Upload
neal-owen
View
219
Download
2
Tags:
Embed Size (px)
Citation preview
Strategy Toolkit
Acknowledgment: During the first years of my professional career I had the pleasure of working with many excellent professionals at Arthur Andersen. It is because of their hard work and dedication of advancing knowledge that this document was prepared. So I feel it is somewhat ashamed to see this document go to waste. Therefore, I have decided to make it available for students enrolled in Module 2 of my Excellence in Financial Management Program. This document is made possible by the folks at Arthur Andersen and I do not take any credit for this Strategy Toolkit. – Matt H. Evans
Welcome to Version 1.0 of Strategy and Organisation’s “Strategy Toolkit”.
Good strategy is based upon structured thinking. Subsequent action based upon that strategy is dependent upon the clear communication of your structured thinking. Accordingly, this booklet has been put together to help support you in structuring and communicating your thoughts as you help clients address their (often complex and ill-defined) problems.
Hopefully this booklet will:• act as a reminder (or an introduction) to a range of useful structuring tools;• give a clear description of each tool and indicate where it may be most fruitfully employed;• highlight some of the short-cuts (and pitfalls) when using those tools;• provide a best practice example which can be adapted to your own situation; and• suggest experienced practioners within ABC who may be able to help you further
The aims of the toolkit are simple:• to increase the quality and insightfulness of the work we do for our clients;• to improve our efficiency by avoiding reinvention of standard tools;• to support ongoing training programmes;• to create an ongoing store of intellectual capital; and• to help communicate with all our colleagues in Andersen, helping them understand what
we do
Perhaps the biggest intellectual challenge in compiling this booklet was defining what we mean by a tool. I am not convinced this issue has been fully solved, and you may discern three types of construct:
• widely accepted strategy consulting tools (e.g. growth share matrix);• approaches to particular types of issue which are less prescriptive; and• presentational devices, applicable to many situations
All, however, should support you in generating strategic insight for your client.
This booklet is intended to be your back-pocket guide to the tools most commonly used on strategy projects. It does not claim to be exhaustive or even comprehensive. However, you will find over 50 tools on the following pages, each one selected for its usefulness and general applicability to the types of client engagements we work on. I am sure that some of your favorites will be missing – but this is only version one and the toolkit will evolve through time. It is intended that this booklet will be updated regularly and your input is most welcome.
We believe that development of this Strategy Toolkit is an essential element in building a world-class strategy practice within Andersen. However, it is not a substitute for hard work and creative thinking, so do not limit yourself to the tools in this book.
Finally, some acknowledgments. This toolkit is not the first to be produced by the practice. It draws heavily on previous versions, whose authors I would like to thank. I am also very grateful to those of you who have submitted best practice examples and suggested entries – keep them coming.
Foreword
Table of contents
Strategy at Andersen ...................................................................................................... 5An indicative guide to using the tools .............................................................................. 6Data sources................................................................................................................... 7100% bars....................................................................................................................... 8Activity maps................................................................................................................... 10Answer first hypothesis ................................................................................................... 12Asset extension modelling............................................................................................... 14Business definition .......................................................................................................... 16Capability assessment .................................................................................................... 18Competitor analysis template .......................................................................................... 20Conversion waterfall........................................................................................................ 22Customer experience analysis ........................................................................................ 24Customer segmentation .................................................................................................. 26Customer segmentation analysis .................................................................................... 28Dupont analysis .............................................................................................................. 30Economies of scale ......................................................................................................... 32Executive dashboard....................................................................................................... 34Forecasting techniques ................................................................................................... 36Free cash flow diagram................................................................................................... 38Gantt charts .................................................................................................................... 40Growth share matrix........................................................................................................ 42Growth spread matrix...................................................................................................... 44KPC comb charts ............................................................................................................ 46Marimekko charts............................................................................................................ 48Market definition ............................................................................................................. 50Market entry and exit....................................................................................................... 52Market sizing................................................................................................................... 54Model front panel ............................................................................................................ 56Parfait charts................................................................................................................... 58Partnering maps.............................................................................................................. 60PEST analysis................................................................................................................. 62Porter’s five forces .......................................................................................................... 64Portfolio matrix ................................................................................................................ 66Prioritisation funnel.......................................................................................................... 68RACI analysis ................................................................................................................. 70Reverse costing .............................................................................................................. 72Risk matrix ...................................................................................................................... 74RONA charts................................................................................................................... 76Root cause analysis ........................................................................................................ 78ROS/RMS ....................................................................................................................... 80Scatter graphs................................................................................................................. 82Scenario development .................................................................................................... 84Sector charts................................................................................................................... 86Sensitivity charts ............................................................................................................. 88Shareholder value analysis ............................................................................................. 90Share momentum charts ................................................................................................. 92Sources of value waterfall ............................................................................................... 94Strategy articulation map ................................................................................................ 96SWOT analysis ............................................................................................................... 98Traffic light charts............................................................................................................100Value chain analysis .......................................................................................................102Value disciplines ............................................................................................................104Weighted column chart ...................................................................................................106Feedback form ................................................................................................................108
An indicative guide to using the tools
4
100% barsActivity mapsAnswer first hypothesisAsset extension modellingBusiness definitionCapability assessmentCompetitor analysis templateConversion waterfallCustomer experience analysisCustomer segmentationCustomer segmentation analysisDupont analysisEconomies of scaleExecutive dashboardForecasting techniquesFree cash flow diagramGantt chartsGrowth share matrixGrowth spread matrixKPC comb chartsMarimekko chartsMarket definitionMarket entry and exitMarket sizingModel front panelParfait chartsPartnering mapsPEST analysisPorter’s five forcesPortfolio matrixPrioritisation funnelRACI analysisReverse costingRisk matrixRONA chartsRoot cause analysisROS/RMSScatter graphsScenario developmentSector chartsSensitivity chartsShareholder value analysisShare momentum chartsSources of value waterfallStrategy articulation mapSWOT analysisTraffic light chartsValue chain analysisValue disciplinesWeighted column chart
Strategic intent Strategic architecture Strategic change
100% bars work effectively for many purposes, such as:- comparing competitors within an industry or market by
sales, market share, geography, product type etc.- costs that go into the manufacture of a particular product; - key elements that comprise a company’s revenue streams- addressing changes over time etc.
This enables people to easily recognize the relative impact of different factors that go into a process or trend.
In particular, placing a series of 100% bars in order can highlight changing patterns in relative terms, over time, region or any other segmentation. 100% bars do not reflect changes in the absolute size of the category in question.
The 100% bar is a powerful and flexible presentation tool for highlighting the relative proportion of elements within a fixed total.
5
Excel has an option to create 100% bars as part of its Chart Wizard, so they are easy to create.
Gather the data appropriate to the particular application you are using the 100% bars for, from expert interviews, analyst and brokers’ reports and, if necessary, client interviews.
Ensure that you are happy with the data you have gathered and that, if you are creating a series of bars, the information refers to the same type of data.
Annotate the chart and draw conclusions from it.
Unless you are dealing with many categories, it is best to put the absolute size of each item at the end of the bar.
For comparisons between bars over time, clearly mark the CAGR for each of the key elements of the bar.
100% bars
Typical application
Typical process
Description
0%
20%
40%
60%
80%
100%
Use shading to highlight key messages you wish to show to the client.
100% bars are often interchangeable with (or augmentations of) Mekkos and Parfait diagrams.
Tricks and tips
Example output
Source: RBS presentation, Feb 2001
Concentration of Customer Profitability
A
B
C
D
Customer ranked by profitability
Net profit
% of Total
0%
20%
40%
60%
80%
100%
Source: Private Wealth Management, 1998/99
Wealth by Source Region
S. America
Asia
N. America
Europe
1986
% of Total
Middle EastAfrica
1996 1997 2000
40% of customers
generate 90% of profit
7m £17m
$7.2tr $16.6tr $17.4tr $23.1tr
6
An activity map is an easy, visual summary of a company or series of companies and what they do.
Activity maps are a good way of moving from a broad overview of a particular company or industry’s activities to a detailed and comprehensive list of all activities within the value chain.
They are designed more to spark discussion than provide an answer to a particular problem, but make good slides for a presentation or a client pack.
