Ken Vermilion

Oldsmobile, Pontiac, Sony and Bucatini – Victims of Shifting VRQs

April 18, 2021 by Ken Vermilion Leave a Comment

Ken Vermilion

Value can be viewed through a set of lenses that include your customers, internal business processes, and traditional financial perspectives. This article looks at value through the customer lens.

The Customer Perspective of Value Influenced by Value Related Qualities (VRQs) –

As stated in the first article, Conversations About Value, I put forward the hypothesis that value is in eyes of the beholder. When customers use phrases like “I really enjoy” or “It’s our favorite place,” it’s difficult know exactly what customers mean. Steven Lauer and I co-authored a book, The Value-Able Law Firm. We developed Steve’s Value Related Qualities (VRQs) concept to help law firms better manage the creation of value by better understanding client expectations.

VRQs can help define value and can be applied to many consumer service or product relationships. For example, when a customer indicates they really enjoy a particular restaurant, they could be indicating:

Parking is always easy;
The bartender recognizes us by name when we enter;
The food is delicious;
Daily specials are a great value;
The service staff makes me feel like one of the family.

Each of these elements can be viewed as specific VRQ that contributes to the consumer’s overall evaluation of enjoyment. The consumer’s value equation.

Value Related Qualities (VRQs) can be found in any consumer product or service. The key to understanding how VRQs create value is to understand the VRQ’s order of importance to the consumer.

Remember, value is in the eyes of the beholder. For a particular restaurant, is easy parking more important than delicious food or for a burger joint, is feeling like one of the family more important than speed of service or consistency of product? And are consumer VRQs fixed in order of importance or do changes in the business environment change consumer VRQ priorities?

Consumer VRQs don’t necessarily remain static over time. And, as often as not, changes in the business environment can dramatically alter how consumers prioritize VRQs, no fault of the provider of consumer goods and services. Value is further complicated because not all VRQs are created equal. Some VRQs are convenient or cosmetic in nature while others can change the way we think about ourselves.

Stocking the larder and COVID-19 –

As COVID-19 spread and news coverage of a possible pandemic declaration became more likely, social media lit up. Hoarding was the order of the day with toilet paper and hand sanitizer being at the top of the list. Almost instantly, these two (2) items went from ordinary household supply items to high value and scarce items subject to rationing. Worse yet, they became items worth fighting over in big box retail outlets!

People were forced to bunker at home meaning the home galleys were pressed into service like never before. Pasta inventories quickly shrank. One of our favorite pastas is bucatini. Manufactures of this specialty pasta shelved its production to accommodate the increased demand for more pedestrian pastas. If you can find bucatini and can’t live without it in your pantry, be prepared to pay between $10 and $60 per pound. Some specialty foods have become scarce causing the consumers VRQ structure, or order of importance/priority, to shift. Cheese and yeast were other items that suddenly became scarce and therefore more valuable.

Grocery pickup services, shopping services and meal kit services also mushroomed as the pandemic took hold of society. What drove the value? People didn’t want to subject themselves to crowds. Grocery shopping could be seen as a COVID-19 super spreader activity and therefore too risky.

Can political views impact VRQs? –

There were the political influences related to the pandemic. Were facemasks really necessary to slow the spread of the virus? Are vaccinations key to eradicating the virus? The science unequivocally says yes and citizens found value in following the guidance and being vaccinated.

However, there was the spread of conflicting non-science-based arguments that convinced others to believe the value to them was in not masking-up or being vaccinated. Depending on the consumer’s point of view, the VRQ for facemasks could have been rooted in personal safety or freedom.

Consumers reprioritize their VRQs –

An example of consumers being forced to reprioritize VRQs would be General Motors doing away with the Pontiac and Oldsmobile brands. General Motors needed to look strategically at production costs throughout the organization. A question raised was whether or not there was enough differentiation between Chevrolet, Buick, Pontiac and Oldsmobile. A result of General Motor’s brands introspection resulted in Pontiac and Oldsmobile consumers being forced to reevaluate their VRQs related to the feelings of a car’s attractiveness or prestige.

The trash heap of failed innovation is littered with great ideas and products with mismatched marketing strategies, e.g. Sony’s Betamax.

Sony’s marketing pitch was, “Watch whatever, whenever.” Their emphasis was on recording TV programing. The Betamax recording machine was solid as a rock at 36 pounds and produced superior recordings on 60-minute tapes. And it was expensive. Early adopters didn’t care about the cost.

