Transaction Costs is why B2B marketing is such a challenge: Ronald Coase (1910-2013)

Ronald Coase passed away yesterday at the age of 102. He wrote a paper in 1937  called The Nature of the Firm, that has inspired many posts on this blog. While Coase received the Nobel Prize in 1991, his student Oliver Williamson received the Nobel Prize in 2009 as discussed in an earlier post.  Here is how Ronald Coase’s ideas explain the challenges that B2B marketers face every day:

  • Why does the firm exist- why not outsource everything? Firms are reluctant to outsource everything to contractors because of “transaction costs” in the market. For example, for mission critical software US organizations employ highly paid programmers in house for a variety of reasons including intellectual property, too difficult to explain even when an outsourced virtual programmer might cost one-tenth of an employee. Transaction costs for recruiting a reliable B2B supplier for high value procurement of goods or services involve a lot of work and risk. You need to put together a detailed RFP (Request for Proposal), invite bids,evaluate bids, negotiate prices,sign a contract perhaps for a year. Several things can go wrong during the first year including that the supplier does not perform as expected, the supplied product /service has glitches as it is integrated into the value chain of the buyer firm. If things do go well, a buyer-seller relationship is established and both the supplier and buyer firms start getting to know each other at multiple individual levels, spend time at work and also form personal friendships, understand each other’s processes and are able to navigate them and get things done.
  • So how does a new supplier get in? Unless the existing supplier is seriously problematic – it is extremely difficult for a new supplier to get in. An existing entrenched supplier, when alert, is able to navigate changing management and even mergers and acquisitions at the buyer organization. Because the efficient and dedicated supplier works just like a reliable employee and as a trusted partner. By this time existing suppliers involve very little “transaction cost,” for the buying organization which tends to renew contracts. If the new supplier puts in a lower price bid, the existing supplier might even get a chance to match. Just in case the new supplier is really low in price, as in overseas suppliers, and the item is a standard item the new supplier gets a chance to supply. Even here entrepreneurial existing suppliers do set up their own low cost overseas supply system.
  • Innovation the solution: Yes new suppliers can succeed when they offer something that really changes opportunities for the buying firm. This could mean a solution that significantly increases production output, greatly enhances quality or final customer uptake.

 In a recent blog post (at the age of 101!) at HBR Blog, Coase urges economists to move beyond price and be “reoriented to the study of man as he is and the economic system as it actually exists.”  It is because of this gap in Economics that fields like Marketing and Supply Chain developed. Luckily Behavioral Economics responds in some part to Ronald Coase’s call.

RIP Ronald Coase.

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Candor is the difference: Steve Balmer Microsoft stack-rank vs. Jack Welch GE Bell Curve

Source :Jack Welch GE’s 4P’s and 1 E- Curve StratoServe Blog

This post is from August 27, 2013 and is updated with reformatting on January 23, 2022.

Candor: the quality of being open, sincere, and honest

Source: Merriam Webster DICTIONARY

Microsoft employees and the market are celebrating the exit of Steve Balmer and hopefully the exit of the much hated employee “stack rank” system at Microsoft which must be at least partly to blame for Balmer and Microsoft’s troubles. Since the stack-rank Microsoft style of employee ranking is after all a bell-curve, like Jack Welch GE performance evaluation system pictured alongside, the question is: Why does a bell-shaped ranking of employee performance  seem to work at GE and not at  Microsoft?. Here are some thoughts:

  • GE and Welch advocate candor: Instead of seeing the performance appraisal as paper work or some kind of political play, Welch advocates frankness and candor. Here every employee is given feedback not just once a year but as often as possible. Welch writes(Pages 104 and 105, Winning 2005 Edition- with Suzy Welch) :
    • The performance review document should be not more than two pages. Jack Welch used to send hand written notes to direct reports covering only two things (a) what the person did well and (b) how he thought that the person could improve.
    • Should measure quantitative goals (how long did you take to develop that new product compared to the agreed time? )  and behaviors ( are your team members feeling burnt out or energized?).
    • Informal evaluations should be done by every manger for her/his team and communicated frequently. At least one formal face to face evaluation must be done a year and preferably two evaluations, where the employee is told clearly where she/he is performing in relation to team colleagues.
    • There must be a professional development component in evaluations to allow the individual to grow in her direction of choice. Must ask who will potentially replace the manager when she moves up to another role.

