Playbooks

Playbooks have become a recurring theme in my life recently.  Thinking about the marketing plan, it can really be considered a playbook.  You evaluate your team’s own strengths and weaknesses, then potential threats or opportunities based on opponents’ (competitors’) strengths and weaknesses and other conditions, develop a strategy and implementation plan.  Entergy’s Chief Nuclear Officer, Jeff Forbes, chose to present this year’s business plan in the form of a playbook.
 

 

I was born in Philly and grew up in South Jersey; specifically Collingswood, just outside of Camden, across the river from Philly.  Unfortunately for me, I grew up an Eagles fan.  Speaking of Eagles fans and playbooks, did everyone get to see “Silver Linings Playbook”?  Better yet, has anyone read the book?  Although Jennifer Lawrence was incredible in the movie, I liked the book better.  Although it is fiction, the author, Matthew Quick, used real places in the book, mostly in my hometown of Collingswood and the surrounding area including Westmont and Haddon Township.  The reason he used that area is because he is a fellow graduate of my Alma Mater, Collingswood High School.  In fact, he graduated with my sister, who is many years younger than I am.  The diner scene is specified in the book as being the Crystal Lake Diner, where my wife and I take my mother for breakfast almost every trip we make back home.  Matthew refers to himself as “Q” – one, because of his last name and, two, same hairstyle as our CNO (he has a sense of humor about it). 

 

   

 

My father passed away in 2001.  He was a huge football fan.  One of the last and best memories I have of my father was him having a conversation in his hospital bed with my cousin, Jimmy.  Jimmy, who lives in Maryland, is a Baltimore Ravens season ticket holder and had just gotten back from the first Raven’s Super Bowl win.  My father asked him how much he paid for the ticket, Jimmy told him, then my father told him what an idiot he thought he was, but with more colorful language.  This past Super Bowl Sunday I was rummaging around my house and I came across another playbook.  My father was assistant coach for my midget football team, the Westmont Tigers.  I had kept his playbook. 

   

I started looking through the playbook remembering some of my old teammates.  Tommy Madden was our quarterback.  I was in the backfield and a bunch of friends that I later went to school with were on the team.  A couple of weeks into the season, a new kid, Steve, kind of replaced in the backfield (I was moved to end).  He also played defensive back.  We weren’t a very good team, but Steve turned out to be our star running back.  He later starred in baseball and also played football for the University of Pennsylvania.  Anyway, Steve ended up marrying Tommy Madden’s older sister, Karen.  They settled in another neighboring South Jersey town, Audobon, and had six children; four boys and two girls.  One of their boys went on to play quarterback for Audobon and then for another of my Alma Maters, the University of Delaware.  I was thinking that my father would have really enjoyed watching the Super Bowl this year with me.  My cousin Jimmy was at the game, again, this year, but this time with his wife, Joyce. 

Steve and Karen and most, if not all, of their children were there, too.  In fact, one of their sons played in the game and was later named Super Bowl MVP. 

  

A lot of success is coming from our little area of South Jersey.

Another playbook may soon become a big part of my life – Entergy’s Continuous Improvement (ECI) Playbook.  I interviewed for the Manager of ECI for Vermont Yankee and Pilgrim in February and I’ve been told that I am in the final stages of the HR process, but the position has since been put on HOLD.  Entergy has enjoyed a lot of success as a result of our ECI program, including the 2007 NEI (Nuclear Energy Institute) Top Industry Practice Award. 

http://www.nei.org/newsandevents/News-Releases/employeesofentergynuclearearntopindustrypracticeaw

The reason I want this job is that I see an opportunity to make the program better.  Currently, every employee is required to participate in two ECI’s per year.  Each ECI gets points depending on what type or size of improvement is made.  For instance, safety, standardization and quality related improvements will get you 4 points, customer experience improvements get 2 points and cost savings, both person-hours and dollars, improvements range from 1 (<$1,000) to 8 points (≥$100,000).  The goal is for each single unit site to earn 950 points, with a stretch goal of 1050.  ECI points account for 15% of the yearly plant incentive awards.  Both Vermont Yankee and Pilgrim have exceeded the stretch goal for the past several years.  While the ECI numbers indicate a lot of improvement the past couple of years, it isn’t really translating into improved outage or even operating performance or industry ratings.  Local optimization everywhere does not create global optimization.  Mark Graham Brown, the author of “Baldrige Award Winning Quality - 17th Edition - How to Interpret the Baldrige Criteria for Performance Excellence”, is even more critical.  “Companies that tell every employee to go off and improve their processes frequently find that this leads to chaos, and the improvements in one area cause problems in others.”  I tend to agree.  We’ve seen ECI points awarded which restored processes back to the way they were before other ECI points were awarded to change that process.  We’ve also seen ECI points awarded for changes which completely bypassed other procedural requirements.  Knowing this, it appears our metrics aren’t really providing much useful information.  This has been acknowledged by upper management since there is now a charter team working on performance indicator improvements.  The numbers are astounding.  They’ve already identified 128 gaps between our indicators and NRC and INPO indicators; then they plan on looking at an additional 700 non-regulatory and non-industry indicators.  Of course, these are obviously not just marketing indicators, but I wonder how it got to be such a high number.  Mark Graham Brown has also written a number of books on metrics and balanced scorecards, which I plan on reading in my spare time.