You can use the activities collated in a number of ways to stimulate thought about the company in question. Try: - Mapping company activities against competitors and discussing differences; - Shading boxes according to relative capability; and - Shading boxes according to desired state and noting discrepancies with ‘as is’
It is surprisingly difficult to develop activity maps. Take time over the process and make sure you don’t miss out important activities.
Start by drawing the value chain in which the client operates, vertically on the left side of your slide.
Taking each element of the value chain in turn, try and record all the sub-activities necessary that comprise the element as a whole.
Place each activity in a box to the right of the value chain.
This exercise can be completed with a client, but if not try and discuss it with a client afterwards to ensure you have captured all activities .
7
Activity maps
Typical application
Typical process
Description
Tricks and tips
Example output
Note: the above example is not to scale (was originally the size of a powerpoint slide). To present this much data in a client situation, ensure that all boxes are clear and well spaced.
You can shade boxes according to competency or desired competency if you wish to draw out key messages.
Overlaying current with desired activities helps clarify key conclusions in advance of alliance, M&A activities, etc.
Consider adding rows for parameters which fall outside the value chain, but which can help distinguish competitors, e.g. geography, customers.
Source: TMC example
High-level activity map for fixed line telecoms: Now and Future
VoiceFilms/ Programming
Music Video conference
Rich Media
News Interactive E-mailInformation TransactionsGames
Media/ Publishing Corporate CommunicationsAdvertising
Local Access
Content Production
Content Provision
Portal
InternetAccess
Provision
BackboneNetwork
LocalEquipment
Publishing Exhibition
BrowsersE-comm. tools
Searchengines
App’n hosting tools
User Applications
Enterprise app’ns
Content-specific
apps
Strm’gmedia
Cach’gNetw’k mgmt
Metr’g
Middleware
BIlling
“WalledGarden”
Open
Portal
“WalledGarden”
Open
Mobile Portal
Fixed ASP
ISP
Fixed
ISP
Mobile
Intern’lBackbone
Bandw’thTrading
National Backbone
Coloc’n/Hotelling
Network Provision
Switching/routing
Co-ax CopperFibre Switchesand Routers
Network Equipment and Infrastructure
Hosting
Rights ofWay
Sat.
PSTN/ ISDNDial-up Cable
Fixed Network Services
Co-ax 2.5G
Mobile
3G2G
Web sites
MobileHandsets
PDAsFixedHandsets
TVs
Devices
SpecialistDevices
OperatingSystems
SpecialistLocal Apps
Applications
LocalMiddleware
Set top box
W-ASP
ASP
Multiplexers
Fixed Netw’k Eqpm’t Infrastructure
xDSL Radio Fibre
Cus
tom
er m
anag
emen
t
Current area of activity
M’wave
HSI GPRS
ASPE
Data
Traditional offline media
Key areas of future activity - owned or as part of an alliance
8
The hypothesis or logic tree is a key method of thinking used on strategy projects. It provides a framework for a piece of research or analysis to ensure that all factors are suitably accounted for and evaluated, and allows you to apply principles of structured thinking to simplify complex problems.
Structured thinking is a key method for approaching - and hopefully answering - a question in a compelling way. It helps you to be clear about the key issues you are tackling, to remember the information you have uncovered and to structure the solution you propose.
The hypothesis tree should be used early on in a project, once a basic understanding of the issues has been established. It should be returned to and changed as your thinking develops.
The hypothesis tree can be translated directly into a research tree to structure the activities that need to be performed. Once the key questions have been established it is usually clear which research method is the most appropriate.
The process of creating a hypothesis tree is ideally completed by one person first, then discussed with the team - hypothesis trees cannot be written by committee.
Begin by formally stating the situation your client is in. Then write down the key complication. In other words, define your client’s problem.
This should lead to a question which will point you towards your tree’s hypothesis or ‘answer’. Write this at the ‘top’ of the tree as a positive statement which directly answers the client’s question.
Create sub-branches by splitting the top of the tree into its natural components (this takes practice). Each horizontal level should contain statements of a distinct category or type; vertically, the ideas should support each other.
9
Answer first hypothesis
Typical application
Typical process
Description
A positive statement, although more difficult to express, is more valuable in developing a proof.
Express assertions in complete sentences rather than in note form as they better assist clear thinking.
Some first level “splits” of the hypothesis tree occur rather regularly. Typical first level branches are: - Sales, margins and costs; and - Customers, competitors and costs
Tricks and tips
Example output
The sub-branches should obey the MECE principle (Mutually Exclusive Completely Exhaustive). This implies that:
- if one of the sub-branches is false then the top of the tree must be false
- if all the sub-branches are true then the top of the tree must be true
Discuss the tree with your team as an initial test of logic and completeness, and change if it is required. Once the tree is developed sufficiently, each question should be possible to address in a manageable way. Take each element of the tree and formulate an appropriate match in the research tree to satisfy the question
BankCo. Loyalty Scheme Redesign
The proposed changes to the loyalty scheme will generate significant profit uplift… but will not have the desired impact if the changes are incremental
Will generate profit uplift Incremental changes won’t work
Can change customer behavior
Cost reductions can be made
Declining market
position
Poor customer
rel’nship and targeting
Rewards do not solicit required
behaviors
Can improve customer behaviors
Can increase contribution from best customers
Can manage out poor
customers
Can convert more prospects
Can create new revenue streams
Can reduce costs for
sourcing of goods
Can reallocate balance sheet
costs beneficially
Can save mis-targeted
marketing spend
• Sourcing costs are higher than industry
• Can offer high value goods selectively
• Swap high for low value rewards
• Can legally change provision position
• Others have lower provisions
• Posted materials can be reduced
• Process inefficiencies can be reduced
• Can identify profitable customers
• Can retain them longer
• Can increase x-sales
• Can reduce LLP
• Can identify borrowers, and make them borrow more
• Can identify poor customers
• Can price them out profitably
• Can manage attrition
• Can identify good prospects
• Can design attractive CVPs
• Can win converts from competition
• Can increase share of wallet
• Can increase x-sales
• Can partner profitably
Source: Example
10
Asset extension modeling is a simple too (or technique) for identifying new business opportunities, based upon a company’s existing strategic assets.
It is all too common in the new economy to define potential business opportunities which are simply not realizable given the starting position of a particular company. This techniques avoids those pitfalls by isolating core, near and far opportunities based on the structuring of existing assets such as brand, market reach, capital, IP, etc.
By defining the “distance” of a business opportunity it is much more likely that you will identify the likelihood of achieving stretch opportunities without straying into the realms of fantasy.
Typical applications for asset extension modeling might include: - e-commerce brainstorming; - identifying regeneration targets; - skills gap analysis; - re-engineering; and - portfolio investment planning and divestment analysis
Complete a skills audit, ensuring that all asset classes are captured (from soft assets through to hard assets). Typical asset classes might include: free cash, debt availability, skills, scale of workforce, IP (knowledge, patents), customer base, products, brand, access to industry influences, etc.
Rank the strength of each assets, and then cluster into 2-6 groups.
One or two teams members should then develop an asset extension map, which can then be tested internally with the rest of the project team. Run this past the primary client contact and incorporate his or her feedback.
Plan and organize a workshop, paying specific attention to the “stretch questions” you will ask.
During the workshop, treat the exercise like a brainstorming session, but keep drawing the threads back to the defining assets.
Conclude the workshop by gaining agreement on which opportunities are most likely to be successful.
11
Asset extension modelling
Typical application
Typical process
Description
Example output
Source: April 2001
Don’t let suggestions in the “far satellite” region get too far away from reality. But balance this against the need for individuals to test their creativity.
Use extension modelling alongside scenario planning, beachhead mapping, etc.