All these things happen in a flat organization where roles,responsibilities,reporting and deliverables are crystal clear and understood at the manager and team level. Incidentally, the appraisal system promotes innovation and team work.Now consider the Microsoft stack-rank, conducted in a multi-layered organization:

  • Lack of candor at Microsoft :As David Auerbach explains in detail at Slate.com, employees were graded in absentia. Microsoft and the ratings could be completely overturned as the managers at every level jockeyed to get their people better rated. Auerbach writes ….”for years Microsoft did not admit the existence of the stack rank to nonmanagers.”

As teachers from elementary school to Universities and graduate programs know, most students are willing to put up with a heavy work load and any hard grading, that the teacher comes up with. However, no student is willing to put up with grading ( again a bell curve)  where the grading process and criteria are not perceived to be clear, transparent and fair to all students in the class.

It is quite amazing that many large companies including Microsoft, seem so reluctant to tell each employee exactly how they are doing and how they can improve. By avoiding candor, not only is the bottom 10% devastated but the middle 70% does not want to take any risk and innovate.Microsoft’s lackluster innovation output points to exactly this situation.

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Best Buy matches online prices: invents new brick retail model?

Best Buy invents new retail model-StratoServeIt was just this weekend that a friend was happily recounting how a Best Buy store in Chicago matched the  price of an iPad on the Apple website that they found on their smart phone – in the store!. And today's news is all about how Best Buy is turning around under CEO Hubert Joly mentioned in a previous post. While most news reports are highlighting the cost savings by way of closing stores,reducing layers of management, allying with Samsung and Microsoft to operate their own boutiques  in Best Buy stores, it appears that Best Buy has re-invented the brick retail model.

Showrooming was really killing Best Buy, where customers would come to the store,touch and feel the product, learn about it and then search online to buy wherever it was the cheapest.Local retailers have been wanting  Internet sales tax on online sales to combat "showrooming."

Best Buy has done something ridiculously simple and brilliant : match the price for 19 online retailers and also match lower prices for 15 days after the sale.Here is why the Best Buy strategy points to a re-invention of the Brick retail model:

  • Value of a customer in the store: The value of a customer who actually enters your brick store is gigantic. For unlike the 2 second bounce from an online store, there is no way that you can leave a Best Buy in under 5 minutes or 300 seconds even if you did not speak to a sales rep. Now consider the great sales support and expertise of the sales people with the assurance that you will not pay more than the online price.
  • Customer Lifetime Value: If you walked into a Best Buy and the store matched the price on your smart phone – would you buy? It is likely that you'd buy a case for the iPad as well like my friend did. And next time you search on Amazon, you'll think about checking out Best Buy because the risk of higher prices is simply taken away.
  • Empowered store staff: The ability to match online prices is a huge empowering move for the store staff. Motivation and morale  can really zoom when floor sales people know that they can match online prices just as customers search prices on their smart phones in the store.
  • Store as fulfillment center: Best Buy is trying out 50 pilot stores as fulfillment centers according to ZD Net. While there may be concerns about efficiencies in such small operations, online Best Buy customers will have a reason to visit the brick store… and that comes with the opportunity to check out other offerings. 

If the quarterly profit of Best Buy is an indicator, price matching is working and might be the way to go for every business that has a bricks presence. Contact StratoServe.

If only airlines had not charged for baggage: Anti-trust makes a comeback with US Airways lawsuit

Tonight some top US airline officials must be wondering : "If only we had not charged for baggage." This as anti-trust makes a comeback with the US DOJ and six state and DC lawsuit against the US Airways and American Airlines merger. If there is one thing that annoyed the public it was the angst of paying for checked luggage or deal with the aggravation of going through the daunting TSA inspection for overstuffed cabin baggage.

Before the collapse of communism in 1989  US anti-trust law enforcement was so vigorous that competing Detroit auto executives who worked for Ford and GM did not play golf together. If they did, then there would be car price fixing allegations and anti-trust action according to Lee Iaccoca, reminiscing about his days in Ford Motors. Without communism, neither the public nor the Federal Government had been really looking at the potentially anti-competitive actions of big organizations. But the recession changed all that and suddenly the $25 for the first bag, $35 for the second bag  etc. seemed like a lot and also pretty unfair. Consider that there are several start-ups trying to offer luggage carrying services just because the public is so peeved with the hassle and cost of carrying baggage on airplanes.

The DOJ Complaint makes interesting reading. Check out the point 4 of the complaint that quotes US Airways President:

“Consolidation has also . . .
allowed the industry to do things like ancillary revenues[e.g., checked bag and ticket
change fees] . . . . That is a structural permanent change to the
industry and one that’s
impossible to overstate the benefit from it.”

