6. Window on managing suppliers

The cultural change at Microsoft has been well documented, partly because everyone knows
the brand and partly because the change has been so dramatic.
What can procurement learn from this most famous of case studies? In the sixth in the series
of blogs about change management in procurement, I consider the cultural change at
Microsoft and what it can teach us about managing suppliers.
There are many anecdotes about Microsoft, the personal computer software company under
the leadership of Steve Ballmer, CEO from 2000 to 2014. The culture was highly competitive
and at time ruthless. In an interview with the Chicago Sun-Times early in his tenure in 2001,
Ballmer called Linux, an open-source operating system and popular Windows alternative, “a
cancer that attaches itself in an intellectual property sense to everything it touches.” This was
at odds with many Microsoft staff who viewed the open-source concept, or the idea that
software should be shared publicly for others to use, as vital to collaboration and the key to
technological progress.
Microsoft became the butt of jokes, laughed at for missing out on mobile entirely, as well as
its clunky hardware, talking paperclips, and susceptibility to viruses and spyware. The share
price also suffered.
Fluctuation in the technology sector are more extreme than many other sectors and
Microsoft’s dominance, like any other organisation, was only temporary. Procurement
professionals often feel that they are the preferred buyer of a supplier’s goods and services,
but this is rarely the case and circumstances can change quickly.
The surprise appointment of Satya Nadella 5 years ago marked a dramatic change in
Microsoft’s approach to business and culture. It shifted away from software licensing to
cloud based solutions.
Central to the new CEO’s world view was the growth mindset, the
belief that skills are improvable and they aren’t set in stone. Nadella wanted his company to
become one of “learn-it-alls,” not know-it-alls. People needed to see themselves, and the
organisation, as more fluid entities. The focus was on improving, not proving, themselves.
Although the leadership team established a long list of principles, they recognized the
neuroscience research which shows that humans have an extremely hard time remembering
exhaustive list. They shrank it to shrink to just three, two-word phrases: “Create clarity,
generate energy, deliver success”.
One of Nadella’s first announcements was that Microsoft was going to release a version of its
signature software suite—Microsoft Office—on the iPad, bucking Microsoft’s reputation for
not collaborating with rivals. As the keynote speaker at Salesforce’s Dreamforce conference
two years later, Nadella used an iPhone during a product demo, a sight that would’ve been
unimaginable in the Ballmer era.
Since taking over as CEO five years ago, Microsoft’s share price has tripled. Last November,
its market capitalisation briefly passed Apple’s, temporarily making Microsoft the most
valuable company in the world.
Many procurement professionals are protective over their organisation’s intellectual rights
and are wary of collaborating, especially with competitors. The Microsoft case study does not
suggest that buyers should ignore the value of their organisation’s intellectual property, but it
does show that having an open mind, exploring opportunities and taking some chances can
have a positive benefit on the bottom line.
These days all the cool kids may still have Macs, but Microsoft, under CEO Satya Nadella,
has turned a corner. Procurement can do the same.

On time, on budget

Why does a task always seem to take longer than you think it should? It doesn’t matter if it some DIY at home or the implementation of a new IT system at work, it takes longer than everyone expected. Procurement projects, whether that’s getting a purchase order approved or sourcing a new product, often suffer the same fate.

The planning fallacy, first proposed by Daniel Kahneman and Amos Tversky in 1979, is a phenomenon in which predictions about how much time will be needed to complete a future task are under-estimated. The planning fallacy is one of the most common and consistently demonstrated cognitive biases.

In the fifth in the series of blogs about change management in procurement, I consider the planning fallacy, why it occurs and what we can do about it.

There are 3 reasons for the planning fallacy: optimism bias, coordination neglect and procrastination.

