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Table of ContentsGraphs & Charts.........................................................................................................................3
1. Pareto Chart.....................................................................................................................3
2. RACI - Part 2..................................................................................................................3
3. Ishikawa Diagram / Fishbone Chart................................................................................4
4. Diagram of Arguments....................................................................................................6
5. Timeline Chart................................................................................................................8
6. Problem Solving Techniques..........................................................................................9
7. Twelve Principles of the Networked Economy............................................................12
8. Drivers and Constraints.................................................................................................15
9. Google Motion Charts...................................................................................................16
10. Cost Curves, Experience Curves, Learning Curves..................................................18
11. SMART Acronym.....................................................................................................19
12. Communicating Project Expectations.......................................................................32
13. Spider Web Graph.....................................................................................................32
14. Structure Conduct Performance................................................................................33
15. Power Curves.............................................................................................................35
16. Sensitivity Analysis...................................................................................................37
Organization Design & Change Management.........................................................................39
17. 7-S Framework..........................................................................................................39
18. Capabilities................................................................................................................40
19. People Performance and Potential Model.................................................................41
20. Greiner's Growth Phases Model................................................................................42
21. Change Management Phases.....................................................................................43
22. Delivering Change Effectively..................................................................................45
23. Purpose, People, Process...........................................................................................45
24. Six Dimensions of Knowledge Management............................................................47
Corporate Strategy...................................................................................................................49
25. ADL Matrix...............................................................................................................49
26. Merger Integration Approaches.................................................................................50
27. Vertical and Horizontal Integration...........................................................................51
Business Strategy.....................................................................................................................54
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28. Porter's Five Forces...................................................................................................54
29. PEST Analysis...........................................................................................................55
30. Strategic Control Map...............................................................................................56
31. Value Chain...............................................................................................................57
32. Four Levels of Uncertainty........................................................................................58
33. Strategic Game Board................................................................................................60
34. Profit Pools................................................................................................................61
35. Three Growth Horizons.............................................................................................63
36. Balanced Scorecard...................................................................................................65
37. The Seven Strategy Questions...................................................................................66
Human Resource Management................................................................................................67
38. People Management Pyramid....................................................................................67
39. Performance Mindset Diamond.................................................................................68
Marketing.................................................................................................................................69
40. The Four Ps of Marketing..........................................................................................69
41. Strategic Marketing Framework................................................................................70
42. 8-Step Market Assessment........................................................................................71
43. Mapping the Market..................................................................................................73
44. Brand Touch Point Wheel.........................................................................................73
45. AIDA for Consumer Behaviour................................................................................74
46. Buyer Utility Map......................................................................................................76
47. Product Life Cycle.....................................................................................................77
48. BCG Matrix...............................................................................................................79
49. Growth Matrix...........................................................................................................81
50. Analyzing Growth Opportunities..............................................................................82
Finance.....................................................................................................................................84
51. ROE Tree...................................................................................................................84
52. Four Cornerstones of Corporate Finance..................................................................85
Operations................................................................................................................................87
53. 4Q Methodology (Measure, Analyze, Improve, Control).........................................87
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Graphs & Charts1. Pareto Chart
A Pareto Chart is a graph with both bars and a line, where the individual values of a
data series are presented in vertical bars (generally in descending order), and the
cumulative values are presented as an increasing, concave line. Often, the vertical
axis on the left of the chart is used to depict the number of occurrences (or costs, or
other metric), while the vertical axis on the right is used to show the percentage of
total occurrences.
Pareto charts are often used in quality control, analyzing reasons for why defects are
happening or why a process is not working properly. As a matter of fact, they are
considered one of the key seven tools of Total Quality Control (TQC). A Pareto chart
shows a quick highlight on what the key reasons are for a problem or issues (e.g.
addressing the top two issues will help us solve xx% of the total defects).
The chart is named after Vilfredo Pareto (1848 to 1923), an Italian engineer and
economist who taught at the University of Lausanne in Switzerland. He was best
known for his “Pareto distribution,” stating that the wealth distribution in a society
generally follows a power law curve.
2. RACI - Part 2One of the most popular post on my blog is the review of the RACI framework (link).
It generates consistently high page views. That’s somewhat surprising, because in
my work with clients, it is not something that comes up very often. But it does show
that readers are interested in some of the most practical, implementation oriented
questions. I have been asked if there is additional information on the RACI
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framework (or some of its close relatives, like RASCI, CAIRO, DACI, ARCI or
RAPID), so here goes:
For starters, there is a great Wikipedia page (link) with a good overview.
There is a boutique consultling firm called RACI Training, in the US, focused
on this methodology. Their web site (link) has a number of good materials,
including a white paper, template and a blog.
There are a number of smaller sites and blogs that talk about RACI. Most of
them are only about a page or two, so they won’t provide a lot more in depth
material. But these five sites may be worth a quick view anyway: Value Based
Management (link), Project Management Hut (link), Project Smart (link), Bright
Hub (link), and CIO Update (link).
Here are links to two XLS file templates that allow you to quickly build a RACI
matrix in Excel: link link
Here are two presentations on SlideShare that may come in handy: link link
Interestingly, neither the McKinsey Quarterly nor the Harvard Business
Review have much relevant material on the topic. And even the site of Bain &
Co. (supposedly the creators of the RACI matrix) doesn’t bring up any results.
Amazon also doesn’t seem to bring up any books specifically dedicated to RACI.
You'll have to settle for broader volumes on project management and business
process mapping. Clearly, there is a market opportunity for somebody to sit down
and write „RACI for Dummies.“
The most comprehensive overview I did find, however, is in a PDF file by Michael
Smith and James Erwin, for a Project Management Forum in 2005 link. All you will
ever need to know about RACI!
3. Ishikawa Diagram / Fishbone ChartThese diagrams are named after Kaoru Ishikawa, a Japanese professor and
influential quality management expert. They were first started to be used in the
1940s, and are considered to be one of the seven important tools in quality
management. They are alternatively referred to as Ishikawa diagrams, fishbone
charts, cause and effect charts, or root cause diagrams. They are most frequently
used in product design and manufacturing, analyzing defects or deviations and trying
to identify the root causes.
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The problem is stated in a box to the right of the diagram, and each major branch is
devoted to some of the key issues that could have caused the problem. Major issues
are generally grouped by people, materials, machinery, processes, measurements
and external factors. But there is a whole art to grouping these major branches, and
people have come up with standard groupings such as the 8 Ms, the 8 Ps, or the 4
Ss.
The 8 Ms (used in manufacturing)
Machine (technology)
Method (process)
Material (Includes Raw Material, Consumables and Information.)
Man Power (physical work)/Mind Power (brain work): Kaizens, Suggestions
Measurement (Inspection)
Milieu/Mother Nature (Environment)
Management/Money Power
Maintenance
The 8 Ps (used in service industry)
Product=Service
Price
Place
Promotion/Entertainment
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People(key person)
Process
Physical Evidence
Productivity & Quality
The 4 Ss (used in service industry)
Surroundings
Suppliers
Systems
Skills
There is a great Wikipedia article on Ishikawa Diagrams (link), which provides a lot of
context, questions to ask in each branch, and additional resources and links.
4. Diagram of ArgumentsHopefully, when you approach a strategic challenge, you’ll start this problem solving
exercise by developing an issue tree, defining the various options, identifying the
analyses necessary to support potential solutions, and then come up with a story line
that reflects your issue tree and your findings. This is the Standard problem solving
approach that all consulting firms will teach you.
Sometimes you just have to present part of your issue tree in a presentation. It may
not be the final presentation, but it may be a good way to get feedback from people
on whether you have covered the critical areas. One way to do this is with a chart
such as this “Diagram of Arguments” below.
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You’ll take your key strategic challenge, list two or three potential solutions, a
number of the critical arguments (both pro and con), as well as the supporting facts
you have gathered so far. If you are 25% into your project, you should have gathered
the relevant information to pull this together, and use it in additional interviews to test
your hypotheses and make sure you didn’t miss anything.
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5. Timeline ChartWe used a time line chart again in a recent steering committee document for one of
our a-connect projects. They can be quite powerful to summarize key information in
a succinct way, This information could relate to a specific product line or business
unit, to key events of an acquisition target, or to the history of a company’s presence
and growth in a geographic market. Time line chart allow you to group information in
various ways. The example below distinguishes between internal and external
events:
Other ways to structure and group relevant data points:
On the external side: PEST (political, economic, social, technological), Porter
5 Forces, etc.
On the internal side: 4Ps (product, promotion, place, price), etc.
I also find it helpful sometimes to overlay the relevant revenue picture (by product
line, region, company, etc.) behind the time line chart, to put the key elements in
perspective visually.
Note that there are ways to automatically create time line charts in MS Excel (see
link).
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6. Problem Solving TechniquesI wrote an earlier post on “Developing a good storyline,” and was asked to expand on
this topic. A storyline is, after all, only as good as the work performed in earlier
phases of a project. A number of problem solving techniques can help you structure
this work:
“We thought we had all the answers, it was the questions we had wrong.”
Good problem solving starts with a clear problem definition. That may sound
obvious, but it’s amazing how many times I have seen teams jump into a project and
start research before they have clarity around what core question they really were
trying to answer. More importantly, you often have quite a few differences on what
the problem really is. Spend some time sitting down to really define the problem.
Write it down in a clear question: “How can Business Unit A improve its position in
Customer Segment X?” is not a good problem definition. What does ‘improving its
position’ mean? Increase market share by 10%? Get to a contribution target of 20%?
Make sure you problem statement is SMART – Specific, Measurable, Actionable,
Realistic, Timely. Make sure it’s independent of other problems (no ‘if, then’
statements). Discuss a draft with your team, and with key stakeholders: Is this really
what it all boils down to? If we can answer this one question, will we have
succeeded?
“Life is a maze in which we take the wrong turn before we have learnt to walk.”
As you begin the journey to answer the core question (now clearly defined), you
quickly find that there is a million things to look at, lots of people to talk to, hundreds
of potential analyses to be done. You don’t want to get stuck in a maze of analyses
and research! The key is to smartly disaggregate the problem, and break it down into
logical components. This will help you create manageable tasks, focus the data
collection and analysis, and communicate your problem (and ultimately your answer)
in a compelling way.
Again, this sounds simpler than it is. A problem can always be broken down in
different ways, always! You will have to experiment which way makes most sense.
Take the example above: How can BU A achieve a contribution target of 20% in
Customer Segment X? You could break this down into “increased revenue vs. lower
costs,” or you could break it down into “renew the product line vs. hire more sales
people.” What you are trying to build is an issue tree that starts with the problem
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statement at the left, and then at each stage asks “How would we do that?” Below is
an example of an issue tree on a problem that’s much more personal, something we
all may face at home:
As you can imagine, the question is very often one of sequencing. To come back to
our business example from above: Using the revenue vs. cost breakdown probably
makes sense as the first branch of the tree, things like product line vs. sales people
may come further down in the breakdown of the tree.
