Think Past Product when You Think about Disruptive Innovation

aldi-copycat-packaging-print-print

Author: Dermott Dowling @Creatovate (2016).

Now more than ever we need to think past new products and improved product performance when we think of truly ‘#disruptive innovation’ that upsets incumbents in industries and creates sustainable competitive advantage for the disruptive innovators.

How many types of innovation can you think of?  Have a go…write them down below as many as you can…can you see 10 or more distinct types of innovation examples?

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Often, when we think about innovation all we think about is new products or improving existing product performance.  This is very important, but one of the increasing challenges we face in a hyper-competitive fast-pace modern business world is the ability of low-cost fast-to-market competitors copying your innovation and reducing your margin on new products and improved product performance as quickly as you can bring these new products to market.

Take this comment from a former Australian PepsiCo® R&D manager – is it symptomatic of your industry as well?

We knew Smith’s Popped Chips was going to be a success as Popped Chips was doing very well in the US and our early prototypes tested very well with consumers and retailers.  What we didn’t expect was 3 other competitor brands and a private label retail brand launching at exactly the same time as we did!” PepsiCo® R&D & Innovation Manager, AIFST Innovation Reloaded Conference, Sydney, 2014.

The following extracts from articles and sources follow to help you think of multiple types of innovation so the next time you come up with a great idea for your business you might also think of some additional types of innovation to build on that great idea and ask your peers and customers and networks inside and outside your business for their ideas to help build a truly ‘disruptive innovation’.

Whatever your company hopes to do in terms of innovation, we suggest that the answer involves innovating within the following 10 distinct innovation areas, classified by the Doblin model:

  1. profit model,
  2. company network,
  3. company structure,
  4. company process,
  5. product,
  6. product performance,
  7. customer service,
  8. customer channel,
  9. innovative branding and
  10. customer engagement.

Let’s take a look at each of the 10 distinct types of innovation and an example of a company using that type of innovation as a key distinct advantage in their industry.  Note that you need to aim for at least 3 and ideally 5 or more different types of innovation to create a truly ‘disruptive innovation’ that can be sustained for a decent period of time in a highly competitive industry (Keeley, 2015).

Profit Model

How you make money | Innovative profit models find fresh ways to convert your offerings and other sources of value into cash. Great ones reflect a deep understanding of what customers and users actually cherish and where new revenue or pricing opportunities might lie. Innovative profit models often challenge an industry’s tired old assumptions about what to offer, what to charge or how to collect revenues. This is a big part of their power: in most industries the dominant profit model often goes unquestioned for decades. (Doblin, Deloitte Development LLC.)

Examples of companies that successfully altered profit models in established industries to include:

  • Gillette – the ‘razor and blades’ profit model has been celebrated for years and adapted to countless other industries from ‘printers & cartridges’ to ‘coffee makers & capsules’
  • Dell – reengineered the go-to-market delivery system when it first launched selling direct causing large share loss for competitors with traditional reseller business models.

Network

How you connect with others to create value | In today’s hyper-commercial world, no company can or should do everything alone. Network innovations provide a way for firms to take advantage of other companies’ processes, technologies, offerings, channels and brands — pretty much any and every component of a business. These innovations mean a firm can capitalize on its own strengths while harnessing the capabilities and assets of others. Network innovations also help executives to share risk in developing new offers and ventures. These collaborations can be brief or enduring, and they can be formed between close allies or even staunch competitors. (Doblin, Deloitte Development LLC.)

Examples of companies that have successfully created value through network include:

  • Target (US) – work with product designers and world-renowned fashion designers to create items only available at Target, other retailers to create Pop-Up stores for limited times only.
  • P&G – Connect + Develop – P&G connects with external innovators and companies who submit innovations to P&G’s Connect + Develop. Connect + Develop is P&G’s program for encouraging open innovation, also known as crowdsourcing.

Structure

How you organize and align your talent and assets | Structure innovations are focused on organizing company assets — hard, human or intangible — in unique ways that create value. They can include everything from superior talent management systems to ingenious configurations of heavy capital equipment. An enterprise’s fixed costs and corporate functions can also be improved through Structure innovations, including departments such as Human Resources, R&D and IT. (Doblin, Deloitte Development LLC.)

Some companies that have created value through network innovation include:

  • Whole Foods Market – is a ‘high trust organization’ where teams are everything from hiring which requires 2/3 team approval to P&L management, transparency is everything and decentralized innovations are amplified quickly instead of achingly slowly (if at all) (Keeley, et al, 2013, p. 28).
  • L. Gore – has used a ‘flat lattice’ organisation model where teams are deliberately kept small and every employee becomes a shareholder after 1 year of service.

Process

How you use signature or superior methods to do your work | Process innovations involve the activities and operations that produce an enterprise’s primary offerings. Innovating here requires a dramatic change from “business as usual” that enables the company to use unique capabilities, function efficiently, adapt quickly and build market-leading margins. Process innovations often form the core competency of an enterprise, and may include patented or proprietary approaches that yield advantages for years or even decades. Ideally, they are the “special sauce” you use that competitors simply can’t replicate. (Doblin, Deloitte Development LLC.)

Examples of companies that have created value through process innovation include:

  • Zara – using fast fashion trends and supply chain optimisation Zara can move from the sketchpad or fashion runways of this world to the shop floor in just 3 weeks, the clothes will hang from Barcelona to Berlin to Beirut (Helft, 2002).
  • Toyota – ‘lean’ production system reduced waste and excess, driving astonishing efficiency and continual product and process improvement across the business.
  • IKEA – ‘flat-pack’ furniture with no variation by region or country with the same hardware and instructions regardless of where bought or sold streamline internal production processes.

 

Product Performance

How you develop distinguishing features and functionality | Product Performance innovations address the value, features and quality of a company’s offering. This type of innovation involves both entirely new products as well as updates and line extensions that add substantial value. Too often, people mistake Product Performance for the sum of innovation. It’s certainly important, but it’s always worth remembering that it is only one of the Ten Types of Innovation, and it’s often the easiest for competitors to copy. Think about any product or feature war you’ve witnessed — whether torque and toughness in trucks, toothbrushes that are easier to hold and use, even with baby strollers. Too quickly, it all devolves into an expensive mad dash to parity. Product Performance innovations that deliver long-term competitive advantage are the exception rather than the rule. (Doblin, Deloitte Development LLC.)

Examples of companies that have used Product Performance innovation include:

  • Dyson – from vacuum cleaners to hand-dryers to fans Dyson continuously innovates on ways to deconstruct what is not working well in existing industries and then rebuild products on platforms that offer customers superior product performance and charge premium prices for the privilege of use of these products.
  • Mars – with My M&Ms people are able to add their own messages, logos, or images to specific colour M&M candies – personalising product and opening up new uses. Ferrero has done similarly innovative things to reinvent Nutella and put it back on the table at home or out and about in cafes and shopping malls.

Product System

How you create complementary products and services | Product System innovations are rooted in how individual products and services connect or bundle together to create a robust and scalable system. This is fostered through interoperability, modularity, integration, and other ways of creating valuable connections between otherwise distinct and disparate offerings. Product System innovations help you build ecosystems that captivate and delight customers and defend against competitors. (Doblin, Deloitte Development LLC.)

Companies that create product system innovations include:

  • Microsoft – Office – initially the products that went into MS Office like Word, PowerPoint and Excel were sold as individual products, now bundled together with Outlook and more they create an integrated system that is used as a productivity suite globally.
  • Scion by Toyota® – Scion allows consumers to build their own car choosing from a selection of models and colours, paint and tyre trim modifications, radio, and more.

Service

How you support and amplify the value of your offerings | Service innovations ensure and enhance the utility, performance and apparent value of an offering. They make a product easier to try, use and enjoy; they reveal features and functionality customers might otherwise overlook; and they fix problems and smooth rough patches in the customer journey. Done well, they elevate even bland and average products into compelling experiences that customers come back for again and again. (Doblin, Deloitte Development LLC.)

Some companies doing the obvious great are:

  • Zappos – who would of thought buying a pair of shoes could be so much fun and so rewarding for the founders – Zappos sold to Amazon for US$1.1billion in 2009. ‘Deliver ‘WOW’ through service’ is the first of Zappos 10 core values.
  • Sysco – one of the largest food distributors in North America with $43b in revenues, to elevate service in a relatively commoditized industry, Sysco created ‘Business Reviews’, a FREE consulting service helping clients to design menus or plan back-of-the-house logistics.

Channel

How you deliver your offerings to customers and users | Channel innovations encompass all the ways that you connect your company’s offerings with your customers and users. While e-commerce has emerged as a dominant force in recent years, traditional channels such as physical stores are still important — particularly when it comes to creating immersive experiences. Skilled innovators in this type often find multiple but complementary ways to bring their products and services to customers. Their goal is to ensure that users can buy what they want, when and how they want it, with minimal friction and cost and maximum delight. (Doblin, Deloitte Development LLC.)

An example of a company who connected their offer to customers in new and innovative way:

  • Xiameter® from Dow Corning is a web-based sales channel first launched in 2002 that assists customers with a new way to buy silicone. Cost conscious buyers without the need for technical support or advice were able to select from 1,000s of product options, choose pricing and terms that suit them and lock in price and volume commitments in a simple but effective no frills business model that ran alongside the mother company.
  • Nespresso® has retail stores and coffee shops worldwide, operates concessions inside department stores, online club for ordering capsules and machines, retail resellers for machines, partnerships with hotels like Ritz-Carlton & Hyatt, Airports and a Chefs and Sommelier program for harmonizing coffee with food and wine. Multiple channels are used to engage customers and consumers.

Brand

How you represent your offerings and business | Brand innovations help to ensure that customers and users recognize, remember and prefer your offerings to those of competitors or substitutes. Great ones distil “a promise” that attracts buyers and conveys a distinct identity. They are typically the result of carefully crafted strategies that are implemented across many touch points between your company and your customers, including communications, advertising, service interactions, channel environments, and employee and business partner conduct. Brand innovations can transform commodities into prized products, and confer meaning, intent and value to your offerings and your enterprise. (Doblin, Deloitte Development LLC.)