  • Optimism bias is a cognitive bias that causes someone to believe that they themselves are less likely to experience a negative event. It is also known as unrealistic optimism or comparative optimism. Examples include buyers who think they are less exposed to price increases and project managers who think they are less inclined to go over-budget.
  • Coordination neglect exists when organisations divide a task and then fail to integrate it effectively. This is as a result of many factors including inadequate communication (lack of a common language and lack of perspective taking), partition focus (an emphasis on dividing a task and to do this quickly which results in inadequate planning) and component focus (people focus on a particular task and have narrow functional specialties).
  • Finally, procrastination arises do a lack of impulse control, that is, we do what is more instantly gratifying. Unfortunately, the digital communication revolution and the way it is designed to distract us make procrastination more likely.

So how can we avoiding or minimise the planning fallacy? There are 3 ways:

  • The first step is to recognise that the planning fallacy exists. When a new project is presented that requires procurement input, we should recognise that the presenter has probably under estimated the cost and overestimated the benefits. This is called strategic misrepresentation. All though this may sound like we are calling the presenter a liar it is common among all presenters of new projects so the only way they can get their project noticed is by following everyone else. To avoid any mudslinging, it is advisable to have a record of previous projects so that we can see the level of strategic misrepresentation in the past. The UK government have a green book which contains data about public projects and have found that they are typically 40% over budget. Now I must be clear, I’m not saying that we should give contractors 40% more money. We must draft contracts that incentivise contractors to meet the original target and construct liquidated damages that enable us to claw back a representative proportion of the over-spend.
  • More time should be given to effective planning. Procurement have a key part to play here by ensuring that sufficient time is allowed to develop the scope of work, conduct the negotiations and finalise the contract.
  • Finally, more resources should be given to communication across the team. Again, procurement have a key role. Procurement can help with translation, for example, where engineers can’t talk with marketers and where suppliers can’t talk to cost centre managers.

The planning fallacy is real but we are not helpless. No one wants to tell the boss that it’s going to cost more and take longer but she’s going to find out eventually. It’s better to be the trusted advisor that is proved to be right that someone who’s seen to be part of the problem.

4. Beating the odds

The failure rate of mergers and acquisitions is well known. Study after study puts the failure rate of somewhere between 70% and 90%. Responsibility rests largely with poor change management, that is, a failure of leadership, communication or planning.

In the fourth in the series of blogs about change management in procurement, I consider the role during a merger. I have led the procurement activities in a merger for a number of clients and follow the planning, transition, optimisation (PTO) methodology. In my experience, procurement is uniquely placed to deliver the lion’s share of the benefits including cost reduction. Procurement savings are greater and can be delivered more quickly than those from, say, financial re-engineering or organisational design.

A merger is an agreement that unites two existing companies into one new company. Mergers and acquisitions are commonly done to expand a company’s reach, expand into new segments, or gain market share.

There are two types of mergers: horizontal mergers involve companies with similar area of work e.g., Chevron and Texaco; and vertical mergers involve companies with diverse area of work e.g. AOL and Time Warner. From a change perspective, vertical mergers are more challenging.

If a merger is seen purely as a financial transaction, then the benefits will not be realised. If it is seen more widely, that is, the union of two different cultures then success is much more likely. Trompenaars and Hampden-Turner’s model of national culture differences is a framework for cross-cultural communication applied to general business and management. The model has seven dimensions that can be equally applied to companies in a merger or the buyer and supplier in supplier relationship management (SRM). It can help the leaders of both companies involved in the merger face the challenges such as cultural management, stress management, redundancies, organisational change, resistance to change, job insecurity, talent drainage and low motivation.

There are several models of the change process include Kurt Lewin‘s which suggests 3 stages: The first stage is unfreezing the organisation’s existing culture by discontinuing current practises, attitudes and behaviours. The second stage is transition which basically involves teaching the work force new concept like category management or the use of new technology. And the final stage is refreezing the culture by reinforcing new practises, attitudes and behaviours once the change was implemented.

Effective change management is critical to any merger. Procurement and supply chain is uniquely placed to deliver the synergy savings. Combining the two means that companies have a much better chance of beating the odds and delivering a successful merger.