A few things to consider when building an issue tree: Make sure you are MECE –
Mutually Exclusive, Commonly Exhaustive. Increased revenue vs. lower costs is
pretty MECE (although one could argue that “improved quality” could lead to both
higher revenue and lower costs...). Renewed product line vs. more sales people is
definitely not MECE – there are a lot of other actions like pricing, new channels, etc.
that may also play a role at that level. Also, when building an issue tree, it really
helps to use some of the key strategy frameworks. The business system, the Four
Ps of marketing, the AIDA sales funnel, Porter’s five forces, the DuPont ROI tree,
etc. – there are dozens of frameworks that will help stimulate your thinking on how to
break down the problem at each level of the tree. It is worthwhile spending quite a bit
of time to develop a good issue tree. Make sure it includes at least five levels. You’ll
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probably go through several iterations and toss out a few sheets of paper. But
eventually you’ll end up with something that you and the team feel comfortable.
“The great tragedy of science is the slaying of a beautiful hypothesis by an
ugly fact.“
The next step is to translate your issue tree into a hypothesis tree. Your issues tree
could potentially become quite large, and each box at the right hand side of the tree
could represent a number of analyses to perform and topics to investigate. You run
the risk of chasing down hundreds of blind alleys. To use the much maligned
consulting expression: You don’t want to boil the ocean. Some branches of the tree,
and some analyses, will undoubtedly be more relevant than others. As you discuss
the issue tree with the team and do some initial qualitative interviews with clients,
you will quickly develop early hypotheses. You’ll get a feeling that there may be more
opportunities on the revenue side than on the cost side. In particular, you hear that
pricing seems to represent a big opportunity to increase revenue. You will take these
insights and translate them into a hypothesis tree. In essence, this highlights one
branch from the issue tree that seems the most important, states why you think this
is a key focus area, breaks down what needs to get done, and also (for the sake of
completeness) states why you believe other branches of the tree are less critical to
solving the problem. Below is an example of a hypothesis tree, using the personal
example of how to end up with more money at the end of the month:
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Your hypothesis tree will be a living document. An initial version will allow you to
define a clear plan for analyses and research. At the end of each box at the right
hand side of the hypothesis tree, you can essentially list a few pieces of data,
analyses or research that you will need to conclusively confirm whether this
statement is correct or not. You can translate this into a work plan for your team, and
off you go. But as the data comes in, and as you continue to do interviews, your
initial hypothesis may change. Don’t disregard the “ugly facts” from the quote above,
even if they change your beautiful hypothesis. Revisit your hypothesis tree regularly,
to see if you’re still on track.
As we have already seen, a strong and coherent hypothesis tree will also form the
basis of a good storyline for your end product.
7. Twelve Principles of the Networked EconomyThese twelve principles or laws are based on an article by Wired editor Kevin Kelly.
It appeared quite a while ago, in the Wired issue of Sept 1997. But it’s amazing how
relevant this still is. Definitely worth reading in detail (link).
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Here is some background on each of them:
1 The Law of Connection
Two key technologies (semiconductors and telecommunications/internet
connectivity) continue to make dramatic advances. The results: Everybody will be
increasingly connected to everybody else through a variety of devices. And not only
that: Everything will be connected to everything, as tiny chips are implanted into UPS
packages and soup cans and refrigerators.
2 The Law of Plentitude
As the number of nodes or members in a network increases arithmetically, the value
of the network increases exponentially. The more plentiful things become, the more
valuable they become (think fax machines).
3 The Law of Exponential Value
Success is non-linear in the networked economy. During its first ten years,
Microsoft’s profits were negligible. But once they started to grow, they exploded. The
same applies to fax machines, net technologies, new software: An early phase of
slow growth often turns into explosive growth once the network effects kick in.
4 The Law of Tipping Points
New businesses, products and services in the economy follow an epidemiology
model of spreading: The beginning is an uphill battle, each new user has to be
convinced against all odds. Once a critical mass of users is reached, the momentum
becomes overwhealming, and success feeds on itself.
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5 The Law of Increasing Returns
This is probably the best know and most critical laws of the networked economy. As
a company gains momentum, it’s increased critical mass allows it to further improve
and refine its offering, and it will continue to outperform and attract additional users,
feeding on itself.
6 The Law of Inverse Pricing
In the networked economy, the very best gets cheaper every year. New generations
of a product or service will show significant improvements in features, but the
consumer today expects them to be radically cheaper. In the old economy, small
increases in quality came with small increases in price.
7 The Law of Generosity
Taking laws number 2 and 6 to the extreme means that in many cases, products are
given away for free in the networked economy. With marginal costs at or close to
zero, free is often the right price to gain momentum. Premium services can cover the
limited fixed costs.
8 The Law of Allegiance
A company’s primary focus in the networked world is not to maximize its own value,
but to maximize the value of its network and platform (think game companies who
nurture their ecosystem of programmers, Apple who nurtures its relationship with
app developers and media companies).
9 The Law of Devolution
A company may evolve to become the best hard disk manufacturer of the world. But
in the networked economy, things tend to shift very rapidly, and the hard disk market
may have evaporated a few years later. So a company has to “devolve”, and find
new niches, before it can evolve again in a new area. Kelly wrote this article before
Christensen’s Innovator’s Dilemma, but it’s fundamentally the same point.
10 The Law of Displacement
Kelly posits that there is a gradual displacement in the economy of materials by
information (cars become lighter yet better, etc.). Nicolas Negroponte made the
same “atoms to bits” statement. I’m not so sure about this point. It may apply to
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certain products (books, laptops, etc.), but not to everything.
11 The Law of Churn
This is essentially Schumpeter’s point of the creative forces of destruction. Firms
continue to be created and go out of business. The key is to create the right
framework and boundary conditions for this process to happen smoothly.
12 The Law of Inefficiency
In the Network Economy, productivity is not our bottleneck. Our ability to solve our
social and economic problems will be limited primarily by our lack of imagination in
seizing opportunities, rather than trying to optimize solutions.
8. Drivers and Constraints
This is not a revolutionary new framework from a strategy guru, it’s just a visually
compelling chart that I recently saw in a presentation. It breaks down the market growth of a
given industry into a variety of factors, some being growth drivers, some being constraints.
The key elements to this break down could be regions (US, Europe, Japan, Emerging
Markets, Rest of Asia, etc.), product segments (high-end vs. low-end, product lines A/B/C,
etc.), customer segments (OEM, retail, private label, etc.), business lines (products vs.
services) or even quantity vs. price.
The trick is to be MECE (mutually exclusive but commonly exhaustive). You could
technically also do this by not being MECE, i.e. list the top five regions and top five product
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categories, even if they overlap. But I think the chart is more powerful if it breaks down the
factors in a way that they really represent additive elements of that overall growth rate. And if
you want to get really fancy, you can then adjust to width of the bars to reflect the relative
importance of any given factor.
Note that you can also do this chart for the revenue of a company, or of various divisions – it
doesn’t have to be overall market growth.
9. Google Motion Charts
Most of us would consider ourselves to be fairly advanced users of PowerPoint and
of making a point in a visually compelling way. But Hans Rosling takes data
visualization to a whole new level. And now you can get access to the tools he
developed though a Google app, called the Google Motion Chart
But first a bit of background: Hans Rosling is a Swede, originally set on a medical
career, who then realized that his real passion lies in public health issues. He
teaches at the Karolinska Institute in Sweden, and has started the “Gapminder
Foundation.” He realized early on that reams and reams of data are available on a
variety of topics in public health, but it was difficult to get audiences engaged in a
compelling story. Take the question, for example, of whether life expectancy is linked
to income levels (i.e. GDP per capita). It’s a challenge to cram data from 150
countries, over 200 years, into a single compelling chart. Yet this is exactly what
Rosling did:
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If you run the “Play” button in the chart above, the circles representing each country
move across the chart, and you can observe an evolution from the starting point
(year 1800, at left) to the end point (year 2009, at right). Watch it on Rosling’s web
site - it’s amazing when you see this the first time.
Rosling is actually quite famous, and has lectured at Davos and at TED, has advised
Al Gore, and has also met with the Google founders. They were so impressed that
they ended up buying the software and made it available on their site as a Google
app. You can use it with your own data, but will need some knowledge of Java
programming.
A simpler alternative is to use it in Excel with a macro. The following link to a blog by
S Anand provides an example (or you can also e-mail me at rene.limacher@a-
connect.com).
Talk about stepping up your presentation skills!
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10. Cost Curves, Experience Curves, Learning Curves
These are strategic concepts which many of us learned about in a college microeconomics
101 course. They may be a bit theoretical, but nevertheless often provide helpful insights into
how an industry functions.
The industry cost curve concept is a classic framework helpful to understand pricing. It
fundamentally states that producers of commodity products are willing to supply products as
long as the price is higher than their cost of production. The graph of an industry’s cost curve
charts capacity on the horizontal axis and unit costs on the vertical axis, incrementally listing
various competitors in order of increasing costs. The theory states that the competitive market
price is determined by overall market demand and the unit costs of the next available
supplier.
In reality, a number of questions make this a lot more complicated than it seems at first blush.
Key questions would include: Are the products really interchangeable and do various user
segments attach a different perceived value to different suppliers’ products? Are there
significant entry and exit barriers? Do the locations of suppliers vs. users matter? What about
non-commodity products? Some of these questions can be included in a more complex
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analysis, using linear programming. But in the end, a qualitative element will always remain
part of the analysis. Nevertheless, the industry cost curve provides an interesting starting
point for many pricing related questions.
Related to the cost curve is the experience curve. The terms of experience curve and learning
curves are used mostly interchangeably (although the former more often refers to
organizations becoming better at doing things, while the latter generally applies more to
individuals). The fundamental rule states that the more you do something, the less time it will
take next time around. Or in other terms: if the quantity of an item produced doubles, the cost
decreases at a predictable rate (as little as a few percentage points, or as high as more than
30%). Experience curves have been observed empirically in a variety of industries, and you
can find formulas to express the relationship (Wikipedia has good sections on both cost
curves and experience curves).