I already had most of this written when we got the instructions for the final post.  The second sentence of this post was “Thinking about the marketing plan, it can really be considered a playbook.”  Drucker says that the purpose of any business is to create a customer and that every business has two basic functions; marketing and innovation.  I think that there is for room for innovation in marketing, but the basics of marketing remain the same 4P’s; product, price, promotion and place.  Drucker says that customers define quality, so it is a good thing that quality improvements efforts have moved towards the customer focus rather than just process improvements.  Drucker felt that the most important questions that you should ask about your organization are 1) What is our Mission, 2) Who is our customer, 3) What does our customer value, 4) What are our results, and 5) What is our plan?  This, of course, should be in our playbook or marketing plan.  Implementing Drucker’s Marketing View involves four major instructions; 1) Market marketing to all internal organizations at all levels (cross-functional view), 2) Understand the difference between sales and marketing (sales can be detrimental if you are coercing rather than informing customers), 3) Educate and lead, and 4) Approach the business from the customer’s point of view.  These seem to be good instructions to take into any leadership position.  Hopefully, I’ll have my leadership position soon – or is that showing professionalism, which Drucker doesn’t really like?  I guess it depends.     

Now it is over – one more class for MBA, but for the time being, a little Alice Cooper SCHOOL'S OUT FOR SUMMER…

http://youtu.be/XbNEOJMGFAo

 

 

 

Forecast – Event – Response – Reforecast

To quote PracticalForecasting.com, “Forecasts are a critical part of business planning, management, and strategy -- but they're always wrong.” I think it depends (where have I heard those words before) on your assumptions and desired or expected level of accuracy.  I was deeply saddened this week when Southern California Edison (SCE) announced that they would be permanently closing their San Onofre Units.  For those who don’t know about it, here is a link to some information about the shutdown and problem.

 

 http://ansnuclearcafe.org/2013/06/07/songsretiredecommission/

 

I had interviewed for an Engineering Fix It Now (EFIN) Supervisor position at San Onofre about a week before they initially shutdown because of the leaks in their almost new steam generators that were manufactured by Mitsubishi.  Although there will be some jobs remaining at their site for decommissioning, I was kind of surprised at the number of employees that they had there when I interviewed, about 2700.  I guess I’ve gotten used to our small Vermont Yankee staff of 600.  Of course, when they were operating at full uprated power, they were producing approximately 2150 Megawatts compared to 620 for Vermont Yankee.  Now, that carbon-free capacity is gone forever because of unnecessary regulatory uncertainty.  How many windmills or solar panels does it take to replace 2150 Megawatts of carbon free power or even the 70% of one unit’s capacity, which they planned to produce without much regulatory interference and is still greater than the output of our little VY plant?  Either we’ll find out or it will be replaced by more natural gas, which still emits carbon, or coal plants, which kill more people per megawatt hour than any other power source available. I’m guessing the later, since wind and solar require “farms” to produce any appreciable capacity.  Unfortunately, the NRC decided they needed to rethink their own previous decision to allow them to operate and it would take them more than a year to decide.  I’m not blaming SCE for their decision.  They face that certain uncertainty (our regulatory inadequacy) that requires them to make the difficult decision to abandon a product. 

 

This week’s prompts included “what is the most important thing you learned during the simulation?”  I think it’s that you have to balance how much effort you put into data gathering, the situation analysis and the marketing plan.  Outside situations, which may or may not already be happening, can change your plans for you.  I originally didn’t really consider the allergy medication to be a viable product because I thought the market to be too small. I didn’t realize that it would be the first non-drowsy allergy relief medication on the market.  Even though the first to market doesn’t always lead the market, I saw this as an opportunity to capitalize on our already good brand name to expand our mission into the allergy relief market.  It is still an expensive product to produce and I don’t really know why, but it is currently profitable enough to continue and shows promise since most customers feel we are priced too low.  Our team is focused on market leadership rather than profitability or sales revenue.  Those will follow once we have established market leadership, but we are more concerned about providing the most relief for our customers.

 

Although we didn’t specify it in our marketing plan, we did consider the competitive advantage versus market attractiveness matrix.  We gained competitive advantage with the combination of Allround and Allround+ in the cold market, which also extended into the cough and allergy markets.  The cold relief market continued to expand and we saw the opportunity to reach children and others concerned with the alcohol and cough suppressants present in our original formula, which we did not want to abandon because of brand loyalty and market leadership.  We knew that the new formula would cannibalize some of the existing product, but felt it would increase our overall market share in the cold relief market.  As the allergy market consistently increased, we recognized the market attractiveness potential for a non-drowsy formula, even though it was not specifically stated (but forecast) in our original marketing plan.  The market attractiveness of both the cold and allergy relief markets increased as those were the two markets that were showing consistent growth above population growth.

 

The incidents have been interesting, since we didn’t have any in the practice runs.  For the Social Media incident in the first period we chose “Website with interactive blog and use up to 5% of the advertising budget toward Google Adwords to generate additional awareness and direct people to the website.”  We felt it wasn’t enough just to create a website, which, because Allround.com was not available, we used Allstar.com.  We also didn’t feel Facebook or Twitter could really promote our product(s) like a website would.  The second special decision was the Quality Assurance incident and we disposed of the soon to expire product rather than messing with our distributors.  The next special decision was the cannibalization incident.  We felt the children’s formula would cannibalize our original formula more than it actually did but also felt it wouldn’t be as bad as the cannibalization from a 12-hour capsule.  We didn’t think the cough formula market attractiveness was there compared to the children’s formula which, at the time, had only one other specific competitor.  The Social Media Problem was next and we chose to check the page often and respond to comments rather than ignore or delete them, shut the page down or get legal involved.  For the Detailing Changes Incident, we chose to add e-detailing to our website in hopes of improving recommendations from doctors and pharmacists.  For the Creative Marketing incident we chose to run an ad contest to have customers come up with a clever ad to run on the web in order to get customers involved and gain some insight from them.  For the Price Discrimination Incident, we chose not to extend the additional discount to the large chain store, thinking that would upset our other distribution outlets if we gave special treatment to one.  We probably lost some sales for a short period but, being the market leader using a pull strategy, customers will likely get them to sell our product again.  We’re still working on the Product Tampering Incident.