Companies that have used ‘brand innovation’ successfully to date include:

  • Virgin – starting as a mail order record business and now involved in planes, trains, rockets, telecoms, wealth and health management and more! Virgin is the elastic band of ‘brand’!
  • Aldi – have innovated using brand ‘exclusive’ or ‘destination’ branding that cuts out the middleman and goes direct to suppliers to find unique food products, beverages, and houseware.

Customer Engagement

How you foster compelling interactions | Customer Engagement innovations are all about understanding the deep-seated aspirations of customers and users, and using those insights to develop meaningful connections between them and your company. Great Customer Engagement innovations provide broad avenues for exploration, and help people find ways to make parts of their lives more memorable, fulfilling, delightful — even magical. (Doblin, Deloitte Development LLC.)

Companies using customer engagement innovation to excite and delight customers include:

  • Blizzard Entertainment – World of Warcraft has more than 11million subscribers worldwide who are actively encouraged to engage with each other using a multitude of technology and techniques and ‘team up’ to achieve higher rewards.
  • Apple – shows off its new hardware and software first to its developers and affiliates at its World Wide Developers Conference (WWDC) where tickets are distributed in a lottery system with prices of $1,599 a ticket for WWDC2015.

Winning innovations typically use multiple types of innovation – if you can get 3 or more that’s great and if you can get 5 or more in your next big bet that’s even better!  You are much more likely to create a sustainable innovation that endures when you innovate across multiple types of innovation.

An example of a truly transformational business and industry innovation that transcend many types of innovation follows:

Nespresso

  1. Profit Model – machines were first available widely across multiple channels and retailers at low prices but pods were only available direct from the club.
  2. Network – machine manufacturers were engaged to create truly great coffee and growers were engaged to source elite top quality coffee and retailers were engaged to get the machines out there far and wide.
  3. Structure – Nespresso did not start out as an idea from the inside the mothership Nestle but rather the opposite it was ‘incubated’ across the road from head office in a distinct and different building with a dedicated team set about to disrupt their existing instant coffee business
  4. Process – Nespresso® licensed a unique technology from the Battelle Institute that made coffee in an instant using an entirely new process (Silberzahneng, 2010).
  5. Product Performance – we all can remember the first time we had a good Nespresso and could not believe how good the taste was for a homemade coffee.
  6. Product System – build into the Nespresso club was the unique pods system with multiple types of coffee to suit different palates and desires.
  7. Service – with Nespresso® club and direct engagement of end consumers through the stores, direct mail, social media, etc. Nespresso® took delivery of a staple to a whole new level.
  8. Channel – Machines – sold everywhere Pods – direct from Nespresso®.
  9. Brand – Nespresso did not choose George Clooney as their ambassador – the 2 million friends on Facebook decided he was the ultimate spokesman for their most adored brand.
  10. Customer Engagement – from online to telephone to direct mail to Nespresso shops and stalls in busy hubs like airports, hotels, etc

Systematically determining what needs to be changed inside and outside your company to create innovation that transcends multiple types of innovation typically involves the following steps according to Keeley (2015).

Understand the beliefs, practices and truths. Start by just listing the unchallenged assumptions about rules, tools, techniques and ingrained habits about the industry.  Now think about ways to challenge these orthodoxies.

Starbucks sought to challenge its industry orthodoxies, the first one it faced was the assumption coffee was a commodity for which Americans wouldn’t pay premium prices.

What are your inclinations or predispositions towards doing business in a particular way today?

Imagine life without those assumptions. Consider a customer group that would not behave the way your customers typically behave.  Imagine a business that specifically does the opposite to what you are doing right now?  What would be some of the likely and unlikely outcomes?

Now think about different ways to rebuild the platform.

Now that assumptions are stated, think of all the ways to challenge them, from a new profit model to different customer-engagement tactics. Most companies stop at trying to do product innovation that marginally alters the offering. The big returns come from multiple approaches, (Keeley, 2015).

Think about Starbucks again. The company flipped its industry’s profit model orthodoxy by creating a premium experience. People may not pay more for coffee, but they certainly do pay more for a different atmosphere in which to drink it.

Start with one of the 10 types of innovation you find most interesting, start thinking of different ways you could innovate under that configuration on your business / category / customer today.

Ask questions. ‘how might we?….’ ‘what if?….’ ‘what’s frustrating you right now? ‘what’s frustrating your customers right now?’ ‘If you had a magic wand, what would you change?….’ Answers to the right questions can lead to an idea, an overview sketch of a new strategy, something to share and build upon.

Once you pick the areas you want to tinker with, how will you explain this new way of doing things to your mother? Where will you concentrate first, and then next? What does the new idea add that is fresh and valuable? What should be prototyped to help customers, users, insiders and partners?

Dermott Dowling is Managing Director @Creatovate, Innovation & International Business consultancy. Creatovate help businesses create, innovate and growth through sustainable innovation processes and spreading their wings outside their home base.

References:

James Janega, (2014), April 2 Larry Keeley, Doblin and the 10 categories of innovation  http://bluesky.chicagotribune.com/originals/chi-larry-keeley-doblin-innovation-strategy-bsi-20140401,0,0.story retrieved 12/04/2016.

Larry Keely, Ryan Pikkel, Brian Quinn, Helen Waters (2013) Ten Types of Innovation: The Discipline of Building Breakthroughs, John Wiley & Sons, New Jersey.

Business Today, (2011), Dec 11 Cover Story: A Happy Marriage http://www.businesstoday.in/magazine/cover-story/innovation-toshiba-ups/story/20185.html Business Today online viewed on 12/04/2016.

Charles Fischman (1996) April 30, Whole Foods is all Teams http://www.fastcompany.com/26671/whole-foods-all-teams viewed on 13/04/2016

W.L. Gore http://www.gore.com/en_xx/aboutus/culture/ viewed on 13/04/2016

Helft, Miguel (2002) May, Fast Fashion Forward Business 2.0

Philippe Silberzahneng (2010) March 18, https://philippesilberzahneng.wordpress.com/2010/03/18/nespresso-complexity-innovation-process/ viewed on 15/04/2016


Can BIG FoodCo Think! Act & Adapt like a Startup?

Fast business

Concept of small business running fast!

Is it just us or does it seem today that the small food companies are moving faster than ever before and the big companies are moving more slowly when it comes to innovation in our local food industry?  Perhaps you and I are not alone in our thinking? The literature and newswires in the US have been awash with stories of “the war on big food” (Kowitt, 2015) with big bold claims like “big food is under attack from the rise of startup granola!”

Changes are not only taking place abroad in the US supermarket aisles where shoppers are cruising the periphery of the store seeking out new and trendy, authentic and unique chilled, fresh, natural and healthier food options.  The same trends are evident in Australia and plain as daylight for all to see on the high street where the Fast Food Evolution has seen global super brands like McDonalds, KFC, Subway, Pizza Hut and Burger King scrambling to reinvent themselves against the rising tide of ‘fast, casual dining chains’ like Grill’d, Nando’s and Mad Mex (Brown & Han, 2015).  Let’s not even start a conversation about the global food truck trend that could be today’s incumbent fast food operators tomorrow’s ‘disruptor’.

VIDEO: Can big food and beverage think like a startup?

Big food companies will need to rethink their business models if they want to innovate like startups, according to Dermott Dowling, managing director of innovation and international business consultancy Creatovate.

Speaking recently at the Food & Drink Business Disruptive Innovation LIVE forum, he explained why this is growing in importance, and how some of the world’s largest food and beverage companies are responding.

According to Dowling, the top 25 food businesses in the US lost at least $4bn in market share last year as consumers skipped the core food aisles in favour of the fresh segments, and increasingly sought out innovative products from smaller companies.

In this video clip, Dowling describes how some of the world’s largest companies, including Nestle and Coca-Cola, are responding to the movement, and he shares some examples of local companies that are having a go at digital disruption in the food space. See the full clip here.

Why is this happening all of a sudden?  Is it another off-shoot of the start-up tech trend finally finding its way into the food industry? Like most complex issues of business today it is a symptom of a number of factors and key influences colliding to create the perfect storm for “disruptive innovators” in the food industry.  Let us start with the trends underlying today’s shopping decisions consumers are making today with their wallets – after all is it not the shopper who ultimately controls the marketplace nowadays?

Campbells Soup

  1. Shoppers and consumers are looking for ‘authenticity’ and ‘realness’ more than ever before. Their trust in global multinationals is at an all-time low and most major food companies operating in Australia are global multinationals http://www.slideshare.net/dowlmott/going-global-in-food-grocery-retailing-business . With a smart phone in every shoppers pocket the truth is out there on Facebook, Instagram and Twitter and consumers trust their friends and followers and influencers’ more than super brands blasting the old mass media airwaves. Hirschberg (2015), founder of Stoneyfield Organic Farms sums it up when he says “There’s enormous doubt and scepticism about whether large companies can deliver naturality and authenticity.”  As a result consumers are more connected with small and medium size family owned or startup food businesses and brands.  They feel a closer affinity with the founders than the boardrooms and polished CEO communicators of “Big FoodCo”.  They connect through their social media accounts, love the storytelling of startup founders and the authenticity of the founder(s) stories up all night packing boxes in their garage or cooking new prototypes on their stovetop before racing to the local farmer’s market or grocery shop on their way to fame and fortune.

Back to Natural

2. Mintel (2015) Trends report highlights front, bold and centre Trend #3 Less processed foods, more natural as consumers continue to be concerned with eating natural and ‘less processed’ food products.

aldi-vs-big-brands

3. Consumers and shoppers are more affluent than ever before and yet more sporadic in their shopping and buying behaviour. They fill their trolleys with private label staples and shop at Aldi and CostCo to save on essentials and then simultaneously splash out on their indulgent luxury food treats. They love sharing their discoveries at their local high end speciality independent grocery store or Asian specialty shops with friends and taking something a little unique and special over to their neighbours or friends place for dinner to start a ‘foodie’ conversation.  Again here the shopper leans towards the ‘smaller, more real, and authentic’ food brands.