What drives the experience curve effects? A variety of factors play a role:
<!--[if !supportLists]-->-<!--[endif]-->Labor efficiency
<!--[if !supportLists]-->-<!--[endif]-->Standardization and specialization
<!--[if !supportLists]-->-<!--[endif]-->Technology and automation
<!--[if !supportLists]-->-<!--[endif]-->Better use of equipment
<!--[if !supportLists]-->-<!--[endif]-->Changes in the resource mix
<!--[if !supportLists]-->-<!--[endif]-->Product redesign
The link back to the cost curve is that you would typically expect the largest producers to
have the lowest unit costs (i.e. they appear to the left of the cost curve). Strategically, it can
be a significant advantage for a significant competitor to fully take advantage of experience
curve effects, generating above average profits or achieving higher market shares, or a
combination of both. Of course, we all know that cost leadership is not the only way to
achieve a strong sustainable position.
11. SMART AcronymSometimes an acronym is as powerful as a great graphic. Particularly if you're in a discussion with a client and need to think of a quick way to get an important message across.
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I like this SMART acronym, originally developed by the great Peter Drucker in his 1954 book "Management by Objectives." I helps when discussing with clients on how to set objectives for individual people or departments. But it also comes in handy when thinking about objectives for a consulting project.
Framework of the Week - 34 - Three Levels of Culture
We are talking to a client right now about a project that involves a fairly strong change management component, and in particular an important element of “cultural change.” So I was looking up some concepts and frameworks focused around culture and cultural change, and came across some references to Edgar Schein. I had read his classic 1992 book “Organizational Culture and Leadership” a long time ago. It emphasizes the need to take organizational culture into account in any change management effort. Whether it is organizational learning, development or change, culture is likely to be the primary source of resistance.
Schein basically defines culture at three levels:
Artifacts are at the surface, they can be easily observed, although not necessarily easily understood.
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Espoused values are more conscious strategies, goals and philosophies.
Basic assumptions are the core and the essence of culture. They are largely unconscious, and therefore hard to discern.
The three levels get to the core of what culture really is (again, according to Schein): “A pattern of shared, tacit, basic assumptions that a group learned as it solved its problems of external adaptation and internal integration, that is considered to have worked well enough to be taught new members as the correct way to perceive, think and feel in relation to these problems.”
Interesting and certainly valid, my only concern would be how actionable is really is. As Schein himself acknowledges, describing and changing culture is a notoriously difficult endeavor. He recommends an iterative and almost "clinical" approach, similar to the relationship between a psychiatrist and her patient. Whether all of us strategists have those clinical skills is another question. I'd be curious to hear about people's experiences.
Posted byRene Limacherat1:10 AM0 comments
Labels:Frameworks
Saturday, February 6, 2010
Framework of the Week - 32 - Eight Phases to Change
John Kotter, in his 1995 Book “Why Transformation Efforts Fail,” has outlined a number of obstacles to implementing lasting change, and suggests a model with eight phases to the change process:
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Specifically, the phases include:
Increase urgency: Highlight the evidence from the outside that change is necessary, identify the crisis, and major opportunities.
Build the guiding team: Assemble a group with the necessary authority to lead the change effort, show enthusiasm and commitment to these change leaders, encourage them to work together as a team.
Get the vision right: Create a vision that helps to direct the change effort, and develop corresponding strategies in order to achieve this vision.
Communicate for buy-in: Build alignment and engagement through stories, keep communication simple and honest, over-communicate at every opportunity possible.
Empower for action: Remove obstacles to change, and change the systems and structures that work against the objectives you outlined.
Create short-term wins: Plan for and achieve visible short term improvements, recognize and reward those involved in implementing these achievements.
Do not let up: Plan for and achieve longer term performance improvements as well, recognize and reward those in the lead, and reinforce behaviours that have led to these improvements
Make change stick: Articulate the connections between the new behaviours and the renewed success of the organization.
An interesting concept to use when you embark on a change project - always good to quickly ask yourself the key questions of whether you have laid the groundwork to make it happen.
Posted byRene Limacherat10:13 AM0 comments
Labels:Frameworks
Sunday, January 24, 2010
Framework of the week - 28 - Gaps in Service Offering
Here is an easy matrix to graphically highlight survey results and identify gaps in a company’s service offering. We used this once for a start-up tech company.
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Surveys often include two types of questions related to a company’s features or service offering: How important is a given feature to you (on a scale of x to y), and how happy are you with different features, how do you like or dislike a given feature (also on a scale of x to y). Many consultants treat these answers differently when they put together a PowerPoint presentation of the survey results. But it’s natural to combine the answers in a matrix.
We ended up grouping the answers in a 3x3 matrix for our client. We also had results from both end users as well as from channel partners, which added an additional layer of information. We used color to highlight key differences.
Posted byRene Limacherat7:18 AM0 comments
Labels:Frameworks
Sunday, December 27, 2009
Framework of the Week - 27 - System and Process Governance
This is a framework I have now used twice in IT related project proposals. Whenever certain processes or systems touch multiple organizational units, the question of governance is usually an important element of setting things up for success: What can the different units decide for themselves in order to tailor the system or process to their specific requirements? What parameters, on the other hand, need to be standardized across the board in order to guarantee consistency and comparability? Who owns the data? Who decides on what?
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The framework above (the original source is from Baseline Consulting) breaks these issues down into four components. It almost provides a “charter” to organize a governing body and lay out in broad terms how it operates. It’s also a nice checklist, to make sure you have thought of the key issues.
Note that this framework is somewhat related to an earlier framework I have talked about: The IT project framework (a circle with four interlocking arrows).
Posted byRene Limacherat7:53 AM0 comments
Labels:Frameworks
Sunday, November 8, 2009
Framework of the Week - 25 - RAPID or RACI
RAPID is a decision making tool developed by Bain & Co., one of several tools available to diagnose the sources of decision making problems and map out how decision should be made, in a variety of settings, team sizes, or organizations. It is based on the acronym of different roles that people play in the decision making process (although the sequence typically does not matter):
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R stands for “Recommend,” typically the person who drives the process, does most of the work.I means “Input,” i.e. somebody whose opinion is valued but who does not have a vote or veto over the decision.A stands for “Agree” (or it could also be “Approval”), in other words an I with more power, with a vote or a veto.D means “Decide,” this is the person who can commit the organization to action (typically one person!).P stands for “Perform,” this is the person who carries out the work once the decision is made. Note that often a P is also an I in many decisions.
RAPID is a very helpful tool to clarify decision making processes, removing ambiguity, and documenting the structures of decision making in an organization. It hopefully leads to faster and more efficient decisions, but that can also be one of the potential drawbacks and trade-offs. In organizations that have a culture of highly participatory decision making, using a RAPID approach may not be that effective.
Note that there are a number of other, similar approaches to decision making, all with their own acronyms. I have seen RACI and RASCI being used (Responsible, Accountable, Supportive, Consulted, Informed). In essence, they are all quite similar. Pick your acronym!
The second chart above shows how you could potentially use a RAPID or RACI approach in
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documenting decisions. This is an example from a project we did at a B2B client, documenting decisions in their “Order to Cash” process.
Posted byRene Limacherat9:27 AM0 comments
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Saturday, October 24, 2009
Framework of the Week - 24 - Business Unit Size and Profitability
Here is an interesting way to depict different divisional or business unit results, split into key prdoucts or key regions, and at the same time capture revenue and gross margin in a simple way:
I'm sure people have done these type of charts for a long time, but for some reason I just recently saw one and thought it was quite visually compelling.There are obviously a number of variations to this theme: Use it for gross margin or net income, for different divisions, products or regions. You can also use it to compare one company's key figures agains those of a key competitor.
Posted byRene Limacherat10:58 AM0 comments
Labels:Frameworks
Saturday, October 17, 2009
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Framework of the Week - 22 - IT Project Framework
This is a framework we used a while ago for a project proposal on an IT related project. The client wanted to improve the way they handled customer data more consistently. This is a topic that many large companies face: Multiple systems with different customer records, difficult to link them, difficult to understand hierarchies at customers (corporate accounts, divisions, plants, individual contacts at specific locations, etc.). And if it’s not customers, it could be products, or other key elements of a company’s IT infrastructure.
We struggled to find a way to describe in a structured way how the project would tackle the different aspects, and came across this wheel. Clearly there was going to be a systems and software component. But equally important were the other aspects of defining the data structure (what really is a customer), of understanding processes (how to make sure order entry and sales reps don’t add the same customer twice), and governance.I think it was a very helpful framework, even though we did not win the project ;-)
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Wednesday, September 30, 2009
Framework of the Week - 21 - GE-McKinsey Nine-Box Matrix
In the 1970s and 1980s, a number of large firms operated multiple business units. GE was one of the prime examples of that type of business, and today one of the few remaining, successful firms active in a number of disparate sectors. The GE-McKinsey Nine-Box framework was developed in the 1970s to offer a systematic approach to evaluating different business units and make sure the firm as a whole pursues the right priorities. The problem with different business units is that their financial performance and projections may actually vary quite a bit, depending on asset intensity, competitiveness of markets, need for heavy R&D, etc. So to use a fixed set of financial metrics and hurdle rates across different businesses may well lead to the wrong decision.
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The GE-McKinsey framework is somewhat similar to the BCG matrix. The key difference is that it takes into account multiple decision criteria and groups them into two broad categories. Rather than taking a single proxy for industry attractiveness (as the BCG matrix does with growth rates), the idea behind the framework is to take a series of indicators and develop an aggregate evaluation of whether the attractiveness of a given industry is high, medium or low. The same is true for business unit strength, where the BCG matrix uses market share as a proxy.
For industry attractiveness, key criteria would be:- Market size- Market growth rate- Industry profitability- Demand variability- Degree of competitiveness or rivalry- Macroeconomic factors- Etc.For business unit strength, one would include factors such as:- Market share- Changes in market share- Profit margins relative to competition- Production capacities- Distribution channel access- Brand equity- Intellectual property- Etc.
Behind each of these factors could be a number of very detailed analyses, and an overall rating would be derived by applying a certain weight for different factors.
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The strategic implications derived from the framework are again fairly similar to the BCG matrix. They would typically be summarized in three broad recommendations:- Grow- Hold- Harvest
In some ways, one can look at the GE-McKinsey Nine-Box Matrix as a forerunner of a variety of portfolio model, or of the “portfolio of initiatives” approach that McKinsey more recently focused on.
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Saturday, September 26, 2009
Framework of the Week - 20 - Pocket Price Waterfall
Pricing has always been an important lever for managers to shore up profitability. Simple math will tell you that in a business that has a 5% net margin, a 1% price increase, all else being equal, will bring this net margin to 6%, a whopping 20% spike. One element of any pricing project will typically include the strategic aspects of pricing. Those are issues largely focused around how to set the list price: How do the features of our products/service match up to those of competitors? In which markets do we over/under-price? Should we be price leaders or followers? Etc.But tactical elements in pricing are often just as important as the strategic questions, and here is where the pocket price waterfall comes in. It’s an analysis of all the elements that affect what the company takes in “net net,” after all the discounts, rebates, allowances, costs to serve a customer, etc.
