In contrast to Apple’s clear desire to shut competition down and “hold exclusive rights to produce any modern smartphone or tablet, claiming ownership of all multi-touch in mobile devices and all thin, rectangular minimalist mobile device designs”, sources in Samsung have suggested that Samsung  ”does not truly wish to restrict consumers selection, rather they hope that a potential sales ban would force Apple to drop its questionable lawsuits out of self-interest and let consumers decide which company’s products are victorious”

Personally I’m a fan of letting consumers decide rather than attempting to legislate forced consumption based on designs featured over 40 years ago in popular science fiction.

PHP Freelancer

My Music

PHP Freelancer

Essentially, the authors (below) are reminding us of the importance to focus less on ourselves, and more on the competition.  Or more specifically, why our customers focus on the competition.  They go further and present a number of simple formulas to estimate your businesses “wallet share” of your customers, or the proportion of their spending that is going to you or away from you to your competitors.  They suggest that where you are not number one in your niche, to ask why, and not get distracted with satisfaction measures that may only lead you to preach to the converted.

They make the example of a supermarket providing a nice ambiance that scores well on satisfaction surveys.  Focusing on this strength may further enhance customer satisfaction along this dimension, but may not address your competitive weaknesses if in fact, it is price of staples that is driving your customers toward your competition.

The authors also remind us of the importance focusing on our competitive environment, and addressing that, rather than focusing on our own strengths and weaknesses.

My personal experience supports this argument as I have seen all to many businesses fail over the years that took a personal passion or flair and turned that in to a business only to realise too late that it was not what the market was looking for.

I argue that before investing a single hard earned dollar toward any venture, it is of critical importance to understand the current market and competitive environment.  Belief in one’s self and one’s vision is inspiring, but will it draw customers away from your competition?

I wish to thank the Harvard Business Review and Timothy L. Keiningham, Lerzan Aksoy, Alexander Buoye, and Bruce Cooil for providing the inspiration for this article.

PHP Freelancer

Personally, while I am glad to see a little ‘pay back’ for what I am inclined to perceive as un-necessarily aggressive and broad sweeping behavior by Apple using some dubious “look and feel” type patents, I do wonder if all these this arms race is a waste of time and money.  With the Western world teetering in the edge of economic collapse, would these reserves be better deployed to innovation?  Not only would this benefit a lackluster global economy, but it would also enrich our lives.

All this posturing and counter-posturing seems to achieve is a stifling of innovation and a mad rush to patent everything under the sun however generic or ridiculous.  An example is the joining of two common English words such as “multi” and “touch” in to a patent which was, thankfully, overturned in a rare show of sanity (and reported again at ZDNet).

What are your thoughts?

PHP Freelancer

This is an all too common scenario and no matter how often this is repeated by government campaigns and financial planners, this advice sadly often goes unheard.

What are your thoughts?

Before you answer it is worth considering a few even more sobering facts about inflation:

People often forget inflation.  I.e. if you believe $50k / year would be a comfortable retirement figure today, that will rise to $100,000 years in around 20 years at 3.5% inflation.  20 years after that, which is a reasonably conservative life expectancy estimate post retirement, that figure will rise to $200,000 / year.  All to sustain what $50,000 / year today would provide.

Some rough back of the envelope estimates for what amounts of superannuation would be required to provide this yield are in the millions, quite easily approaching $3 million.  Just to support a comfortable, but by no means exorbitant lifestyle in retirement.

Thought provoking?

PHP Freelancer

I have argued for some time that this is the case and telcos risk becoming just another dumb pipe and as we know commoditisation spells the death of profits.  And low and behold, Telstra’s profitability has plummeted in recent times, admittedly as part of a deliberate strategy but one none-the-less bought about by these dreaded competitive forces.

And another note, notice Apple’s once prized prices dropping this year while they declared all out legal holocaust on their rivals? I wonder why?