There are also a few key influences in the background from broader business theory on innovation that are impacting the ability of the smaller and medium size companies to grow faster than ever before and hindering the larger elephants from dancing the same jig when it comes to innovation.

Customer Development Models

Customer Development Model (Blank & Dorf, 2012)

  1. Small and medium size companies by their very nature are ‘searching for growth’ ‘new business models’ and ‘repeatable and scalable business models’ and most importantly they are actively seeking out ‘new customers’. As they seek out new growth pathways for their businesses they discover unmet customer needs and wants, gaps in the market and they scurry back to the lab or pilot plant or co-manufacturer and whip something up quickly in the ever desperate search for sales and a repeatable scalable business model. With those real sales comes learned experience what’s working, what’s not, what needs fixing and so the cycle continues at pace – Build, Measure, Learn or as we like to say @creatovate “earn & learn”.  Less time in research more time spent doing, making, talking to customers and consumers with real prototypes, failing, learning, earning, and eventually success! $:-)
Business Model Iteration

Business Model Iteration (Blank & Dorf, 2012)

2. Being smaller by nature you are in fact at a strategic advantage when it comes to innovation. Less $/people/time makes you smarter in your choices, you look for fast hacks forward, cut corners and try to make more from less without the bureaucracy of Stages and Gates and internal meeting after internal meeting and research after research spending valuable $/people/time but earning nothing, spending a lot and often learning very little about real customer and consumer problems in the marketplace.

innovation police

3. Small and medium size companies lack middle management aka ‘ the innovation police’ who are stringently guided and controlled by budgets, plans, processes, performance reviews and the need for ‘incremental’ over ‘transformational’ growth and innovation. The middle manager’s role is to shepherd the workforce on the annually set KPIs, Manage Budgets and stop people seeking out opportunities off the strategic plan no matter how promising those opportunities might look or feel to the front line.

Resource Dependence

Resource Dependency Model

 

4. Stakeholder dependency theory (Hillman, et al 2009) suggests any organisation is interdependent on its ecosystem and the biggest interdependencies on any organisation are its ‘customers’ and its ‘shareholders’. Think about who the dominant customers are of a small or medium size food enterprise in Australia vs. a large one? Think about what investors are seeking in small and medium size business? Fast growth? Exits? Vs. Large stable food businesses? Safe and consistent returns?

think-act-adapt-innovate-like-a-startup-3-638

Technology and capital are influencers in the background and technology enables the small and medium companies to better connect with their consumers, levels the playing field in terms of ability to interact professionally with customers (retailers) and trade partners.  Capital seeks growth opportunities and will look for the opportunity to enter and exit as quickly as possible where the opportunity for disruption exists.  Are we likely to see the small and medium growth food companies grow faster into the future – most definitely Yes! Will the large incumbents sit back and watch the ants eat their cake?  That remains to be seen and we are in for an exciting food future ahead.

Dermott Dowling is Managing Director @Creatovate, Innovation & International Business consultancy. Creatovate help businesses create, innovate and growth through sustainable innovation processes and spreading their wings outside their home base.

References:

Blank, Steve & Dorf, Bob (2012) The Startup Owner’s Manual K&S Ranch Inc, California, US. First Edition.

Dowling, D (2015) Think! Act! Adapt & Innovate $ like a Startup! http://www.linkedin.com/pulse/think-act-adapt-innovate-like-startup-dermott-dowling?trk=prof-post LinkedIn, Aug 19, retrieved on 05-Nov-15.

Dowling, D (2015) Putting “I” first in Insight to Innovation http://www.linkedin.com/pulse/putting-i-first-insight-innovation-dermott-dowling?trk=prof-post LinkedIn, Feb 25, Retrieved on 5-Nov-15.

Dowling, D (2012) Globalisation of Food & Beverages http://www.slideshare.net/dowlmott/going-global-in-food-grocery-retailing-business Slideshare, Retrieved on 5-Nov-15

IRI Worldwide (2012) The Pacesetters Report http://www.iriworldwide.com/iri/media/iri-clients/4-17-13T_T%20April%202013%20NPP%20vFinal.pdf  viewed on 5-Nov-15.

Kowitt, Ben (2015) The War on Big Food http://fortune.com/2015/05/21/the-war-on-big-food/ Fortune Online 21 May, retrieved on 5 Nov. 15

Brown, R & Han, E (2015) Fast Food Evolution – Global Super brands are having to reinvent themselves to keep up The Sydney Morning Herald online 11 January   http://www.smh.com.au/nsw/fast-food-evolution–global-superbrands-are-having-to-reinvent-themselves-to-keep-up-20150106-12j7mc.html  retrieved on 05-Nov-15

Australian Food News (2015) Top Global Food and Drink Trends for 2015 http://ausfoodnews.com.au/2015/10/21/top-global-food-and-drink-trends-for-2016.html October 21, retrieved on 05-Nov-15.

Amy J. Hillman, Michael C. Withers and Brian J. Collins R (2009) Resource Dependency Theory: A Review Journal of Management 2009 35: 1404 originally published online 23 September 2009 https://www.unifr.ch/intman/assets/files/Teaching/Network_2014/Additional%20Readings/Hillman-Withers-Collins%202009%20-%20Resource%20Dependence%20Theory.pdf retrieved on 5-nov-15

Sue Mitchell (2015) Here’s Why Consumers are Choosing Aldi over Woolworths and Coles http://www.smh.com.au/business/heres-why-consumers-are-choosing-aldi-over-woolworths-and-coles-20150714-gicgix.html July 15 retrieved on 04-Jan-16.


Think, Act, Adapt and Innovate like a Startup!

think-act-adapt-innovate-like-a-startup-3-638

Large companies’ size and culture make disruptive innovation extremely difficult (Blank, 2010). Despite this challenge many large food businesses today recognise the need to be disruptive innovators and test new business models in the digital world.

bat-in-face

 

Why change? Because the bat is coming…

Change is coming, it’s here now and there are many ways businesses can react to change.  They can duck and hide and hope the flying baseball bat misses them and takes out the competition.  They can look the other way and collect the full force of change to the face like the poor gentleman below at the Red Sox game or they can be brave anticipate the changes that are coming and reach out for the bat like the guy just out of shot.  Often its the startup that is just out of shot or sight of the incumbents.  Backed by passionate founders and astute investors they anticipate change, react to it positively and use innovative new business models and new technologies to literally land the baseball bat in the face of the incumbents and harvest the glory of fast growth in a new economy.

In this keynote address given at Food&Drink Business Live! Disruptive Innovation, Creatovate – Managing Director, Dermott Dowling takes the audience through some practical learning steps and lessons from local digitally focused food innovators leading the way in this exciting new land of opportunity.

Think!

Thinking is the first step in any business innovation. Alas, it’s hard in isolation. You sit and stare and scribble on the blank sheet of paper in front of you.  However, people as social beings need each other and our collective mind power to come up with breakthrough ideas to innovate. More often than not we scan the environment for what’s out there already and working? Alternatively, we look for problems – what’s bugging our current customers or potential new customers? We then map the value chain from inputs to outputs looking for – what can we take out? Where can we fit in? How we can create value for customers and ultimately our own business?

Think

 

Act!

Next step in the process of building an exciting startup or disruptive innovation is design & rapid prototyping our ideas into Minimal Viable Prototypes or MVPs. Rough and ready is fine here, what’s most important is we start testing & experimenting our hypotheses on existing and new customers ASAP.   Gone are the days we spend weeks and months in kitchens, pilot plants and focus groups with consumers.  The market demands we move at ‘tech speed’ now!  I can not wait as your customer or your boss for months while you toil and spend $$$ without any real customer or consumer feedback!  By that I mean people reaching into their pockets and paying for the food and beverage products, not just talking about how cool it is or whether they might like to buy it when it hits the shelf in 12-18 months time!  As we act, we simultaneously align as a team adapt to the changing customer feedback. We also measure & monitor early results for signs of customer acceptance and readiness to scale our new business model.

Business Model Canvas

Startups are not small versions of large companies. They need different tools for thinking and acting. Its important you create a common language in your company if you venture down the path of creating intrapreneurial startups inside your large organisation, so people are talking on the same page and not hearing Blah! Blah! Blah! when we mention new terms like Business Models. For this reason at Creatovate, we recommend a common approach to our clients hypotheses generation like the Business Model Canvas (Osterwalder, 2012).  This is an excellent thinking tool to get the team ‘on the same page’ in terms of understanding of terms, hypothesising ideas and creating a new Business Model for real market testing.

BMC Hypotheses

Adapt!

Once you have thought and aligned on your initial business model hypotheses “get out of the building” and ask potential users, purchasers, and partners for feedback on all elements of the new business model, including product features, pricing, distribution channels, and affordable customer acquisition strategies. If we accept that startups are engaged in the search for a new business model, we recognize that radical shifts in a startup’s business model are the norm, rather than the exception. For this reason rather than fire the executive team when the normal approaches to go-to-market are not working, we pivot and change tack (Blank, 2013).  Pivots are a completely normal part of the startup process as you first discover customers who will pay an acceptable price for your product and validate your minimal viable prototypes fit their needs and are worthy of scaling.  Venture Capital and astute investors understand pivots as an essential part of building a startup.  The question is does established incumbent business leaders understand they need to treat startups in their own company very differently to the normal go to market new product development that may go through an existing business process like Stage-Gate to existing customers using existing norms.  If you are going to create a breakthrough innovation and business model in the digital economy its highly likely you will be doing things very differently.  As such leaders need to be aware of a different set of behaviours and skills to encourage the startup founders and intrapreneurs to boldly push on and not be afraid to pivot as they learn and lean left and right to find the right business model and validate their multiple hypotheses.

Business Model Iteration

Innovate $

Private equity and venture capital are investing in disruptive startups in the food industry right around the world.  The top 25 U.S. food and beverage companies have lost an equivalent of $18 billion in market share since 2009. Some analysts are describing ‘big businesses in food’ nowadays as being like melting icebergs, every year they become a little less relevant to customers and consumers (Kowitt, 2015).