The graph above shows an example of a pocket price waterfall. It includes typical elements, such as distributor and end-user discounts, promotions, cash discounts, the financing costs of having receivables on your books for 60 days, etc. There are other potential elements not listed above (e.g. promotional advertising, merchandising costs, etc.).Putting together a pocket price waterfall is usually quite an analytical exercise. It starts with
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downloading a set of data from a company’s ERP system. The trick is to get enough data points to make sure the analysis is relevant (if there is strong seasonality, or strong business cycles, make sure you cover a period that is long enough to be representative). The whole analysis really has to be done on a “line item” basis: If a customer buys 6 products on an invoice, this really needs to be broken out into six line items (essentially representing 6 lines in your XLS spreadsheet). Some of the data will be available on a line item basis. But much of it will not, which is where the fun starts. You will need to gather that data (e.g. what was the volume discount we gave to customer X at the end of the year), and then proportionately allocate that amount to all the all the line items of customer X. Similarly, if we ran a promotion for product Y, you will have to allocate the costs of that promotion to all the line items of this product Y. It’s this allocation process that usually is quite tricky. If you have a large data set, it becomes quite difficult to do this in XLS. There is specialized pricing software out there, that allows you to do this.But once you have it all allocated, it actually becomes quite easy to slice and dice the data according to a number of dimensions (by product or product segment, by customer or customer segment, by sales rep or region, by quarter, etc.). The analysis will usually show a number of outliers, which often generates interesting discussions and material to suggest process changes that have a quick positive bottom line impact.
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Monday, September 7, 2009
Framework of the Week - 19 - Sequential Bar Chart
I call this the sequential bar chart – although there may well be another (better) name for it out there. This is a helpful graphic if you want to zero in on a particular area of interest, but want to put this in the context of a bigger picture. The example in the chart is based on a set of questions in a consumer survey. The key message of the chart is that a lot of consumers buy our product for reasons related to “price” or “cost/benefit” comparison. But you want to put this message in the context of how many consumers are aware of our product, and how many have actually purchased it in the last 12 months.
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You can apply the same concept to other topics as well, for example an analysis of a firms cost structure: COGS represent 45% of our overall costs, and within that, Manufacturing Overhead represents 25%, and can itself be broken down into A, B and C.It’s a good chart to use at the beginning of a presentation, to set the stage, define the context and then zero in on a specific topic.
12. Communicating Project ExpectationsHere is a framework which is not copyrighted or patent protected by
McKinsey or BCG. But one of our consultant recently used it in a kick-off
document for a project that had a significant change management
component.
I wish I had used this type of approach before in some of my past
projects. Communicating with the team and the employees who are going
to be affected by a project is always very critical. And I think as
consultants we often focus on the facts and the basic process. This chart
talks to the audience at an emotional level and really prepares them for
what to expect.
13. Spider Web GraphSpider Web Graphs are helpful to graphically illustrate how different
customer segments value different elements of a product or service
offering. In the attached example, one segment of a life sciences supply
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company (high-end users) values the company’s regulatory and
maintenance services very highly, and is less concerned about the ease of
use of the products or their price. Contrasting this spider graph with that
of another segment will visually highlight important differences in
decision criteria.
The attached PPT chart is actually based on an underlying XLS tool,
where data points from various respondents can be translated directly
into the chart.
I have also seen similar versions of the spider web graph, where the
various decision criteria were not defined as the “axes”, but as the “slices
of the pie.” I think that’s actually a more correct version of doing it. If
you depict the criteria as axes, then the visual representation will depend
on the sequence: Having three high-ranking criteria next to each other
will result in a visually very large surface, while having three high-
ranking criteria mixed in with three low ranking criteria will result in
visually much smaller “spikes.” Using the slices of the pie to depict these
results actually eliminates this error.
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14. Structure Conduct PerformanceStructure-Conduct-Performance (SCP) is a paradigm coming from
industrial economics (1960s and 1970s).
It states that performance (of entire markets and of firms operating in
these markets) depends on various elements of market structure (e.g.
entry barriers, market concentration, and number and size of
competitors), as well as different forms of firm conduct and strategic
behaviour (e.g. capacity utilization, marketing, innovation).
The framework is an interesting one to describe an industry (e.g. if you
are looking at a potential acquisition opportunity which is a bit outside of
your core markets), and get a better understanding of what’s happening
and why. A number of academics have worked with this framework, and
developed quantitative measures of market concentrations, to then study
how this affected conduct and performance.
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But the attached example shows that the SCP framework can also be
used descriptively, and the key words listed on the first PPT page are a
good checklist to remember.
One criticism of the framework: It is obviously quite deterministic and
linear. Structure is the exogenous (explanatory) variable, everything else
is dependent of that. In reality, structure itself is probably also affected
by firms’ conduct.
15. Power CurvesA small number of companies have achieved huge scale, while a large
number of companies are quite small. A small number of internet
users/sites have many connections, while many other internet users/sites
are connected to only a few others. A small number of external shocks to
an economic or biological system have huge implications, while many
small shocks have hardly any impact at all. All of these relationships
follow what’s called a “Power Law.” A power law distribution generally
talks about the relationship between the size of an occurrence and its
rank (I know this isn’t mathematically correct – let’s skip the details of
how the power law is different from Zipf’s law and Pareto’s law …). But
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just to stay with math for a while: If you replace the nominal scale on the
y axis with a logarithmic scale in a power curve graph, you basically get a
straight downward-sloping curve.
Power laws and power curves are helpful to understand industry
structures. Studies have shown that the concentration of players in
specific industries follow power laws, and that if anything, the
inequalities increase over time. Chris Anderson in “The Long Tail”
(amazon.com)has argued that there is a lot of money to be made
reaching niche consumers, particularly in industries where electronic
distribution is feasible. (A recent HBR article questioned some of his
findings.)
Why do power curves exist? They are linked to intangible assets (brands,
talent, intellectual property) leading to increasing returns. A McKinsey
study shows that labor and capital intensive industries (e.g. chemicals or
machinery) have flatter curves than industries such as software or
biotech.
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One of the most intriguing discussions of power laws is the book “Why
Most Things Fail” by Paul Ormerod (amazon.com). I just loved this book.
Ormerod talks a lot about biological systems, and shows how exogenous
shocks have lead to extinctions of species over the last 500 million years.
Not surprisingly, there is a power law here: A few large shocks killed a
lot of species, many others had very limited impact. He then applies
these findings to the economic world: How do external shocks lead to the
disappearance of companies, and what can firms do to “improve their
strategic fitness level? But that's a whole separate discussion ...
16. Sensitivity AnalysisYou often have to forecast business results or analyze investment
proposals by making assumptions on a number of parameters. The key
assumptions may relate to revenue (price, volume, mix), costs (fixed vs.
variable, material vs. labor, etc.) or other variables (capital invested,
etc.). A presentation on such a business outlook should always include a
sensitivity analysis and a discussion of potential scenarios. The way I
suggest to do this:
(1) Identify the key metric used to evaluate the business or the
investment proposal (in the example below: Return on Sales).
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(2) Show on one slide which assumptions potentially have the biggest
impact on this metric.
(3) Take the two or three most critical variables, and calculate how the
key business metric would look like of you change the base assumption to
an optimistic scenario vs. a pessimistic scenario.
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If you do this only for two key variable, it's quite easy to show it
graphically - a simple 3x3 matrix (or you can even do a 5x5 matrix with
more gradual scenarios). If you do it for three key variables, you will
have to work witha tree structure and multiple matrices - as shown
above. You can also highlight in color which scenarios fulfull a certain
threshhold. For example, if your company has a minimum requirement of
a 5% Return on Sale, all boxes where the ROS is below 5% could be
colored in red.
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Organization Design & Change Management17. 7-S Framework
The 7-S framework is really all about organizational effectiveness, about
understanding an organizations’ ability to change. The beauty of the
model is that it shows seven factors that are all interrelated, without a
hierarchy. The ability to change and improve one factor is likely related
to what happens on a number of other fronts. It can also be a good check
list to review when you look at an organizational unit. Most people think
about one key issue – the 7-S frameworks helps you make sure you don’t
forget anything. The 7-S framework was developed in the 70s by
McKinsey, and the bestseller “In Search of Excellence” discussed it
extensively.
I was talking to a client today about organizing a strategy review
workshop with the extended management team. This client has three
distinct businesses, and we were discussing what guiding frameworks we
could use for the three different teams to inform their thinking as they
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prepare for the workshop. Two of the businesses are smaller and newer,
and really understanding the market dynamics, customers, competitors
etc. is key. The largest business, however, is fairly mature, and the key
issues seem to be not so much strategic positioning, but much more
“execution.” So in this instance, a 7-S framework could be an interesting
reference for the team.
The one thing that I always remember when I look at the 7-S framework
is that organization is not just about structure and hierarchy – there are a
lot of other factors that play a key role as well.
18. CapabilitiesLet’s say you developed this wonderful growth strategy for a business unit or division or country organization. When it comes to implementing this strategy, a number of things usually have to happen. This “capabilities” framework is useful for such a discussion.
It highlights a number of areas, and allows you to dive into specifics on People (do we need to hire new staff?, train our marketing team?), Process (how will the order and delivery process work?), Systems (do we need to adjust our web site?) and Organization (shall we
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drive this growth effort with an independent team of sales reps?). The groupings may vary, and I have seen a variety of ways to define the four quadrants.
Another nice graphic way to address the same topic is to use a number of different cog wheels. This easily allows you to come up with only three key areas, or five for that matter. And it gets the case across that all these areas are usually quite closely interrelated.
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19. People Performance and Potential Model
Oh no, not another two-by-two matrix! This one applies to classifying the employees
of a group or department into four buckets, based on low or high performance as
well as low or high potential. Mildly reminds you of the BCG matrix with the stars, the
dogs, the cows and the question marks, doesn’t it?
20. Greiner's Growth Phases Model
Larry Greiner was a professor at USC focused on organizational development and
growth. In the 1970s he proposed a model of growth phases for start-ups, based on
the recognition that many entrepreneurial companies go through predictable cycles
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of growth spurts and crises. The model was originally based on five phases; he later
adjusted it to include a sixth phase.
Phase 1: Growth through creativity
An entrepreneur is focused on creating new products and services. A small staff can
be managed through informal communication and a shared vision. But as the firm
grows, there is often a leadership crisis with the need to bring in professional
management.
Phase 2: Growth through direction
With new management in place, growth continues. There is more clarity on what the
objectives are. Budgets introduced, functions are more clearly defined, incentive
schemes are established. This may result in a crisis of autonomy, with a need to
define clearer structures and hierarchies to delegate tasks.