3. It’s the people, stupid

Implementing new systems is fraught with problems. In a recent survey almost half (48%) said the SAP project failed to achieve their business objectives. So why do organisations invest so much in these projects when they deliver so little? And is there are better way?

In the third in the series of blogs about change management in procurement, I consider the change activities required to implement new purchase to pay (P2P) and source to contract (S2C) solutions. Traditionally, most procurement systems have been implemented as part of a larger enterprise resource planning (ERP) system like SAP or Oracle, however, the market is changing with specialist like Coupa, Curtis Fitch, Ivalua, Jaggaer (Bravo Solutions) and Proactis offering modular systems focused on procurement’s requirements.

I have led several implementations of enterprise wide solutions (SAP, Oracle) and specialist solutions (Ariba, Curtis Fitch). If we assume the basics are in place, namely, a robust business case, an implementation plan based on best practice and an adequate budget, then I encounter 3 common problems:

  1. People should be at the heart of any change. The first stage of Kotter’s 8 stage change model is to establish a sense of urgency so that “a majority of employees, perhaps 75%, of managers overall, and virtually all of the top executive…believe that change is absolutely necessary.” This may sound like a very high bar, however, the same people who believe that change is absolutely necessary will be asked to attend briefings and training courses and will eventually use the system every day. It is better to share information early, even if is going to change, and listen to people’s concerns before telling them the answer to all their problems!
  2. Effective and efficient processes offer competitive advantage, not software. Adam Smith, the grandfather of economics, opened his seminal text with a description of the processes in a pin factory (An Inquiry into the Nature and Causes of the Wealth of Nations – 1776). More recently, Peter Drucker, the management guru, explained the benefits of simplification and decentralisation of processes in General Motors (Concept of the Corporation – 1946). A contract for a software solution from SAP does not, in itself, offer any benefits. And taking a manual tender process and simply automating might remove a few key strokes but will not deliver much benefit. All too often, programmes are described as systems implementations and lead by IT. I believe they should be described as business transformation programmes and lead by the people who are most affected.
  3. Every system implementation plan includes a phase for data migration, however, many organisations fail to recognise the volume of data that is required to power ERP systems and the need to structure it in such a way as to drive compliance. It doesn’t matter how good your P2P process is if requisitioners have to trawl through a list of thousands of suppliers to find one they want. If a new system is needed then it stands to reason that the data held in the old system needs to be gathered, cleansed and enriched before it is migrated to the new system. Unfortunately, improving data is time consuming and requires scarce resources. Managing data well has generated fortunes for Amazon, Facebook and Netflix. Every systems implementation should value process and data equally and follow Carly Fiorina’s matra, that is, “the goal is to turn data into information, and information into insight”.

A new IT system is no silver bullet. It should be seen for what it is, a series of configurable workflows and reports. If organisations want to achieve the benefits of  business transformation then they should invest in engaging with the people affected, design effective and efficient processes and structure the data in a way that makes being compliant easier.

2. Changing source

The outcome of strategic sourcing invariably involves some change. Introducing a new supplier, for example, or offering a new range of products or outsourcing services all impact day to day operations. Where there is significant disruption, change management can be as important as negotiation.

In the second in the series of blogs about change management in procurement, I consider the change activities required in sourcing projects. Research by Burnes showed that two thirds of change management projects fail. In my experience there is no reason to believe that strategic sourcing projects are any different. In this blog I’m going to look at the strategic sourcing process, ways to assess the impact of any change and approaches to communication.

There are several strategic sourcing processes with anything from 5 to 12 separate steps. My favourite is A T Kearney’s 7 steps for sourcing information products. Change management is mentioned in a couple of steps:

  • Step 1: Profile the category, understand needs analysis: “You should … interview current users to develop a thorough understanding of their needs for the product, their view of the suppliers’ performance, and any enhancements that they would like to see in the product.”
  • Step 6 Integrate suppliers: “If you have decided to work with a new supplier and/or to discontinue an old one, you will need to identify any transition issues, consider organisation implication and any required changes, create new processes and procedures if necessary create a transition /implementation plan and communicate the changes to your users.”