VC Funding for Food & Beverage Startups

Major packaged-food companies lost $4 billion in market share last year alone, much of it to smaller, more health-conscious companies.  Venture capital firms are taking notice. Over the past five years, they have invested nearly $570 million in food companies. Famous Australian VC/PE funded food businesses include Rafferty’s Garden (Anacacia Capital’s sale of baby food maker Rafferty’s Garden to PZ Cussons for over A$80m).  Notable trade sales recently of established food businesses that have been reinvented include Pacific Equity Partners’ sale of Peters Ice Cream to UK-based ice cream maker R&R (AVCAL Handbook, 2014).

Large multinational food companies are not taking the changes in their markets lying down.  Nestle founded Inventages in 2002 and has invested EUR$150m in 38 companies across a breadth of categories from consumer health sciences to CRM to supply chain to innovative packaging solutions.  Tate & Lyle established Tate & Lyle Ventures in 2006 initially with a £25M VC fund & currently has another active £30 million fund investing £1-2 million per tranche in each investment.  Coca-Cola Founders program was established in 2011 and already has 19 co-founders, across 10 countries, with 9 startups partnering with Coca Cola to provide much needed scalability to the startups and their co-founders.

Design to Grow

Large businesses need startups and vice versa. Is there some magic in the middle and what can incumbents do to learn to be lean and act and adapt and innovate like a startup! Established businesses are in danger of not being able to adapt quickly enough, while nimble start-ups fail due to their inability to scale. Tomorrow’s business winners will be the ones who know how to combine the two (David Butler, VP Innovation & Entrepreneurship, Coca-Cola).

Learn & Lean

Australia is seeing signs of life now in the land of digital disruption with several new startups from both existing food companies and new entrants.  Some digital disruption innovation leaders interviewed for this key note include Dish’d    Kogan Pantry and Marley Spoon  MDs & Founders.  Each business plays to its own unique space in this exciting new field of play, but there are several key common learning shared by their leaders for any business thinking about entering the exciting and highly disruptive digital innovation landscape in food.

dishdkogan pantryMarley Spoon AU

Challenges

Challenges of starting a new food business in the online world today in Australia include:

Sub-culture of a startup within a large business can be hard to swallow for staff and senior leaders alike in established traditional food businesses.  Patience is essential alongside persistence with payback horizons very long and initial sales may fall well short of what can be expected from taking NPD to market through traditional go to market retail channels.  Consumers want whole of shop/meal solutions rather than parts of the pantry stocked from several different eTailers, and they are looking for suppliers to make their lives easier, not harder when it comes to shopping online and/or cooking meals at home.  Inventory / demand / supply chain management is even more challenging in the online with demand for hot specials either going viral and off the charts or product being unappealing and not moving at all.  Never underestimate the response from incumbents who will fight back extremely hard with loss leading specials and pressure exerted on their existing suppliers to restrict supply of goods and inputs to the new entrants.  Go in eyes wide open – the online world requires the same effort if not more than a business in the bricks and mortar world of food and beverage manufacture, supply, distribution and marketing.

Why do it?

We get asked this question a lot from our clients!   Our first response, is to remember that whatever innovation or change you make it must create economic value to you and your business.  Change for changes sake is not innovation, it might be creative but its not innovation until it delivers economic return to your business.  This may not happen for significant time when testing new business models or startup strategy but we also ask our clients what are the possible consequences of doing nothing?  Going backwards? Getting hit in the face by a baseball bat?  You may be chasing additional demand and/or contributing back to your online community if you are already an established online entity.  You might be looking to engage and interact with existing and new consumers if you currently exist in the traditional bricks and mortal retail led food industry.  You may be seeking to grow into adjacent verticals. Whatever your strategic reasons, for action they need to be strong enough to survive the bumps in the road ahead as there will be many!

Advantages!

Some of the key advantages from entering the online world of food and beverage eTailing are the longer term potential scale advantage that can come quickly if you are successful.  Likewise the plethora of instantaneous data analytics like Google Analytics that can help you pivot and test and adapt much more quickly than through traditional customer/retailer feedback networks.   Recognise that Australian eCommerce market maturity could be as much as 5 to 10 years behind the US and our Australian eCommerce supply chain maturity has some considerable road to run especially in the area of chilled B2C food or meals solutions delivery to consumers doorsteps.  These are significant challenges and can not be underestimated but the early entrants will learn faster and be further down the field as new enabling technologies like drone deliveries or driverless vehicles become very real solutions to today’s very high cost of service to the Australian consumers doorstep.

Omni-Channel

Omni-channel could be a red herring – beware!  The economics are vastly different between off-line and online retail in Australia, however for incumbent off-line retailers who have online eTail offers the commercial incentives are quite simply not there to lower their online prices for their eTail offers such that it would cannibalise their healthy real world margins in bricks n mortar retail.  Let us not forget the significant sunk costs the incumbents have in ‘land banked’ property investments, the enormous number of staff on their books in their shops who would cost $$$ to layoff if their online services took off!

Food Supply to Disruptors

Food manufacturers, wholesalers and suppliers are aware of the current industry trends and have a strong willingness to supply new food focused digital startups.  That being said beware the earlier caution about incumbent retailers pressure to stop supply to new entrants.

Price Leadership

Price leadership is of paramount importance online and that could be in part due to the fact that Australian consumers have been trained to expect deals online.  Brands matter online and deep cut discounts bring traffic!

eCommerce US 2013.jpeg

 

Groceries look like the last to take-off in the land of digital commerce.  Online suits small, expensive, commodity driven categories hence why it has disrupted so intensely in travel, music and electrical goods.  Wastage is an important driver in eCommerce in food. Consumers care about their household (average 20%) and supermarket waste (average 35%). This can be a compelling emotive and commercial value proposition for digital disruptors.  Consumers also expect their food in the same condition they find it in store when they get home and see it at their doorstep.

Clearly, we have a long way to go in terms of digital disruption and disruptive innovation in the food industry in Australia and what is around the corner is the million dollar question for startups and incumbents alike.  When an intelligent member of the audience from Nestle Australia asked “what’s the next big thing in terms of disruptive innovation in the food industry in Australia?” to the panel of experts on the stage she got 6 very different answers ranging from predictions of drone and driverless vehicle meals and drinks delivery to consumers demanding a direct interaction with their favourite food producers not only in the social media landscape but in terms of direct purchase and order-to-delivery-to-doorstep.

One thing is certain, the businesses that can have the foresight to anticipate change and react positively to it will be the ones who avoid the baseball bat to the face and will seize the opportunity our new tomorrow brings to us all.  The multi-million dollar business question is which of the incumbents or venture backed startups has both a) the foresight and b) the resilience and bravery to not only see the bat coming but to calmly stand up, reach out and catch it!  When everyone breathes the collective sigh of relief and the startup sits back down in the stands, they will have banked the profits on the table and will be the new incumbent. Go Gators!

MITCH-DAVIE-BAT-Catch

References & Bibliography:

http://businessmodelalchemist.com/tools

AVCAL (2014) Australian Private Equity & Venture Capital Association Ltd

Blank, Steve (2010) Crisis Management by Firing Executives – There’s A Better Way Nov, 18. http://steveblank.com/category/customer-development-manifesto/page/2/

Blank, Steve (2013) Why the Lean Start-Up Changes Everything, May, Harvard Business Review

Danielle Gould (2014) Food & Ag Investment Sources Explode in 2013  http://www.foodtechconnect.com/2014/01/02/food-ag-investment-sources-explode-2013/ viewed on 11/8/2015

Kowitt, B (2015) Special Report: The War on Big Food Fortune May 21.

Montgomery, M. (2015) How The Tools Of Venture Capital Are Revolutionizing Food July 14 Forbes

Osterwalder, A. Pigneur, Y. Bernarda, G. Smith, A. (2014) Value Proposition Design Wiley.

Osterwalder, A (2013) A Better Way to Think about Your Business Model

Phillips, E. (2015) Food ‘Accelerators’ and the $10 Bag of Pasta The Wall Street Journal Jan 6.

Kolodny, L (2014) Will Investors Still Back Food Startups As Competition Heats Up?

Wall Street Journal July 25.

http://coca-colafounders.com/

http://www.coca-colacompany.com/innovation/

http://www.iamdigital.com.au/2015/02/coles-woolies-vs-kogan-pantry.html


Why do elephants find it hard to dance?

dancing elephant

It’s not just the tech sector that is startup crazy – technology is a key enabler of disruptive innovation in every industry, and food and beverage is no exception.

Startups are the talk of the town among both large and small companies, from Silicon Valley to Sydney, and in agriculture, manufacturing and retail and every sector in between.

Many executives scratch their head as more nimble private and venture capital backed businesses nibble away at the edges of their empires.

Their disruptive offerings are slowly but surely taking away existing customers or offering better value goods and services to their customer base.

Moreover, it seems as though the speed of innovation and new products has accelerated beyond what is possible in some companies and the failure rates are getting worse not better for new product development.

So how can traditional companies protect their core business against this endless wave of disruptive innovation whilst simultaneously executing the business plan for this quarter and financial year?

There are a number of strategies, structures and frameworks that companies can use to upskill their people, become an ambidextrous organisation, build an innovative culture, and create their own disruptive innovation.

Creatovate specialises in the critical thinking frameworks that startups use to rewrite business models, innovate beyond product and win with in the market.

At the upcoming Disruptive Innovation Industry Forum in August, I will share some of these, delivered in a way that can be used by traditional companies to unleash the intrapreneurs who are already working inside their businesses.

Dermott Dowling is managing director of innovation business consultancy @Creatovate.

Published on 24 Jun 2015 at http://www.foodanddrinkbusiness.com.au/news/why-do-elephants-find-it-hard-to-dance


Putting “I” first in Insight to Innovation

lightbulbs

Welcome to the first in a series of posts as we travel the journey from insight to innovation.  Our plan here is to share some ‘insights’ ironically behind what differentiates the businesses that succeed in finding an insight, generating compelling new product or business ideas and concepts from their insights and taking them through a systematic process to innovation in the market place.