Enter JVC and the VHS tape format. JVC’s machines did not produce as quality a reproduction of images and sound as Betamax, but was lighter by 7 pounds which allowed for a significantly less expensive product and their tape recorded for 2 hours which could accommodate TV programming and the length of most movies. Sony thought they would prevail in a battle with JVC.

JVC developed relationships with the now extinct video rental industry and the rest is history. While consumers entertainment VRQ lit up about being able to record their favorite TV shows and watch the shows when it was convenient for them, watching movies at home on an okay tape format using a machine that was significantly less expensive trumped quality and created different entertainment VRQ priority.

Businesses beware –

Consumer driven VRQs are a dynamic ever-changing set of variables. Keep an eye on your industry competitors and work, strategically, to avoid being surprised by the direction your industry may bend to accommodate the VRQ variables your customers rate higher than others.

Conversations about Value – A Series

April 12, 2021 by Ken Vermilion Leave a Comment

By Ken Vermilion

Value –

Exactly what is value? How is it created? Is measuring value and its creation the application of straightforward financial metrics? Value can be expressed in terms of financial strength or growth, or as a function of quality or prestige. In many ways, value is in the eyes of the beholder.

What is value? It depends! Let’s take a look at a couple of short stories that illustrate this point.

Satisfaction Guaranteed –

A colleague of mine tells a story about an experience from his consulting days. Roughly, the client he was working for was discussing the values of the company and how his employees understood the company’s core values. Especially the “satisfaction guaranteed” value.

The company was a catering business. The story related to a customer not being happy with an element of the food offerings for their event. Without hesitation, the young crew chief apologized and promised a full refund, not just a refund for the disappointing offering. The owner of the catering business was proud that this employee understood that they had the authority to make things right for the customer on the spot. No need for securing approvals.

We Will Address Global Warming –

Out of the blue, the CEO announces, “Your Company has committed to reduce its carbon footprint by XX% over the next 10 years. Let’s get to work!”

The buyer of “contraptions” immediately partnered with the vendor to rethink the production process. It was determined that packaging for “contraptions” was excessive. Paper backing was reduced, plastic coverings were eliminated, and the overall package size reduced. Good news, more “contraptions” fit into the reengineered shipping containers. Job well done! Maybe yes, maybe no.

Logistics wasn’t prepared for handling the new dimensions of a box of contraptions, which caused inefficiencies in loading, distribution and storage. Inventory managers economic ordering quantities calculations no longer were efficient and out-of-stock issues bubbled up, and displays in the stores just looked goofy.

Some history –

In the mid to late 90’s, publicly traded companies began to contemplate measuring Economic Value Added (EVA) and shareholder value. Companies worked to crystalize value drivers and their employees role in the management of these drivers, e.g. customer service, new business development, return on investment thresholds, expense management, etc. And the finance group was busy developing metrics that ensured profits covered the costs of capital, including expected returns to shareholders.

Companies launched training programs focused on explaining how each employee’s role contributed to the development of EVA. Senior management began to see one more performance criteria creep into the calculations for compensation purposes.

Smaller operating units within the corporation were seeing this somewhat esoteric “Headquarters EVA” initiative begin to reshape their thinking, but not always in a good way.

For example, smaller operating units with the company began to analyze their operating costs with an eye on reducing them. But rather than looking inward for operating improvements, some looked to off load costs to other operating units within the organization. “These extra production steps accommodate the shipping department specifications. They should pay for these added costs!” “Why is my P&L burdened with the cost of the legal department? We don’t use lawyers!” “The basis for my headquarters cost allocation is wrong! Tell the finance manager to reduce it?”

Value creation within particular units of a company’s operations may be very different than within other unit operations. Value drivers for the sales department are very different from the value drivers of customer service or manufacturing or the finance department. And not carefully managed, creation of value in some operating activities may actually destroy value in other activities.

So, Tell Me More –

What do these stories have to do with understanding value? And is there a difference between a company’s value proposition and its value promise? Keep reading.

At the end of the day, senior leadership should determine what the organization’s value “promise” is going to be. That “promise” will most likely be measured differently across the various parts of the organization. The marketing department’s metrics might measure sales productivity or company reputation as viewed by customers. Human Resources might utilize any number of employee engagement measuring tools and implement an employee attitude survey. Company legal departments could create cost avoidance measurements rooted in implementing risk management and compliance initiatives. The finance department has any number of metrics that look at a company’s change in financial condition over time or value to shareholders to illustrate the creation or loss of value.

