Abandon

One should abondon yesterdays bread winner before one really wants to let alone before one has to. - Drucker

Drucker quoted it so strongly decades back and it seems to be true irrespective of time and context , organizations and individuals need to come out of their comfort zone a little earlier and start looking out for next big thing , the problem is if they dont do that willingly at early stage then after some time they will be forced by changing business environment to abondon exiting belief and adopt new and then they will have little or no time to react , infact entire approch will be reactive and no space for creatvity and pilot runs.

Abandon the way you work : In todays dynamic (yet vibrant) business environment , organizations need to ask continously what will be the next way of working . They can not keep working on same set of business processes because technology is injecting changes into processes every now and then and significant number of disruptive ones.

We need to constantly think about new way of working and abondon old ones. for example Even before there is need or question of cost advantage we need to evaluate cloud computing.
In fact in my opinion Abandoning itself may not be as beneficial as the process of thinking in this direction which will help you visulaize new and improved ways of doing things.

WinIT LooseIT of e-Tailing

The concept of e-tailing is as old as 1990’s since those days there have been pioneer in this business model and there are organizations who have also burnt fingers by entering into the e-tailing without ground work. This work is an effort to trace journey of two popular e-tailers of the history where one has come as winner all the way but another could hardly survive for couple of years.

Tesco:
In a quest to find new avenues in business, the leading retailer of UK decided to start supporting its brick & mortar business with online model. Lets see what were some of the key strength of this retail giant
1) A well established and Profitable brick and mortar business: A retail chain started by selling grocery from 1919, Tesco grew organically and inorganically over the time. Like its counterpart Walmart and Target , it started transferring the savings gained by volume purchase to its customer and gained instant popularity.
2) Amazing ground work: It was a very obvious observation for Tesco that to go online it customers should have access to net. Tesco decided to provide broadband services and soon become well known ISP. With this it became first retailer who was also an ISP. Tesco also did intensive analysis on the profitability of the business model.
3) Running pilot model first: Tesco started pilot model in one of the London store , a very basic website was designed and the model was a combination of telephone, fax and internet. After successful broadband business and encouraging results from its pilot project, Tesco started providing online shopping in many of its London based stores.
4) Efficient Operation: Once customer has ordered the merchandising, Items would be picked up from store by employees and delivered to the customer.
5) High focus on technology: Tesco was very clear that its technology has to be the best to provide amazing customer experience not only in terms of website navigation but also in terms speed .It went on to the extent to produce updated CD’s and supply to its customers so that they can add items to their basket and then connect to internet by dial up connection to just place the order.
6) Geographic expansion of e-Tailing : Tesco made sure that it sticks to the basic for expanding its e-tailing. It targeted places like South Korea, where Internet use is high and where high-speed Web connections abound, enabling the grocer's jam-packed pages to download quickly.
7) Going that extra step: Tesco went one step beyond when it enabled Tesco.net for visually challenged people. Blinds could now purchase online with the help of speech recognition systems. The system, which the company developed along with the Royal National Institute for the Blind (RNIB), uses technology that converts text to speech, describing products on the company's Tesco Direct Web site and guiding consumers through the buying process.

WebVan.com
Unlike Tesco , webvan is started as only an online retailer without having a support of brick and mortar stores. Louis Border started it with the help of several VCs in 1999. WebVan pioneered technology to serve its customer sand went on creating a huge infrastructure to the extent that after some time the expense of running business was much more then the cash inflow.
1) No Support : WebVan did not have any brick and mortar business to support, instead it developed its distribution centre from where it supplied to the custmomers.
2) Ambitious plans without any groundwork: WebVan went on an expansion ride without even looking at the feasibility of the business model. The plans were really ambitious involving expense of multibillion dollars in setting up infrastructure.
3) Ignorance to availability of internet : Even though webvan made a point setup its business in town with higher broadband penetration but still it over estimated the potential of online shopping in those days.
3)Huge Investment in automation : WebVan spent a fortune in automating its distribution centers. They were equipped with conveyor belts on which merchandising used to travel to reach to the picker trucks. It used refrigerator trucks to keep vegetables fresh. Webvan missed on the fact that for sustaining such kind of investment it would need huge customer base since very beginning
4) Misfit collaboration : In less then one year webvan decided to takeover one of its archrival HomeGrocer. HomeGrocer & Webvans business were running on entirely different business strategies. Webvans distribution centres were very high tech and automated whereas in HomeGrocer DC operations were manual.
5) Every thing can not be automated : Automation in webvans distribution centre was common for all the items and their was no way it can be customized for separate merchandising , specially for food items which were soft and come in delicate packaging.
Webvan was bankrupt by july 2001, Over ambition and high reliability on a niche segment caused closing down of webvan