Before we begin we need to start with a simple definition of what an Insight is and Why? it is so important to uncovering unmet consumer or customer needs to create new ideas for products and/or services for your business.  Edwards (2013) points out Insight is a term commonly bandied around in marketing circles and often misused and misunderstood.  Edwards’ definition is:

“Consumer insight: is a revelatory breakthrough in your understanding of people’s lives that directs you to new ways in which to serve your customers better.”

The “revelatory breakthrough” bit really bites. Do not expect “revelations” on a daily basis.  How do you know when you’ve got one? You will feel both surprised and find it obvious at the same time. Insights make you exclaim “Of course!” The revelation makes sense because it fits with what you already understand about human nature; yet there is something about it that is utterly fresh, to which you had been blinded by your, category-based, “curse of knowledge” (Edwards, 2013).

Insights are often discovered through your own painful experience(s) as a consumer or through deep discovery research like ethnography, Pampers nappies is a good example of an insight discovery from research.  Previously everyone in the nappies category was talking about ‘leak-free’ performance during activity and all the innovation and category and brand communications centred on this attribute.  However, following ethnographic research following consumers closely Pampers discovered that what counted for most in a home with a baby was sleep! Everyone craved it – and wetness was often the reason they didn’t get it.  Hence the “Aha!” revelatory breakthrough discovery and a shift in focus from ‘leak-free’ to ‘golden sleep’ and Pampers innovated with extra ‘dry layers’ for bedtime.

pampers baby dry

Entrepreneurs and small businesses often lack the funds companies like P&G has to do extensive and expensive ethnographic consumer studies.  However, there are countless examples of entrepreneurs own “Aha!” discoveries often bought on by their own ‘pain points’ and real life experience(s) that what they are buying or using in the home is simply not satisfactory and spurns a strong desire to create and innovate – what I call the Insight of “I”!  For example, Rafferty’s Garden baby foods were born out of a firsthand consumer insight and discovery of the founder Adrian Pike, an unexpected full time Dad – looking after two young children and a terminally ill wife.  While trying to feed his 6 month old niece on an extended family holiday with supermarket bought baby food she hated it and when he tasted it he understood why?  Pike was using organic and fresh ingredients in his own kitchen in a bid to improve his family’s health. Years earlier he had made all of his son’s food from scratch, so he knew a thing or two about what babies liked.

“Within that four-year period of looking after my late wife, I learned a lot about nutrition,” Pike says. “I thought, we are doing this upside down. We should be giving children good nutritional food from birth, not start when they are older and get ill.” (Lindhe, 2011).

Adrian Pike

In what today has become common parlance and the mantra of ‘lean Startup’ methodology Pike did what every resource scarce and persistent driven entrepreneur or small business owner does and rapidly prototyped his own very first batches of Rafferty’s Garden organic baby food with his own children and niece.  Before checking in with consumers on his products he already knew pack formats were woefully inadequate for busy modern parents ‘on the go’ to kinder, activities and parks.  Glass jars were inconvenient on the go so Pike assembled a prototype for how he thought the food should be packaged using a foil soup packet from his pantry and a tube of toothpaste. “It was very rough … I cut it to size myself but I thought it could work,” says Pike (Lindhe, 2011).

raffertys garden

An unexpected benefit of the packaging is that babies can suck the food directly from the pouches, saving parents time and mess when they are travelling.  Almost unknowingly or with deep first hand ‘insight’ and experience Pike had stumbled across a deep consumer insight and unmet need.  Trends toward healthy eating and whole foods were globally evident, products in the baby category clearly lacked credibility with modern parents in this space.  Coupled to this fundamental product insight was the need for more flexible convenient pouch formats to heat and eat on the go, in the car, in the pram, remember both parents are often working now so a traditional cook and eat at home experience with baby is a luxury in many households.

From an insight or “Of course!’ or “Aha!” discovery of what consumers really need in a category or market space comes a great opportunity platform to create ideas for new products and services to meet those unmet needs or to recreate your existing product or service offer.  You are digging in rich gold laid territory and the likelihood of finding some gems that people will pay more $ to buy are exponentially increased compared to coming up with product ideas on a hunch or a gut instinct.  Large companies invest spend a lot of $ and time digging for insights.  Personally, I wonder if the incumbents in the baby food category –already had the insights that modern parents were looking for healthier organic baby food options in convenient to carry packages.  Were they asking the wrong questions? Not listening to their consumer and customer feedback lines or heavily invested in existing glass jar manufacturing plant?  In any event a Startup caught them off guard taking a whopping 40% market share of the ‘wet’ baby food and eventually getting snapped up for A$70m by PZ Cussons in 2013 (Bailey, 2013).

Insights are valuable both to existing businesses in their existing categories and markets and to new entrants.  I’s are important in Innovation and starting with the first one – an Insight is a great place to start a value creation journey to innovation pay dirt.

Interested to find out how to find insights in your industry or new markets, please feel free to reach out to us, share your own story or case study and have a no obligation conversation.

Dermott Dowling is Managing Director @Creatovate, Innovation & International Business consultancy. Creatovate help businesses innovate with certainty from insight to innovation in the marketplace using proven methods and partners. Contact Dermott if your business needs help digging for insights and starting the insight to innovation journey.

References:

Helen Edwards (2013) The true meaning of ‘customer insight’ – and why marketers should treat it with care July, 29, Marketing Magazine, http://www.marketingmagazine.co.uk/article/1193164/helen-edwards-true-meaning-customer-insight—why-marketers-treat-care viewed on 18/2/2015.

Jane Lindhe (2011) Baby Basics, April 28, BRW, http://www.brw.com.au/p/sections/features/baby_basics_tAA85mjCPUDxw8MSe8hEaM retrieved on 15/1/2015.

Michael Bailey (2013) Rafferty’s Garden founder cleans up thanks to Cussons, BRW, 8 July updated 11 July, http://www.brw.com.au/p/entrepreneurs/rafferty_garden_founder_cleans_up_F5j2hJX3P7IbTYzD40nnlK viewed on 26/2/15.


When to enter new markets?

First and foremost we stood back and used our head as well as our heart to determine Where to go? 1st, 2nd, 3rd, etc.  Secondly, we looked at each market on our Market Opportunity Index© and worked through the appropriate market entry model: Export, Contractual or Investment?  Last, but not least we need to time phase our market entry over the coming horizons of growth so that we can competently and capably execute on our international business strategy.

One of the most enduring and misunderstood growth strategies used in business today is the McKinsey ‘Three Horizons of Growth’.  Having worked in large corporations for well over a decade and consulted to both large and small businesses for several years now I often hear comments from busy executives in corporates and business owners alike “we will do core (Horizon 1) activities this year, then get to international markets (Horizon 2) next year and then start creating new products for those markets (Horizon 3) in 3 years’ time”.  The reality is you need to be working on all 3 horizons of your business growth simultaneously to build a sustainable business growth platform for your business.  Of course you cannot spend equal $/people/time on all 3 horizons but you need to be clear in your choices, communicate them widely across the business and allocate some of your precious scarce resources to all 3 horizons to realise the growth that comes from effort exerted in the ‘now’ that will payback ‘years’ into the future.

McKinsey Model: Three Horizons of Growth (Coley, 2009)

McKinsey 3 horizons of growth

Creatovate has been privileged to work with clients who clearly get the need to plan the “When to enter?” in their international business strategy and work simultaneously on all 3 Horizons of Growth – defending and extending their current home base(s), building momentum by entering new international markets and allocating some of their scarce resources (the most scarce being their time) to creating options for future new market entry which may also entail new market entry models.

Let me share an example.  One of our clients knew they needed to grow fast in their existing ‘hub’ or core home market(s).  They did not want to distract unnecessarily their executive team in their home market(s) with international business opportunity in the immediate term.  They engaged Creatovate as consulting partners and together we set a clear choice based strategy for international growth that had a clear structure with hub or home markets to focus 100% on their patch whilst simultaneously supporting the international business development unit (a dedicated small team).  The leader(s) in the International Business Development unit worked with Creatovate to identify, rank and prioritise new markets for entry and systematically we phased those markets for entry over 3 time horizons, knowing some would be easier to enter than others for example using perfect partners and easier modes of entry like export.  However, our client did not stop there allocating some precious resource: $/people/time and strategic foresight to simultaneously explore and create future options for business growth in difficult but very large new markets that would require more complex entry models like contractual and/or investment.

Speed bumps and unexpected surprises hit them hard in one core home or hub market.  However, the work for international business growth has been done and they are in the very fortunate position of having a queue of difficult to enter highly attractive growth markets sitting in their new business development pipeline ready to activate.  Contrast that story with the vast majority of businesses who are spending almost 100% of their $/people and time defending and extending in their saturated core home market(s) and quite simply can never get out of the daily grind to contemplate growth outside their home base.  I know which business I want to be working with and a part of especially at their budgeting and strategic planning cycles when the topic of ‘new horizons of growth’ comes up for discussion.

The need to focus and split your scarce resource allocation wisely over your core Horizon 1 business – say 60%, and emerging new business – say 25% and finally creating options for future new businesses – say 15% is not simply the domain of big business.  Creatovate has also been privileged to partner with a family owned client business who has very successfully extended and defended their core home market, entered a new market adjacent to their home country and built significant momentum from a standing start in less than 18 months and created a viable new business venture into another new and highly competitive and complex country all in the space of 2 years and all with a team of less than 10 full time employees.  The When to enter? question is vital to your business planning and differentiates the true growth businesses from those that are simply ‘doing the business’.

The lifespan of a company today is getting shorter and we do not have to look far for evidence of this fact.  The average life expectancy of a multinational corporation-Fortune 500 or its equivalent-is between 40 and 50 years. A full one-third of the companies listed in the 1970 Fortune 500, for instance, had vanished by 1983-acquired, merged, or broken to pieces (Business Week).  To increase your business chance of survival we believe you need to work on more than 1 Horizon of Growth and we believe you need to work on all 3 Horizons of Growth simultaneously.  Reach out, give us a call, send us and email, share your thoughts and comments and experience with us.

Without a clear strategy of Where to Go? How to Enter? Export? Contractual? Or Investment? And lastly but not leastly When to enter? You risk making mistakes and damaging your growth plans.