But how do you “identify transition issues, consider organisation changes … and communicate the changes”?

There are several evaluation methods but the most popular is the 7-S model. As the name suggests there are seven interdependent element which are categorised as either “hard” or “soft”.

“Hard” elements are easier to define and management can directly influence them: strategy (the plan devised to maintain and build competitive advantage); structure (who reports to whom); and systems (the day to day activities and procedures that staff members engage in to get the job done).

“Soft” elements are less tangible and more influenced by culture. These soft elements are as important as the hard elements for the organisation to be successful. Soft element include style (of leadership); staff (type and number of employees and the way they are recruited, trained, motivated and rewarded); skills (the actual skills and competencies of the employees working for the company) and shared values (or “superordinate element” , that is, the core values of the company that are found in the corporate culture).

The model states that these seven elements must be aligned and mutually reinforcing for the organisation to perform well. Take, for example, replacing several hotel, flight and car rental suppliers with a single travel management company (TMC). A new expenses policy (strategy) and approvals hierarchy (structure) can be embedded with the TMC to provide a more robust controls framework. New processes (systems) will be required to channel employees to the single supplier and then to the most cost-effective travel arrangement. Staff will need to be trained on the new policy and processes (skills). Given the emotive nature of travel, support from the organisation’s leaders will be critical to success (style). Finally, the approach must be aligned to the organisation’s shared values, so making everyone fly on Ryan Air will probably back fire.

Now that changes have been identified, how should you communicate these to the organisation? There are several factors to consider including the structure of communication, target audience and method.

There are many ways to structure message, but the 3-step approach works well for introducing new suppliers:

  • start with “coming soon” – “We have selected a new TMC to replace supplier X, Y and Z”
  • followed by “save the date” – “The new TMC will go live on 1 Jan”
  • finally, “go live” “The new TMC went live today so if you have a travel requirement click here”

The message should be tailored to the audience. Travellers, for example, need details of the supplier, scope of work, service level agreement and where to get help. Approvers, however, only need to know that something is changing.

There are several methods of communication and include:

  • web-based communication – one of the lowest costs methods but relies on internal stakeholders actively looking for information (pull communications)
  • email – another low-cost option but you can’t rely on recipients to read their email (push communication)
  • video and telephone conferencing – enable people in different locations to interact
  • face-to-face meetings: enable the most interaction and should be supported by a presentation to ensure consistency
  • reports: used to drive compliance

The best approach is a combination of all methods so that as many people as possible receive the message in a way they find easy to understand.

Poor compliance to new procurement processes is common and arises for many reasons. The route cause is a lack of clarity about processes and inadequate training and communication. If procurement wish to realise the full savings potential then investment in change management is essential.

1. Change is the only constant

Following the success of last year’s series of blogs taking an in-depth look at procurement technology and data, I wanted to follow up with a similar series on change management. For procurement technology and data to bring about a paradigm shift in procurement performance, organisations will have to provide excellent change management.

Organisations today perceive themselves as less and less stable, and more as a work in progress undergoing continuous change (Burnes, 2009). The frequency of mergers and acquisitions, new technologies, product innovations, all contribute to the continuous state of flux. Procurement often find itself at the forefront of many of these changes so adding some change management tools to the procurement ones make procurement professionals even more valuable.

The good news is that many of the skills required for procurement are also required for change management. Looking at the CIPS core skills programme the key requirements are negotiation and performance management. The Centre for Creative Leadership found that the competencies required for successful change initiatives were communication, collaboration and commitment.

Before going any further, it’s worth defining change management. It is the systematic approach to adjusting and transitioning organisational processes, procedures, strategies, attitudes, functions or technologies from their existing state to one that is considered superior (Burnes, 2009; Cameron and Green, 2009).

