Episode #92 - Best Business Books - May 2016

Hermann Simon is the founder of pricing consulting firm Simon-Kucher & Partners in 1985, together with two of his doctoral students. With 30 offices in all major countries and revenue in excess of $250 million, his firm today is a global leader in price consulting.

Excerpts

“I confess that there may not always be a level playing field between the seller and the consumer. generally I think that the game is fair. The reason lies in one word: value. Customer satisfaction is the only way to maximize long-term profits.”

“Some people see 'profit' as the ugly side of capitalism. 'Maximize profit' is an inflammatory phrase which can send shivers down these people’s spines. The simple truth is that profit is the cost of survival. Making a sustainable profit is a matter of ‘to be or not to be.’ And price, whether you like it or not, is the most effective way to generate higher profits.”

“But I am not a fan of short-term profit maximization. My mission is to support companies in optimizing their prices to achieve sustainable long-term profitability.”

“Never run a business in which you have no influence on the prices you charge.”

“We received further support and inspiration Peter Drucker. ‘I am impressed by your emphasis on pricing,’ he told me during a visit to his home in Claremont, California, adding that it is the ‘most neglected area of marketing.'"

“Pricing intrigued Drucker from an economics and also from an ethical perspective. He understood profit to be the ‘cost of survival’ and sufficiently high prices to be a ‘means for survival.’

“Before his death in 2005, he provided a testimonial for Manage for Profit, Not for Market Share, a book which I co-wrote with two colleagues: ‘Market share and profitability have to be balanced and profitability has often been neglected. This book is therefore a greatly needed correction.’”

“Pricing is always a reflection of how people divide up value. We are constantly making decisions about whether something is worth our money, or trying to convince others to part with their money. That is the essence of pricing.”

“Managers tend to have fear of prices, especially when they need to increase them. Managers will keep their hands off the pricing lever if they have doubt, turning their attention to something more tangible and more certain: cost management.”

“Most important aspect of pricing. I answer with one word: ‘value.’ Only the subjective (perceived) value of the customer matters. The objective value of the product or other measures of value, such as the Marxian theory that value is defined by the human labor time invested, do not matter intrinsically. They matter only to the degree that the customer thinks they matter and is willing to a pay a price in return.”

“In Latin the word pretium means both price and value. Literally speaking, price and value are one and the same.”

“Behavioral economics does not yet offer a complete, unified theory. Test results which support behavioral economics have begun to face increasingly critical challenges. Most of the findings come from laboratory settings, should serve as a warning against throwing the idea of the ‘rational human’ completely overboard. Human beings are not as rational as classical economics claims, nor are they as irrational as some behavioral economists claim. This means that you should take both of these research traditions into account, but proceed with caution.”

Richard Wagoner, the former CEO of General Motors , said: “Fixed costs are extremely high in our industry. We realized that in a crisis we fare better with low prices than by reducing volume . After all, in contrast to some competitors, we still make money with this strategy.”

“Former Porsche CEO Wendelin Wiedeking represented the exact opposite end of the spectrum with this statement: “We have a policy of keeping prices stable to protect our brand and to prevent a drop in prices for used cars. When demand goes down, we reduce production volume but don’t lower our prices.” We always want to produce one car less than the market demands.”

“In a war, the atomic bomb and price are subject to the same limitation: both can only be used once. Overcapacity is the most frequent trigger for a price war.”

“Pricing belongs on the CEO ’s desk.”

“A 2012 study, which included 2,713 managers from over 50 countries and a large cross section of industries found for companies with strong CEO involvement: The pricing power was 35% higher.

"The success rate for implementing price increases was 18% higher. 26% more achieved higher margins after the price increases, which means that they were not just passing on higher costs to their customers. 30% had a special pricing department, which in turn had an additional positive effect on profits.”

One Disagreement

When Hermann writes: “Tighter antitrust regulation contributes to better price competition. It is one of the rare examples of government intervention which actually allows pricing mechanisms in markets to function more freely.”

I think this is highly contestable, based on the evidence of the damage that anti-trust laws have on enterprise, including the uncertainty the laws create.

Honorary Mention

Two other Simon-Kucher partners just published Monetizing Innovation: How Smart Companies Design the Product Around the Price, by Madhavan Ramanujam, Georg Tacke, 2016.

“Choose the right pricing and revenue models, because how you charge is often more important than how much you charge.”

“A bad monetization model can be worse than a bad price.” 

“72% of new products/services miss revenue/profit goals.”

Drucker’s Lost Art of Management: Peter Drucker’s Timeless Vision for Building Effective Organizations, by Joseph A. Maciariello and Karen E. Linkletter, 2011.

Maciariello is a professor of management, Karen is a historian.

Drukcer called management a “liberal art,” linking it to the humanities.