Dermott Dowling is Managing Director @Creatovate, International Business consultancy. Creatovate help businesses grow outside their home base from market entry strategy to route to market to go to market launch. Contact Dermott if your business needs help expanding your business internationally.

References:

Steve Coley (2009) Enduring Ideas: The three horizons of growth  http://www.mckinsey.com/insights/strategy/enduring_ideas_the_three_horizons_of_growth     retrieved on 12/02/2015

http://www.businessweek.com/chapter/degeus.htm  viewed on 12/02/2015


How to enter new markets…Investment modes of entry

Investment

Investment modes of entry are the most significant in terms of investment of your resources – $, people and time and correlating to that can be your most rewarding and risky entry mode.  Following on from the all-important Where to Go? Question as you plan your international business growth strategy is the “How to enter new markets?” Question.  In this our third post of our How to enter new markets …, the first being Export and the second being Contractual  we will explore 4 common Investment modes of entry, their objectives, advantages and disadvantages and pitfalls to be aware as you undertake potentially your most rewarding mode of new market entry.

joint venture

1. Joint Venture

Collaboration between two or more known parties with mutual interest that may or may not necessarily be equal in shareholding and usually relates to a single product or market. Fundamental to building any Joint Venture will be trust and mutual interests and understanding.  Often a ‘marriage of equals’ is favoured over an elephant and a flea type joint venture despite the obvious attraction for the flea to partner with an elephant for growth opportunity.  Finding, getting to know and understanding your joint venture partner(s) interests is fundamental as you are literally ‘getting into bed with a foreign company in a foreign land so best you look for your ‘perfect partner’ wisely and use your head as well as your heart in the decision or match making process.

The advantages of a joint venture are that they are good for accessing manufacturing and/or distribution in markets that are hard to enter e.g. Japan or Korea.  They also help to break down ‘physic distance’ or bridge cultural divides where two cultures come together that are very different as they force parties to get to know each other much more deeply than simple transactional business and take time to understand the host market for your new business.  The disadvantages are they take time to a) find the right partner and b) build the relationship of trust to the point both parties are willing to invest and share resources and profit rewards. They can create competitors and if there is misunderstanding or disagreements they can end badly for the foreign company entering the new country e.g. Danone & Wahaha Joint Venture in China that turned sour or Carlsberg & Thai Beverage falling out after 12 years together in Thailand.  Common interests and mutual benefits may dissolve over time and this is something each party needs to be aware of and plan for alternative dispute resolution in their JV agreements should separation become a reality down the line.

Strategic_Alliances_are_Built_Around_Trust_1

 2. Strategic Alliances

Independent partners come together and develop a long term vision or strategy to cooperate rather than compete in the territories of the alliance.  There typically are no equity investments or binding agreements although that may eventuate over time.  The relationship is organised along horizontal lines with sharing of technology, knowledge, systems and resources.  Strategic Alliances are commonly used in the Airline industry e.g. Star Alliance or Oneworld to pool planes and resources.  Alliances are a great way to share the capital cost of accessing new markets.  Another well documented Strategic Alliance that resulted in cross country and company equity investment that has endured in a hyper competitive industry is the Nissan Renault Strategic Alliance.

Advantages of strategic alliances are that they do not require immediate equity investments or binding agreements however that can also result in less commitment to overcome initial challenges by the parties to the alliance.  Alliances can be good for product, market and distribution development.  The fact there may not be a solid binding agreement locking the parties together or binding agreement means it is likely they can dissolve once the initial mutual agreed objective is met.  For further tips and guidance on building great alliances you can read Kanter’s blog on 15 Steps for Successful Strategic Alliances (and Marriages).

Greenfield Investment

3. Greenfield Investment

The type of investment is where companies typically build plant, infrastructure or manufacturing and sales capacity from the ground up in the foreign host market. In addition to creating new facilities the parent company will create new jobs hiring local and placing international staff in many cases to run the new subsidiary offshore.  The advantages of Greenfield investment are 100% control of your own destiny on the ground overseas and there are often local host government tax incentives to invest and build infrastructure behind their trade borders.  You immediately avoid costs of import/export, tariffs, and behind the border trade barriers.  Questions you need to consider before such significant investment include if you are not working with local business partners, are you confident you can independently source raw materials, manage and access local government departments, understand local customer preferences and recruit, train and retain talented local staff?  The risk level for Greenfield Investment increases significantly with the cross cultural differences or psychic distance and we advise extreme caution in this regard if your business home country and host country are polar opposites in terms of culture and ways of doing business.  This mode of entry tends to be favoured by well-resourced large multi-national corporations or in countries neighbouring or close to home markets where cultures are not that divergent.

M&A

4. Merger & Acquisition (M&A)

Refer to the consolidation of companies. A merger is a combination of two companies to form a new company, while an acquisition is the purchase of one company by another in which no new company is formed (Investopedia, 2014). More common than uncommon these days as firms seek faster growth “let the buyer beware” is our caution here as it has been widely researched and documented the vast majority of M&A activity does not deliver a return on investment over time.  Study after study puts the failure rate of mergers and acquisitions somewhere between 70% and 90% (Christensen, et al 2011).

The attraction and advantages of M&A include almost immediate access to the new host market with new capacity, people and incoming knowledge and systems to take your own goods or services to market.   Other perceived advantages include a diversification of product and service offerings, an increase in plant capacity, larger market share, utilization of host market operational expertise and research and development (R&D) and a perceived reduction of financial risk compared to greenfield investment.

Time and time again however, we see the same scenario play out post M&A with culture clashes, turf wars, different processes and systems not integrating as easily as planned and dilution of a company brand (Dumon, 2014).  In addition the acquirer often overestimates the synergy savings that can be extracted and in seeking to extract cost saving often dilutes the strength of the independent businesses and brands in the process.

Summary

Investment modes of entry are not for the weak of heart or mind.  Be prepared to stump up more capital, invest more of your top talent time and scarce resources to make new alliances, joint ventures, Greenfield Investments or M&A activity a success.  If you seek to form alliances or joint ventures be sure to use your head as well as your heart to find the perfect partner.  If you seek to be in control and make your own Greenfield Investment or undertake M&A take stock of the cultural and physic differences in your host market.  Audit your own company capability to integrate smoothly into the host market and your understanding of the local culture, customs, and ways of doing business and rule of law and how to interact with government in that market.  Do not be afraid to ask for professional help and services and look to your networks in both your home and host market for case study examples of successful and unsuccessful Investment entry modes into the new market.

Please feel free to add your own comments and experience on investment modes of market entry below and reach out to us for a follow-up face to face discussion at no obligation on your objectives for international business expansion.  Without a clear strategy of Where to Go? How to Enter? Export? Contractual? Or Investment? And lastly when to enter? You risk making mistakes and damaging your growth plans.

Dermott Dowling is Managing Director @Creatovate, International Business consultancy. Creatovate help businesses grow outside their home base from market entry strategy to route to market to go to market launch. Contact Dermott if your business needs help expanding your business internationally.

References:

Clayton M. Christensen, Richard Alton, Curtis Rising, and Andrew Waldeck (2011) The Big Idea: The New M&A Playbook https://hbr.org/2011/03/the-big-idea-the-new-ma-playbook/ar/1   viewed on 4/12/14.

Marv Dumon (2014) Biggest Merger & Acquisition Disaster http://www.investopedia.com/articles/financial-theory/08/merger-acquisition-disasters.asp  viewed on 4/12/2014.

Rosabeth Moss Kanter (2010) 15 Steps for Successful Strategic Alliances (and Marriages), June 10

https://hbr.org/2010/06/15-steps-for-successful-strate HBR Blogs retrieved on 28 Nov 2014.

http://www.investopedia.com/terms/g/greenfield.asp viewed on 4/12/2014.

http://www.investopedia.com/terms/m/mergersandacquisitions.asp  viewed on 4/12/14.


How to enter new markets…Contractual modes of entry

contractual-modes of entry

2014 is shaping up as a pivot point for Australian International Business with Free Trade Agreements now signed for the Big 3 markets in North Asia – Japan, South Korea & China and commitments well underway in Indonesia and now India to conclude agreements.  Following on from the all-important Where to Go? Question as you plan your international business growth strategy is the “How to enter new markets?” Question.  Following on from our How to enter…export blog post we now turn our attention to common contractual modes of market entry and examples highlighting the pros and cons of each entry mode.

intel licensing

1. Licensing

Licensing is the contractual granting of intellectual property rights which could be in the form of technology, patents, or trademarks to brand usage with some common examples from the technology field being Intel or Dolby or in the field of brand trademarks Disney or Barbie. More often than not the licensee will pay a fee for licensing the technology or trade mark which could be a % royalty of sales or a fixed fee for the technology, product or service provision.  Advantages for licensing are the rapid diffusion of technology or brand awareness for relatively low capital investment.  Licensing is a low cost of entry mode and may lead to possible further direct investment with licensees down the line.  A relatively safe and low risk way to test the market before significant capital investment.  Risks include the limited contact with customers who are managed by licensees and reduced ability to control the end products or services delivery.  You are relying on contractual enforcement of controls and in some markets it is difficult to use legal redress with business partners to disagreements upon implementation.  You are also disclosing IP knowledge which can lead to technology transfer and future unwanted competition.  Good examples of this are well documented in technology sector where O.E.M. (Original Equipment Manufacturers) later use their smarts developed from making others equipment to launch their O.B.M. (Own Brand Manufacture) often with additional features and benefits and disrupt the incumbents in their own industry e.g. ASUS laptops from Taiwan.

McDs Franchsing

2. Franchising.

Franchise contractual market entry modes are commonly used in the quick serve restaurant industry globally and notably world renown examples include McDonald’s and Starbucks whilst closer to home Australian build brands like Boost have used Franchise market entry modes successfully to expand internationally.  Another world renowned brand that uses wholesale franchising is the Coca-Cola Company of Atlanta granting franchise rights to global bottlers to manufacture, distribute and market their beverages in overseas territories.  The Franchisor will retain the intellectual property rights to the recipes, formulas, ways of working or operating the businesses and grant the rights to operate and sell their products or services and brand usage rights to the franchisee in exchange for ‘key money’ and quite commonly a % royalty of sales in exchange for systems knowledge, operations manuals, training and development and often shared pooled marketing.  Other examples of franchising in retail might include car dealer networks or petrol retailers who are franchise retail operators for the vehicle manufacturers or fuel manufacturers.