Phase 3: Growth through delegation
As mid level managers are freed up to pursue opportunities in their markets and
improvements in their functions, growth continues. To management takes on more of
a broad strategic role. The result is often a crisis of control: Managers whose
directive approach was helpful at the end of Phase 1 find it hard to “let go.” A more
sophisticated approach is needed to make sure the different parts of the organization
work well together.
Phase 4: Growth through coordination and monitoring
Growth continues through better coordination, e.g. organizing previously
independent groups along product or service lines. Ultimately, however, the
complexity of the company’s bureaucracy creates a red-tape crisis.
Phase 5: Growth through collaboration
The formal control structure is relaxed to accommodate more flexibility for staff to
group along the lines of specific projects or initiatives. Sophisticated information
system support this new approach. This phase may well end with a crisis of
internal growth, recognizing that opportunities may have to be pursued outside the
firm.
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Phase 6: Growth through alliances
This phase was added by Greiner later on, to recognize the fact that at some point,
firms may need to pursue growth opportunities through alliances, mergers &
acquisitions, outsourcing, or other partnerships.
21. Change Management PhasesThere are numerous ways to structure and describe the phases an organization will
go through in the course of a change management process or transformation
program. I have written about one of these frameworks in an earlier blog post (link):
the catchy “make it rational, make it essential, make it ready, make it happen, make
it stick.”
Another one is the Seed, Scope, Solve, Sustain framework. Interestingly, a Google
search does not yield an immediate source for this S alliteration – frankly I’m not
quite sure anymore where I came across this four step approach.
A third way to describe change management phases is described in a recently
published book called “Beyond Performance” by Scott Keller and Colin Price (Wiley
& Sons, 2011, link). The key elements described by Keller and Price:
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Aspire: Where do we want to go? What is the change vision and overall
objectives that are most meaningful to the organization?
Assess: How ready is the organization to go there? What is the organization’s
ability to achieve its vision and targets?
Architect: What must we do to get there? How can we develop a concrete,
balanced set of performance improvement initiatives.
Act: How do we manage the journey? What needs to happen in each initiative
of the change management portfolio? What resources need to be dedicated to
the various initiatives to make them successful?
Advance: How do we keep moving forward? How can we develop a
continuous improvement infrastructure to make sure this is not just a one-time
change?
22. Delivering Change EffectivelyI had a recent meeting with a client where we discussed change management. She mentioned in passing a framework which I was not familiar with. I could only remember the first and last parts of the framework: “Make it rational” and “make it stick.” I was intrigued enough to look it up on Google after the meeting, and found a presentation from PA Consulting, showing a five step framework to delivering change effectively.
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I’m not sure that the framework is originally from PA Consulting. Maybe somebody else has an earlier “copyright” on it. But I like the overall framework and think it’s a very useful tool to figure out where you are in the change process and what to focus on.
23. Purpose, People, ProcessOne of the well known change management frameworks, Purpose, People and
Process focuses on key elements that need to be aligned in order for a business to
be successful:
Purpose includes elements such as a shared vision, shared values, and
commitment, providing strategic direction to the organization in order to engage
everybody and get them to act towards these goals. It also often will include shared
stories or a history that defines and unites the organization.
People includes factors such as accountability (clear roles, an effective performance
evaluation system, constructive feedback mechanisms, a focus on getting things
done), Leadership (the right style of leadership, empowered managers) and an
effective organizational structure.
Processes include elements like a learning organization (benchmarking, training
and coaching, etc.), a culture of continuous improvements (problem solving,
creativity and innovation, etc.) and effective information systems (to support decision
making, track the right metrics, and capture lessons learned).
The graphic above depicts these three elements, and also highlights the interfaces
between them:
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Clear purpose and effective processes allow an organization to capture value
and execute effective strategic and operational plans.
Effective processes and empowered people will result in an organization that
focuses on the key issues and gets the job done.
Empowered people and a clear purpose will provide inspiration to shape an
organization and allow it to change and adapt to its environment.
I have seen this framework applied several time, often in the context of a large scale
change management effort, or a post-merger management integration project. Note
that there are also a variety of alternative versions of the framework: I have seen:
Purpose, People, Power
Purpose, People, Power, Projects (particularly relevant in the context of a
PMM project, where the issue is to lay-out a number of specific projects to
capture synergies)
People, Purpose, Process, Data
Etc.
And I have seen the various elements graphically depicted as triangles, circles, or
sequential boxes. The sequential boxes are actually quite relevant, because there is
a certain logic to the framework: Purpose usually comes first, followed by people,
then process (and then anything else, if you’re so inclined…).
References:
Collins, James C. and Porras, Jerry I. Built to Last. HarperBusiness. 1994
Goldstein, Jeffrey. The Unshackled Organization. Productivity Press. 1994
24. Six Dimensions of Knowledge Management
One of our current efforts at a-connect is to improve our knowledge management
capabilities and processes. The framework below from PA Consulting highlights
some of the key elements:
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In each dimension, the capabilities will vary along a spectrum, from very basic tasks
to quite sophisticated skills. On the technology side, for example, one company may
have the basics in place through a shared drive with key documents and basic
search features. Another, more sophisticated company may have a full-fledged
knowledge management system, a portal with internal and external access, e-
learning capabilities, etc.
A diagnostic of the six dimensions will help companies understand where they are
and what actions are critical to take knowledge management to the next level.
It struck me that the framework is not only applicable to knowledge management
systems, but also to a variety of other topics that require the implementation of an IT
solution: Anybody who has ever wrestled with the implementation of a CRM system
will recognize the key issues!
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Corporate Strategy25. ADL Matrix
The ADL Matrix, developed by the consulting firm Arthur D. Little in the late 1970, is all about how industry maturity and competitive position affects your strategy. It compares two axes: Industry maturity (embryonic, growing, mature, aging) and competitive position (from dominant to weak). For each quadrant, a number of generic strategies are identified: invest or divest, build market share, go for a niche positioning, etc.
The ADL matrix is most often associated with developing strategies for business units, but it also works just as well for product lines or individual products.
The trick in applying the ADL matrix is obviously to pin point the “right” quadrant. Defining industry maturity is notoriously difficult, and even mature industries or product categories can be re-energized by innovative new products. So in some ways, the ADL matrix is a bit “old fashioned,” but it’s nevertheless a good starting point to ask some fundamental questions.
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26. Merger Integration ApproachesPhilippe Haspeslagh and David Jemison (90) developed concept to define which
approach would be most appropriate when integrating various parts of an
organization after an acquisition. There are a number of traditional criteria that drive
the integration approach: size of the respective businesses, style of the acquirer,
overlap in terms of products and customers, etc. But the authors suggest to take into
account two additional criteria:
The need for organizational autonomy should be viewed in the context of creating
value through the merger. It is driven to a large extent by the question of whether the
merger rationale is based on acquiring a specific set of capabilities. A certain degree
of autonomy may be necessary to preserve and develop these strategic capabilities.
The axis of strategic interdependence is fairly self-explanatory. It tends to be high if
the businesses operate in similar markets, significant cost synergies are expected,
and value is created by transferring a significant amount of functional or general
management skills.
As a result, the authors see four broad approaches to merger integration:
Preservation: Keep the sources of the acquired benefits intact, nurture the
acquired business.
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Symbiosis: Take a gradual approach, pick the best of both worlds, pay careful
attention to cultural integration issues.
Holding: No integration, run the business fairly separately, focus on financial
benefits, risk sharing, general management capabilities.
Absorption: Push for a quick and full integration, take courageous actions.
27. Vertical and Horizontal IntegrationVertical and horizontal integration is a significant factor in a firm’s strategy, since it
can influence its costs, differentiation, and overall positioning within an industry.
Vertical integration refers to the value chain in an industry. The graphic above
shows a manufacturing example, with five simple steps (from raw materials, to
component manufacturing, to assembly, to distribution, to the end user). If a firm is
currently active in the assembly segment of the value chain, vertical integration could
either go backward (or upstream) buying a component manufacturer. Or it could go
forward (downstream), leading the firm to buy a distributor in the industry.
Vertical integration can have a number of benefits:
Control over assets in various parts of the value chain can create barriers to
entry.
Improvement of supply chain coordination, transportation costs, etc.
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Increased opportunities to differentiate, given that better coordination and
increase scale may allow a firm to make specialized investments.
There is an argument that a firm can also capture upstream or downstream
profit margins, although the capital markets theory will state that owners of the
firm may be better off by owning shares of various independent firms.
Vertical integration can also lead to the development of additional core
competencies.
Vertical integration will make sense if there are strategic similarities between
vertically related activities, if there are tax or regulatory issues that make contractual
transactions difficult or expensive, or if joint ownership will allow for specific
investments in capabilities and assets that may not happen in an independent set
up.
Vertical integration can, however, also have significant drawbacks:
The lack of supplier competition can lead to lower efficiencies and higher
costs.
Decreased flexibility if a firm is tied in to specific investments made in
upstream operations.
Capacity issues – an operation may be asked to build up sufficient capacity to
ensure downstream operations don’t get interrupted.
Increased overhead, management and coordination costs.
If the quantity required from a supplier is quite minimal (less than minimum efficient
scale), if a product is a widely available commodity, if core competencies between
firms are radically different, vertical integration probably doesn’t make sense. Vertical
integration also can have the significant drawback that it may put a firm in
competition with another company it needs to cooperate with. If you need various
distributors for your product, and you then buy one of those distributors, the others
will start to look at you as a competitor! In these circumstances, there are a number
of alternatives that firms may want to consider: Long-term contractual arrangements,
franchise agreement, or joint ventures may all be more advantageous.
Horizontal integration refers to the acquisition of an operation at the same level of
the value chain (in the graphic above, a firm who owns one assembly plant buying
another assembly plant). This can be achieved either through internal/organic growth
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or through an M&A deal. And a firm can expand horizontally into a related business
(e.g. acquiring more radio stations if you already own a few) or other business (e.g.
acquiring a few television stations).
The benefits of horizontal integration:
Economies of scale, through e.g. geographic expansion.
Economies of scope, e.g. by sharing resources and creating synergies in
manufacturing.
Increase negotiating power over suppliers or distributors
As always, there are drawbacks as well as benefits. The negative aspects of
horizontal integration include:
Potential management, complexity and coordination costs may outweigh the
benefits.
There could potentially be anti-trust and legal issues, if a firm’s market share
becomes too large.
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Business Strategy28. Porter's Five Forces
This is another one of those classic frameworks. Almost everybody knows
it and has seen it in Michael Porter’s book “Competitive Strategy” … I
have to admit that I don’t often use it in project work. It has come in
handy in the past when I have a discussion with a private equity firm,
they want to do a project with one of their portfolio companies, and we
have an initial scoping discussion to understand the landscape and the
key challenges.