Metric system? It depends!

The title is kind of an inside joke with me because I remember being in high school (a long, long time ago) and being told that we (the US) would be converting to the metric system in the not too distant future.  Here we are thirty-something years later and we still see inches, feet, miles, etc.  Of course, we’re talking about a different metric system in marketing, but I find it amusing.  I also find amusing Prof. Spotts continuous use of “It depends!”  One of my favorite quotes from my undergraduate mentor and thesis advisor, Dr. Norman Collins, Jr., was that you could answer almost any question with “it depends,” but then you had to dig for and find the required information or make assumptions to correctly and completely answer the question.  Although my undergraduate degree (’95) is in Engineering Technology, it wasn’t offered by the College of Engineering at the University of Delaware.  It was actually through the College of Agricultural Sciences (now called the College of Agriculture and Natural Resources).  The first time I met Dr. Collins, I thought he was a janitor because of the way he was dressed.  Ah, assumptions!  I regret not keeping in touch with him because he passed in 2007 and I do consider him one of the top three teachers/professors in my life.

So what metrics have we chosen?  Since I am on the team that was available for the live class, we got to choose.  Looking at the results, our choice did not give us any advantages based on the results so far.  In fact, I’m pretty sure one metric had our team ranked last in the class.  Our challenge is gaining ground based on the actions we defined in our marketing plan.  Maybe our choice of metrics was based on what we already knew we were lacking.  Choosing metrics which accentuate what you are good at can be a recipe for disaster.  There is also the trap of “tell me how you will measure me and I’ll tell you how I’ll perform.”  This can also be a recipe for disaster, as managers manipulate real performance around performance indicators.  The metrics chosen should be objective enough so as not to allow manipulation, but should also show you that you are moving toward your goals and mission. 

 
We are supposed to also comment on three other classmate’s blogs, different from our choices last week and not our teammates.  That doesn’t leave a lot to choose from in a class this size, but… So far, Mindy is the only available classmate who has posted a blog this week (and I know I am one of the worst offenders at posting as late as possible).  She provides a good analysis of why teamwork can be important, the diversity of opinions that need to be considered.  Conflict without confrontation can be extremely helpful in a team setting.  Equally, groupthink can be disastrous.  I also haven’t commented on Abhishek’s blog, yet, even though I have enjoyed reading several of his posts.  He maintains structured and organized responses to prompts and providing the required information and/or assumptions made when providing his answers.  I’ve been holding off commenting on Justin’s blog, even though I do like the way he ties College Football into every post with relevance to the course work presented.  I’m hoping to add a little football theme (specifically, playbooks) to my last blog post for this class.

My experience, so far, with PharmaSim has been interesting, but, after listening to Daniel Kahneman’s “Thinking, Fast and Slow,” I’m wondering how much the simulation is based on real probabilities or what the creators’ opinions are.  My concern here is actually based on a concern that we ran into with our simulator at Vermont Yankee.  The simulator was showing almost full DC voltage (125VDC) on our batteries after a simulated loss of AC power for more than two hours.  My calculations show that DC voltage would be about 110VDC, based on the assumed loads on the batteries.  This gives the false impression that nothing needed to be done to restore AC power to our battery chargers.  Fukushima has shown us otherwise and this anomaly was pointed out by the NRC to us two years prior to the Fukushima incident.  So, needless to say, I’m kind of sensitive to simulations which are not based on complete, or even assumed, reality.  I pointed out my concerns about the “automatic” expansion of operations when capacity utilization reached 110%, which is already an impossible accomplishment in the nuclear power industry.  100% is 100%.  There is no more without a major investment in a new plant or power uprate.  PharmaSim assumes you can sell more than you can produce, which is a common complaint about "marketing" people from "engineering" and "production" people.                         

Strategically speaking

As I was finishing up what I was able to on the Situation Analysis late last night, I found myself thinking about Cohen’s Chapter 15, “How to Do Marketing Research the Drucker Way.”  Specifically, “Why Drucker Preferred Thinking to Number Crunching.”  After crunching the numbers and concluding what I already knew would be the key issues, I could see why he preferred thinking.  I just hope I didn’t “rig” my analysis with my preconceived biases.  However, since we had to provide the facts that provide the basis for the key issues, I’m pretty confident I can defend my conclusions.  Maybe, if I had more skin in the game and this was a real business I was dealing with, I wouldn’t mind spending so much time on the number crunching.

Now that I’m off the soapbox, this week’s reading included Drucker’s Marketing Strategy in Chapters 10 through 14 of Cohen’s book, “Drucker on Marketing.”  I think what sticks with me the most is “The Fundamental Marketing Decision.”  “Your first responsibility is deciding what your business is.”  This reminds me of Jim Collins’ “Hedgehog Concept” from his book, “Good to Great.”  It’s in reference to the hedgehog and the fox story.  Actually the “Hedgehog Concept” integrates some of what Jack Welch did at GE.  Essentially, “if you cannot be the best in the world at your core business, then your core business absolutely cannot form the basis of a great company.  It must be replaced with a simple concept that reflects deep understanding of the three intersecting circles.”  The three intersecting circles are what you are deeply passionate about, what you can be the best at and what drives your economic engine.  From there, strategy may change based on changing conditions, but needs to always consider the “Hedgehog Concept.”  Something else that seems to coincide between Drucker and Collins is “We Go All Out Only for Important, Challenging Goals.”  Collins refers to these as BHAG (Big Hairy Audacious Goals).       