Advantages of the franchising entry model is similar to licensing lower capital outlay upfront and more rapid diffusion of brand and operating footprint leveraging franchisee capital investments.  Controls using franchise agreements over operating procedures, product mix sold and pooled and managed marketing communications of the brand. Risks to manage include finding and managing the master franchise holders and individual franchisees.  Reduced direct customer contact and requirement for sufficient customer service controls and reliance again on contractual modes of enforcement when disagreements arise between franchisor and franchisees.  Lastly there is a profit sharing arrangement with franchisee operators inherent in the agreements as opposed to a wholly owned subsidiary type of operation so whilst upfront capital investment is less it is likely overall long term returns may also be diminished due to profit sharing with local operators.

contract-manufacturingnew

  1. Contract Manufacturing.

Increasingly common and very widespread nowadays for a number of reasons. Contract Manufacturing is a contractual mode of market entry that can give your brand and company local manufacturing cost advantages whilst you still retain marketing, sales and distribution rights and responsibilities for your brand. Advantages of contract manufacturing or sub-contracting include saving in capital expenditure and reduced upfront risk associated vs. a Greenfield manufacturing plant in a foreign country.  You are able to leverage skills and local capability and resourcing of your 3rd party manufacturing party and in some cases you may also be able to leverage their distribution and marketing and sales networks as well.  There is opportunity for two-way technology transfer and learning and of course this is an associated risk to bear in mind with regards to intellectual property around your product composition or manufacturing process.  Examples of contract or sub-contracted manufacturing include the car industry and in particular car parts for later assembly by the auto-manufacturer. It is widely used in the food industry by both retailers and manufacturers and may also be used in home as well as host markets.  In beer for example where freight costs may be a high component to overseas markets and freshness is important you will often find major multinational global brands “Brewed and Manufactured under licence by…” as another example and in many cases they will leverage another brewers distribution, sales and marketing capability with contracts as well.

turnkey

  1. Turnkey Operation

Turnkey Operations are contracts for construction of operating facilities that are transferred to the owner after commissioning for a fee. Most common in large multi-year projects like construction of infrastructure like airports, oil refineries, power plants, roads or railways they are a way for the owners to mitigate risk up front by contracting away the associated management risks of building a major project in a foreign nation.  Advantages include contracting out some of the associated risks of managing a major construction project and the associated reduced management time as its more a case  of fund it, get it build and then take over once it is commissioned.  Risks include the associated technology transfer risks that the sub-contract manufacturer may become a future competitor in your industry with knowledge gained during the build phase.

Mgt Contract

  1. Management Contract

Under a management contract mode of market entry one company provides another company with managerial expertise for a specified period of time. This maybe in exchange for a lump sum payment or a continuing fee on a % of sales value or volume for example. Sectors that commonly use management contracts are utilities services and it may be possible in developing markets where they need assistance from developed markets to manage new infrastructure like water management for example.  Another example might be public council services such as lawn mowing and parks maintainenece and building management services provision which can also be international in scope and nature.  Management contracts maybe useful entry modes where the home party has knowledge and expertise but cannot own the assets off-shore and the other party has a dependence or reason for management expertise.  It can also serve as a useful lower risk learning experience into a foreign territory.  Risks include reliance on the contract for enforcement and remuneration and the possible limited time span.  In addition it may be hard to create and grow any brand equity or awareness in the case of some contract management services.

Contractual modes of entry will inherently rely on trust and relationship building between both parties and important criteria should be considered before you enter into contracts with companies in overseas markets.  Firstly, are you talking to the right partners?  Are they your perfect match?  You also need to bear in mind the rule of law and alternative dispute resolution options in the host country.  Many markets have different legal systems and different levels of respect for contracts as a means of doing business.  Before considering contractual modes of entry our advice is to talk to professional services organisations with experience in this field and others in your industry at home to get a good understanding of the risks and rewards and how to mitigate risks and maximise the success criteria.

Please feel free to add your own comments and experience on contractual modes of market entry below and reach out to us for a follow-up face to face discussion at no obligation on your objectives for international business expansion.

Dermott Dowling is Managing Director @Creatovate, Innovation & International Business consultancy. Creatovate help businesses grow outside their home base from market entry strategy to route to market to go to market launch. Contact Dermott if your business needs help expanding your business internationally.


Why are 74% of all new products flopping in Asia Pacific?

ProductFlop

One of the best ways to overcome price pressure is through new products and still almost three quarters of all new products miss their profit targets according to a recent study of 1,600 managers across 40 countries in Asia Pacific (Tacke, et al, 2014).  We all know we need to focus more of our $, people and time on innovation but how much are we spending solely on new products and product performance vs. the other types of innovation?

Our challenge in the Australian Food Industry right now is to think and act more broadly in your innovation effort to truly disrupt your industry and create a sustainable competitive advantage.  Several years ago Doblin Inc. took three thousand things generally agreed to be innovative and compared them mostly to each other and did that with enough cluster analytics to discover 10 distinct types of innovation (Keeley, 2013).

doblin_ten_types_155111

Product Performance innovation address the value, features, and quality of a company’s offering.  This type of innovation involves entirely new products as well as updates and line extensions that add substantial value. It is only one of the Ten Types of Innovation, and it’s often the easiest for competitors to copy.

Often people mistake Product Performance for the sum of innovation. It is certainly important, but it is always worth remembering that it is only one of the Ten Types of Innovation, and it is often the easiest for competitors to copy. Think about any product or feature war you have witnessed—whether torque and toughness in trucks, toothbrushes that are easier to hold and use, even with baby strollers. Too quickly, it all devolves into an expensive mad dash to parity. Product Performance innovations that deliver long-term competitive advantage are the exception rather than the rule.

The far right delivery types of innovation around Channel, Brand and Customer Experience are more important amplifiers of innovation as are Business Model Innovation and Networking (Partnering).  If you can combine 4, 5 or 6 or more specifically chosen ten types of innovation choosing the ones that others ignore in your industry you will get ‘disruptive’ innovation (Keeley, 2013).

How about we spend more time on the other types of innovation and focus some of our attention to the might higher returns from business model innovation?  What is business model innovation?  Most simply “A business model is nothing else than a representation of how an organization makes (or intends to make) money” Peter Drucker.

More specifically in constructing a new business model you will need to answer three distinct questions:

  1. Why would someone want to buy something from you?
  2. How will you make money selling it?
  3. What, exactly, are the important things you need to do to pull off the plan? (Johnson, 2010).

Most importantly in your own organisation you will need to create a common language and definition for business model innovation.  Use of visualisation and pictorial storytelling can help with that business model definition and design.  The Business Model Canvas is one diagrammatic framework tool that has gained a lot of attraction and usage to design, refine and build new business models (Osterwalder & Pigneur, 2010).  There are 9 key elements to constructing a business model canvas and the following short YouTube clip details these very succinctly.

business-model-canvas

There are clearly demonstrated examples in the food industry in Australia, China and globally of companies thinking and acting differently in how they take innovation to market and using business model innovation.  An example close to home here in Australia is www.dishd.com.au

ADRF3083-Dish-d-Chef-s-Specials8-10-14-3

Here a well-established food business saw an opportunity to use technology to disrupt traditional business models and their go to market strategy for new products.  Setting up a small team with key principles of agility & access to leaders the team @dish’ d set about building platforms from which multiple products could be ‘lifted and launched’ sourced from around the world direct to diners doors in Melbourne and Sydney.  Utilising existing partners in logistics the company was able to launch 220 new lines ‘lifted & launched’ in less than 12 months, none of which they had to manufacture themselves, creating a brand new Brand, business, Channel, and customer relationship management model connecting themselves directly with their consumers.  Dish’d saw a gap in the market, trusted their consumer insight and understanding that shoppers were prepared to pay more for good food delivered to their door and went for it with conviction.

SF Best

Further away in China a boom in e-Tailing and e-Commerce has been occurring for some time and a recent example caught my attention.  SF Best launched in June 2014 is another good example of business model innovation.  Selling everything from Chinese organic fresh milk to ice cream and fresh meat and vegetables SF Best from SF Express even delivered cold beer during Soccer World Cup 2014 to thirsty fans doors in 11 cities across China from an App on consumer’s phones.

SF was born in Shunde, Guangdong in 1993.  They are like China’s FedEx and now operate in China, Hong Kong, Macao, Taiwan, US, Japan, Korea, Singapore, Malaysia, Thailand, Vietnam, Australia with 290,000 staff globally. SF Best Fresh Home delivery services launched in June 2014 to 11 cities in China – now number 27!  SF has leveraged their core process competency in logistics into an adjacent industry – eTailing and appears to have hit the ground running!

Last, but not least is a global example of business model innovation from Nestle with their hugely successful Nespresso

nespresso-business-model

Founded in 1986, Nespresso is an autonomous globally managed business of the Nestlé Group, now present in almost 60 countries with more than 9,500 employees worldwide, compared to 331 in 2000 with over 70% of employees in the markets in direct contact with consumers.  50% of new Club Members experience Nespresso for the first time through friends and family.  Nespresso has over 3 million Facebook fans and 180,000 unique customers visit our online boutique every day.  George Clooney, Nespresso brand ambassador since 2005, was chosen by Nespresso Club Members.

George Clooney

Nespresso exemplifies business model innovation from partnering through to customer relationship management and channel innovation with their mail order, call centre, Nespresso.com and Nespresso stores.  All elements of the business model canvas are worked hard and in concert and the business has benefited from 10+ years of 30% Year on Year growth to become a CHF3b business on its own today for Nestle.

Business model innovation is not easy and your thoughts probably turn to ‘how do we start doing this?’  You can start by following some simple tips to design, refine and test your new business models using ‘lean’ teams and start up like activity within your own businesses.

