November 2018 – In business today, we all seek ROI — Return On Investment. It is said that what is measured gets managed, and professional managers have little choice but to use the analytic tools they have to make decisions. But to maximize profits, especially in the produce industry, executives need to realize the limitations of the tools they have.
We noted this shortcoming decades ago when category management became all the rage at retail. The retailer would put someone in charge of using all the data management and analytic tools available and tell him or her to maximize the profitability of, say, the cookie category. They would swap out some imported French cookie for a seventh domestic chocolate chip cookie and boost the profits of the category. It seemed like a great use of data and analytic skills, all measurable and manageable.
In subsequent years, though, research by the Specialty Food Association and other organizations showed that the whole process was addressing the wrong question. Nobody actually cares whether the cookie category is maximally profitable; all retail executives care about is the overall profitability of the store. That rarefied French cookie might attract a certain consumer to the store — maybe one who buys expensive fresh fish, fine wines, olive oils and such.
Answering the question of how carrying this cookie will impact overall store sales and customer profile is a far more difficult thing to understand and assess. But it is the only question that matters in establishing assortment. Yet because it is hard to measure, many to this day focus on what is easy to manage, not on what is important to manage.
In the marketing end of the produce industry, we’ve been confronted with these kinds of issues over and over again. Executives yearn for ROI, but they are either pursuing things because they can be measured, regardless of importance, or they are incentivized personally in a way that leads to decisions unlikely to maximize corporate success.
What are some of the corporate issues that thwart achievement of the best ROI?
Geographic Organization — Many companies today have organizations divided by national or regional borders, and it makes decision-making complicated. When we went abroad and started opening trade shows and conferences in other countries, this became very evident. We would go to the CEOs of global organizations and they would tell us that because a particular event was in a particular country, the subsidiary in that country would make a decision on participation. Fair enough, but the question was by what criteria would this decision be made? Over and over again, it turned out that the team running the subsidiary had no incentive to help the company overall, so, even if they were persuaded that a big Chinese buyer would place a massive order with their Peruvian subsidiary, that was not sufficient reason for, say, the Dutch subsidiary to spend money on exhibiting.
Assessment Period — If you want to assess the ROI of an investment, you have to question over what time frame this assessment will be made. Yet, companies often disrupt wise investments with incentive programs based on annual results. Of course, a year is just the time it takes the earth to travel around the sun, and so has no particular relevance to the time frame where investments should expect to be successful. In the simplest way, we’ve had calls from good friends canceling ad programs in the fourth quarter only to resume it in the first. Not too infrequently when we drill down to why someone would do such a thing, we learn that they were just missing some budget target that would allow them to get a bonus! Many marketing investments are very successful but only when judged over time — advertising, exhibiting, and those types of activities in a business-to-business environment may show results intermittently or cumulatively.
Function — One of the limitations for companies is that they like to assign costs to a particular function or department, but the benefits don’t necessarily accrue to that particular area. For example, we know of loads of companies that have gotten enormous returns from participating in trade shows. They met an executive who eventually became their best salesperson, or they sublet unused space in their distribution center for 20 years to another company becaue of meeting someone at a trade show.
But very often the participation in the event is paid for by a division — say retail sales. There is no mechanism for the added value of any of these things to go back to the paying division.
So, the consequence of all this is that most businesses substantially “undermarket” themselves. Internally, they just can’t create a mechanism by which expenditures that A) support different countries and regions; B) will be profitable over time; and C) support different divisions and functions can be offset by these benefits. So, they don’t do things that would produce substantial ROI.
In The Hitchhiker’s Guide to the Galaxy, a supercomputer given the name Deep Thought ruminates for 7.5 million years and finally spits it out: “The answer to the ultimate question of life, the universe and everything is 42.”
Had Douglas Adams, the author of the book, known the produce industry, the joke might have been a warning against excessive faith in that which can be calculated. pb