Read what ZDNet have to say on the matter

http://www.zdnet.com.au/telcos-ignoring-tablet-commandments-339322319.htm

PHP Freelancer

Whilst I continue to harbour deep concerns about our fragile commodity dependent economy, I believe that Australia needs to become a republic for the following reasons.

Before I do, however, I acknowledge that Australia is blessed with a continuing human habitation stretching perhaps more than 50,000 years.  I regard our indigenous people as a treasure to be respected and protected for the benefit of all humanity.  Indigenous people respect their elders, and in turn I respect indigenous peoples as the oldest continuous culture on Earth.

1. Australian’s are grateful for the social and political heritage of it’s British parent nation and will remain forever close to it’s parent, however Australia long ago attained a level of maturity commensurate with independence.

2. A clear relationship with the British Monarchy and class system with Australian society not evident.

3. The concept of British class based society is antithetical to Australian meritocracy.

4. Australian economic, political, and social performance is sufficient to warrant independence.

5. The Australian convict heritage is an asset to be celebrated, as the fittest of a brutally repressed class of economic refugees went on to contribute to the Australian economy and society.  Many convicts found freedom in the open blue sky paradise they found here, and it is not unlikely that some were perhaps grateful to have been freed from the dreary economic servitude that was England for many at the time.  Australia should celebrate this heritage as something to be proud of.

6. Australia is an ethnically diverse society.  Australians are less concerned with preserving ethnic isolation and separation than many other nations, and widespread ethnic contributions to Australian society contributes to the strengthening and diversity of the Australian people.  The vibrant Australian ethnicity is a precious asset to be celebrated.  Migrants drive Australia from strength to strength and we are grateful for their contributions.

7. Diversity leads to innovation and adaptability.  Diversity leads to a thriving society energised with diverse viewpoints.  Australia’s diversity is our strength.  Our proud diversity strengthens our ethnic, intellectual, cultural and economic heritage.

8. Australia has demonstrated a consistently superior level of political and social stability.  Of a large number of constitutional referendums, only a very few crucial amendments have passed, most notable that granting suffrage to indigenous peoples (and I am sure would have included women had they not already been granted equality and suffrage from Australia’s incorporation).  By and large, Australians are satisfied with the political system and wish to preserve it.

9. Australia has received no support from any other nation in all of its history, strengthening its independence, and weakening its obligation to remain beholden to any other nation except for strategic military alliances for the purpose of self preservation.  Australia is a net contributor to the welfare of the human race and in turn has earned the right of independence and recognition for its contributions.  With gratitude to mother Earth and its bountiful dry wealth found here, Australia has never required any economic or other assistance from any other nation.

10.  It is time for Australia to shake off the last remaining shackles of it’s distant colonial past and embrace its history as its strength.  Australia will stand up on the world stage and be respected as an independent and thriving society that will determine its own destiny, independent of others, and in harmony with its international responsibilities.  Australia will finally march down the path of national pride, for which it has been deserving for well over a century.

I support that Australia should retain the right to determine who is granted the precious gift of Australian citizenship, and only those who appreciate the magnitude of this gift shall receive it.

Australia is a precious and delicate land, endowed with boundless natural wealth and fragile ecosystems hidden in the summer for a million years, and entrusted to us for care.

We are custodians of this nation and we will protect it for the benefit of all human kind.

We are One, we are Many, we are Few, we are Australian.

As passionately as I feel for the above, out of respect for Queen Elizabeth, for whom I hold the greatest respect for as an asset to the human race, I see the status quo remaining intact for Her lifetime.

PHP Freelancer

The World Trade Organisation and an increasingly loud chorus of commentators are now supporting my position that I have pushed for over a year now.  I have grown increasingly concerned with Australia’s reliance on commodity exports, and I am convinced that the single main reason Australia avoided the worst of the GFC was due to China’s insatiable appetite for our red and black dirt (iron ore and coal) which account for around half our entire national exports, perhaps more.

