
GM: You state, "A spirit of innovation must now permeate the entire organization". Is innovation the future and the key to winning?
Innovation is certainly one of the keys to winning, alongside the other critical elements we discuss in the book that characterize a successful transition from a supply-driven company to a demand-driven one. Your point is well taken however, that innovation in the demand economy will command an entirely new position in the organization than it has in the past. To understand this one needs to understand what I believe innovation truly is.
I believe that innovation is about finding unsatisfied profitable demand in the market and then fulfilling it. Understanding this new definition is the key to consistent, successful innovation. Rather than creating supply through these creative exercises, and then seeking demand in the market to absorb it, this new approach to innovation is a disciplined, demand-based process … supply is created only where we know there is profitable demand to absorb it. And in that regard, innovation is absolutely the future, and a key to winning in the future.
GM: You introduce the concepts of "demand profit pools" and "demand landscapes". Is segmentation moribund?
While segments are convenient and logical, they don’t actually reveal the deeper reasons or beliefs behind buying decisions; they only label who is doing the purchasing and what they are buying. By contrast, demand profit pools focus primarily on the "why" underlying the purchase decision —an understanding that encompasses both demographics and an understanding of past purchasing behaviour. Perhaps most important, demand profit pools also create an understanding of the different economic opportunities (i.e., how potential profits vary) within each customer group.
The other critical dimension included is the concept of "need states". Need states are the circumstances or the occasions that cause you to want something and to take action in its pursuit. Gatorade, for example, built its business around the "hot and sweaty" need state for the replenishment sought after exercising or playing sports. Need states allow for greater competitive differentiation because they are directly linked to why consumers make specific purchases.
Aggregating all of the individual demand profit pools for an industry or market along with the need states experienced within it creates a complete picture of the customer opportunities within that market. We call this consolidated view of demand profit pools and need states the "demand landscape." The Demand Landscape allows managers to more precisely reach and motivate consumers who create by far the most value for you and your shareholders than is true for traditional segmentation.
GM: You also modify the traditional "four P’s of marketing" model to include a fifth – precision. Why is this extra element important and how can it be utilised effectively?
In the new demand economy, the margin for error for all businesses grows smaller and smaller. In the past, when the economy was booming, flawed assumptions in planning and poor execution were hidden as business sales and profits went up constantly. These days, you are not only competing with ever growing sources of supply from competitors all over the world, but all of that supply is competing for flattening – even contracting – demand. In this new competitive reality, any mistake you make can have dire consequences. The solution must go beyond tightening the screws still further on the supply chain. Now, the precision must occur on the demand side of the equation.
We believe that solution comes in the form of the Demand Chain. Businesses that leverage the Demand Chain gain the precision and superior economics of delivering exactly the right offer to the right consumer in the right place at the right price and the right time. At the same time, the Demand Chain brings much greater precision to the ways companies reach and communicate with their consumers, by building what amounts to a virtual media network of exactly those programs, publications, websites, blogs, social media and other media channels target consumers are most engaged in and influenced by.
GM: Are suppliers now dancing to the tune of consumer’s precision demands instead of marketers pulling the puppet strings and creating demand by aspiration – effectively, a flip in the balance of power?
Clearly, this change did not happen overnight, but the change you note is absolutely here. One of the most notable changes is how the available demand within markets is being shaped and aggregated in ways never before possible due to the Internet and social media. Demand is now more dynamic and "viral" than ever before, forming and moving around the globe rapidly. Marketers are not driving this, consumers are. And, companies that don’t have the tools to anticipate and satisfy rapidly shifting demand opportunities will fall behind competitors that do.
GM: Finally, are there any closing comments you would like to make?
Business is about change, it always has been. And the constant companion to change is opportunity. While this can be intimidating for some, it actually lays a rich landscape filled with opportunities for those willing to engage. Change always brings with it new and exciting business opportunities. It is the notion of "creative destruction" first identified by the economist, Joseph Schumpeter.
Going forward, successful growth companies will compete on supply, but will ultimately win on demand. For companies willing to evolve from a supply-driven company to a demand-driven company, the rewards will be great… bigger profits, greater market share, and higher customer loyalty, even as your competitors struggle and fade. And it all begins with a little change of perspective.