He called himself a social ecologist—creates and maintains a society of functioning organizations, anticipates discontinuities, provides for both continuity and change.

“Management is a practice rather than a science or a profession, though containing elements of both.”

Management’s only hope to be a moral force for right and good   is to ally itself with the liberal arts. The early business schools recognized that…they required education in the liberal arts.

This book sets out to explain what he meant—he didn’t define it clearly.

Management cannot be concerned solely with results and   performance

Management: “The art of getting things accomplished throug people”

Four topics putting management as a liberal art into practice:

1.    Federalism (Federalist Papers, USA’s lasting contribution to Western thought)

2.   The human dimension (natural rights theory; dignity)

3.   Leadership (responsibility, not rank or privilege) “assuming responsibility for getting the right things done.” Integrity of character is its essence. Also, succession.

4.   Social ecology

Organizations must provide: status, function, sense of community and purpose.

Liberal education instilled standards of conduct and character, knowledge, and mastery of a body of texts, a respect for societal values and standards, and an appreciation for knowledge and truth. It can be defined by what it’s not: vocational training.

In 1959, Ford and Carnegie foundation report: Higher Education for Business, concluded:

Business education lacked any cohesive curriculum, failed instill sense of professionalism and accountability, suffered a   serious absence of academic quality and content. 

E’ffing Debate!

Effectiveness is not a “batting average,” the number of successes over the number of attempts. Rather, effectiveness is a “slugging average,” actual contribution to the mission of the organization over potential contribution.

Ed’s Books

The Future of Management, by Gary Hamel, 2007. I know Ron profiled this a while back, but I wanted to have my say on it as well. 

Hamel's Innovation Stack

Some great questions

What's the "tomorrow problem" that you need to start working on today?

What is the frustrating "either/or" you'd like to turn into an "and"?

What is the espoused ideal you'd like to turn into an embedded capability?

What's the "can't do" that needs to become a "can do"?

Quotes

"If you wring all the slack out of a company, you'll wring out all the innovation as well."

"If you can't find enough people to work on your project, maybe it's not a good idea."

"At Gore, tasks can't be assigned, they can only be accepted."

From David Weinberger, "Our biggest undertaking as a species [the Internet] is working out splendidly, but only because we forgot to apply the theory that has guided us ever since the pyramids were built."

Follow-up book by Gary Hamel: What Matters Now: How to Win in a World of Relentless Change, Ferocious Competition, and Unstoppable Innovation, 2012.

Sterling’s Gold: Wit and Wisdom of an Ad Man, by Roger Sterling, 2010.

Quotes (as only Roger Sterling, aka John Slattery, can deliver them)

"I'll tell you what brilliance in advertising is: ninety-nine cents. Somebody thought of that."

"I don't know if anyone ever told you that half the time this business comes down to: 'I don't like that guy.'"

"It probably didn't help things that our billings crept up for no apparent reason. Eventually an accountant is going to read the mail."

"I'm being punished for making my job look easy."

"Big talent attracts big clients."

"4:30? Close enough."

"I told him to be himself. That was pretty mean, I guess."

"Mona had a dream once where I hit the dog with the car. She was mad at me all day, and I never hit the dog. We don't even have a dog."

"Believe me, somewhere in this business, this has happened before."

Book Recommendations from TSOE Listeners

Special thanks to Caleb and Lauri for the following book suggestions.

Caleb L. Jenkins (@CalebLJenkins): It’s Not Your Business: Kingdom-Centered Business in a Self-Centered World, by Gary Miller, 2015.

Lauri Jutila (@ljuti): Effective Apology: Mending Fences, Building Bridges, and Restoring Trust, by John Kador, 2009.

The Business of Belief: How the World’s Best Marketers,   Designers, Salespeople, Coaches, Fundraisers, Educators, Entrepreneurs and Other Leaders Get Us to Believe, by Tom Asacker, 2013.

The Prime Solution: Close the Value Gap, Increase Margins, and Win the Complex Sale, by Jeff Thull, 2016.

Infinite Possibility: Creating Customer Value on the Digital Frontier, by B. Joseph Pine and Kim C. Korn, 2011.

Other resources

Ed's session on strategy at Accountex in the UK.

Comment

Ed Kless

Ed Kless joined Sage in July of 2003 and is currently the senior director of partner development and strategy. He develops and delivers curriculum for Sage business partners on the art and practice of small business consulting. Courses include: Sage Consulting Academy, Business Strategy and Customer Experience Workshops. Ed is the author of The Soul of Enterprise: Dialogues on Business in the Knowledge Economy, a compendium of a few of the episodes of his VoiceAmerica talk-show The Soul of Enterprise: Business in the Knowledge Economy with Ron Baker, founder of the VeraSage Institute where Ed is also a senior fellow.