I do a lot of recruiting too, including interviews with MBA candidates.
And in those interviews (which generally include case discussions), I hear
about the Porter model on a regular basis. Almost too regularly, so my
advice to MBA students interviewing for jobs would be to try to use other
frameworks if at all possible …
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29. PEST Analysis
The acronym PEST stands for Political, Economic, Social and Technological. It is a
framework used in the early phases of strategy development to describe the
landscape and environment, in which a firm operates. It’s particularly useful for
situations where firms consider entering a new geography, e.g. an emerging market,
and would like to get an exhaustive overview of the various factors that will affect its
operations there (maybe even comparing multiple options).
Political factors evaluate how to and to what degree the
government intervenes in the economy, through tax, labor,
environmental, trade and other laws, or to some extent through the
direct provision of goods and services and direct control over
sectors of the economy (e.g. infrastructure).
Economic factors include elements such as growth, interest rates,
inflation, exchange rates and other macroeconomic elements that
affect a company’s business operations, cost of capital and ability
to import/exports goods and services.
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Social factors include issues such as population growth,
demographics, health consciousness, entrepreneurial attitude, etc.
Many of them will affect demand for a company’s products and
services, as well as its ability to find a qualified labor force.
Technological factors include R&D activities, technology
incentives and the rate of adoption and change of important
technological elements. They may determine barriers to entry, as
well as the cost and quality of operations in a given country.
Note that there are a number of variations on the PEST analysis, and on the
grouping of the various factors. Some people separate Environmental, Legal and
even Demographic factors from the four groups above. Depending on how you look
at things, your PEST analysis will then turn into SLEPT, PESTEL, PESTLE,
STEEPLE or even STEEPLED. Have fun with the acronyms!
30. Strategic Control MapThis tool is helpful in analyzing an industry landscape, looking at various
companies or firms in this industry, by breaking down overall
performance into two key drivers or indicators. It is essentially taking a
simple A = B * C formula and translating it into a compelling graphic
form.
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The graph above uses two key examples: One would be an analysis of the
asset management industry in a given country. The formula basically
states that market capitalization = book value of assets under
management * market-to-book ratio. As you can see, the graphic
translates this into a horizontal axis (the underlying business driver or an
indicator of size, i.e. assets under management), a vertical axis with the
key performance indicator (market-to-book ratio), and the resulting
isoquants represent the overall market capitalization. Companies on the
same isoquant have achieved the same market capitalization, although it
may well be through a different combination of assets and market-to-
book ratio.
The fundamental assertion here is that companies with high market
capitalization are in a stronger position, have more strategic control, and
would more likely be in a position to acquire other companies.
Companies with a combination of low assets and low market-to-book ratio
are probably quite vulnerable strategically.
The example can also be used in a variety of other settings. The second
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example listed on the graph is an analysis of law firms, where the key
drivers are number of partners, profit per partner, and as a result overall
firm profitability. Other combinations exist as well.
Another twist to this framework: Rather than just list the participation
along the key axes in any given year, one can also use the strategic
control map by plotting different market participant over time. Showing
where different firms stood in 2002 and 2008, for example, will show
some interesting and revealing trends, with clear winners and losers.
31. Value ChainThe Value Chain is a useful concept to understand how a company’s
interrelated activities create competitive advantages. The details of a
potential value chain can vary greatly by industry. Michael Porter, for
example, outlined five generic primary value chain steps (inbound
logistics, operations, outbound logistics, marketing/sales, service) and
four generic support value chain steps (procurement, technology
development, HR management, company infrastructure). But it’s obvious
that for a financial services company, inbound and outbound logistics are
not very meaningful value chain steps.
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The analysis of a company’s value chain can be an interesting first step to
understand its competitive position. Process flows within each value
chain step help to further identify individual value creating activities. The
framework is also helpful when looking at outsourcing decision, or when
trying to understand how a firm links its activities to suppliers,
distributors, or other cooperation partners. Often these linkages can
provide significant advantages in an industry “ecosystem.”
32. Four Levels of UncertaintyStrategy is all about defining a course of action for the future. Executives often make
predictions about the future where they underestimate uncertainties. A McKinsey framework
of four levels of uncertainty can be helpful to select the right set of strategic tools:
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Level One: A predictable future.
This would apply to situations where sufficiently precise predictions can be made about key
variables affecting a company’s markets and businesses (e.g. market demographics in a
reasonably stable consumer goods sector). In this case, executives can apply the standard
strategy tool kit (market segmentation, competitor’s costs and capacities, value chain
analysis, Porter’s five forces model, etc.) to define an optimal course of action.
Level Two: Alternative futures.
Sometimes firms are faced with discrete scenarios, e.g. regulatory changes, significant
actions of competitors, etc. It’s hard to predict which outcome will actually happen, although
one can assign probabilities to various alternatives. The recommendation here is to develop
strategic scenarios, and apply a decision analysis framework or a “real option” approach.
Important is also to define trigger points, and monitor markets and competitors closely, in
order to react quickly once some of these uncertainties are removed.
Level Three: A range of futures.
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Unlike level two (where the outcome is either-or), in level three, a small number of variables
define a broad range out outcomes, but the actual result may lie anywhere in between. An
example would be a company entering an emerging market, where the consumer penetration
rate could be very low or very high, or anywhere in between. Similar to level two, executives
are advised here to develop a number of scenarios. It will be important to define these
carefully, make sure they don’t overlap, and cover a reasonably broad range of outcomes.
Level Four: True ambiguity.
This type of uncertainty is actually quite rare. It may happen in cases of entirely new
technologies (e.g. mobile internet applications), where technology adoption, platform
prevalence, competitive landscape and revenue models are all up in the air. Strategy in this
situation would be highly qualitative, based on the study of analogous markets and patterns.
33. Strategic Game BoardThe Strategic Game Board is a concept championed by McKinsey & Co.
Interestingly enough, if you try to look it up on the site of the McKinsey
Quarterly, you won’t find anything. Probably an indication that it’s not
one of the most recent or frequently used frameworks. But I sometimes
find it quite useful anyway.
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The basics of this framework are fairly self explanatory: Where to
compete, how to compete and when to compete. In many cases, the
Where and How is interpreted as a matrix of geographies and products.
A good example of that is Pfizer’s efforts over the last few years to
radically refocus their efforts, exit a number of market but push harder in
others, reduce the number of products they area active in, simplify their
manufacturing base, etc.
The more strategic view of the game board, however, is to combine it
with the fundamental options a company faces: Where to compete is
fundamentally a question of whether one wants to focus on serving a
niche market really well, or whether a company has aspirations of being
a mass market player. How to compete is linked to the question of
structural change: Do we play the old game really well, or are we trying
to take advantage of innovation (on a product specific level, or on a more
structural, market specific level)?
34. Profit PoolsThe profit pool framework was developed by Bain & Co. You will find the key references in a 1998 HBR article by Orit Gadiesh (Chairman of Bain & Co.) and James Gilbert: “Profit Pools: A Fresh Look at Strategy.” The strategy of a firm should be informed by an understanding of the sources and distribution of profits generated in an industry. Gadiesh and Gilbert took a value chain perspective to this when developing the profit pool framework. This is really more of a broad strategic framework, and there are multiple ways to depict profit pools visually. But one common graphic looks as follows:
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Even though the concept is quite simple, implementing it in reality is generally quite complex. Profitability in different segments and stages of the value chain may vary a lot by product and customer group, by geography, or by channel. Also, make sure to clarify how you define profits (Accounting profits? Return on investment? Cash Flow?). Finally, the definition of activities in the value chain is not trivial either. The following process will help you map the profit pools.
Step 1: Define the industry and value chain steps.
Key is to look at the industry broadly, beyond it's traditional boundaries. Include all the activities that are meaningful to influence your organization's ability to earn profits (today and in the future). Examine the industry from four perspectives (your own, your competitors', your customers', and your suppliers') to make sure that you include all relevant elements. Talk to key analysts and industry players to understand if there are any emerging business models. Some other key questions to consider: Are there activities performed in other industry that could replace parts of what you’re doing? How would your customers define the life cycle of your product? The objective is to come up with a complete list of activities in the value chain, be broad, but not unnecessarily detailed.
Step 2: Determine the size of the pool.
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At this point, the goal is to estimate overall industry profits, which will serve as a base line. This may require some estimates for individual companies, and already an initial breakdown of aggregated numbers by product, channel, region, etc. Try to cross-check the numbers by combining different perspectives (e.g. by company, by product). Focus on the larger companies and key products – you can always extrapolate these numbers to smaller players.
Step 3: Break down the profits by activity.
If you are in an industry where all companies focus on an individual step in the value chain, you can just aggregate their respective numbers. If - and this is generally the case - there are a number of vertically integrated or mixed players, you will need to disaggregate each company’s financial data, and make estimates for specific activities. Again, looking at pure players, and looking at large companies who break out their results in 10Ks by segment, will help you solve 80% of the puzzle, so that you can then extrapolate the other 20%. Don’t forget to look at your own company’s economics as a proxy. And finally, here is where creativity comes in!
Overall, the “profit pools” framework can serve a number of purposes:
- help identify new sources of profits for a company;- rethink the role a company plays in the value chain, potentially helping to refocus;- assist in product and segment decisions.
35. Three Growth HorizonsThe Three Growth Horizons concept was popularized in a book by a
number of McKinsey consultants (Mehrdad Baghai and others) in 1996.
The book was based on a study of 40 growth companies, where the
authors tried to identify how these successful companies approach and
implement growth strategies. The key pattern that the authors identified
is one of a step-by-step approach, a “staircase of initiatives.” Companies
certainly keep an eye on the longer term strategy, but also
simultaneously manage the near term. Each time a short term target is
reached, a new capability is developed, a small acquisition is integrated,
successful growers look at this as a platform for the next step. This may
be a platform to continue to execute towards a strategic goal that had
been set in the past. But it may also be a stage where new opportunities
arise, that the company may not have been aware of before.
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One of the key prerequisites of this approach is the simultaneous
management of different time horizons. The core business needs to be
defended and extended – this is the base where successful companies
“earn the right to grow.” In the second growth horizon are a select
number of opportunities that typically already have a significant size to
have a positive impact on the overall top line of the company. In the third
growth horizon are seeds that the company plants. Some of them may
work out, some of them may not. Many of them are likely to be small,
entrepreneurial ventures.
We used this concept recently in a growth strategy workshop with the
division of a services firm. The client had an important core business
which was quite cyclical. A number of other, smaller business lines
existed, and the executive team struggled to really understand which
ones to focus on. The three growth horizons concept proved quite helpful
to the team. It allowed them to classify “grow” and “seed” business lines,
and differentiate expectations, investments, and action plans accordingly.