Two Pizzas

Remember the 2 Pizzas Rule: Small Focused Teams who can be fed on no more than 2 pizzas.  Every team should number not more than 7 people as every person in addition to the 7th member of the team is a 10% decline in team productivity to the point where if you have 17 people on the team you have 0% productivity and a team talking to themselves (Jeff Bezos, Amazon.com; Scott Anthony ,2013).

Push to learn in market “Get out of the building!”  Here is a litmus test to gauge the degree to which you are following the approach described. Ask the team the ratio of their time spent preparing materials for management (or conducting desk research to feed into materials for management) versus time spent with customers, developing products, or talking to potential partners. If the ratio is higher than 1:3, you have a problem (Scott Anthony, 2013).

Measure learning, not results.  We are in new territory here exploring new ways of working and doing business, looking for customers, asking them about what problems they have, etc.  You need to be asking your teams “What did you learn? What do you still not know?”  Venture fund the team with sufficient funding to address critical uncertainties.  If they answer those uncertainties fund them to the next gate of decision making but do not automatically fund projects into infinity.  Be prepared to decide and act fast, pivot, lean and learn is your modus operandi.

Lastly make sure the decision makers with the right experience guide the team.  The role of the business leaders is more coach and mentor or venture capitalist as opposed to Go / Kill gatekeepers.  Early team mentoring sessions could be answering and solving problems / opportunity like ‘who is our customer?’ ‘what are their problems that remain unsolved?’ ‘what are their unmet needs’ and ‘who can we partner with to move faster?’

ten-types-of-innovation1

No one said innovation would be easy least of all when you are working on multiple types of innovation all in the same project at the same time.  You need to be doing that to make a real impact in your industry and disrupt your competitors and create sustainable competitive advantage.  We all share the same information on global NPD and research and can ‘copycat’ faster than ever the latest new product. To pull away from the pack you are going to have to work smarter not harder on how you take innovation to market and working with innovation partners to guide you into unchartered waters is one way to help you stay honest to your objectives to think and act differently.  After all if all we continue to do is keep launching new products through the same channels expecting a different result, are we simple insane?  We know 74% of all new products flop so why not invest some of your valuable $, people and time in other types of innovation as well as product performance.

Dermott Dowling is Managing Director @Creatovate, Innovation & International Business consultancy. Creatovate help businesses create innovate and grow through improved idea-to-innovation process. Contact Dermott if your business needs help improving your innovation processes or expanding your business internationally.

References:

Scott Anthony (2013) Five Ways to Innovate Faster http://blogs.hbr.org/2013/07/how-to-innovate-faster/ July 30 retrieved on 14/10/2014

Mark W. Johnson (2010). A New Framework for Business Models January 21, HBR Blogs

Larry Keeley, Bansi Nagji, Helen Walters (2013). Ten Types of Innovation: The Discipline of Building Breakthroughs, John Wiley & Sons.

Larry Keeley (2013) Ten Types of Innovation, YouTube, published 12 July http://youtu.be/vJ5Jq3MyXAk viewed on 14th Oct 2014

Alexander Osterwalder & Yves Pigneur (2010) Business Model Generation John Wiley & Sons, Inc. New Jersey

Alexander Osterwalder (2013) A Better Way to Think About Your Business Model May 6, http://blogs.hbr.org/2013/05/a-better-way-to-think-about-yo/ retrieved on 13.10.14

ALEXANDER OSTERWALDER (2010) COMBINING BUSINESS MODEL PROTOTYPING, CUSTOMER DEVELOPMENT, AND SOCIAL ENTREPRENEURSHIP AUGUST 05, http://businessmodelalchemist.com/blog/2010/08/combining-business-model-prototyping-customer-development-and-social-entrepreneurship.html viewed on 15/10/2014

http://www.nestle.com/csv/case-studies/AllCaseStudies/Ecolaboration-Nespresso-platform-sustainable-innovation viewed on 13th Oct 2014

http://www.nestle-nespresso.com/about-us/facts-and-figures viewed on 13th Oct 2014

George Tacke, Jochen Krauss, Fan Chen & Jan Haemer (2014) http://www.simon-kucher.com/sites/default/files/simon-kucher_global_pricing_study_2014_apac.pdf retrieved on 6th Nov 2014

http://www.sf-express.com/cn/en/news/SF-Best-Creates-the-Ultimate-Cold-Chain-Service-Door-to-Door-Distribution-of-Imported-Cold-Beers-During-FIFA-World-Cup-Brazil/ retrieved on 6th Nov 2014.


How to enter new markets…Export

Export

Alarmingly only 7% of all Australian businesses earned overseas income in 2011-2 down from 9% in 2006-7 (ABS, 2013).  Of that group just under 1% account for over 70% of international trade value.  In Australia’s case that group is dominated by the big miners in particular (Austrade, 2014).  There are barriers to taking the first steps towards international business and the top two cited is local culture and regulations.

As a result it is hardly surprising that most Australian businesses will expand to neighbouring markets with common language or cultural heritage like New Zealand, Singapore, the UK or the USA before considering more culturally divergent markets like Indonesia, Japan or China for example.  As a business owner considers firstly, ‘Where to go?’ and then ‘How to enter?’ they will often opt to get involved in international business by one of the lowest risk and reward options of exporting their goods or services or importing overseas goods and services.

Taking a consumer packaged goods or manufactured goods perspective there are several ways for businesses to begin exporting their goods to overseas markets which we will detail below:

Export Merchants

1. Export Merchant at Home or Australian Based Consolidator.

Here a home base company or merchant will buy the goods on behalf of overseas customers and make payment in local currency and arrange all shipping, documentation and clearance of goods via sea or air freight to the foreign destination.  This was more common in the past and still exists with regard to smaller enterprises or smaller markets where consolidation of goods at port of despatch helps to reduce freight costs and makes business dealing simple for the goods manufacturer.

Export Agent

2. Export Agent at home.

Here an agency or agent is used in the home country or place of production to seek out and negotiate pricing and contract with overseas customers on behalf of the manufacturer. The agency is rewarded most often with a commission on the sale but the contract is between the goods manufacturer and overseas customer.  This arrangement is commonly used where the manufacturer has low export knowledge and awareness or contracts and relies on the agent to negotiate a fair and reasonable price for the exporter.  As technology evolves and the world shrinks virtually with the internet we are also seeing the emergence of export agencies or facilitators at home like AusPost who will partner locally based small and medium size enterprises to facilitate listing their goods for sale on large eTail/Commerce websites especially in China like Tmall inside Australian Pavilion shops and pages with their connections to both China Post and Alibaba (owners of TMall) facilitating end to end delivery of goods.  Likewise, VECCI can facilitate the development of an individual customised microsite that will sit in the Australian Pavilion on yiguo.com a large Shanghai based B2B and B2C eCommerce website to assist your company in showcasing its products.  These facilitators and eCommerce providers will assist with goods clearance and import, website/shop set up and provides an avenue for small and medium size business in particular to test their products and get direct consumer feedback in foreign countries.

Overseas Agent

3. Agency in foreign country.

The agent identifies a buyer and negotiates with both parties (exporter) and buyer (the importer) on prices and delivery details. It is then the exporter’s responsibility to ship the goods to the importer and receive payment and pay an agreed rate of commission to the overseas agent.  Overseas agents are invaluable where cultural and linguistic barriers might otherwise prove unsurmountable and give confidence to the importer who is dealing with someone on their own home soil.  This type of arrangement tends to be more common in cultural diverse or distinct markets e.g. Korea where an Australian company maybe uncomfortable with the language and cultural and business challenges and seek an agents support to begin the trade and relationship building.  For the exporter it is important to know their agent is working for them and not competitors in the same category of business and for the agent it is important as s/he builds up the exporters business and contacts s/he is not cut out as the middle (wo)man who enabled the trade to be established.

Importer Distributor Retailer

4. Direct export to an importer/wholesaler/distributor/retailer.

Direct export requires a deeper knowledge of the foreign marketplace and would normally follow a trade discovery market visit or existing agency relationship. It also tends to appear where parties on both sides are of sufficient scale to support international business dealings and is common in medium to large size consumer goods companies for example.  Increasingly today we are also seeing direct export from consumer goods manufacturers to retailers as both sides look to maximise their share of the value chain.

Overseas Branch

5. Overseas Branch Office

The most significant investment for export/import is establishing and overseas branch office that maybe focus on the market it is based or a regional holding company or base from which to expand into neighbouring territories. Normally employed only after significant trade has been established and sales have plateaued or by large companies with significant resources required to invest in local business licence to operate, rental of offices, hiring staff and establishing banking and legal facilities.  Some countries are easier to establish branch offices than others and even actively encourage it as part of their economic growth plans.  The World Bank issues annual rankings on countries ‘ease of doing’ business and Singapore tops the list followed by Hong Kong, New Zealand and the US.  Australia ranks 11 after UK and Norway on that list while some markets near us like Indonesia rank 120 or the Philippines 108 indicating the importance of upfront thinking and work on ‘where to situate’ your overseas branch office.

As you can see from the relatively fastest, lowest risk and lowest reward ex/import market entry model you can see there are at least 5 possible entry models to begin international trade.  The appropriate model for your business will of course depend on a number of factors including your size, turnover, international business experience, products or services and overall objective for going international.  We highly recommend you contact us or other professional international business consultancies and government bodies with experience in the area like Austrade and your local State Government services and Chambers of Commerce to do the ‘upfront thinking’ before you jump into international business. Unpicking unsatisfactory trade relationships is time consuming and costly to your business and reputation.

Please feel free to add your own comments and experience on export/import international business entry models below and reach out to us for a follow-up face to face discussion at no obligation on your objectives for international business expansion.

Bibliography & References:

Australian Bureau of Statistics (2013), ‘Selected Characteristics of Australian Business’, cat. no. 8167.

Austrade (2014) http://www.austrade.gov.au/about-austrade/news/latest-from-austrade/2014/australias-international-business-survey-2014 retrieved on 10 Oct 2014

Bruno Mascitellia & John Tinney (2012) The Global Business Environment: An Australian Perspective McGraw Hill.

The World Bank Group (2014) Doing Business Internationally http://www.doingbusiness.org/rankings retrieved on 2 Oct. 14.


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