Asset Extension Modeling
CoreOpen
architectureECN for US
equitiesOpen
architectureECN for UK
equities
B-Bintegrationservices
Gold andjewellerytrading
Mobilecredit
derivatives
InternetPrivateBank
On-linewealth
managementtools
Institutionalfixed
incometransaction
platform
Operationalrisk on-line
advisor
Mobilebond
syndicationtool
Interest ratederivativenetwork
Mobilecredit
derivatives
Forex portal
Mobileresearchprovision
Internetderivatives
managementand settlement
InternetPrivateBank
XMLderivatives
tradingplatform
Operationalrisk on-line
advisor
Institutionalfixed
incometransaction
platform
Internetderivatives
managementand settlement
Institutionalinvestor trading
and riskmanagement
hub
XMLderivatives
tradingplatform
Product extensionMarket extension
Brand extensionSkills extension
Near satellite
Far satellite
12
Tricks and tips
13
Business definition
Typical application
Typical process
Description A framework to help clients understand how they might best manage their business as unified or separated entities. It also forms a basis for identifying new business opportunities and for estimating the potential of markets.
Business definition is based on the logic that “shared customers plus shared costs constitutes a single business”. Alternatively, if a business shares neither customers or costs they are distinct.
This has significant implications on how to structure businesses in a manner which can leverage scale and reach customers to maximize cross selling and minimize channel costs.
There are many uses for business definition, but key applications include: - establishing the boundaries of new e-business; - deciding how to manage a portfolio of opportunities; - as a basis for market entry studies; - to support new business start-ups; and - value proposition development
Begin by getting a contextual understanding through background reading.
Use this knowledge to identify discrete business activities in the area your client is working (as is). For example, food manufacture, pet food brand management, wheat milling, food distribution (US), food distribution (France).
Determine the cost structure (i.e. the key components) for each activity. Use the 80:20 approach, but dig down as quickly as possible into existing management accounts.
Plot 100% bars for costs against each other, and identify through shading where cost sharing occurs (or could occur).
Map the channel processes at a high level, which serve the customers for each business activity.
Plot this as a value chain, each against the others and identify areas of channel/customer sharing.
Plot each business activity on the “cost sharing vs. customer sharing” matrix.
14
Example output
Source: Example
Read examples of how new entrants have managed to get a foothold in new industries, and determine what elements of their existing business they have leveraged. For example, Virgin’s brand extension activities, or Japanese cost sharing in the motorcycle and engine manufacturing business).
Assignments of this sort can be helped greatly by Global Corporate Finance’s knowledge of “best owners” for discrete businesses. Don’t assume your client is the best owner of its existing business portfolio.
Co
st s
har
ing
Customer sharing
100%
50%
100%0%0%
50%
Single business
Distinct businesses
Single business(with niche potential)
Distinct business(with cost leadership
potential)
Single business
(with substitution
potential)
Distinct businesses
(with channel sharing
potential)
Business Definition Framework
Use this to draw out implications regarding which businesses can be: - stand alone or unified; - leveraged off each other’s distribution or cost base; and - better “cross-sold” between sets of customers.
Tricks and tips
Capability assessment encompasses a number of tools designed to focus a client on specific skills that the client or competitor’s company may have or lack, and that therefore may act as a basis for a sustained source of competitive advantage.
Capability assessment is an important activity for isolating and ranking capabilities in a particular company, business unit or department. It can be used either to rank capabilities as seen within a company, or as perceived by customers or clients externally.
By using tools such as the spider chart in displaying the results, characteristic patterns can be isolated, and the cumulative impact of over- or underperformance in a number of fields can be highlighted.
See also: Value disciplines
Determine the key capabilities you wish to assess the company by. These may be the three core capabilities from the ‘value disciplines’ model, or other categories (agreed with the client in advance), indeed almost anything that can be broadly termed a ‘capability’. This might include: - superior skills in producing high quality products; - superior system for delivering customer orders accurately and swiftly; - better after-sale service capability; - more skill in achieving low operating costs; - unique formula for selecting good retail locations; - unusual innovativeness in developing new products; - better merchandising and product display skills; and - superior mastery of an important technology
Conduct a comprehensive survey of a predetermined target audience (customers, employees, etc.) based on ranking each capability. Average the results for each category to get a single score for each capability.
Plot the results of the survey on a spider chart so that each capability runs along its own axis. Join the points on each axis together to form a complete shape.
You may wish to shade the area enclosed by the lines to indicate a rough ‘overall’ performance.
Annotate your results carefully so as to highlight the conclusions you have drawn.
15
Capability assessment
Typical application
Typical process
Description
Tricks and tips
Example output
There are many other ways to present the information in an informative way - take the so-called ‘wheel of fortune’ (below).
Source: FSI Project, April 2001
0
1
2
3
4Strategic fit with ML
Success of EXN
Leveraging of EXN relationships
Industry leadership
Industry collaboration
Enhancing fund management infrastructure
Rapid implementabili
ty
EXN
BW1- low importance4- high importance
Source: Client project, May 2001
Be aware that selecting capabilities and subjectively ranking them can produce results that are very sensitive for the client and/or generate certain levels of disagreement. Also, take care when reproducing diagrams in final packs as they tend to divert attention and/or cause disagreement.
Remember when conducting a customer survey to be aware of the impact of your sample size, the types of questions you ask and the ‘unrealistic’ environment of the survey. Also, make sure to ask open questions so you can provide qualitative evidence to support or bring out your conclusions.
Inherently relative, spider charts usually work best when a series of different results are compared. For example, ask customers to rank not only the company but competitors; or compare the results of internal surveys between departments.
Assets
Cash generating activities
Financially strong negotiating position
High quality customer segmentation data
Operating in a growth industry
Experienced and stable workforce
Airports and lots of space
Good track record of management and investments
Attractive, captive, guaranteed footfall
Professional
Looking at the long term
Generally risk adverse
Location (proximity to capital and entrance to EU)
Very strong airport brands @ Heathrow and Gatwick
BAA brand is fairly anonymous
On airport infrastructure e.g. roads and utilities
Responsible
Safe
Realistic
FinancialHuman
Physical
Brand
Cultur
e
Rep
utat
ion S
upport
Comm
ercial &
Marketing
Asset
oper
ation
sAss
et
optim
isat
ion
Regulation & political
Customer operations
16
Wherever a rigorous comparison between market players has to be made.
To address a company’s structure, strategic conduct and performance.
There is no “magic” to this particular template, but something similar should be employee in order to avoid uncomparative or non-focused analysis.
Review the hypothesis for your current client assignment and agree the key parameters which capture the behaviors of each competitor related to your specific issue.
Try the template on one or two competitors. Then simplify and modify it on the back of the experiences you find.
Feed the information into the strategic decision making steps in the assignment.
If you cannot fit all of your summary onto a single page you have not understood the issue or the competitor well enough. Revise.
A template which aids direct comparison between industry competitors, based around strategically important differentiating factors. This template is not uniform, but is typically structured.
17
Competitor analysis template
Typical application
Typical process
Description
Tricks and tips
Example output
Source: UBS, March 2001
Pro
fita
bil
ity
- R
elia
nce
on m
ass
afflu
ent
mar
ket
Cha
rles
Sch
wab
has
exp
erie
nced
sig
nific
ant
net
inco
me
grow
th (
5 ye
ar C
AG
R o
f 33
%).