Proff. Spotts asked us to comment on three of our non-teammate classmates’ blogs.  Kenny provided a nice summary of this weeks’ reading on Drucker, including the five certainties that can help strategists predict the future.  He also includes a short synopsis of his team’s PharmSim activities and provided comments on three blogs, including both of my teammates’ blogs.  Kristin also chose both of my teammates’ blogs as two of the three which she provided comments.  She also seems reluctant (as I am) of providing too much information on her teams’ PharmaSim activities, since it is intended to be a competition.  The she provided a nice short description of Drucker’s “looking out the window.”  And to complete the trend, Christine also comments on both of my teammates’ blogs as two of her three.  I already knew I had great teammates, so I’m glad to see I was not alone in that assessment.  Christine definitely provided more detail about her team’s PharmaSim activities and I am pretty impressed with the results. 

Specific prompts during class included, “Do you agree that customers determine what business you are in?”  Yes, because without customers, you have no business.  If you decided that your business was to make the highest quality rotary phones on the market, how many customers would you have?  You have to satisfy the customers’ needs or wants.  Otherwise, you will not be in business very long.

Another prompt was “What is the purpose of using historical data to predict the buying habits of customers?”  My answer is because, currently, that’s all there is.  So far, no one can accurately predict the future, except by random guess.  In fact, research has shown that so-called experts are actually worse at long term predictions than the average observer.  This may or may not be a factor named by Daniel Kahneman in “Thinking, Fast and Slow” as the Law of Small Numbers.  Since there are a smaller number of experts, their errors may be exaggerated.  More than likely, though, it is as he explains later, “you should not expect much from pundits making long-term forecasts - although they have valuable insights into the near future.  The line that separates the possibly predictable future from the unpredictable distant future is yet to be drawn.”   Near term trends can be estimated using historical data, but you also need to keep an eye on how much market penetration already exists and what else is going on.  Economic or other factors could collapse the market, but they could also expand the market.  These factors are pretty unpredictable, so all you have left are the factors in which historical data exists.     

 
The last prompt was to think about the metrics to be used for the PharmaSim case.  Since we are kind of competing as teams, I’m not sure how much information about our team metrics we should release.  We are in the process of thinking of them and I'm thinking we should make them BHAG!

Speaking of predicting the future, I think we need to hire Griffin!
http://www.youtube.com/watch?v=PSxuL_54sMk

Promo

This week I attended the WNE College of Engineering’s Annual Spring Gathering and Hall of Fame Induction Ceremony.  The Western New England University College of Engineering Hall of Fame was established in 2002 to recognize graduates and individuals who have distinguished themselves by making a significant contribution to the engineering field and/or the University.  Dennis Lind ’80, Vice President of Design & Engineering and Integrated Facility Planning Strategies for Walt Disney Parks & Resorts® was inducted this year.  It has been three years since the last induction ceremony, but they have the spring gathering every year and this was the first one I’ve attended.  As a recent MSEM graduate, I was invited and curious. 

 

After meeting talking with a number of people, including Dennis, I was privately honored when the College of Engineering’s Dean, Dr. S. Hossein Cheraghi, asked me to join him at his table for dinner.  I ended up sitting next to University President Anthony Caprio.  There was some interesting dinner discussion about the planned speaker at the Law School, Lois Lehrer, a WNE Law School alumna who just a few hours before the dinner announced that she would not be speaking.  For those who don’t know, she works for the IRS and has faced some recent scrutiny for her role in one of the latest controversies.  In the words of Forrest Gump, “And that’s all I got to say about that.”     

As Dean Cherighi was giving his opening remarks (king of a State of the College address), I soon realized the real purpose for the invite.  He was explaining the growth of the College, including the new Ph.D. program in Engineering Management (with 11 current candidates), and then turned to me and said, “So, maybe, when you finish your MBA, you will come back.”  So this was a part the personal selling process for the Ph.D. program.  They are using relationship selling rather than traditional sales techniques.  I should have known because they had already generated and qualified the lead (me) when I attended the first information session that they advertised and held for the new program about a year and a half ago.  The invite was a way of approaching the customer (me) and probing my needs.  I am already pretty much convinced that I will end up applying.  Using the AIDA model, they already have my attention, interest and desire.  However, Im holding off on any action because it depends on what happens at work.  I’m up for a couple of other positions and my ability to commit to more school depends on which position I end up being offered.  So there would be no objections for the College to deal with, but then I will have to go into the personal selling with the wife.  When she has objections with something that I’m planning, she usually lets me know by saying something like, “Your third wife might like that.” J

Deciding how to promote your product or service depends on how familiar customers already are with what you are selling and how much of the market share is yours.  If you are a market leader, you want to use a “pull” strategy or get the customer to demand your product from the retailers.  If you are trying to penetrate or gain market share, you want to use a “push” strategy or get the retailers to help you gain customers.  Trade promotions are usually associated with “push” and consumer promotions with “pull” strategies.  Advertising strategies also depend on your place in the market.  If you are the market leader, it doesn’t really make any sense to use comparisons to another product because that would basically be giving you competitor free advertising.  You want to use comparison advertising when you are entering the market or trying to gain market share.  Market leaders want to use benefits advertising to emphasize product benefits and reminder advertising to maintain awareness and stimulate repurchase.  New or recently added competitor products want to use primary advertising to create awareness and stimulate demand.                 

