As many view the holiday season as a glimmer of hope, I was struck by several news items this week:

 Apple vs. Google

The battle for Silicon Valley supremacy has heated up in the last few weeks as the two behemoths vied for two start-ups:  La La Media (bought by Apple) and Ad-Mob (purchased by Google in November).  As technology often drives M&A activity, these deals may be a spark for a wave of acquisitions, as investors who have been sitting on the sideline may re-enter the fray.  The release of operating systems from Microsoft have often been the trigger for waves of technology spending, and it will be interesting to see how the sector fares this year.

Retail Discounting

I was struck by an offer by a local golf course this week. It read “What Rain, Play all Day on Friday for $39”. It used to be that marketers offered discounts when demand was low. Now, everyone from carpet cleaners to retailers are trying to drive demand to offset over-capacity or excess inventory. Such a combination creates a double whammy, where high costs are only exacerbated by diluted margins. It appears as if our worst fears for the retail sector are coming to fruition.  A shocking 95% of Americans say they are holding off purchases to take advantage of last minute sales.

 The uber discounting in the retailer sector is truly horrific. Retailers used to make all their margin in the fourth quarter, but they are sabotaging any enterprise value by giving away the store.  If you feel compelled to start a price war in your business, do it at a time when you want to introduce new customers to your product or services, not when they are going to buy from you anyway.

Boeing Tests 787

 The aerospace sector has also been crushed by high oil prices, the recession and the delay of new products.  Yet this week Boeing’s 787 airliner will make its inaugural flight and begin a year of field testing. The 787 is Boeings’ response to the European Airbus A350, a generation of planes built using up to 50% composite materials.   

United Airlines ordered twenty five 787’s and twenty five A350’s, suggesting that airlines may be ramping up capacity, especially in more profitable long range routes.   With the exception of military suppliers, the American aerospace industry has been in a deep freeze and is eagerly awaiting a rebound.

It appears that some sectors of the economy are starting to improve while others remain stagnant.

It seems that corporate acquisitions have come full circle.  In the 80’s, behemoth conglomerates fell out of favor as many of them were seen as too fat and inefficient.  Over the last decade, specialization and commitment to “core competencies” have been the mantra of CEO’s and management consultants.

Yet a recent trend has emerged as companies are going vertical, and seeking out business combinations that enhance positioning within the value chain. Our firm has recently worked with several companies employing this strategy, at a time when PepsiCo is buying back bottlers they spun off in the 90’s, and Oracle is purchasing Sun to which Larry Ellison spewed, “We’re really brilliant, or we’re idiots.”

Two converging trends seem to be the impetus to a return of vertical integration.

• Complex computer and distribution systems make integration critical to the success of an organization.
• The movement towards thrift and efficiency amplify a basic rule of distribution-the last mile of distribution is the most expensive (the implication being that it is more important than ever to control the distribution channel).

Many U.S. companies who have outsourced manufacturing and service overseas are starting to see the  upside of owning their suppliers.  Recent activity begs the question, when do such acquisitions make sense?

Much research around M&A’s over the last few years has yielded data that suggests that return on investment in these deals is realized through incremental revenue, not through cost cutting and efficiency. With the staggering costs of completing such deals, shaving a point or two of margin does not provide a very enticing payoff.

Thus companies seeking alliances and mergers should be focused on acquiring companies that complement their business in a natural and synergistic way.  For example, buying a supplier of quality parts provides the opportunity of integrating systems which may optimize inventory, improve cycle time and enhance the customer experience. If such synergies translate into more revenue, vertical integration can contribute to both the top and bottom line.

As a champion of value creation, I wanted to vomit on Black Friday.  As abhorrent as the massive discounting was, it did serve as a reminder that customer expectations are always a moving target.  For retailers, the bar has been lowered to staying open all night and giving product away at cost.

 For those of us who seek value by providing better service, we must push the envelope with equal fervor. The service you provide is not defined by you or your competitors, but by Lexus, FedEx and Nordstrom. Customers have come to expect extraordinary service on their terms: quickly and efficiently.   Every interaction with a customer offers what one SAS executive refers to as a “moment of truth”. In a single transaction, an organization can have dozens of such moments with a customer.

 Every company should do a “touch point audit” at least a couple of times a year and assess every potential customer “touch”.  To complete such an audit, create a checklist of touch points such as web, email, phone system, reception, customer service,  invoices, packing slips, etc. that represent the opportunity to disappoint or delight your customers. We have all been to voice mail hell, had a customer service call mismanaged or used information on a website that was no longer valid.

 It is useful to have a 3^rd party conduct such audits. Another approach is to conduct customer interviews, peer to peer.  I once had a client send their CFO to meet with a client’s CFO only to find out that invoices were poorly labeled and confusing.  By making some minor adjustments to the design of the invoice, my client improved receivable cycle time with the client by 5 days.  The CFO may not seem like an important person in the value chain, but casting your net wide within clients is an important selling strategy, especially when every nickel is being scrutinized.  The point here is that today’s marketer must take the time to evaluate every conceivable moment of truth and design systems and processes that optimize (my favorite word) the customer experience.

 One source of innovation and strategic advantage is to take emerging technologies from other industries and apply them to your business.  In the 90’s, Dell was amongst the first companies to offer email confirmation and real time tracking of shipments.  As the technology spread, customers came to expect such a level of service for online shipments of everything from flowers to wine.  If you are not moving forward with richer customer experiences, service improvements and automation, you are likely falling behind.