How
ever
, th
e re
cent
dow
ntur
nin
onl
ine
trad
ing
has
impa
cted
C
harle
s S
chw
ab
mor
e th
an o
ther
on
line
brok
ers
beca
use
of t
heir
grea
ter
focu
s on
afflu
ent
cust
omer
s, a
s op
pose
d to
act
ive
trad
ers
Val
ue
crea
tio
n
Cu
sto
mer
ass
ets
- ne
w b
roki
ng c
usto
mer
s an
d cu
stom
ers
attr
acte
d fr
om o
ther
s
Cha
rles
Sch
wab
att
ract
ed s
elf-
dire
cted
cus
tom
ers
from
tra
ditio
nal
full-
serv
ice
brok
erag
es a
nd
cust
omer
s ne
w t
o br
okin
g7
.5 M
n a
ctiv
e a
cco
unts
,$
872
Bn
cus
tom
er a
sset
s (2
000)
Str
aplin
e: “
Cre
atin
g a
wor
ld o
f sm
arte
r in
vest
ors“
Phi
loso
phy
•H
igh
tech
, hi
gh t
ouch
•T
echn
olog
y le
ader
ship
•A
cul
ture
of
inno
vatio
n
Org
anis
atio
n•
24,3
00 e
mpl
oyee
s
Mis
sio
n -
To
prov
ide
cust
omer
s w
ith t
he m
ost
usef
ul a
nd e
thic
al f
inan
cial
ser
vice
s in
the
wor
ld
Inte
rnat
ion
al b
usi
nes
ses
•La
tin A
mer
ican
cen
ter
•C
harle
s S
chw
ab E
urop
e•
Cha
rles
Sch
wab
Hon
g K
ong
Ltd
•C
harle
s S
chw
ab T
okyo
M
arin
e C
o•
Cha
rles
Sch
wab
Can
ada
•A
sia
Pac
ific
Ser
vice
s ce
nter
Ret
ail s
ervi
ces
415
bran
ches
, ele
ctro
nic
brok
erag
e
3,00
0 fu
nds,
32
prop
rieta
ry
Sch
wab
fund
s•
Inve
stm
ent t
rack
ing
• S
tock
quo
tes
• T
rade
ord
ers
• A
sset
allo
catio
n•
Res
earc
h
Sch
wab
In
stit
uti
on
al
•O
pera
tiona
l su
ppor
t, tr
adin
g an
d te
chno
logy
so
lutio
ns fo
r in
depe
nden
t fee
-co
mpe
nsat
ed
inve
stm
ent
advi
sors
Sch
wab
R
etir
emen
t P
lan
S
ervi
ces
•In
vest
men
t ad
vice
to r
etire
d
•S
ervi
ces
to p
lan
adm
inis
trat
ors
•T
rust
Mar
k se
rvic
es
Cap
ital
Mar
kets
&
Tra
din
g
•T
rade
exe
cutio
n
•T
radi
ng, r
esea
rch
and
supp
ort
serv
ices
for
inst
itutio
nal c
lient
s
•C
usto
mis
ed
serv
ices
for
HN
W
cust
omer
s
Str
uc
ture
Co
nd
uc
tP
erf
orm
an
ce
Acq
uis
itio
ns
- In
vest
men
t /H
NW
foc
us
•R
esea
rch
grou
p C
hica
go I
nves
tmen
t A
naly
tics
(Nov
200
0)•
Inve
stm
ent
man
agem
ent
grou
p U
S T
rust
for
$2
.9 B
n (J
une
2000
) to
tap
wea
lthy
inve
stor
s
“pur
veyo
r of
inve
stm
ent
advi
ce a
nd p
rivat
e ba
nkin
g se
rvic
es t
o so
me
of A
mer
ica'
s ric
hest
fa
mili
es”
(Mor
e th
an $
5 M
n in
vest
able
). W
ill r
etai
n th
eir
sepa
rate
bra
nds
•eT
radi
ng t
echn
olog
y an
d br
oker
age
CyB
erC
orp
(Feb
200
0) (
Pro
vide
s in
tern
et b
ased
ser
vice
s to
hi
ghly
act
ive
onlin
e in
vest
ors)
•R
esou
rce
Tru
st C
ompa
ny H
NW
ban
k. (
Feb
200
1)
Req
uire
s cl
ient
s to
hav
e $3
mill
ion
of in
vest
able
as
sets
All
ian
ces
- E
xten
ding
the
dis
trib
utio
n ne
twor
k
•M
ulti-
year
alli
ance
with
AO
L to
bec
ome
the
prem
ier
finan
cial
ser
vice
s co
mpa
ny a
nd
brok
erag
e fir
m a
cros
s A
OL’
s pe
rson
al c
hann
els
(Oct
200
0)•
Tea
med
with
Eric
sson
to
deve
lop
mob
ile
inve
stin
g pr
oduc
ts (
June
200
0)•
Alli
ance
with
the
3 m
ajor
wire
less
car
riers
(N
ov
2000
)
Mar
keti
ng
- C
usto
mis
ing
the
prod
uct
offe
ring
•Lo
wer
pric
ing
for
cust
omer
s w
ith h
ighe
r as
set
base
s or
tra
ding
vol
umes
•
Look
ing
to e
xpan
d of
ferin
g to
pro
vide
priv
ate
bank
ing
serv
ices
for
aff
luen
t cu
stom
ers
and
acce
ss t
o le
adin
g ed
ge t
echn
olog
y fo
r ac
tive
trad
ers.
•
Oth
er n
ew p
rodu
cts
incl
ude
Gift
Pac
kage
for
new
in
vest
ors
(Jun
e 20
00);
and
Wom
en’s
fin
anci
al s
ite
(Oct
200
0)
Pro
duct
s
18
The conversion waterfall is a tool that helps identify areas of relative competitive weakness and strength, whether between internal factors (e.g. different locations or products) or relative to competitors. The waterfall is a simple way of representing the findings of a customer interview programme targeting six major measures.
The conversion waterfall illustrates the attitude and/or behaviour patterns of a company’s customer base. It provides insight into where a company is losing or gaining customer interest.
By focusing attention towards the strongest relationships, conversion waterfalls can be used to direct a company’s efforts into retaining customers.
See also: Customer Segmentation, Customer Lifecycle
Understanding customer behaviour is a very important part of strategic business analysis. By examining customer attitudes and behaviour, a business can identify where their strengths and weaknesses lie and begin filling the competitive gap or maximising a competitive opportunity.
Begin by carefully planning your activities. This includes defining the hypothesis to be tested in your interview programme, and determining the interview target population. When setting up the interview programme, ensure the sample size is large enough. As a rule of thumb, interview more than 30 customers.
Design your questions to ensure you answer the questions required for the planned output, and include redundancy to check customer consistency.
Clearly define each category in the interview plan/questionnaire. If you don’t understand the differences between the factors you are evaluating, the customer never will.
Where possible conduct research in more than one market. A variance of results may just show cultural differences, but in some cases it might give an insight into the way different markets operate.
Spend some time thinking about the results. Average the quantifiable scores, then seek to explain through reference to what you know of an organization's brand, image, store, location or product feature.
19
Conversion waterfall
Typical process
Description
Typical application
Tricks and tips
Example output
Apply the results with intelligence and consider accompanying the chart with qualitative comments gathered in the interview process to flesh out your conclusions.
Clients can take different messages from the results of this analysis. They may wish to refocus their efforts on areas of weakness; or they could change the messages they are taking to market so that their stronger performance is recognized.
It is possible to show a repurchase column, representing the number of customers that return. This is a key output of customer satisfaction as customer acquisition costs in some industry sectors are enormous, so assessment of repurchase across segments is critical to understanding customer dynamics.
Make sure you identify customer segments and then target your interview programme at the most important segments. It is very important to get the segmentation process right first, as otherwise valuable differences may be obscured during averaging.
Source: TMC Project, March 2001
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Awareness Knowledge Liking Preference Tested Purchase
New Holland
Competitor
% of populationConversion waterfall, combine harvesters, 2001
20
The full process for undertaking this analysis can be extremely comprehensive. Below is described a number key steps which are typically undertaken.
- define and agree customer segments (need-based)- develop insight into customer behaviours (e.g. understand
customer promise, rank needs, define perception gap etc.)- develop hypothesis of how to fill ‘gap’ and estimate $potential
- identify all customer contact points (high level, then detailed)- develop detailed gap analysis at each contact point – using
existing client and public domain data, interviews etc.- prioritise areas for investment which will solicit maximum change
- determine root cause- financially model benefit returns
- design processes for achieving changes in customer behaviour- develop transition plan and measuring/monitoring system
Clearly, the full end-to-end analysis requires multiple tools and techniques, but the fundamental framework of identifying and prioritising customer contact points can be very powerful.
Customer experience analysis
Customer Experience Analysis is a mechanism for identifying the critical decisions, events and actions a customer undertakes during the full purchase process. It helps identify the customer contact points and the key criteria for success at each one. This analysis is sometimes labeled Customer Value Exchange.
Useful for any company which has to compete for and retain customers (i.e. all of them). The concept is easily extendable to employees (internal customers), suppliers, partners and other shareholders.
Improving customer profitability is only possible if you change the customers’ behavior (e.g. buy more, use lower cost channels, recommend to friends etc.) Measuring customer behaviour at every interaction point with the company allows you to advise on where your client must invest (i.e. change things) in order to bridge the gap between customer expectations and delivery against them.
Many other tools can contribute to this analysis, including CVP definition, root cause analysis, customer satisfaction surveys, product prioritisation, financial return modeling, customer segmentation etc.