The previous paragraph doesn’t suggest that in order for an organization to create value over time that every operating entity within the organization needs to demonstrate the creation of value over the same period of time. Or does it? What a wonderful world it would be if that were the case.

Stay tuned for the next chapter in this series.

WHAT WE KNOW FOR SURE – Part 3 – Financial Pressure

October 27, 2020 by Ken Vermilion 2 Comments

We posted COVID, STRATEGY, AND WHAT WE KNOW FOR SURE about a week ago. Here are some further comments and observations about the second “known.”

Gee, about a year ago, things were simple. Put together a good strategy and ride it into the future. Sweet!

BAM! COVID-19! >>>>> FINANCIAL PRESSURE WILL INCREASE!

OK, it’s obvious that financial pressures have and will increase. The question you might want to dig into is “So, how much should I, a non-expert but an up-and-coming leader, need to know?”

See if the following list list makes you nervous. If so, start learning just a wee bit more about the magic stuff (money) that keeps your business running.

Profit and Loss Statement

Net Sales
Cost of Goods Sold
Merchandise/Product Margins
Net Profit
Cash vs. Non-Cash Items
Accrual Reporting vs. Cash Reporting
Variance Analysis
Are you really making money? How much profit does the company make on $1 of revenue?

Balance Sheet

Types of Assets
Types of Debt
Owners Equity

Cash Flows

Operating
Investing
Financing

Meaning of Basic Financial Ratios

DuPont ROE Model
Return on Investment
Return on Sales
Return on Assets
Impact of Leverage/Borrowing

Budgets

How to Budget
Variance Analysis

Don’t get snowed as the world changes around you. Financial literacy is needed at ALL levels of leadership.

A Middle Managers Guide to Finance

May 2, 2020 by Ken Vermilion Leave a Comment

What is Financial Management?

Today’s post for A Middle Managers Guide to Finance provides middle managers a quick outline of financial management. And, hopefully, in a manner that is relatively painless. Feel free to comment at the end of the post!

I’m going to guess that as a middle manager, you probably await finance reports that signal to you and your manager how your part of the business is performing. These reports may come from the accounting department and report current performance data compared to some sort of budget/plan and last year. I’m also going to guess you probably dread the annual planning/budget exercise. And when your CFO talks about the company’s performance, “What did the CFO just say?” is the question of the day.

Just what is Financial Management and how much do I need to know about financial management to do my job? Isn’t all that finance stuff the CFO’s problem?

Financial Management starts with Financial Managers and their high level Goals/Responsibilities. In a general abbreviated format, financial managers have the following responsibilities:

Financial Planning and Analysis – These responsibilities refer to activities related to forecasting future business results, ensuring company goals can be achieved and putting pencil to paper to measure whether or not forecasted goals were actually achieved. Financial management professionals also kick the tires on new endeavors; again ensuring the returns fit company expectations. A great deal of accounting data supports these activities.
Asset Management – Here, Asset Productivity could be the description as well. Financial management looks at the returns being generated on the investment in assets, e.g. cash, inventory, people, technology, equipment and buildings.
Overall Financial Structure – The financial structure refers to managing the amount of cash and debt the company uses to operate. This activity also determines how new assets, e.g. buildings, will essentially be paid for or financed. And whether or not new equity (shareholders money) should be raised in lieu of borrowing additional cash.

Your company’s financial reports are rooted in accounting data and reports subjected to Generally Accepted Accounting Principles (GAAP). These principles are generally accepted set of accounting principles. Standards and procedures issued by the Financial Accounting Standards Board (FASB). GAAP and FASB exist to bring reporting standards of financial data in such a way that enables comparisons to be made between company’s reports and to provide clarity and consistency.

To be a successful middle manager, you must have a grasp of fundamental financial management concepts in order to “walk the talk” about financial performance levers under your control. Understanding the fundamentals of finance help you ask the right questions if performance is either too good, on target or slipping. Understanding the fundamentals also helps you make business adjustments where needed.

Key pieces of this financial foundation include performance analysis and asset management. Yes, mathematics is involved! Financial concepts involving the time value of money, ratio analysis, cost of capital, return on investment, profitability, valuation, price elasticity, etc. will be covered in future posts.