Not all growth opportunities are created equal!
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36. Balanced ScorecardThe Balanced Scorecard is a performance management tool developed by HBS professors Norton and Kaplan in the early 1990s (originally in an HBR article of 1992). BSC stipulates that a company’s vision and strategy can be translated into various metrics that cascade down through the organization. The key finding is that these metrics should not only be financial, but should also include three other key elements: Customer related metrics, internal process metrics, and learning and growth metrics.
Many companies (but also government agencies and non-profits) have instituted Balanced Scorecards in a rigorous way, often involving long-term projects and software tools. The objective in these implementation is to identify causal relationships: If our vision and strategy includes the fact that we want to become the most customer friendly company in our industry, then we want to pick four or five key customer metrics that best reflect this objective, e.g.: Being ranked #1 in independent customer satisfaction surveys, having a product return rate of less than x%, respond to all customer contacts within a time of y, etc. This list is not complete, as a matter of fact it is critical that an organization pick only the key metrics that really matter.
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The exercise then continues, and the highest level metrics are being translated into key metrics for different departments, key initiatives that have to be undertaken, etc. Some companies even have linked employee objectives to the overall BSC.
37. The Seven Strategy QuestionsThis list of questions is based on a book by Robert Simons, a Harvard professor
(“Seven Strategy Questions” (Harvard Business Press, 2010). It relates to strategy
execution more than strategy formulation, because the advice is to continuously ask
these questions in order to fine tune the focus of the organization and stay ahead of
the competition. The questions are:
Who is your primary customer? Have you organized your company to deliver
maximum value to that customer?
How do your core values prioritize shareholders, employees, and customers?
Is everyone in your company committed to those values?
What critical performance variables are you tracking? How are you creating
accountability for performance on those variables?
What strategic boundaries have you set? Does everyone know what actions
are off-limits?
How are you generating creative tension? Is that tension catalyzing innovation
across units?
How committed should your employees be to helping each other? Are they
sharing responsibility for your company's success?
What strategic uncertainties keep you awake at night? How are you riveting
everyone's attention on those uncertainties?
If you don’t feel like reading the book, there is also a related HBR article that
explores the key issues (link).
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Human Resource Management38. People Management Pyramid
Have you ever been in a situation where you had to review the HR
function of a firm? May be as part of a due diligence of an acquisition
candidate, or during a functional review of a client organization. I have
found the attached framework to be quite helpful to guide and structure
the overall approach in this.
Some of the ways to use this framework:
- Who spends how much time on what, do we neglect certain areas?
- What is the output in these key areas? Does the HR function provide
value to the employees, are they satisfied?
- Where are the key issues, where are the improvement opportunities?
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39. Performance Mindset Diamond
This is a framework that one of our professionals used on a recent large scale
transformation project with a fairly large team. I was not personally involved in this
project, but like the different dimensions. When you are a new project manager at
any consulting firm, they teach you to think about your team, and to talk openly with
the team about everybody’s motivations, working styles, personalities, etc. I still
remember the first time somebody mentioned the skill/will dimension to me. This
diamond framework is actually more detailed, and a good checklist to go through at
the beginning of a project.
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Marketing40. The Four Ps of Marketing
The four Ps of marketing is a useful categorization when looking at the
marketing mix of a business, and at the marketing decision that a
manager can control (subject to certain constraints). The key elements of
this mix include:
Product aspects: Physical characteristics such as functionality,
quality, safety, etc., brand name, design, styling and packaging, as
well as warranty, repair and support services.
Pricing: Strategic pricing decision (overall strategy, list price,
bundling, etc.), as well as tactical pricing decision (discounting,
rebates, terms and conditions, general price flexibility, channel
considerations, etc.).
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Place / Distribution issues: Overall coverage strategy (selective,
broad), general channel decisions, identification of specific
distributors or Points of Sale, physical distribution questions
(inventory management, warehousing, logistics, etc.).
Promotion decision: Overall promotional strategy (e.g. push vs.
pull), advertising, sales force, promotions, PR, etc.
The framework is useful not only in analyzing the marketing mix for a
product, but also in understanding the go-to-market strategy for an
entire business unit or business.
To framework does have its limitations, though: It seems well suited for
physical products, maybe a bit less so for services. And in a world where
the traditional marketing tools seem less and less effective, many
question the validity of the four Ps. Some have suggested to extend it to a
5th P (e.g. People or Processes). Others have come up with an equivalent
four Ps for marketing in the 21st century (see chart). Despite all of that, I
still find it a useful concept when looking at a business.
41. Strategic Marketing Framework
I have talked about other marketing frameworks, such as the 4 Ps (product, price, place and
promotion) or the AIDA framework (attention, interest, desire, action). Below is an overview
strategic marketing framework that includes both of those:
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It’s a fairly self explanatory summary, certainly not rocket science. But it may provide a good
overview to frame a discussion, inform a proposal, or help identify where potential issues lie.
42. 8-Step Market AssessmentThis is a framework that we are using at a-connect in market assessment projects, particularly
for pharmaceutical clients. They often look at new drugs under development, and have to
make an evaluation of the market potential, various treatment options, size of the market
segments, and pricing. The objective is not only to come up with a proposed product
positioning, but also with a financial forecast which would then inform licensing or
acquisition discussions. But the framework applies to other industries just as well. It works in
parallel on financial and non-financial aspects of assessing a market, starting with broad
outlines and zeroing in on specific findings.
Step 1:
The broad market assessment typically consists of a high level quantitative and qualitative overview, including key definitions, what’s in scope / out of scope, important adjacencies, a high level value chain (who are the main stakeholders), a technical understanding of the proudcts and solutions offered, as well as an initial overview of segments and competitors.
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Step 2:
The next step in the analysis is a thorough understanding of the customers and their needs. In assessing a drug candidate, this would include an evaluation of various treatment options and a „patient journey.“ A similar approach works in other sectors, where a thorough understanding of customer needs (and how they fill them today) is important.
Step 3:
In a third step, the competitive landscape is being analyzed, reviewing the attributes of key products that are either already on the market or in development, and evaluating the importance of these attributes. This can take the form of a high-level qualitative assessment, or be supported by detailed quantitative market research.
Step 4:
Based on the competitive assessment performed in Step 3, a product profile and positioning is developed, that describes the optimal value proposition of the product. This profile is tested again through interviews or market research.The goal is to understand the attractiveness and drawbacks of the product in a customer’s mind, and to explore potential uptake of the product in the different market segments identified in Step 2.
Step 5:
In parallel to Steps 1 to 4 above, the starting point for the revenue forecast is a comprehensive market model. In some instances, publicly available sources (e.g. analysts covering a specific market) provide a base model with key drivers (customers, penetration / adoption, number of uses, units sold, price, etc.), and at least a starting assumption on key segments. In other instances, a new model has to be developed from scratch, informed by the findings from Steps 1 to 4.
Step 6:
An important element of a financial forecast ist o make the right assumptions on market share, and how it may evolve (and hopefully grow) over the forecasting period. This can in ist simplest take the form of a qualitative evaluation based on interviews with key market experts. More sophisticated models with take into account various factors such as price elasticity of demand, forecasted market entries and product launches, etc. Large quantitative survey and/or conjoint analyses may be necessary for this.
Step 7:
In regulated markets like pharmaceuticals, pricing assumptions play a key role, and are often hard to preduct. In other markets, assumptions on pricing (net realized prices) are more straightforward, informed by benchmarks for existing or similar proudcts. Unique product attributes may provide the ability to command a price premium, which is important to take into account here.
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Step 8:
Finally, all the assumptions about market size, segments, shares and pricing obtained in Steps 5-7 are integrated into an overall revenue forecast in a user-friendly Excel forecast model that can be easily updated. All assumptions are clearly laid out, labeled and sourced. In addition to point estimates for revenues, it is important to also provide sensitivity analyses (either simple scenarios, or sophisticated Monte Carlo-type simulations).
43. Mapping the MarketThis is an interesting way to describe a market by showing visually both
the size of the various customer segments as well as the market share
(segment by segment) of key competitors. One can even add a growth
dimension by adding +/- signs, or up/down arrows.
As usual, the trick is how to define the segments. The recommendation is
generally to look at end users, not necessarily the purchasing decision
makers or the distribution channels. Doing this at a fairly detailed level is
often time consuming and difficult (lack of reliable data). But it tends to
reveal interesting insights in terms of market penetration and growth
opportunities.
44. Brand Touch Point WheelMost strategists, even people who are not marketing experts, are very familiar with the marketing funnel. Awareness, Interest, Desire, Action is typically one of the key frameworks of Marketing 101. And it is still being closely followed today. The 2002 book Building the Brand-Driven Business by Scott Davis, Michael Dunn and David Aaker offers an alternative construct – the brand touchpoint wheel. Davis, Dunn and Aaker are all three partners in the
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strategic branding and marketing consulting firm Prophet, so they know what they are talking about.
The brand touchpoint wheel distinguishes three phases in the marketing, purchasing and customer relationship process: pre-purchase (awareness, interest, consideration), purchase (trial, purchase, repeat), and post-purchase (loyalty, advocacy). The picture above shows a number of tools and tactics that can be used in each of the three phases. But the interesting aspect of this framework is that it is not only useful for tactical consideration. It informs strategy as well as tactics and campaigns, it works for B2C and B2B situations, and it’s applicable to both products and services.
For more information, check out the book "Building the Brand-Driven Business." You will also find interesting discussions on marketing topics and frameworks on the marketing blog of Kai Wright.
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45. AIDA for Consumer BehaviourAIDA is a marketing concept and acronym used to describe the process that a potential consumer steps through, from first becoming aware of a product to ultimately buying and using it. The four key steps of that process are commonly described as Awareness, Interest, Desire, and Action, hence the acronym AIDA. But the graph below also shows that a number of variations and other acronyms can also be used (some in three, four or five step increments).
AIDA is graphically best depicted as a funnel, because the fundamental idea is that as potential consumers step through the different phases, their numbers decrease. Millions of consumers may be aware of a product, a smaller number may be interested in this product or at least this category, an even smaller number may be actively looking to buy it, and an even smaller number may have gone through with the purchase.The AIDA concept is very useful in marketing and market research, because it allows marketers to identify key gaps and orient their messages and marketing campaign. A comparison of different products may show that they have similar levels of awareness, interest and desire, but that one of the products has a large drop off in the last stage of the process. This would lead the marketer in charge to design a sales and marketing campaign oriented towards “Action” (i.e. how can we encourage trial, how can we get people in the stores, etc.). For a different product, Awareness may be more the issue, and therefore the messaging and structure of a marketing campaign may look quite different.The AIDA concept has been around for a long time. Some newer studies and literature (link) have actually found that it may be a bit too simplistic and linear, and that in today’s world, where consumers have a lot more information on their finger tips and may be influences by
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social networks, online reviews and a host of other factors, the purchasing process may be much more complex and circular than the simple AIDA funnel suggests.