Typical application
Typical Process
Description
21
This is very difficult to sell to a client as an end-to-end solution. It needs to be broken down into it’s sub-elements.
Use a value chain to help build the initial high level customer interaction points.
One way to identify how value may be generated from changing customer behaviours is to use a ‘customer contact point matrix’. Create a comprehensive list of all customer contact point (list vertically), then list all the profit impacting behaviours you desire of a customer (list horizontally). Use ‘traffic lights’ to indicate ‘high-medium-low’ impact.
Typical sorts of changes to behaviour you might look out for are: buy more, buy more frequently, buy more categories, submit business, close business, recommend to friends, use cheaper channels, buy higher margin products etc.
Source: FSI project, 1998
AwarenessAwarenessInterestInterest
Search for alternativesSearch for alternatives
DetailedselectionDetailedselection
PurchasePurchase
RepurchaseRepurchase
RecommendRecommend
Deliver ServiceDeliver ServiceEvaluateEvaluate
PayPay
ConsumeConsume
• Financial advice• Advertising and
Media • Personal
Recommendation
• Service requirement identified
• Ease of contact for enquiry
• Initial contact enquiry
• Marketing material
• Access to financial advice
• Price differences• Promotional
materials• Overview of
products, services and options
• Product/Service quality• Sales Consultant recommendation• Price, delivery times• Additional services (e.g. ‘all in one’
provider)• Ease of access/convenience
• Quality of service and staff• Ease of access to service
and efficiency• Accommodation of
customer requirements• Order taking process and
documentation
• Progress monitoring • One point of contact• Telephone problem solutions• On time transaction
completion • Effective problem
handling• Follow up contact
• Payment alternatives• Account set up• No additional charges• No billing enquiries
required
• Service provision satisfies customer’s expectations
• Performance confidence• Customer - supplier
relationship• Quality of problem
resolution
Key contact features identified for a UK insurance company
Tricks & Tips
Example output
22
The key to operating successfully in a competitive market is understanding customers needs, values and behaviors and being able to take action. Segmentation identifies groups of customers with homogeneous needs, who can be served by a tailored proposition.
From what you know about the client’s customer database, industry analysis, client or expert interviews, and focus groups, begin by developing a number of hypotheses about likely segmentation schema.
Segmentation seeks to group customers according to similar purchase behaviors, attitudes and profiles. The outputs of a segmentation schema must be: - identifiable/recognizable: you must be able to identify which segment a customer is likely to be in so that marketing programmes can be actioned; - actionable: you must present strategic options for each segment which are achievable; - measurable: it must be possible to measure segments by key dimensions and assess them for market potential; and - stable: there must be an assessment of a segments short, medium and long term viability. Segments rarely remain the same over time
When you are happy with your hypotheses develop a questionnaire to test them/validate them. Keep the questioning as short as possible and only focus on the things you really need to know. “Pilot” the questionnaire with a small group of customers to test that it works.
The sample size for the actual programme should be a minimum of 50 to be useful, or 30 per customer segment identified. This can be a large task and it may be more economical to subcontract the work out.
Analyze your results. Perform factor analysis to group customers and identify trends and similar responses, and be prepared to re-formulate your hypotheses if necessary.
Look at the groups to identify the characteristics that can be used to describe them and their purchasing criteria, remembering the objective is to identify a MINIMAL number of groupings.
Draw out the implications of your findings as they may require the client to readdress its marketing strategy and/or business model.23
Customer segmentation
Typical process
Description
Tricks and tips
Example output
Remember that the purpose of segmentation is to identify “attractive” customer segments. Defining what is meant by attractive is key and depends upon the clients business objectives, for example; - customers who are currently highly profitable; - customers with high lifetime (future) value; and - large customer segments who, whilst might not be hugely profitable, support business development into other more profitable segments.
The client’s views of the existence of customer segments, their characteristics and attractiveness are often based on opinion and not fact and should be viewed with caution.
Segments do not need to include all customer data points. There will be some outliers. If outliers look significant or interesting then conduct further research to understand whether they are significant.
Source: Client project, Aug 2000
Note: size of bubble represents the approximate size of potential segment1: Bubble size representative only
Irregular
Riskaverse
Regular
Visitors
Event goers
Shoppers
Commuters
Meetinggoers
(business)
Vulnerable people /careers (1)
x
x
x
x
xx
x
x
x
xx
x
x x
x
xx
xx
x
x
x
x
x
xx
x
x
x
x
x
24
Customer segmentation is the subdivision of a market into discrete customer groups that share similar characteristics.
Any product or service potentially appeals to a universal audience. In reality, a company will sell to only a small segment of the population, and may derive value from a sub-segment of that.
Customer segmentation can be a powerful means to identify unmet customer needs. It allows you determine a client’s customer base and its characteristics in a meaningful way, splitting customers up into groups and ultimately making operational decisions about the allocation of resources for such activities as product development, marketing, selling methods, distribution strategies and pricing.
This allows a company to compete only where it is strong and likely to prosper. For example, companies that identify underserved segments can achieve a leadership position by being the first to serve them. Customer segmentation is most effective when a company tailors offerings to segments that are the most profitable and targets them where the company has a distinct competitive advantage.
Divide the market into meaningful and measurable segments according to customers’ needs, their past behaviors or their demographic profiles.
In many ways, this is the most difficult part of the process. Determining the most insightful segmentation variables can be done through research, customer surveys, or focus groups (see customer segmentation section for details).
Determine the attractiveness of each segment by analyzing, for example, the revenue and cost impacts of serving each segment or client retention rates.
Use shading and annotation to draw out the key market segments the company should be targeting.
Try and identify ways the client can invest resources to tailor the product, service or its marketing or distribution programmes to match the needs of the key target segments.
25
Customer segmentation analysis
Typical process
Description
Typical application
Tricks and tips
Example output
Ultimately, this should allow you to develop a performance measurement programme. This should assess ROI and be flexible enough to adjust over time as market conditions change.
The most important thing for segmentation analysis is ensuring that the categories you define are meaningful for the exercise you are participating in. The easiest segments to identify - age, region, and so on - are often the least indicative ways of dividing a group of people for a company hoping to achieve a particular objective. Base all segmentation on hard, data-based analysis, not gut-feelings.
One of the most difficult lessons of customer segmentation, particularly for the client, can be finding out which customers not to sell to.
Source: Example
Customer annual contribution ($)
4.8%
Loyalty Segmentation for US Bank
70
75
80
85
90
95
100 150 200 250 300 350 400 450
Retention(%)
Lifetime NPV
£100m
YoungWealthy
Mid-Wealthy
Retired savers
Mid-Affluent
YoungAffluent
Students
Types of segmentation and their applications
• Economic value
• Demographics
• Purchase
behaviors
• Usage behaviors
• Channel
• Attitude
Identify customer
needs
Priorities targets
Develop CVP
Create market
positionReach
Segment by:
low relevance high relevance
26
Dupont analysis is the creation of a series of financial ratios designed to quickly indicate a company’s health so that senior staff can manage the business for sustainable growth.
Any decision that influences product prices, unit costs, volume or efficiency impacts the profit margin or turnover ratio. Understanding how these linkages work is the key to operating a company successfully and extracting maximum value from capital.
Pioneered by the Dupont company, these ratios are designed to provide a comprehensive summary of performance of a particular company. The ratios are simple to calculate, each links closely to a separate business function (for example, marketing). This helps to demonstrate the relationships between otherwise disparate business units.
The process to be followed is highly dependent upon the particular issue you are addressing for your client. However, some general guidelines apply:
- use both published a data and your own market/performance analysis as inputs to the Dupont analysis (e.g. Management accounts, analyst reports, annual reports etc.)