So, what does this mean to middle managers? Breathe easy. You won’t be asked to develop spreadsheets to augment your decision-making tool kit or to develop the metrics for valuing the purchase of new equipment or additional inventory. Financial professionals will perform these activities.

But you need to possess a high-level understanding of financial management concepts, especially when preparing budgets or requesting additional resources. Financial managers want to know resources are being applied efficiently in your business and are producing expected returns, all based on how they measure productivity and performance. And guess what, you want to know, too! My goal will be to provide you this understanding foundation as we move through other financial management posts.

If you can’t demonstrate an understanding of basic financial management concepts, you will be left in the dust. Another middle manager who can engage the finance department will make off with your resources while someone else reorganizes your operations. Enough said.

Reflect back on the post related to cash for a minute. If you were able to follow through with the Career Momentum suggestion at the end, you better understand the connection between the people and activities under your supervision and their connection to cash sources and uses. Plus, you now are on a first name basis with your new best friend, the financial manager attached to your business-operating unit. (Seriously, having the finance manager on your side is invaluable!)

A final word about reporting. Typically, there are internal financial reports, external financial reports and management performance reports. Each serves a different audience and therefore contains different types of financial data. Most meaningful to you will be understanding the genesis and underlying financial concepts related to management performance reports used to evaluate your business’s performance.

Career Momentum Builder

Ask your supervisor to share with you their point of view regarding the keys to their management performance reports, usually produced by the accounting department monthly or quarterly. What’s most important? How does your operating unit fit into these reports? Are there performance targets to be attained this period? How can you be more helpful in attaining these targets? Is there a role you can play during the next planning cycle?

A Middle Manager’s Guide to Finance – Cash

March 26, 2020 by Ken Vermilion 4 Comments

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The phrase Cash is King is frequently used when educators begin imparting business management wisdom upon unsuspecting students or when owners of family businesses prepare others to assume owner responsibilities. Understanding how cash flows through your company will definitely enhance your strategic thinking skills.

Cash is the vital fuel used to run the engines of business. Simply put, cash enables business. Enough said.

The management of cash is crucial to the successful business. Cash flows into the business from a number of sources, e.g. cash sales, accounts receivable collections, and loans. Cash is used a number of ways in business and therefore flows out of the business, e.g. buying materials, clearing accounts payable, paying back loans, and paying employees or shareholders. Plus, strong predictable cash flow helps businesses negotiate favorable financing terms.

Cash is also an asset and should be subject to standards of productivity. A company needs enough cash on hand to meet the demand and should be collecting cash quickly and efficiently. Therefore, cash is subject to budgets and forecasts. To facilitate the reporting of cash in (sources) and out (uses) Cash Flow Statements are prepared. Middle managers are rarely involved in the aforementioned activities/reports. Managers in accounting, finance and treasury keep their fingers on the pulse of cash inflows and outflows as well as cash on hand for the company CFO.

However, middle managers can and do influence cash flows.

Think about it. Most everything around your department has something to do with cash.

The building, office furniture and equipment, electricity used to provide light and run the equipment, supplies, etc. were put in place by some sort of cash transaction. The same can be seen in a warehouse or a doctor’s office.

Now, let’s think about the nature of your business. Does your company sell products? Does your company make the products or buy the products to resell. Both models require maintaining an inventory of product. Think about inventory as cash waiting to happen.

Take a moment to think about your role in the company’s need for cash or exchanging goods or services for cash. Are there activities that could slow down or reduce your company’s need for cash without compromising employees, customers or shareholders? How could you or your department’s activities accelerate the collection of cash?

Add understanding of how cash flows through your company as an additional decision-making lens for managing your department’s activities.

A final note; cash is not the same as profit. Cash is the fuel for business. Without it companies will fail. However, cash does not make the multiple moving parts of business work effectively or efficiently.

A car makes a great analogy. Keep your eye on the fuel level and make sure your not going to run out before the next gas station. But gas alone does not keep the car moving forward. You need to understand how the car works. Business is the same.

My advice, keep an eye on how your activities impact the level of cash in the fuel tank and know what you are looking at when you raise the hood!

Career Momentum Builder – For the next few days, view your activities and your department’s activities through the cash flow lens. Make some notes identifying whether or not cash is being used or generated. Have a discussion with your finance manager about your department’s impact on cash and listen to their point of view regarding the possibility for cash flow improvements.