As the DOJ lawsuit plays out , it seems unlikely that the US Air and American Airlines merger will materialize. It would be hard to prove that the merged entity will be altruistic when it comes to looking out for consumers.

Given that there is overwhelming research evidence that most alliances fail unless carefully managed , the resurgence of anti-trust action puts new challenges in the management of B2B alliances and mergers. Contact  StratoServe.

Washington Post website has huge traffic : great prospects to reinvent digitial

The purchase of the Washington Post by Jeff Bezos of Amazon for $250 million is stunning news. Since Alexa.com , an Amazon  service, ranks the global traffic at washingtonpost.com  at an impressive global rank of 405,  Bezos  seems to have made  a great move.With huge global traffic, the Washington post website has great prospects to reinvent digital news and associated advertising revenue.

As Raju Narisetti, former managing editor of the Washington Post explains in the video,the print edition is printed in just one location and distributed in only seven counties in the Washington DC area with a circulation  in the mid 400.000's. According to different estimates,  current daily web visitors at washingtonpost.com exceeds one million with over three million page views  daily. Given that Jeff Bezos has been able to make Amazon and the online retail model
work, brings hope to the news industry. While the newsroom will not be
affected, Jeff Bezos should be able to "unchain the the digital
potential" of the newspaper from the legacy print operation according to
Narisetti.

Carl Bernstein of Watergate fame,  speaking at the Piers Morgan show on CNN tonight feels that Jeff Bezos should be able to invent a new business model for the Washington Post and the US news paper industry. A new business model must generate cash so that the "best obtainable version of the truth" is pursued by professional journalists.Without resources, newspapers are not able to cover the stories they'd like to cover , said Bernstein. This is true across smaller regional newspapers as well, just as a leading PR manager told this blog: "unless the story is really exciting, they (newspapers) can't cover it because there are no reporters." Without reporters and resources, news organizations are not able to work a nascent story in depth, because it does not have a "shocking" headline to start with. In fact, no resources means that too many stories are just not pursued that might eventually result in pathbreaking, world-changing, work.

Since much of the digital content produced and posted on the web depends on professional news reports online, its critical that Jeff Bezos and Amazon is able to re-invent the Washington Post and newspaper model  for the digital age. There will be no shortage of news talent given that Communication is among the most popular majors in US colleges.Contact StratoServe.

Why no consumer outrage? 40% UK consumers confuse Google Ads with organic search results

The Telegraph of  July  11, 2013 is reporting that  research by Bunnyfoot suggests that 81 % of UK Internet users clicked on Google Ads instead of the organic results although the Google AdWords Ads were clearly identified. Over half of those i.e. 41% did not know which results were Ads and which were organic results based on SEO efforts of the website. So why no consumer outrage? But first the difference between Ads and organic results.

Flowers keyword Ads and Organic results-StratoServeIf you searched for “flowers” – the keyword, your search history and advertisers Google Adwords campaigns will trigger  “Ads related to flowers”that appear below the  Google  Search Bar in the screenshot. The organic results  appear after.

Why are consumers not outraged and abandon Google? Also why are businesses so caught up with SEO when people do not care to differentiate between ads and organic results? Here are some thoughts  why:

  1. Top ranked Ads are relevant to keyword and search intent:  If your website has nothing to do with “flowers” just paying more for keywords like “flowers” will not help with your paid AdWords campaign or your SEO.  Google wants first to make its searchers happy and they’ll show the Ads and when they see that people click  , go to your website and then leave (bounce) in disgust,  your keyword starts getting a poor quality score. The Ads are not even shown unless you increase your keyword price to ridiculous levels. And when you see that after paying $10 for a click your visitor bounces, you will need to review your strategy and your Ad price will keep going up as the Google algorithm tries to avoid your irrelevant Ad just so that the searcher is happy . Even $10 a click from you that results in unhappy searchers does not help Google.  In the old world media the newspaper and TV station would tell you if  your Ad was not relevant to its audience but if you insisted and paid … they’d keep quiet. After all,  consumers could fast forward recorded TV or simply flip the newspaper page and not think poorly about the TV station for putting out a boring,irrelevant Ad. Not so on the Internet, when someone searches Google,Yahoo or Bing they really want the best results that speak to the underlying search intent.
  2. SEO-Ad landing page-keywords are related: SEO (Search Engine Optimization) , Ad landing page after clicking on an ad and the keyword that triggered the paid Ad or showed your page on top of the organic results are related concepts. If you have a clear and useful response to the search keyword/s you are ahead in SEO. So if you have lots of flower pictures that are properly tagged, you have text  content that are the “last word” on that type of flower you are ahead in organic results. Just try out the detailed content of  organic results for “flowers”  or any other item in your own location.