Australia is becoming an asset based economy – an economy based increasingly not on productive capacity but the value of assets such as residential property and other investments, but mostly residential property and general consumer debt which I strongly suspect accounts for most of Australia’s private (non government) debt.  In other words, our wealth is increasingly based on how wealthy we feel and how much value we place on assets, rather than on what we actually do.  The only significant non commodity export, education, is being wiped out by the rallying dollar that is driving us to a drunken splurge on overseas goods.

In response to my blog posts, I have received suggestions that I am falling victim to mercantalist economic theory, and that our long term trade deficit and reliance on exporting dirt, is nothing to be concerned about.

In fact, I argue the opposite.  I am passionately opposed to all forms of trade protection support minimisation of economic distortion and manipulation by governments.  What I am concerned about, is that we are growing drunk on false wealth, and if any market distortion is justified, it is toward business investment and away from non productive assets such as property.  I am not suggesting slowing property construction, I am suggesting trusting natural market forces to govern the property market and remove distortionary taxes such as stamp duties and negative gearing.

I support national competitiveness, not mercantalism which is an outdated nationalistic mode of thought.

The following is a brief collection of some of my writing over the last year on these topics, and I will continue my campaign to raise awareness of our need for economic competitiveness.

Australia’s Unsustainable Export Composition (May 2010)

Questioning Our Obsession with Property (May 2010)

Australia’s Reliance on Coal Exports (June 2010)

Conflicting Opinions on Real Estate (June 2010)

Government spending masking real economic risks (June 2010)

Property investment masking threats to business investment (June 2010)

The following excerpt from Wikipedia makes for chilling reading, as this sounds remarkably like the USA before their crash:

In an asset-based economy, manufacturing, as well as perhaps services, no longer provide the engine for growth. Rather the appreciation of assets leads to an increased net worth among individuals which, in the direct sense, can serve as collateral for borrowing, which in turn creates greater demand for goods and services. Proponents of the model often advocate reduction of tax rates in order to stimulate greater demand for assets, which in turn raises asset prices yielding even greater equity.

Critics of the asset-based economy contend that it is highly flawed because it depends on the continuation of low interest rates to stimulate the borrowing that will finance the purchase of assets at a rate sufficient to sustain the upward trend in asset prices. Thus, they reason, the model is highly vulnerable to the perhaps inevitable decreases in the real estate and financial markets.

PHP Freelancer

http://www.itnews.com.au/News/252196,nokia-stalls-painful-job-cut-talks-to-end-of-april.aspx

Posted from WordPress for Android

PHP Freelancer

Competition is heating up, your suppliers exerting upward pressure, your customers are exerting downward pressure, your products and strategies are being imitated.

Sooner or later no matter how successful your product based business is, you will hit a wall unless you are very lucky.

So how did Apple beat this game?  Lets look at the smartphone market.

Smartphones were hardly new before the iPhone, as were portable music players before the iPod.  It is arguable that Apple has not really released anything ‘new’ in the last decade or so, but they have taken technology that would have been a prime candidate for commoditisation, and revolutionised it.  Their success is nothing short of stunning, now accounting for more raw profitability in the smarthphone market, than any other manufacturer.  Nokia are practically dead in the water, and while Android is rising fast, these devices do not enjoy Apple’s profit margins and likely never will.

I bet you would like to run a business like that!

One trick is to consider where your business operates.  Let me show you.

Spheres of Operation

The five circles ‘Extended Enterprise’ concept is a useful model that can be used to illustrate how successful companies such as Apple preserve profit margins, while established and once leading companies such as Nokia succumb to falling margins and the never ending arms race to rebuild profitability – the dreaded profit trap below.

What’s the difference?

Boomer (2007) suggests that great companies that are successful in commoditised markets operate in all of the five circles described below.