Change occurs in three ways:

  • planned change is driven by management and employs a structured approach. Much of the theory of planned change was developed by Kurt Lewin, among others, and lies at the heart of organisational development. It is often perceived as slow and time-consuming producing outcomes that are out-of-date. An example of planned change is the successful implementing a new ERP solution like SAP Ariba
  • unplanned change shares many characteristics with planned change but is initiated outside the organisation. When a government passes new legislation like GDPR, for example, organisation have to change their processes in order to comply
  • emergent change is the continual process of experimentation and adaptation that takes place across an organisation. It is the most important development in change management in recent years. Given the organic nature of the change it is often perceived as inefficient and messy. The manager’s role is to maintain the organisation’s cultural characteristics so that good change can occur. Kaizen, the Japanese word meaning “change for better” is an example of emergent change. A more recent example is Facebook’s mantra for developers, “Move Fast and Break Things.”

Over the next four months I’m going to look at ways change management techniques can support procurement and provide hints and tips for making procurement programmes more successful.

Coming of Age

Many people are sceptical of the benefits of new technology and procurement and supply chain professionals are no exception. I believe, however, that this specialist technology is finally coming of age and here’s why. https://www.marketdojo.com/resource/guest-blog-coming-of-age-angus-craig/

Brexit negotiations

Introduction

2018 will be remembered for the Brexit negotiations. Like many voters and as a procurement professional, I’ve been bewildered by the negotiation strategy that has unfolded since Brexit began almost 2 years ago.

Voters have become familiar with a variety of soundbites like “Brexit means Brexit” and “nothing is agreed until everything is agreed”. Initially this served the perceived political need for all parties, both right and left, to believe that they were going to get the Brexit they wanted, whether that was a hard or soft Brexit. The Chequers Plan shattered any of these illusions by providing no one with what they wanted.

The purpose of the Chequers Plan was to provide Theresa May, the Prime Minister, with a list of requirements. One of the most popular forms of negotiation preparation involves using a Seven Elements approach, as first outlined in “Getting to Yes: Negotiating Agreement Without Giving In” by Roger Fisher, William Ury, and Bruce Patton. The Seven Elements include interests, options, legitimacy, alternatives, communication, relationship, and commitment. It is not clear if these elements were considered at any time before or during the negotiations. As a result, May appears to have been unprepared and poorly informed which has resulted in a deal that is unlikely to be passed by parliament.

Before embarking on a negotiation, procurement professionals would create a strategic sourcing strategy which would include an analysis of the key drivers and the negotiation approach. In the case of the Brexit negotiations, the important drivers are economics, requirements and communications.

1. Economics

As with any debate of this nature, statistics have been used by both parties to justify their opinions. Unfortunately, there are many examples of the misuse of statistics, for example, the claim on the Leave campaign’s bus stating “We send the EU £350 million a week”. This compounded the uncertainty that many already felt.

I could quote the relative value of exports and imports, the criticality of services like banking and funding for EU wide initiatives like scientific research but, in terms of the negotiation, these all pale into insignificance when we consider that UK economy is a sixth of the size of EU.

This single statistics shows us the impact of Brexit on the EU will be much lower than UK which means that EU has considerably more bargaining power. Philip Hammond, the Chancellor of the Exchequer said that “looking purely at the economics, remaining in the single market would give us an economic advantage”. From a finance perspective, I would say that the business case for Brexit does not add up and the project should be abandoned.

2. Requirements

Several different surveys have shown that the two main reasons people voted Leave was sovereignty and immigration.

If UK consumers want to eat fresh tomatoes all year round, drive affordable cars and go abroad on holiday, they will have to adopt some international standards.

Furthermore, various interest groups from farmers to hotels to the NHS have asked for exemptions to the proposed immigration rules.

Given these pressures, it is difficult to see how UK parliament will have more scope to set unique laws in areas voters consider to be in the national interest.

From a business perspective, voters have been allowed to develop unrealistic expectations. This should have been identified at the start of the project and addressed through the communications strategy.