46. Buyer Utility MapThis framework from Blue Ocean Strategy (link) outlines on one axis the stages in a
buyer’s experience cycle, and on the other axis a variety of “utility levers.”
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The experience cycle includes:
Purchase: How long does it take to find the product? Is the place of purchase
attractive and accessible? Is the environment secure?
Delivery: How long does it take to get delivery? How easy is it to get the
product ready to use? How difficult and costly is the entire process?
Use: Does the product require training or assistance? How effective are the
products features and functions? Are there too many bells and whistles for the
average user?
Supplements: Do you need other products and services to make the product
work? If so, how costly / difficult to obtain / time consuming to set up are they?
Maintenance: Does the product need external maintenance? How easy is it to
maintain or upgrade the product? How costly is maintenance?
Disposal: How easy / costly is it to dispose of the product? Are there legal /
environmental issues in the disposal of the product?
The utility levers (customer productivity, simplicity, convenience, risks, fun and
image, environmental friendliness) can be applied to each of these cycles. Ask
yourself in the top left box of the table: How productive is the customer in the
purchasing stage? How could this phase be made more productive for the
customer? And so on for each box in the table. Also, taking a “horizontal” view, you
should ask: At which stage of the customer experience cycle are there the biggest
blocks to productivity, simplicity, etc.?
47. Product Life CycleTraditional marketing theory states that a product passes through four phases in its life cycle: Introduction, Growth, Maturity and Decline. The chart below outlines these phases graphically. You can of course also plot gross margins or net profits, based on the different stage.
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Depending on the phase in which the business resides, the overall marketing strategy changes. In the introductory phase, the objective typically is to build awareness and develop the market. In the growth phase the objective transitions to building brand preference, establishing a leading market share, and reaching not just early adopters but a broad mass audience. In the maturity phase, the objective often becomes one of defending market share and maximizing profits. The table below the graph highlights some of the basic tenets of marketing theory related to the 4 Ps (product, pricing, place, and promotion). It also illustrates that in the last phase, a firm has multiple options, from investing heavily to reinvigorate the product, to harvesting and focusing on other opportunities.Of course, the reality is never as simple as this theory. Classifying different products into these phases is often tricky (e.g., by product family, by SKU?). And even products that have been on the market for past 20 years can often enjoy nice growth rates. But the product life cycle is nevertheless an interesting concept when looking for example at decision such as where to focus R&D or marketing resources, or also how to define strategic pricing principles.
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The above framework can give some idea on how to identify the phase in which a product resides currently.
48. BCG MatrixOne of the best known frameworks - probably on everybody's top ten list:
the BCG growth / market share matrix. The tool was developed by the
Boston Consulting Group in the 70s. The objective is to identify priorities
of specific products within a business unit, or priorities of different
business unit in a larger corporate setting. The fundamental assumption
is that an enterprise should have a portfolio of products that contains
both high-growth products in need of cash and low-growth products that
generate cash. The BCG matrix has two dimensions: market share and
market growth.
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The matrix results in four quadrants:
Stars (high growth, high market share): Stars are leaders in the
business. They are frequently roughly in balance on net cash flow.
The goal is to hold or expand market share.
Cash Cows (low growth, high market share): Cows are often the
stars of yesterday and they are the foundation of a company.
Because of the low growth, investments needed should be low.
Dogs (low growth, low market share): Avoid and minimize the
number of Dogs in a company. Watch out for expensive ‘rescue
plans’. Dogs must deliver cash, otherwise they should be
liquidated.
Question Marks (high growth, low market share): Question Marks
have the worst cash characteristics of all, because they have high
cash demands and generate low returns, because of their low
market share. Either invest heavily, or sell off, or invest nothing
and generate any cash that you can.
The BCG matrix has a number of advantages. It highlight, for example,
that generic targets (in terms of growth, or return on capital), can be
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very misleading in a portfolio of business units. The matrix was
developed in the context of an overall understanding of product life
cycles: A new business may start as a small star, will grow over time,
becomes one of the cash cows of the company, and may end up as a dog
towards the end of its life cycle. But the concept also has a number of
limitations:
It neglects the effects of synergy between business units.
High market share is not the only success factor, and doesn't
necessarily always lead to high profitability.
Market growth is not the only indicator for attractiveness of a
market.
Sometimes Dogs can earn even more cash as Cash Cows.
There are also basic problems in terms of defining what is a
"market," getting the right data on market share and growth, etc.
But overall, it's definitely a good model to know and keep in the back of
your mind.
49. Growth MatrixThis is one of the more traditional growth frameworks, but nevertheless a
helpful one.
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The trick is obviously to think through the dimension: Entering new
markets can mean new geographies, new customer segments, or new
applications, products and service offerings. That dimension is usually
fairly clear. The trickier task is how to define distinctive capabilities. It’s
hard enough to define what a company’s or division’s current unique
capabilities are. But there are a number of interesting frameworks on
that as well – next week …
50. Analyzing Growth OpportunitiesThis is a framework we recently used in a proposal for a client that wanted to look at a series of adjacent growth opportunities. The suggested approach was to look at these distinct market opportunities in two dimensions: Their potential to create value, and their links and synergies to the core system.
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The vertical axis, value creation potential, will analyze key figures related to revenue, profitability, growth rates, but also competitive intensity, the cost of doing business (both in terms of capital investments required to get into the business and the ongoing costs to operate in the business). Finally, for many firms the evaluation of the attractiveness of an adjacent business should also include an evaluation of its risk profile (Is it a business with lots of ups and downs? Does it amplify the cycles of our current business or complement them? Etc.).
The horizontal axis evaluates the synergy potential between the new market segment and the core business. This is already broken down into client/market/distribution synergies vs. skills and system synergies. The latter tends to be overlooked, but is critically important in evaluating an adjacent market. Many industries today (technology, financial services, life sciences) rely largely on intellectual capabilities and/or on significant investment in large scale IT systems. The client and market synergies are traditionally analyzed by looking at the adjacent markets and trying to understand whether this market overlaps with the current business: Is it the same clients or new clients, do they use the same products or very different products?
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Finance51. ROE Tree
The ROE Tree is sometimes also referred to as the DuPont Tree, DuPont
Method or DuPont Analysis, since it was developed by DuPont all the way
back in the 1920s. Not exactly a new idea! But still very useful. There are
a lot of variations on the theme: Some versions of the tree have three
main branches (operating efficiency, asset efficiency, financial leverage),
others use five main branches (see graphic). Similar trees also exist for
ROI (Return on investment), Return on Capital Employed, etc.
The tree is an interesting tool to look at different businesses. Some
industries such as grocery retailing work with low margins and limited
leverage, and therefore ROE is largely driven by high asset turnover.
Other industries such as financial services rely more on leverage, etc.
DuPont used the tool to evaluate different businesses within the group.
The tree concept is an interesting tool to breaking down a number of
different business metrics into their component parts: Increasing revenue
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is driven by increasing the number of customers and increasing their
average spend. Increasing the average spend is driven by more units
and/or a higher price. Increasing the price is driven by either a higher
list price or lower discounts, etc.
52. Four Cornerstones of Corporate Finance
A recent book by McKinsey authors (link) outlines four principles of how companies
create value:
The core-of-value principle states that value is created by growth and return on
capital. Practical example: When considering projects, a company should carefully
consider whether they match the required return on capital requirements and add to
the company’s growth prospects.
The conservation-of-value principle asserts that absolute cash flows are what
counts, not earnings per share. Rearranging claims on cash flows does not create
value. For example: Just because a merger promises EPS growth does not mean it
creates value per se.
The expectations-treadmill principle means that the more investors expect of a
company’s share price, the better the firm has to perform to keep up. In practice, this
has for example a significant impact on structuring executive compensation (e.g.
indexed to the market performance of peer companies).
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The best-owner principle states that a business’s value depends upon its owner’s
capabilities. Examples are obvious, you just have to look at the value Android could
have created for its previous owners vs. what it has created for Google (remember –
that was an acquisition in 2005 ...).
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Operations53. 4Q Methodology (Measure, Analyze, Improve,
Control)The “Measure – Analyze – Improve – Control” framework, sometimes also referred
to as the 4Q (for 4 quadrants) methodology, is based on a classic six sigma
methodology of problem solving. Some firms refer to the fourth quadrant as
“Sustain,” but Control is used most often in six sigma literature. Also, other
applications of the methodology use five phases, adding a “Define” phase at the
beginning. So you may also find literature on the Internet under the acronym DMAIC
(Define, Measure, Analyze, Improve, Control).
Sticking to the four most important quadrants:
Measure: The purpose of this step is to define the scope and the problem, and to
learn about the current state, and capture the base line data. This includes, among
other things: Creating a statement of the opportunity, understanding what the
Customer wants. Identifying team members and time frames. Investigating the
current situation in detail: Who, What, When, Where. Developing a detailed process
map of the situation. And plotting baseline data over time to look for special causes.
Outputs from this phase will typically include data that shows the problem’s location,
baseline data, and a better understanding of the current process.
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Analyze: The second step is focused on to identify the root cause(s) of the problem,
and to find/prioritize/verify the greatest opportunity for improvement. This will include:
Generating many potential causes or opportunities. Organizing and evaluating
causes for greatest impact. Collecting data to verify the selected root cause or
opportunity with greatest potential. And identifying the relationship between the
selected cause and the process outcomes. Outputs from this phase will typically
include identified root causes or improvements that have been tested and confirmed.
Improve: The purpose of the third step is to develop, pilot, and implement the
solutions that address the root causes. This includes: Generating many potential
solutions or improvements. Evaluating and selecting the best solution. Running a
pilot if necessary. Implementing the best solution quickly. And measuring results and
comparing them to the baseline to verify expected results were obtained. Output
from this phase will typically include completed actions that eliminate or reduce the
root cause of problems or implement improvements to the process.
Control: The purpose of the last step is to maintain the gains you have achieved
with the project and make sure the process stays “in control.” This includes:
Documenting changed work methods or processes. Training employees on the new
methods. Summarizing results and communicating learnings to the organization.
Identifying next steps for this process. Output from this last phase will generally
include documentation of the new process or method being followed, communication
of the results, and further recommendations of the team.
The chart above lists a number of specific statistical tools, six sigma concepts,
frameworks and methodologies that can be applied in the various phases. And the
chart below shows an example on how some of the key findings could be
summarized on one page for a specific problem that needs to be solved.
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