The bottom line is that so long as consumers get great search results a large majority do not seem to notice the difference between paid ads and the organic SEO results- they are not outraged. Because the quality of top ranked Ads,landing pages with respect to searched keywords are well aligned – and quite comparable to organic search results. For organizations, great products and services must be supported by relevant web content that makes life easier for searchers and search engines for top paid Ad ranking and SEO ranking.About StratoServe Digital Marketing Services.

USPS door delivery is a corporate strength- why stop door delivery?

Door delivery for the US Postal Service (USPS) is a corporate strength and  USPS is actually considering stopping door-delivery mail and move to a cluster delivery starting with 35 million addresses. The savings are projected to be $ 4 billion which is more than the $3.5 billion they could have saved with stopping Saturday deliveries that appeared in an earlier post. It seems that the Saturday stop service is on hold, thankfully.

USPS  can do a better job of telling the world how great it really is. The majority of its $65 billion revenue came from commercial post including the much maligned “Junk Mail” as mentioned in the pictorial. USPS door delivery is at the core of a $1 Trillion Direct Mail industry and 8 million jobs.Here are some more surprising facts right from the USPS website :

  • The US Post delivers to 152 million homes,businesses and PO Box numbers in the US.
  • It carries 40% of the world’s total mail. And its not because the 350 million Americans write more letters, but because the Direct Mail industry is very highly developed as illustrated.
  • With 65B$ revenue in 2012 the USPS would rank 42nd in the Fortune list if it were a private company, in the Global Fortune 500 it is ranked 135.

There is no other institution in America that physically reaches so many homes and businesses.  Ask any US marketer trying to enter global markets and they’ll tell you how hard it is to get a deep distribution going. Winding down an excellent ground distribution team does not make sense.

Although this blog is a champion of digitization, we do believe that there will always be a place for printed and mailed material. In any case, anything bought online will need to be delivered cheaply. Direct (Junk) mail will always reach  people who you cannot reach through any other media.Door delivery is a key strength of the US Post and not merely a cost center. About StratoServe.

Coca Cola “social sharing” can is a brilliant idea

Coca Cola results today pulled down the stock market as overall global sales volumes dipped. Just to cheer up all those Coca Cola loyalists out there, check out the Coca Cola social sharing can video which is truly a brilliant idea.

The "sharing can" idea has come from Coca Cola ad agency Ogilvy and Mather Asia Pacific in Singapore, where the word "can" is a part of popular Singaporean speech, signifying a blend of saying yes, agreement,support and general optimism. Here is why the "sharing can" is a brilliant idea:

  • Social in the real world: The move from physical products to the digital social world is like a one way stampede for most brands. This is probably one of those rare instances that takes a very physical Coke can and converts it into a social sharing item in the real world.
  • No changes in Supply Chain and distribution : Given that the sharing can is nothing but a 330 ml  can split to probably 165 ml cans of the same size the logistical brilliance is amazing. The canning lines should work with minor modifications and the vending machines do not require changes. Also the shrink wrapping lines for can trays for small retail distribution does not require engineering modifications.A quick global roll-out should be possible.
  • Serving size goes down: Bringing down the serving size to half a can has huge benefits in different global markets. In Asia, affordability is a big reason that pack sizes have been smaller and in the developed markets like the US,there is huge concern with soda and obesity and smaller serving sizes help.
  • Consumption outside the home: In  emerging markets Coca Cola is an outside the home consumption item and Asian  cultures are very conscious about reciprocating. So if your friend "shares" a Coke can you sort of feel obligated to reciprocate the next time. Much more than if you got a paper cup from the retailer to split a 330 ml can.Overall unit sales goes up!

Recycling the additional  cans is a concern in the comments on the viral video that has already got 1.58 million views. But if you think about it the extra aluminium may be just the lids of the second can which probably can be made thinner since the volume is halved. All in all a brilliant idea from Coca Cola. Contact StratoServe.