- agree with your team and client the definitions of each ratio - these do vary
- calculate the ratios from your research data- think about your audience, then create a presentation which
addresses their particular ‘hot buttons’ (e.g. lenders are more interested in liquidity and leverage; managers care about profitability; shareholders care about ROE)
As a strategist you should not stop at this point. This is where the insight begins:
- try to understand the drivers of financial performance. This can be informed by other strategic analyses (such as Porter’s five forces, which have direct bearing on sales volume, margins, unit costs etc. that impact the PAT ratios)
- question which measure is critical for your client. For example, is ROE really most critical for a new entrant into a market or would market share alone
- highlight potential trade-offs between financial and operational decisions to best manage organic growth
If appropriate to your task, design performance measurement systems that reflect the critical Dupont ratios favorably
Dupont analysis
Typical application
Typical process
Description
27
Dupont analysis works best with easy to quantify and measure, finance based, statistics. Unlike much of strategic work, the introduction of estimates weakens the analysis.
Remember: ratio analysis does not give answers; it helps you ask the right questions.
Margin (Marketing efficiency)
PAT
SalesX
Sales
AssetsX
Assets
Debt + EquityX
Debt + Equity
EquityX
PAT - dividend
PAT
Asset turnover (Production efficiency)
Capital leverage Equity leverage Retention ratio
ROA (operating efficiency)
ROC (capital efficiency)
ROE (equity efficiency)
Equity growth rate (sustainable growth)
Dupont Analysis – Framework 1
Tricks and tips
Example output
Dupont Analysis – Framework 2ROC
profit capital employed
exceptional fixed assets
revenue costs working capital
volume debtorsprice creditorsunit cost
stockfixed costs
fixed assets
market share
market size
market growth
industry competitors
suppliers buyers substitutes potential entrants
28
Drawing a scale curve shows the benefits of scale in the production of a particular product or component.
Economies of scale can help to explain differences in cost between different producers.
Economies of scale are most likely to be found in industries with large fixed costs of production such as chemicals, petroleum, steel and automobile manufacture, etc. They are a significant barrier to entry if fixed costs are high.
Economies of scale do not just apply to manufacturing businesses, however. There can also be economies of advertising, promotion and marketing.
Begin by gathering the relevant data on cost per unit from your client (e.g. get exact capacity and cost per tonne for client in four plants).
Research your client’s competitors’ costs through desk based or direct research. If necessary, with project partner approval, you can also interview competitors. For missing data, try and use your ingenuity (e.g. by how much would your cost per unit drop if the size of organisation doubled).
Organise your results in a table showing output and the effect of a change in output on cost input. Use the Excel scatter function to create your chart, and the r2 function to determine whether there is a strong correlation.
29
Economies of scale
Typical application
Typical process
Description
Tricks and tips
Be aware that the quality of result will depend on the number of data points used (e.g. five gives an illustrative outcome, ten to twelve points will give more confidence).
The example above illustrates economies of scale via a decreasing average cost curve. It is also possible to illustrate the same effect with an increasing returns to scale diagram where the scale on the vertical axis is inverted.
Economies of scale operate at the level of factory or plant rather than company for manufacturing .
Be aware that there are two versions of the scale curve: one is really about learning, the other is about scale. In the first case, the horizontal axis should represent the cumulative number of units produced to date and the vertical axis, the cost per unit over time. (e.g. aeroplane manufacturing where few units are produced each year and the cost of each unit falls as assemblers get better at it). In the second case, the horizontal axis should represent the size of a given process and the vertical axis the cost per unit for this process in various plants (as above).
Manufacturing directors/managers are not often approached for market research and are may be more willing to discuss production units and capacity if asked the right way.
30
Example output
Source: Example
Manufacturing Capacity (kTonnes, 1996, Log scale)
Cost per Tonne (excl. materials, 1993, £k/Tonne)
Manufacturing scale curve, biscuits industry, 1997
A 10 times increase in scale represents a theoretical cost improvement of £275p.Some of this, however, would be offset by increased distribution and other costs.
R2 = 65%
0,0
0,2
0,4
0,6
0,8
1,0
1,2
1 000 10 000 100 000
Broxburn
Linkoping
Durango
Lauragais X1
X2
Hatton
AshbyGyor
Maastricht
Jyvas Hyva
CarlisleDortmund
GenoaTyneside
The executive dashboard is a tool designed to give a one-page overview of the performance of a company that goes beyond simple measures of financial performance. It provides a framework to translate strategic objectives into measurable performance indicators, giving the CEO/COO full and timely control over business performance and/or business change
The dashboard comprises a series of key performance indicators (KPIs) that look beyond financial performance alone and can address a very wide range of issues. The most common applications are
- monitoring the performance of a business in a dynamic industry- monitoring the progress of business process reengineering- monitoring organisational change initiatives
Some typical example KPIs include: financial performance (turnover, profit, working capital); employee measures (satisfaction levels, utilisation); customer measures (churn, delivery time, satisfaction)
Most successful applications of the dashboard have supporting “exception reporting” pages which identify individuals responsible for outstanding or poor performance against targets or milestones.
Dashboards are typically constructed as the final output of an earlier study of the business fundamentals, so the first step is always to review earlier work and interview team members and the client.
KPIs may be determined through a number of mechanism, including analysis of management accounts, benchmarking, consultation with industry experts. However, do not be surprised if a business is seeking to build a dashboard with no clear view of the critical KPIs (it is certainly not unknown). In this instance determination of the critical KPIs may be long exercise including multiple client interviews, customer interview programmes etc. Whatever, make sure you agree the definition of each KPI and the most critical ones which will populate the dashboard.
After the critical KPIs are determined it will be necessary to derive a hierarchical logic tree of sub-KPIs which feed the critical measures. It is common that the desired measures will not be (easily) available within the business. In this instance it will be necessary to put interim (manual) measures in place to capture the data. The hierarchy of KPIs should stop when an individual’s name can be placed against each measure and hence be held accountable.
Executive dashboard
Typical application
Typical Process
Description
Remember: the function of the executive dashboard is to move clients from vague performance measures to sharp, quantified performance indicators. An example might be moving from a general awareness of the need to monitor product mix to a specific commitment to keep to only two branded products per sales category.
“We can’t measure that” is not a good enough answer. There is always a way to capture critical measures, even if the manual costs are high.
Ask a web page designer to help with the presentation – it will look clearer than your effort. Help by keeping it simple.
If you don’t have a dashboard, get out of the car.
Source: TMC proposal, May 2001
Tricks and tips
Example output
Finally, when constructing the dashboard panel (in HTML, Visual Basic,Excel), always include an indication of which measures are improving or worsening (often via traffic lights or colored arrows).
Forecasting techniques are used to project future market size and growth from the statistical analysis of historical data.
There are three main methodologies for deriving an estimate of market growth: - extrapolating historical data: using time series and statistical demand to infer trends from what has happened in the past. This approach broadly assumes consistent market drivers over the period in question; - inferring from derived demand: developing a general trend from the way demand in other related industries or markets has changed over time; and - compiling projective opinions: gathering multiple views from better informed parties and constructing a best guess estimate
The most common method for extrapolating forecasts from historical trends is by the analysis of time series data. Time series typically comprise four elements: - trends: growth rates of the past market; - cycles: long term fluctuations, usually linked to the economic cycle; - seasonality: consistent fluctuations throughout the year; and - erratic or stochastic events: normally caused by events outside an industry or market’s control
Trends and cycles often require a long time to become evident and can be masked by seasonality and erratic events. Factors can be internal or external to a company, such as the launch of an advertising campaign. When hard pressed for data, a good way to forecast growth is to look to other industries or markets for guidance:
33
Forecasting techniques
Typical process
Description
Down-streamindustrydemand
Demand for steel
Demand for :- automotive OEM- ship building
Up-streamindustrysupply
Demand for ski boots
Supply of :- winter holidays
Complementaryindustrydemand
Demand for car rental
Demand for :- business trips
“Lateral”industrydemand
Demand for Mountain Bikes
Demand for :- video games
To forecast ...
Infer from ...
E.g. Industries using our output
Industries whose output affects demand for our products
Industries whose product / service is bought in conjunction with ours
Industries which share some characteristics with ours (customers, etc.)
Asking ‘experts’ for their opinion is an alternative, less formal approach to forecasting. However, undertake this with care. Ask as many qualified experts as possible and triangulate their views to minimize error. Be aware that opinions can be consistently wrong if all experts are using the same erroneous data set to base their opinions on. Become an expert yourself by reading widely and you will be better able to judge their views objectively.