Learning’s :
Looking over Tesco and WebVans ( and some other etailing ventures) we can have some key points about this business
Brick & Mortar Support: It is very difficult for an online grocer to continue without support of a brick & mortar business. Tesco , Walmart, Fabmart used online as a strategy for market development and became successful. Like WebVan Peapod also tried to be an onlibe grocer by simply collaborating with various superstores but after running into losses for long time it decided to build its own warehouses.
Internet Penetration : Tesco’s plan to become ISP was simply visionary and shows how serious they were about e-tailing. WebVan missed the actual numbers of internet penetration as well as prospective clients who would be using website for grocery shopping. IF we look the numbers for 8.5 lac customers Tesco was generating 2.5 Lac orders a week but WebVan was generating merely 15K orders for 7.5 lac customers.
Phased Investment in Hi tech infrastructure : Where Tesco kept it simple, Webvan went on building state of the art automation technology for its distribution centre. It would have been wiser to test the feasibility of business before getting into such a huge capital investment. Especially in the days when labour was much cheaper then such kind of high end technology. The investment made by Tesco was mostly for making customer experience better, which was the need of the hour.
Strategic collaboration: WebVans collaboration was also a misfit with its business model. It is necessary to have collaboration which can compliment the business model especially in the days of start up. Within 1 years of starting business was not a good time to merge with a business where one would need to spend money for major restructuring of business itself.

I would say one major takeway will be "Put technology and investment where it makes things easire for customer"

Also posted on Cool Avenues (http://www.coolavenues.com/know/system/saurabhs-it-1.php)

ABC of Creative Costing

In traditional costing system it was a simple method because it was made for a simple era , imagine why would Mr Ford need to worry anything in traditional costing after all , he had to produce only one thing and that was black cars . Ford wasn't changing any model in earlier days , forget about model he wasn't even changing colors of the cars and in such a case traditional costing made perfect sense where all the overhead and other costs were proportioned equally to the number of units produced . there was hardly any confusion or apprehension about costing .

No one would have imagined in those days that a process as simple as finding out cost of labor , material , sales and administration and allocating it to number of units will become so creative in coming days. Very soon days of monopoly and cost plus were on their out from industry , it was time to produce more and with various varieties . ( just after one decade GM would have near 8000 model of cars in its portfolio). Then started the problem , not all the product needed same kind of materials neither were they produced by similar processes . Some of them were simple and needed easily available materials but some were specific which needed expensive material and special treatments. In fact Cost differentiation started much before manufacturing , In case of motherboard , chips or other research extensive electronics product research and design also contributed to the cost and determined the way these products need to be produced during manufacturing.

These complexities gave birth to a new comprehensive and creative way of costing , Activity based costing where no longer the cost was a simple function of direct labour , direct material with equal distribution of overhead to all the products . In ABC each phase of product lifecycle was divided into various activities and cost incurred in each activities was calculated , this obviously gave a clearer picture rather then a generic overview.

What were some of the basic points to consider while deciding between ABC and traditional cost.

Disillusionment : At times traditional cost created illusions , lets take a very bookish example which is there in almost all costing books . If a car manufacturer is manufacturing cars of two types one is standard cars which are made in assembly line and completely automated whereas another types of cars are competing head on with Maybach ( Remember these high end cars in which entire interiors is done by hands) and after making these two kind of cars he is simply dividing the total cost incurred in making them by number of units produced , obviously he would now find that the margin for his standard cars have decreased .....
traditional costing created this kind of false illusions for management which may lead to disastrous decisions like closing down production of standard cars or increasing the price of these cars . ABC helped management in such situations by providing them precise information

Hitting right on the correct problem : In earlier days when major portion of motherboard fabrication was done by hands in HP , they found that over all cost for motherboards was high and the obvious blame was on manufacturing . What they missed is two things
1) How will the device be manufactured is decided much earlier in design phase
2) Manual fabrication is much costlier then automated manufacturing.
These are typical example where either a product need some special treatment or one of the process in product development is eating larger chunk f resources then other processes . In such case we need to concentrate only on those pain areas.

Traditional costing could have never detected these issues , it was again ABC which came to the rescue .

Importance for service industry : Traditional costing could have never done justice to service industry . In service industry there is no tangible product to be delivered , every service is simply combination of activities . To find out which activity is costliest you need to apply ABC and once you have done so , you can decide on next strategic move , whether you should keep such activity with you or outsource it to some third party vendors.

Similarly there is one very crucial question which traditional costing will never be able to answer and that is which customer is causing more cost or which is the most profitable customer.
In short here ABC can help you providing right set of services to right set of customers