The Inner Circles

Products, Services and Unique Processes

The inner circles focus on products and basic services sold on top of those products.   This is the traditional bread and butter of most companies, and where many sucumb to the seduction of their initial success, become trapped, and ultimately die.  Who remembers Novell?  Today I walked past a once prominent Novell building in my city (Canberra), and the building is up for lease.   Novell has been carved up and sold off.  It once commanded an unassailable lead in it’s market niche, until it’s suppliers marched right up the value chain and took over – in other words – they had their lunch cut for them.  Last week I heard another story about a company called Wang, that once had this city ‘stitched up’ – who knows them now?  Mainframes were once a golden cash cow – a veritable river of cash.  Sadly, it seems that inadequate investment was laid in to future strategies, and they are no longer with us.

Never become complacent – when times are good – do not rest!

For if you do rest, you get trapped, in what I refer to as the Vortex of Doom.

Boomer (2007) argues that companies that remain caught in the inner circles (what I refer to as the Vortex of Doom) fall into a never-ending trap of margin pressure, cost reductions and subsequent lack of ability to innovate as retained earnings suffer. These companies will either fail, or strive to become extremely efficient at producing and delivering standardised cheap products in a never ending fight with competitors.

Lets look at Woolworths, a company that trades with about as much excitement as government bonds, yet is a an organisation I watch very closely

Disclaimer – the author does not hold any shares in Woolworths.

Woolworths is a moderately diversified company (nothing like the strange case of Wesfarmers that seems to be in to, well, everything)

So how does it’s various divisions stack up?

In 2009, Woolworths reported the following profit margins:

The fuel division reported a drop in petrol sales directly due to lower petrol prices, and a ‘good result’ of 1.6% profit “reflecting the solid volume growth and increased non fuel sales through new and existing canopies” (Woolworths Limited 2009). In contrast, the hotels segment reported almost 20% profit, in a bad year. Supermarkets reported over 5% profit in the volume driven sector.

This example contrasts service oriented hotels, from volume driven fuel, where most profit is extracted from non fuel purchases.

In the fuel sector, as fuel prices drop, players must immediately drop their advertised price in response due to intense competitive pressure and a lack of difference in the fuel product from one operator to another. A player in the fuel business would not survive selling only fuel.

However, in the hotels operation, despite a financial crisis and very significant price pressures on hotels, a 20% profit margin was still attainable. This is due to the ability to differentiate on service and the problem solved, rather than just volume.

This illustrates how product centric versus services oriented business models can yield very different profit margins depending on their market environment, market maturity and the state of commoditisation of the product or service being sold.

In the absence of differentiation and value adding services it is not unreasonable to foresee a future where all product based businesses are subjected to similar pricing pressures. This will drive down margins to a point where investment capital is drained trapping the business in a cycle of an inability to innovate due to deteriorating profit, and an inability to drive up profit through lack of innovation capital.  Once caught in this cycle a business can not escape without significant external capital injections.

In the New Financial World Order where equity will take precedence over debt (remember the Global Financial Crisis), this means to raise money, you erode or even lose control of your business to new shareholders.

Don’t end up like the milk farmers under Woolworths – differentiate!!

Image copyright David Reilly – Australian Broadcasting Corporation

I raise these examples to illustrate how some of Woolworths business lines appear to be caught in the inner 3 circles of my aforementioned Vortex of Doom, where I can only assume that that Woolworths survives and thrives here by erecting barriers to entry based on price competition and supply chain control.  Interestingly though, I have noticed an aggressive push by Woolworths to get in to the marketing game – ever wonder what those barcodes on your fuel ‘saver’ shop dockets are for?  They link your every purchase to your ‘loyalty’ card and build a nice little earner for Woolworths based on monitoring your habits.  Remember how QANTAS once made more money from their marketing database (Frequent Flyer) than actually flying?  Well, it makes you wonder why Woolworths are so aggressive about their loyalty card scheme too.

Image from another supermarket chain – but the concept is the same – note the barcode that links your purchases to your fuel purchase – Communist Russia would have drooled over this level of sophisticated intelligence gathering!

In the other corner however, the Woolworths hotels operation could be argued to not be subjected to these forces to such a degree, although websites such as Wotif will undoubtedly have an impact.  Hotels traditionally have been based on brand and service distinction, not volume.