It is not always practical to do our own research, or you may want to independently validate expert opinions. In these situations used published market research, and bear in mind the following:
Forecasting periods should be kept as short as possible (no greater than 36 months) to preserve accuracy. It will, however, depend on the product and/or sector. Established products such as sliced bread will be easier to predict for a longer term than interactive TV, for example.
Buyer intention surveys
Sales force opinion
Expert opinion
• Particularly useful for product purchases where advanced planning is required and for new products where past data does not exist
• Outcome valid only if the buyer has clearly formulated intentions, will carry them out and will describe them to interviewers...
• Rarely used in practice (low response rate)
• Frequently used• Particularly to interview competitor sales people• Be aware they may try to promote a product but can be useful to
understand major changes
• Very frequently used• Experts can include trade associations, independent consultants,
senior members of companies, distributors, suppliers• Care should be taken to establish the basis for their estimate -
was it based on original market research or is it a figure from another expert?
• Was it based on interviews with 1000 customers or a couple of industry experts?
• Speak to the authors(s). Do their estimates stand up?
• Frequently, lack of reconciliation is due to analysis of slightly different markets, or because one person has used manufacturer selling price in one instance, retail selling price in another.
• Check whether growth is real or nominal
• Is the report thorough?• Has it been prepared by a trade body or market researchers?• Have you had difficulties with this company's estimates before?• Are key pieces of data excluded, e.g. not all countries covered to
the same detail?
How was the market estimated?
Is the source reliable?
Reconcile with other research
Tricks and tips
34
Free cashflow diagram
The free cashflow diagram is an excellent format for displaying the results of a cash flow analysis over time. Its strength lies in the fact that it displays all of the key business indicators looked for by a senior executive. These include: sources of value; fixed and variable investment costs; break-even; net and cumulative cash position; net present value.
Free cashflow represents the net cash flow that a firm or project expects to generate. Unlike a cashflow statement, which attempts to reconcile sources/uses of cash with starting/ending cash (accounting perspective), free cash flow focuses on the key strategic component of the generating/financing equation.
Given this, the free cashflow diagram can be used in almost all circumstances where you need to display the commercial outcome of any strategic business investment. It is one of the most frequently used tools in the strategy consultants armoury.
The diagram should be drawn from an earlier Excel spreadsheet analysis. The following steps outline the main features:
- Identify main sources of cash in and cash spend. (Be aware that more than 5-6 sources makes the chart look cluttered and detracts from the key messages. Consider grouping small and non-critical sources together as ‘other’.)
- Put cash flow on the x-axis, time on the y-axis.- Create column chart chart, showing cash above the line (use
+ve numbers) and cash costs below the line (use -ve numbers)
- Hand draw the net cashflow and cumulative cashflow lines. - Highlight the breakeven point and the point of maximum
exposure (highest negative cashflow).- Name cashflow sources.- Insert figures for net cashflow for the year and cumulative year
on year cashflow figures. This should lead to break even analysis and an analysis of profitability.
- The key ratio for analysis is that of risk exposure - the difference between maximum risk exposed point (worst NPV) and best possible NPV. There is a clear link between the cash flow diagram and the sources of value waterfall. Both show the individual components of an overall financial flow.
Draw this picture early (in combination with your sources of value waterfall diagram). It can form the bedrock of common sense decisions and is a very useful communication tool with your team and the client
Typical application
Typical process
Description
35
With a little bit of tweaking you can use this format to display other time dependent factors most relevant to your client.
Try to avoid including terminal values in this presentation of cash flows. Most business project planning anticipates pay back in the medium term (3-4 years). In some industries terminal value can dominate (e.g. telecom 3G licences, rail investment), in which case it warrants a completely separate argument and representation.
Cashflow isn’t everything. Consider the results of the cashflow diagram in the light of softer issues, which may also have an impact on the project. These could include organisation culture, recruitment or change management.
Source: FSI Project, April 2001
-60
-40
-20
0
20
40
60
80
100
2002 2003 2004 2005 2006
Base Case Cash Flow
(£m)
NPV (£m)
Net Cash (£m) -35 -7 18 34 64
Ongoing costs
Net cash flow
Fixed Investment
Corporate Actions
Outsourcing
TCA
Order routing
OMS
ABCD
Cumulative cash flow
Break-even
Maximum exposure
-35 -38 -20 8 51
Tricks and tips
Example output
36
Gannt charts are used to help plan and manage projects. They should be used in almost any proposal to help explain how we would carry out the engagement. They should also be updated regularly during projects to aid project management. Whilst Gannt charts are rarely used in final client presentations, they can be very useful in intermediate presentations to show progress and future plans, and to highlight project constraints.
The information to be plotted on a Gannt chart should be obtained during the course of project planing and ongoing management. This should include:
• Project phases• Project workstreams• Activities within each workstream• Project milestones• Planned duration of activities• Effort required for each activity• Availability of resources
Gannt charts can be drawn directly in Powerpoint or developed using a project management application such as Microsoft Project.
Involve the project team members and the client in the development of Gannt charts.
A Gannt chart is a graphical timetable of project activities and milestones. As well as showing the planned duration of activities, it can also be used to show responsibilities for workstreams, interdependencies between workstreams, and critical paths.
37
Gantt chart
Typical application
Typical process
Description
Example output
Source:Banking project; March 2001
Project Proposal Gantt Chart29 30 31 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28‘K
ick
Star
t’C
lient
sM
arke
t & C
ompe
titor
sC
onso
lidat
ion
• Pressure test vision• Gather information• Develop hypothesis• Scope & workplan
• Agree key drivers of client segmentation/templates
• Develop client needs• Client interviews• Form segments & CVP
• Agree framework • Develop European
competitor models• Develop US competitor
models and market trends• Augment European value
propositions • UBS relative product &
channel review• Form segments & CVP
Mee
tings
Hypothesis meeting Interim meeting Consolidation meeting Final meeting
• Pre-wire • Prepare board presentation
‘as is’ client /products
• Consolidate into strategic client segments
• Develop likely winning CVP for each segment
• Identify channel implications and unserved customers groups
• Identify and scale sources of value to UBS
Project Proposal Gantt Chart
38
Use colours and dotted bars to improve clarity.
Gannt charts should be living documents - project plans should change as more information becomes available during the course of the project.
Use real dates as column headings, rather than (say) Week 1, Week 2 etc.
Gannt charts can be very complex, particularly on large projects. Make sure you have an up-to-date summary Gannt chart that fits on one page so that you don’t lose track of the big picture.
Tricks and tips
The growth-share matrix - developed by the Boston Consulting Group in the 1970s - is a simple two by two, devised to map business units’ or competitive position. It maps the relative positions of a company’s business units against their industry’s growth rate and the relative market share of the business unit.
Among other things, the matrix: - draws attention to cashflow and investment characteristics of various types of businesses; - encourages you to view diversified firms as a collection of cashflows and cash requirements; - explains why priorities for corporate resource allocation can be different for each business.
The growth share matrix helps to determine a strategy for each business unit to the overall benefit of the portfolio of opportunities that a business develops.
Begin by defining your subject for analysis (market, industry, company) and listing the components (competitors, units, etc.).
Then, basing growth on product, market or industry size data over three to five years, calculate the compound growth rate for each product, market or industry. Strictly speaking, “high growth” businesses are in industries growing faster than the general economy.
Calculate the average size of product, market or industry over time period and plot your results with growth rates against market share. Market share is represented on a log scale, based on the largest data point, with the largest values on the left of the chart. (The size of the bubble should reflect the average size over the time period.)
39
Growth share matrix
Typical application
Typical process
Description
Relative market share
Hold or build market share
Hold market share or harvest
Build market share,
specialise, harvest, divest
Harvest, divest or
specialise
Gro
wth
rat
e
Star Question mark
Cash cow Dog
Question mark
Low market shares in high growth market needs large cash input to finance growth, but poor yields due to weak competitive position.
Dog
Low market share, low growth, usually a cash trap
Cash cow
High market share, low growth, good cash flow can be used to fund developing business
Star
High market share in high growth market requires plenty of cash to sustain growth but strong market position yields high profits
Tricks and tips
Example output
The position of the vertical divide is largely a question of judgement. However, the horizontal divide is classically placed at 10-15% and the vertical at 1.5 or 2
Relative market share is used as a surrogate measure for economies of scale and experience. If such economies do not exist in the market, conclusions drawn from the growth share matrix may not hold.