3. Communications

Inventing Euro myths has been something of a sport for the British press for nearly 30 years. From custard creams to condoms, EU has been blamed for meddling in almost every aspect of British lives. Without tackling the negativity bias [1] towards the EU, any Brexit agreement would be seen as a poor deal for Britain. Like sovereignty and immigration, this should have been addressed through the communications strategy.

Negotiation format

The Brexit negotiations have always been presented as positional bargaining [2] where UK and EU have been at opposite ends of the spectrum. By starting with an extreme initial position, the parties are forced to make concessions to reach agreement. The negotiation often grows hostile, and communications involve threats and lack transparency. The outcome is either one party winning or the negotiations stalling. All these characteristics are true of the Brexit negotiations.

If principled negotiation [3] had been adopted instead then a greater level of understanding and even trust could have been created delivering a better outcome for both parties. Given the economic situation, EU may have rejected principled negotiation in the clear knowledge that they had the most bargaining power.

Negotiation tactics

In keeping with the positional bargaining, May adopted a competing style of negotiation. This works well where fast negotiations are required and there aren’t many variables. Unfortunately, neither of these factors is true for Brexit. In the end, many will view May’s style as accommodative which led to her to be submissive and concede more than was necessary.

A collaborating style would have been more successful as both parties’ needs are met. Parties brainstorm on how to create mutual value and think outside of the box on collaborating on a solution. Again, EU may have rejected this approach.

Conclusion

UK faces an unprecedented situation in which it is impossible to accurately predict the final outcome. Given May’s tendency to procrastinate, an extension to the deadline looks likely to avoid a No Deal Brexit. Hopefully, lessons have been learned and the extra time will not be wasted.

[1] Negativity bias, also known as the negativity effect, is the notion that, even when of equal intensity, things of a more negative nature (e.g. unpleasant thoughts, emotions, or social interactions; harmful/traumatic events) have a greater effect on one’s psychological state and processes than neutral or positive things. Danny Kahneman (an economist who won the 2002 Nobel prize for his work) asked participants in a study to imagine either losing $50 or gaining $50.  Even though the amount is the same, the magnitude of the emotional response is significantly larger for those imagining what it would be like to lose the money.  In other words, the negativity of losing something is far greater than the goodness of gaining something, even when the “something” that has been lost or gained is objectively equivalent.”

[2] Positional bargaining, also known as distributive negotiation, involves arguing based on a position. Each side takes an extreme position based on its wants, needs, and limitations. These positions are almost always on opposite ends of the spectrum. The parties then treat the negotiation as a zero-sum game in which only one party can “win” the negotiation.

[3] Principled negotiation, also known as integrative negotiation, is a negotiation format in which parties work together to forge a value-creating agreement that leaves both parties happy with the outcome and with the status of the relationship. Principled negotiation creates a collaborative environment in which parties establish shared interests and work together to build mutually beneficial solutions. The parties treat the negotiation as a win-win game where both stand to gain from the outcome.

Industry 4.0

The fourth industrial revolution, or Industry 4.0 for short, is a label used for the next paradigm shift in manufacturing. To be more precise it refers to the current trend of automation and data exchange in manufacturing technologies. It includes some familiar terms like cloud computing and the Internet of Things (IoT) but some less memorable ones like cyber-physical systems and cognitive computing.

The term has been around for some time having originated from a high-tech strategy developed by the German government which was widely publicised in 2011. Given procurement and supply chain are at the centre of manufacturing then it’s a concept the profession should embrace.

A number of concepts developed in manufacturing have been successfully applied to services, for example, kaizen and lean. I think Industry 4.0 is no exception.

Industry 4.0 has four design principles, namely:

  • Interconnection – the ability of machines, devices, sensors, and people to connect and communicate with each other via the IoT
  • Information transparency – interconnectivity enables large amounts of data to be gathered providing the opportunity of perfect information
  • Technical assistance – includes systems to aggregate and visualise information which can be used for making better decisions more quickly. It also includes the ability of cyber physical systems to support humans by conducting a range of tasks that are human do not want to do like those that are routine
  • Decentralised decisions – the ability of cyber physical systems to make decisions on their own and to perform their tasks as autonomously as possible

From these principles we can see that the key procurement processes of source to contract (S2C) and purchase to pay (P2P) are going to be largely automated. Indeed, supplier selection and demand management for categories of spend that are deemed low risk like stationery and IT peripherals will be fully automated.