What Price is Right?

This week we learned about pricing.  We performed a detailed price elasticity exercise and learned that a price which results in calculated price elasticity value of 1.00 would also likely be the point that provides the most positive marketing contribution.  This can be confirmed by looking at the Tradeoff analysis.  The picture below (I finally did it!) shows how Allround stacks up with the increased price of $5.75.  This is very close to where the contribution value would be at its maximum.  It is reasonable to conclude that prices which cause your plot point to be left of the tradeoff line would be elastic (absolute calculated price elasticity >1.0), prices which fall on the line have an absolute calculated price elasticity of unity (=1.0), and prices to the right of the line would be inelastic (<1.0).  Although Drucker calls it a deadly sin, if your pricing objective is profit-oriented, it makes sense to try to be on the line and maximize marketing contribution.
    

  

However, you should also try not to have a myopic view of your market.  If you narrowly defined your market to be OTC Cold medications, the Tradeoffs Plot becomes as shown below.  This could give the false impression that you can raise the price even higher to increase marketing contribution when, in fact, you would be moving your price into the elastic region in the previous plot and not achieve maximum marketing contribution.  It might make sense to raise your price based on the value in the OTC Cold market if you were to introduce new products in the cough and/or allergy markets which you know will cannibalize some of your existing sales, anyway, as long as you also price the new products on (to maximize profit) or to the right of (to gain market share) the tradeoff line.

   

One of this week’s prompts is to discuss something interesting that is happening in marketing this week.  During the class we touched on how changing pricing strategy can affect your business and I mentioned that J.C. Penney made that mistake.  Here is an article (actually a WSJ blog post) which details how they are continuing to slide as a result of changing to an EDLP retailer.  The specific quote that really pertains to this week’s topic is “The Company noted that results for the quarter also reflect its prior pricing and marketing strategies, which are being changed under new leadership.”  WSJ online requires a subscription, but they usually allow you to view one article per day, so you should be able to see it.

http://blogs.wsj.com/corporate-intelligence/2013/05/07/the-slide-continues-at-j-c-penney/?KEYWORDS=jcpenney+news

This is a good segway into the most recent audio book that I listened to on my long commute, “The Ten Commandments for Business Failure,” by Donald R. Keough.  Don has some personal experience with failure as he was the one who gave us New Coke.  What was interesting is that they actually had pretty sound reasoning based on research that they had performed.  His warning is that, while many believe that we are living in the Information Age, he thinks we are still just in the Data Age and we should not confuse the two.  That, he says, was his mistake with New Coke.  Data supported the decision.  The taste tests that they performed proved that people liked the taste of New Coke better.  But it wasn’t the taste that led to the failure of New Coke.  It was a part of their past that they identified with and didn’t want changed.  Fortunately for Don, they were able to recover.  Maybe J.C. Penney will, too.  Time will tell.  It’s a witty book that I enjoyed very much and highly recommend it.

 

For those interested, the Ten Commandments are as follows:

1. Quit Taking Risks
2. Be Inflexible
3. Isolate Yourself
4. Assume Infallibility
5. Play the Game Close to the Foul Line
6. Don’t Take Time to Think
7. Put All Your Faith in Experts & Outside Consultants
8. Love Your Bureaucracy
9. Send Mixed Messages
10. Be Afraid of the Future

The right price, according to Drucker, is what the customer values the product or service at in the context of the market.  According to Drucker, this is the starting point and you should then consider costs to determine if the product or service can be sold at a profit, either now or in the future if and when costs can be reduced based on learning and experience curves.  When considering costs, you need to consider the entire chain of costs associated with the product or service and recognize opportunities to also improve those costs.      

What's my position?

We’re coming up on the halfway point for the course and, after quite a bit of reading, videos and discussions, we’re finally getting to what I remembered from my undergraduate course on marketing 18 or 19 years ago.  It seems to me there was more emphasis on developing the positioning statement and value proposition back then.  Of course, technology and research has changed a lot in those years and we are integrating our studies into the rest of the necessary elements involve in running a business.

So how do we get the positioning statement and the value proposition to resonate with customers?  The latest audio book that I listened to on my long commute is Jonah Berger’s “Contagious: Why Things Catch On.”  Jonah mentions that a number of books have provided great stories about things that have caught on, but they don’t really explain the “science” behind why things catch on.  He specifically mentions Malcolm Gladwell’s “The Tipping Point” and the Heath brothers’ “Made to Stick.”  However, I’m sure both could provide arguments that their work does discuss the “science.”  Jonah uses the acronym STEPPS, which represents 6 steps to make any product or idea go viral. The 6 steps are social currency, triggers, emotion, public, practical value, and stories.  Social currency is obtained by sharing things that make us look good.  Triggers are easily remembered information that remains at the top of the mind and the tip of the tongue.  Emotion is involved because when we care, we share.  The information or message has to be public; built to show, built to grow.  The information or message has to have practical value.  And, finally, people are storytellers, so great brands learn to tell stories which contain information about their product under the guise of idle chatter (free advertising).  Things that go viral don’t necessarily have to have all 6 steps involved, but these are common among those that do. 