Boomer explains the risks of remaining in the inner circle (Products) in particular as “with time, almost any product can be re-engineered or cloned, and globalisation has increased the rate at which this is happening” and intellectual property “can normally protect a product for a limited time”.

Boomer proposes the second circle, services, as typically product adds on to differentiate from competitors, such as maintenance services or updates.  However, this is also subject to cost pressure and competition and ultimate commoditisation.   In the case of Woolworths, they have sought to develop online delivery models to provide services on top of grocery products.  This however is still subject to cost pressures.

The third circle, Unique Processes, is often developed and under-valued by companies and leaves with employees.  The challenge is to retain unique processes.  In the case of Woolworths, the supermarket and fuel operations successfully leverage unique processes to maintain business wide efficiency and market responsiveness.   Any new entrant to today’s supermarket and fuel markets would require immediate strengths in all of these three circles to succeed, or failure would soon result.   Aldi is a good example, as they entered the Australian market with mature processes.  This is why small ‘corner shops’ and local fruit grocers often cannot compete with supermarkets and instead exist in niche environments based on consumer experience or niche markets such as higher margin organic markets.

Outer Circles

The outer circles are where successful high margin companies operate, with Apple being a notable example.  These constitute the extended enterprise that is crucial to maintaining margins where products have become commoditised.

Community, the fourth circle is the domain of companies that operate within a community of networks and as a trusted advisor.

The fifth circle Global Environment refers to communities external to the normal spheres of operation or influence for the company in question.  These communities do not currently operate within the company’s spheres of operation and influence, however they may be attracted to the this sphere through various communication channels.  This seems like marketing, however it is a little more complex than that, and this touches an important point in this series.  It is marketingbut not selling, it is about building your empire of influence, because that builds your market, and that builds your sales.  People are smart, and they can easily identify the intent behind a communication, whether it is to sell, or to influence.  Many people are more receptive to well intended influence, than naked selling.

How this relates to Value

Any service will itself be subjected to commoditisation without sufficient execution of a strategy focussing on these circles, with a particular emphasis on client relationshipsand value to clients, with value being the primary source of resistance against commoditisation. The outer circles are important to build perceived value of services.  Remember, Value is not the product of hours worked, commodities transformed or value by virtue of scarcity, it is the subjective perception of benefits that each client perceives that a product or service can yield to them. It is client centric, not producer centric.

So Where Does Apple Fit In To All This?

Apple is a company that suffered from the effects of competition and commoditisation and came very close to bankruptcy in the early 1990s.

Today Apple is one of the few successful examples of companies in the extremely competitive and commoditised personal technology sector.

How did they do this?  The figures are where it gets really interesting.

Company Profit

In terms of margin on company operations, Apple enjoys EBIT profit margins of 40%, compared to Microsoft at 38% (who don’t even make products), Nokia at 4.9% and Dell at 4.1%(Forbes Magazine 2010).

Product (Gross) Profit

In terms of gross margin on products, on the iPad alone, Apple enjoys gross margins of up to 55%, with concerns raised when the gross profit margin falls to ‘only’ 40%(Forbes Magazine 2010), with up to 60% gross profit for the iPhone (Elmer-DeWitt 2010)

Conversely, Nokia and HTC fall to almost half of this figure at just over 30% gross product profit margin, if they’re lucky.

Apple successfully achieved the above margins by creating a thriving commoditisation resistant ecosystem based on “multiple revenue streams by leveraging common technology and intellectual property” (Halpern and Vasiliadis 2009).   Apple is one of only very few companies to have ever increased profitability in a rapidly commoditising market, without market dominance.  Apple did this by focussing on the ecosystem (community) and valuerather than the product. The productmerely become a platform to execute the sales and retention strategies that Apple is now famous for.  It could be argued that Apple is an example of a company that has successfully engaged all five circles outlined in the diagram above (Company Operations).

PHP Freelancer