Those procurement and supply chain processes that are typically done by more junior staff, such as on-boarding suppliers or expediting purchase orders, are going to be replaced by computers in Industry 4.0. This may worry those starting their careers and those looking to develop teams. Fortunately, there are two mitigating factors. First, someone needs to set the rules such as the level of acceptable risk and then provide oversight. Second, Moravec’s paradox still applies in Industry 4.0, which means tasks that require high-level reasoning will be done by computer while those that require emotional intelligence , like managing relationships with internal stakeholders and suppliers, will remain with the humans.

Take my word for it

We met William for the first time in September’s blog and last month we followed him as he managed a supplier selection process. He is a category manager for a global organisation and is responsible for a wide range of spend including marketing. As a result of the successful supplier selection process he persuaded his colleagues in the marketing team to use 3 direct marketing agencies. By agreeing to the organisation’s framework terms and conditions, the 3 agencies became preferred suppliers.

Kate, a team leader, wants to launch a new direct marketing campaign. She passes her requirements to William who uses the eSourcing tool to issue the request for a proposal (RFP) to the 3 preferred suppliers.

All the suppliers respond but the prices vary greatly. Before William presents the result of the RFP to the marketing team, a number of the marketing managers say that the supplier called Sandringham has the best track record and should be awarded the campaign. William is aware of social proof (note 1) so interrupts the discussion to present his result which shows that Sandringham have proposed the lowest number of days to complete the work. William questions whether the campaign can be delivered in such a short time and after a few minutes evaluating the proposal everyone concludes that Sandringham have not understood one aspect of the requirement.

By contrast, St James have the highest price although they propose the median amount to time. One of the marketing managers comments that St James have a reputation for attracting the best talent by paying them the most. The other marketing managers agree. William explains a Veblen good (note 2), one where a high price boost demand, and that a high price does not necessarily lead to a better campaign.

St James’s proposal provides the marketing team with a price anchor and leads them to select the last of the 3 agencies, Windsor, subject to final agreement on the price.

William contacts the account manager, Harry, from Windsor. Harry explains that they are very busy but their best direct marketing manager has just become available. William is aware of scarcity bias (note 3) so doesn’t panic and asks Harry to look at the price again. Harry responds positively and the next day and William passes the final details to Kate who raises a purchase requisition for Windsor.

This case study illustrated the danger of uncritical acceptance of claims by others. This may be based on the word of one person or of many. By recognising bias and being prepared to challenge it William is able to deliver a better outcome.

Notes

(1) Robert Cialdini, Professor of psychology and marketing, persuaded a hotel chain to adapt the message they left in guest’ room trying to encourage towel re-use. He created 3 different messages. The first, his control message, which stated the environmental benefits, was successful among 35% of visitors. The social proof message, in contrasts, simply stated that most people re-used their towels. This version boosted compliance to 44%.

(2) Dan Ariely, Professor of Psychology and Behavioural Economics, recruited 82 people from Craigslist who were willing to receive 2 small electric shocks in the name of science. All participant were given a painkiller; half were told the painkiller cost $2.50 a dose and half that it was only 10 c. In fact, they all received placebos. 85% of those taking the expensive pill reported less pain compared to only 61% taking the cheaper version. The high price of the pill lead to an assumption that it would be more effective.

(3) Stephen Worchel, a psychologist, recruited 134 undergraduates and asked them to rate the quality of a batch of cookies. The participants tasted the cookies from a glass jar containing either 2 or 10 biscuits. When the cookies were in scarce supply they were rated significantly more likeable and attractive. The participants were also prepared to pay 11% more. Scarcity bias means that the less there is the more you want it.

Page 1 of 121234510...Last »