Comparing “Contagious” to other works, Gladwell describes the “three rules of epidemics” in “The Tipping Point.;” The Law of the Few, The Stickiness Factor and The Power of Context.  The Law of the Few includes connectors, mavens (information specialists), and salesmen, which Gladwell suggests are the key to the dissemination of information.  Regarding The Power of Context, Gladwell says “Epidemics are sensitive to the conditions and circumstances of the times and places in which they occur.”  The Stickiness Factor is expanded by Chip and Dan Heath in “Made to Stick: Why Some Ideas Survive and Others Die.”  This book follows another acronym “SUCCES” and can easily be compared to “Contagious.”  They explain that the characteristics that can help make an idea “sticky” are Simple (find the core of any idea), Unexpected (grab people’s attention by surprising them), Concrete (make sure the idea can be grasped and remembered later), Credible (give the idea believability), Emotional (help people see the importance of the idea), and, again, Stories (empower people to use the idea through a story).       

Of course, no amount of stickiness really matters if you don’t know or understand the size of the market you are getting in to.  For PharmaSim this week, we were asked to estimate the market demand and the market value of each of the line extensions considered.  The line extensions are a children’s 4 hour cold liquid, a 12 hour multi capsule and a 4 hour cough liquid.  Figuring market demand really depends on how you define your market.  Some could argue that the 12 hour multi capsule could span into all four categories (cold, cough, allergy, and nasal); therefore, the existing market units purchased is 541.9 million units purchased as shown on the brands purchased report and the industry growth rate is currently 2.6% and forecast to be higher as shown in the industry outlook report.  So a conservative estimate for market demand would be 541.9 million times 1.026, or 556 million units sold.  Manufacturers’ sales as also shown on the manufacturer sales report totaled $1,899.5 million for the current period for an average of $3.505 per unit.  The market update report shows an average increase in price of 2.6% compare to an inflation rate of 6.4% and the forecast inflation rate is 7.0% as shown on the industry outlook report.  Conservatively assuming the same 2.6% increase in price would mean an average of $3.596 per unit, so the market demand of 556 million units would be estimated to have a value of $1,999.6 million.  Since the 12 hour multi capsule would be targeting the same market, there would be some product cannibalism.  However, the 12 hour multi capsule cost $1.03 per unit compared to the $1.37 per unit for our current product as shown on the pricing decision report.

For the 4 hour cough option, the brands purchased survey shows cough medications to be 13.9% of the current 541.9 million market units purchased, or a market demand of 75.3 million units.  However, the manufacturer sales report shows that the growth in the cough market was negative 7.4%.  It’s difficult to say whether that is a true representation, since that report limits itself to brands specifically listed as cough medications.  People may simply be buying multi brands due to the limited number of choices of strictly cough medications (just Coughcure and End) and their relatively high cost.  Although cough medications represent 13.9% of units sold, the $379.6 million in manufacturer sales represents 20% of the total $1,899.5 million market.  I would still use the 2.6% expected sales increase but 2.6% price increase over the average total and estimate a market of 77.3 million units with $277.8 million market value.  There would be some product cannibalism, since a fair amount of Allround is already sold in the cough market, but the new cough liquid capsule cost $1.27 per unit compared to the $1.37 per unit for our current product as shown on the pricing decision report.

For the 4 hour children’s cold medicine, the brands purchased survey shows cough medications to be 75% of the current 541.9 million market units purchased, or a cold market demand of 406.4 million units.  This has to be broken down further to see who would be specifically interested in children’s dosages.  There is currently only one brand that is purely a 4 hour children’s cold medication (Coldcure) and they sold 45.3 million units.  It would be easy to assume that they were selling exclusively to young families, but the brand purchased survey shows that 28.9% of the units of Coldcure sold were actually to mature families.  This could be because grandparents are buying for their grandchildren or the mature families are just looking for smaller doses.  Young families make up 26.7% of the OTC medication market and mature families make up 29.8%.  Coldcure currently captures 28.4% of the young families with cold market (compared to 21.7% for Allround) and 10.5% of the mature families with cold market (compared to 22.7% for Allround) for a cross section total of 19% of both.  So what is a good estimate of how much of the cold market would actually be in the children’s cold market if there was more direct competition?  It is difficult to say, but I’ll guess about half of the young families demand plus a tenth of mature families demand could be dedicated to children’s medication.  So about 16.33% of the 406.4 million units represent 66.4 million current market demand for children’s cold liquid.  I would still use the 2.6% expected sales increase but 2.6% price increase over the average total and estimate a market of 68.1 million units with $244.9 million market value.  There would be some product cannibalism, since a fair amount of Allround is already sold in the children’s cold market, but the new children’s liquid capsule cost $1.25 per unit compared to the $1.37 per unit for our current product as shown on the pricing decision report.

So what did Drucker mean by “charging what the market will bear” as one of the deadly sins?  I think he meant that if you charge too much, but what the market bears, that will invite competition to steal customers away from you a lot quicker than they would have if you had a more reasonable price.

Diving deeper into PharmaSim and other requested discussions

In Week 4, we discussed customer analysis in the first part of class and more about PharmaSim in the second part of class.  Prof. Spotts asked us to restart PharmaSim and perform some specific scenarios which included advancing to period 2 without making any changes.  This was an eye opener for me.  In my previous attempts, I assumed I was doing something right by making changes right away.  It turns out sales increased, anyway, without making any changes, so I was not so smart, afterall.  Then we were asked to look at the conjoint analysis and run period 3 with the preferred changes recommended and then replay with the non-preferred changes recommended and report on the results. 