B2B Buying Center and your website landing page content

Content is king and queen-StratoServeDigital marketers would like to imagine that every member of their prospect's B2B Buying Center would be somehow arriving at their website and either (a) Call or fill up an information request form or better still (b) Place an order if there is an e-commerce option. It turns out that the landing page is a huge deterrent in the actions you want your web visitors to take. But first, let's understand the mechanisms by which your web visitor arrives at your website and why content is both King and Queen ! Here is how visitors arrive:

  1. Through referral: This referral could be from another website,social media  or your own offline advertising, maybe the website URL appears in your packaging or mail brochures. Naturally, this "direct" web traffic is powerful because they have already thought about what they need and have at least a preliminary sense that your organization might be able to meet those needs. This segment of customers are fairly committed to checking you out provided your website is easy to navigate and you provide content that is helpful to this segment.  Simple instructions related to your product or service, copies of manuals, a how-to video are examples of content. Such useful  may not be sensitive in a competitive sense, but can make life easier for the "direct" web visitor and can build your brand and franchise.
  2. Search or SEO traffic:The search traffic are those who search Google,Yahoo or Bing and visit maybe the first page results of such searches. Every business would like to be on the first page of Google- for their product or services but many are not. If you wonder why – it goes back to useful content. As explained in an earlier post, Google is primarily interested in having happy searchers. So if your content precisely answers the search "intent" of the searcher, you come out on top. Once you do – you have less time to convince the visitor that that they should not leave. Analyzing which pages are receiving visitors through "Search", using Google Analytics,  can help identify those pages that need strengthening by way of content.
  3. PPC and Banner advertising: PPC (Pay-per-click) like Google AdWords or banner advertising is a fairly inexpensive way to drive qualified prospects to your website. People search online and although you are not on the first page of Google-they see your ad on the first page and click to arrive at your website. Making sure that they land on content that's relevant to their search "intent" is very important. For example ,you might pay $20 for a click and have people arrive at the wrong landing page – that causes them to leave. On the other hand if the content on your landing page is relevant to their search , your visitors are likely to stay and you will notice that your price per click goes down.

To summarize, content is indeed king and queen when it comes to reaching B2B Buying Center members on the web. Contact StratoServe.

Why marketing is overwhelmed by IT and big data

Sales Funnel and Big Data -StratoServeCompared to other functional areas like supply chain,finance or HR , marketing seems most overwhelmed by IT and big data. David Edelman of McKinsey  suggests how marketing and IT might co-ordinate and this blog had exhorted Ad agencies, marketing and IT to start embracing this huge data opportunity in an earlier post on the digital marketing logjam. However, the question remains as to why marketing seems to be getting most overwhelmed with big data compared to other organizational  functions. So here are some thoughts:

  • The sales funnel:A whole bunch of solutions keep getting thrown at the IT folks in organizations that should help with the front of the sales funnel. These include lead generation systems from mailing lists to the website and social media. IT folks dutifully inform the Marketing colleagues about the barrage of solutions. Meanwhile,Marketing has to cope with trying to prioritize various campaigns and also motivate sales colleagues to try out some of their suggestions. The sales folks are an entirely different group: where depending on compensation and rewards schemes, they might not even enter data at all- for the very real fear of losing out on commissions. Now IT might be suggesting a Sales Force Integrated solution that looks neat and actually integrates well with the rest of the ERP. However,it might have no relationship with the number of people in the marketing department who are fighting fires and the sales folks who are chasing targets with no mental band width to really get to understand the capabilities of the  latest software they are landed with.Forget about sophisticated data analytics, marketers don't seem to be checking out the possibilities of free Google Analytics data on the sales funnel as web analytics guru Avinash Kaushik suggests in his recent post. 
  • The CRM load is on marketing: Everyone is responsible for customers the CEO will tell her organization- but the workload of getting the data and doing something with it- falls squarely on marketing. Before social media and the internet  CRM only meant keeping track of the the kind of pizza your customer had ordered last time – if you were a pizza chain. Now you have to keep track of general social media like Facebook, Twitter and also anything that might specially  pertain to your industry like Yelp and Groupon/Living Social.

Now consider other functional area like Supply Chain which is central to this blog, and you can say the same thing about Finance and HR. Here is how:

  • Supply Chain: No one expects the supply chain manager to be checking out what suppliers are writing on their Facebook pages about the organization.
  • HR and Finance : HR might be interested in your social media presence before hiring you, but  no one really expects HR  to check out employee Facebook pages either. And Finance folks are similarly not held accountable for "feelings" of bankers and need to deal with more concrete type of metrics like credit ratings and interest rates.

In other words, marketing is the function that is most deluged with data and needs to urgently seek more organizational resources to be able to capture opportunity from this huge amount of prospect and customer data. Contact StratoServe.