The preferred changes included changing the price to $3.67 (price utility reference score of 0.333) and dropping alcohol from the formulation (product utility reference score of 0.187).  While sales skyrocketed to 139 million units (up from 118.8 million), net income was negative $13.1 million compared to a positive income of $75.6 million the previous period.  Stock price also dropped from $43.10 to $12.17 per share.  Yikes!  I guess this proves that you can’t always just give the customers what they want or you might be out of business in no time. 

While we’re here, I also want to discuss capacity utilization with regard to PharmaSim.  The guide says that “Plant capacity expands in 20 million unit increments automatically when demand exceeds current capacity by 10%.”  This seems a little unrealistic given the last scenario.  I don’t think any executive would automatically agree to increase capacity when net income falls from positive $75.6 million to negative $13.1 million and stock prices fall from $43.10 to $12.17 per share.  Exceeding 100% capacity is impossibility in my current position.  If we (Vermont Yankee) go above rated 100% capacity even for a short time, we are in serious trouble with our regulator (Nuclear Regulatory Commission) because we would be in an unanalyzed condition.  Serious fines and possible revocation of our operating license could be the result.  So this idea of operating above 100% capacity is more a little than foreign to me.  Adding capacity can involve a much larger decision than the simulation implies.  And now I’ll get off my soapbox and continue with the findings.

The non-preferred changes include changing the price to $6.11 (price utility reference score of -0.4) and keeping the formulation the same (product utility reference score of -0.133).  While sales fell to 103.1 million units (from 118.8 million), net income increased to $85 million compared to $75.6 million the previous period.  Stock price also dropped from $43.10 to $39.99 per share; not nearly as bad as with the preferred changes.  This was a valuable exercise because it shows that you can’t always give the customers everything they want and still stay in business.  You also can’t completely ignore the customer or you will continue to lose sales.  The tradeoffs curve shows that customers believe Allround costs too much for the benefits it brings with these non-preferred changes.  The key is to balance what the customer wants with what the business needs to stay in business.              

We were asked to provide comments on and compare and contrast two different classmates’ blogs.  It looks like my fellow classmates are procrastinating as much as I am this week, so I’ll discuss two classmates’ blogs in general.  I like the way Aleena adds humor to her blog posts.  Her posts last week were a little late last week, but I agree that her posts are enjoyable to read.  She’s also an engineer, so I guess I’m a little biased.  I’m also enjoying Ahmed’s posts, which appear very professional with sited references which are outside the required reading.  By the way, I still have a working Betamax, along with an 8-track player, turntable and all my old Beta movies, 8-tracks and records.  The wife wants me to get rid of them, but I just can’t bring myself to letting them go.  Both Aleena and Ahmed add pictures to their posts, which I like and was something I said I was going to try to do this week.  Unfortunately, time has gotten away from me, so I’ll try again next week.  Neither Aleena or Ahmed seem to be hitting all the points Prof. Spotts would like us to hit, which is something I’m finding a little more difficult each week, as well.

How do I make over the counter cold medication purchases?  I’ve developed brand loyalty to Contac tablets, especially when I want to get a good night’s sleep because it knocks me out.  I’ve found it is really the only product that gives me overnight relief.  Now that they have the day and night formula, it’s pretty much the only brand I’ll buy.  I’ve tried others (Nyquil, Dayquil, etc.), but none really works for me like Contac does.  With the amount of competition that’s out there, Contac doesn’t always get the shelf space I would like because I end up spending more time than I would like trying to find it.

Analyze This

This week we read about and discussed defining our competitive set and analyzing our industry and competition.  One of the interesting questions discussed was “Who defines competition?”  My early response, which was shared by the majority at the time, was that the customer defines competition.  However, later in the lecture, I noted that the company can narrow its view of the competition if it has limited resources.  If they market to a large set of customers, then can’t meet those customers’ needs, they can ruin their reputation and end up losing most, if not all, of their customers.  Therefore, in a sense, the company can choose what industry and who it competes against for customers, but it must always keep the customers’ needs in mind.  The customer ultimately decides who the real competitors are for their dollars, especially when their dollars are limited.

There are a multitude of variables to consider when defining the competitive set and analyzing the chosen industry and competition.  I imagine there are some which have not even been considered, yet.  As Lehmann and Winer state, “The easiest way to define competition is to let someone else do it for you.”  They also discuss methods for determining competitors, which include managerial judgment and customer based measures using behavioral data and customer judgment. 

The generally accepted grouping of factors for industry analysis is aggregate category factors, category factors and environmental factors.  Aggregate category factors include category size and growth, stage in a life cycle, sales cycles and/or seasonality and profits. Category factors include the threat of new entrants, the bargaining power of buyers and/or suppliers, current category rivalry, pressure from substitutes and category capacity.  Environmental factors include technological, political, economic, regulatory, and social.

Sources of information for competitor analysis are usually described as primary or secondary sources, but there are other sources.  Primary sources can be expensive and time consuming and can be gathered from the sales force, customers, employees, suppliers, consultants or specialized firms, and investment bankers.  Secondary sources are more readily available and include internal sources, local newspapers, annual reports, 10K statements, patent or trademark filings, general business publications, news releases, promotional literature, trade press, consultants, employee communications, trade associations, government sources, and electronic data services.  Other sources include help wanted ads, trade shows, plant tours, reverse engineering, monitoring test markets and hiring key employees.  Some other sources which are considered ethically questionable include aerial reconnaissance, buying or stealing competitor’s trash, bribing printers, running phony want ads and snooping on airplanes.  Lehmann and Winer then list various analyses and assessments that can be performed.  Some of these will be performed during the next several weeks in our PharmaSim exercises.         

Another PharmaSim report that I am finding useful is the Performance Summary.  This report gives one-stop shopping of general information about the company’s current performance and the decisions made for that period.  One thing it does not provide is the number of people in PharmaSim’s world.  This week we learned how to extract that information and the number of people in Period 0 is 263.9 million.  This will be important for subsequent periods because the population is expected to change with time. 

We’ve been asked to read and comment on one classmate’s blog.  I’ve been trying to read all of my classmate’s blogs, but last week I didn’t get to all of them.  Being a fellow engineer, I obviously enjoy David Griffin’s posts using on subject Dilbert cartoons in most of his posts.  I also like the way David adds graphs and pictures to his posts.  This is something I still want to learn and will spend more time on in the next week or two.        

PharmaSim report blog post

I realized I didn't incorporate my PharmaSim report discussion in either of my other two posts this week and I couldn't get into any of PharmaSim reports tonight after multiple attempts.  However, I do have the student manual and, from my previous interactions with PharmaSim, the report that interests me the most is the Market Update report.  This report has three sections; news, messages and incidents.  The news section provides market information which might not show in the more specific reports.  The messages are specific to our company and the incidents section relates to information about special decisions.  I plan on using this report to serve as a guide when I don't notice any identifiable trends from the other reports.  This can also serve as a guide to direct specific changes based on what is happening.  I think it is important to have the overall view before diving into specifics, which can lead to myopic decisions.

Qualitative metrics and how they can work – an unusual example and one closer to home

As I said in a previous post, I was listening to “Decisive” on my way to work last week and thinking about a question that one of my classmates presented, but I don’t believe we discussed in class.  The question was about developing qualitative metrics.  The unusual example was in the audiobook and the one closer to home is, of course, one that we use at Vermont Yankee.

The unusual one actually seems like a wacked out antic from a diva rock star.  When David Lee Roth was with Van Halen, there was an unusual demand to have M&M’s backstage.  However, all the brown M&M’s had to be removed.  This was actually written into their contracts.  What they also had written into their contracts was that, if any brown M&M’s were found, the band could refuse to play and still get paid in full.  Sounds pretty crazy, right?  It was actually a very specific qualitative metric.

Van Halen had a very elaborate stage show which required a lot more specific safety and other measures to be followed, so their contracts were much larger than most other bands.  The M&M clause was inserted to ensure that the venue had read and understood everything in the contract.  If any brown M&M’s were found, David would freak out and demand a full quality check of every other detail in the contract.  If there were no brown M&M’s, David could safely assume that the venue had lived up to the contact and he could just perform.  Although they had the right to refuse to play with full pay, doing so would alienate their fans, so I don’t think they ever did.  However, David was accused of being a diva as a result of this unusual qualitative metric.

The one closer to home is for Design Engineering’s specific product, Engineering Changes, or EC’s.  During implementation of EC’s, there are sometimes changes required to the EC.  These are called ECN’s, or Engineering Change Notices.  While we do keep a metric on the number of ECN’s, we also code each ECN with a reason for change code.  If the change is required because of a parts shortage, implementation preference, or unforeseen interference in areas of the plant where we don’t have access to during normal operation, then the ECN doesn’t really affect our performance.  However, if the ECN is needed because a design error or mistake was made in the original EC, that does affect our performance.  This qualitative metric then feeds into another quantitative metric of percentage of design error ECN’s per ECN.       

More on the electricity market in New England - a short situational analysis for EWC

Last year was a tough year for the Entergy Wholesale Commodities (EWC), which consists of the Entergy’s northern plants. 

http://www.kjonline.com/news/Wholesale-electricity-prices-lowest-in-decade.html

Simple regression of the recent trend could lead to panic and, in fact, may already have, after listening to our new CEO’s video message outlining our new vision, mission, business purpose, values, and strategic imperatives.  Our vision is “We Power Life” and mission statement is “We exist to operate a world-class energy business that creates sustainable value for our four stakeholders: Owners, Customers, Employees and Communities.”  I think Drucker would roll over in his grave to see Owners listed before Customers and Dr. Levitt would correctly guess that our new CEO is our former CFO. My other criticism of our company’s direction is that we appear to be limiting ourselves to producing nuclear electrical power; at least in the EWC.  EWC did purchase a natural gas plant in Rhode Island either last or the year before.     

The previous article was written in January.  This past winter exposed what may be a weakness in natural gas’ dominance in providing electrical power in New England.  The attached is a short article which explains the limitations.  This was good news for Vermont Yankee, but could have been better.  Equipment problems kept us from operating at 100% of rated power.

http://www.hartfordbusiness.com/article/20130327/NEWS01/130329866/new-england-electricity-prices-near-10-year-high

In addition, historic trends have shown that natural gas prices can be cyclical.  Factors which can affect natural gas prices are shown in the U.S. Energy Information Administration’s website.  They also recognize that winter weather influences residential and commercial demand.   

http://www.eia.gov/energyexplained/index.cfm?page=natural_gas_factors_affecting_prices

However, I’m not sure anyone recognized how significant that demand affects the New England market (Mass Hub) compared to other regional ISO markets.  The chart in the link below shows this phenomenon for the past year. 

http://www.ferc.gov/market-oversight/mkt-electric/new-england/elec-ne-east-pr.pdf

If we are truly a world-class “energy” business (not just a nuclear energy business), with this knowledge we should be looking at (and taking advantage of) this more closely, and not just talking about the difficult decisions that were continuously reiterated in the CEO’s message.

And now for a short plug for nuclear power.

http://www.youtube.com/watch?feature=player_embedded&v=rW2uXnoBYhE#!