The growth share matrix a product of the 1970’s. Exercise caution when using as it may not be strictly relevant to current circumstances. With current capital markets many firms no longer have to rely on cash cows to finance stars.
Source: Example
A
B
FD
E
G
C
= $30 million sales
Business UnitsProduct - Markets
25
20
15
10
5
010x 5x 3x 2x 1x 0.5x 0.3x 0.2x
Relative Market Share
Market Growth
(%)Cash Cow
Star
Dog
?
40
The growth spread matrix plots a company or division’s ability to create value, relative to its growth. The resulting chart can be split into four quadrants: - destroying value and growing quickly (top left); - destroying value and growing slowly/shrinking (bottom left); - creating value and growing slowly/shrinking (bottom right); and - creating value and growing (top right)
The ideal position for a business unit, sector or companies is in the top right corner. Companies classically tend to move around in an anti-clockwise direction from top left to top right. A business unit which is performing badly will have its underperforming parts cut out or sold, leaving a healthy base which can grow and create value.
A growth spread matrix is used to show the relative performance of a portfolio of business units or companies within a sector.
Define the context for your assessment - it could be an industry, sector, market or company - and the sub-elements which comprise it.
Obtain the last three to five years’ financial results for each element. Define the net assets of each. In the case of comparing companies across an industry or market, you would take this information from the balance sheet. Inside a company, the information can be derived from the management accounts.
Calculate the growth of net assets for each element over the period of examination.
Calculate the “spread”, or value generated by each element, typically as the cashflow return on investment less the cost of capital.
Plot a bubble for each element in a matrix with growth on the vertical and “spread” on the horizontal axis. The size of the bubble is indicative of the size of the business unit.
Use annotation and shading to draw out the key conclusions indicated by the matrix.
41
Growth spread matrix
Typical process
Description
Typical application
Tricks and tips
Example output
If the spread cannot be calculated easily, consider using a proxy such as economic value added. At the extreme use market capitalisation less net assets.
Source: Example
Company A vs. Selected PeersMost Recent FYE
CFROI - CoC
His
tori
cal R
ea
l Ass
et
Gro
wth
10%5%0%-5%-10%
10%
5%
0%
-5%
-10%
Company C
Company B
Company D
Company F
Company A
Company GCompany H
Company E
= $1 Billion Inflation Adjusted Gross Assets
42
The reasons that customers purchase products are central to a company’s competitive positioning.
KPC (key purchase criteria) comb charts are a way of representing these criteria in a visually arresting manner. They allow you to: - evaluate the comparative importance of different purchasing criteria, and which aspects of a client’s product are really valued; - rank your client’s performance against the results of customer research; and - rank your client against competitors.
They are similar to ‘Happy Line’ analysis that assesses how well a company performs against the product characteristics that are really valued by its customers.
KPC comb charts form part of gap analysis and have implications for resource allocation. As such, they are a core part of any market segmentation analysis exercise.
Understanding the importance of specific criteria to customers allows a company to align its products and services more closely to those customers and deliver greater value.
The data for KPC comb analysis comes from a structured customer survey programme. Any interview programme is a major exercise and should be carefully planned.
Take particular care to separate ‘wish list’ needs from preferences that apply in reality: ultimately, every consumer would like the product to overperform, arrive immediately and be free!
The survey should be structured so to rank each criteria for each competitor in the market.
Create an Excel table with the results and calculate an average score for each competitor on each category.
Plot the results on a Bar + Line chart.
43
KPC comb charts
Typical process
Description
Typical application
Tricks and tips
Example output
Do not forget to set the minimum and maximum for the vertical axis to the range offered to the customers in the interview process (say, from 1 to 10, not 0 to 10).
Apply the results with intelligence and consider accompanying the chart with qualitative comments gathered in the interview process to flesh out your conclusions.
Clients can take different messages from the results of this analysis. They may wish to refocus their efforts on areas of weakness; or they could change the messages they are taking to market so that their stronger performance is recognized.
Customers can be segmented according to purchasing criteria. This is a useful technique used by retailers FMCG companies. FMCG companies will develop a portfolio of products targeted at different consumer segments (based on purchase criteria). A retailer’s category will include a range of products which target all (relevant) customers (segments) to the store.
Source: Example
CriteriaComp 1Comp 2Comp 3Client
1
2
3
4
5
6
7
8
9
10
Score (1 to 10)
Criteria 1 Criteria 2 Criteria 3 Criteria 4 Criteria 5 Criteria 6
Key purchasing criteria
Key purchase criteria (KPC) comb, Industry X, Germany, 1999
44
Mekkos are one of the simplest ways of displaying data with a high level of visual impact to develop strategic insight.
Mekkos are typically used to display information about competitors in an industry, but can be used for a wide variety of other applications.
They present subsets of a wider data set in a simple picture. They can be used for almost any set of data, including:
– Market/industry maps, e.g. geography and product– Cost reduction prioritisation, e.g. by process, by business group– Customer analysis, e.g. customers by company
To create Mekkos, you will need to use the Magic Mekko Macro.
Gather your research data from appropriate sources. Divide the data into the segments and sub-segments you wish to analyze. If there is insufficient data for small areas, use estimates or assumptions and document what you have done.
Create a table of the results, with one segment per column, ranked by decreasing size. Each sub-segment of a given segment is placed in the successive rows of the relevant column.
Copy your table into the macro tool. Format your Mekko: state the values at the top of each bar and state the total at top right. Shade to highlight key messages.
Note that it is possible to make a mekko without using the mekko maker. Use the following (Agarwal) process, by developing a set of of stacked bar charts and then stretching them in Powerpoint to the appropriate width.
45
Marimekko charts
Typical application
Typical process
Description
In general, don’t put numbers on Mekkos - they distract the reader from the impact of the image. If it is necessary to include data or descriptions, use a separate slide.
For clarity of reading, segments of 5% or less should be grouped into an “other” segment.
Tricks and tips
Example output
TatamiParquet (wood & cork)Ceramic LaminateRubberLinoleumVinyl (incl. Chlorfree)Textile
Flooring market by geography, volume (m2) of sales in 1997
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
US Germany Japan UK/Ireland
2,297 555 373 348 211 378 240Scandinavia
103
Fra
nce
Sou
ther
nE
uro
pe
Pro
po
rtio
n o
f S
ale
s V
olu
me
Volume of sales in 1997/ millions of m2
No
rth
Wes
tE
uro
pe
Source: Example
46
A market is a place, either conceptually or physically, where a series of different products compete against each other. However, it is not always easy to determine which products compete significantly enough to be considered to be within the same market.
Markets are characterised by the sale and purchase of specific goods or services that have a certain purpose or meet a certain need. Because needs (and purposes) are subjective and difficult to define, however, we have to abstract a little to arrive at a workable ‘test’ for what a market is not, rather than a neat definition.
Successful market analysis requires a robustly defined market. An incorrectly defined market will lead to inaccurate assessments of market growth, competition and customers.
Begin by creating a realistic definition of the market based on your current knowledge.
Based on your hypothesis, define the boundaries of your market by listing ways in which customers can be segmented; and by ways in which it can be differentiated from contiguous markets.
Consider whether the market needs to be subdivided to account for differences between, for example: - Geography: the UK apple market is different to and distinct from the Australian market; or - Time: the market for morning newspapers is different from the market for evening newspapers
Identify a close product or supplier - one you think is in the market or on the market boundary.
A strict test to define a market rigorously includes principles of substitution. Two companies are in the same market if a change in one company’s pricing of its product leads to a significant switch of customer to the other company. A ‘significant’ switch is one that materially impacts a company’s profit margin (use expert advice if necessary).
Repeat this process for each potential competitor until the switch proves to be insignificant.
47
Market definition
Description
Typical application
Typical process
Be sure that the definition is relevant to the client’s situation; make sure that your definition has not been driven by data that is available.
Do not confuse markets with industries - a common mistake. Industries are defined from the supply-side: hence, there is a single white goods industry (built from common components in common factories), but washing machines and dishwashers compete in different markets. Be careful about the distinction: particularly when looking at companies that operate in overlapping markets by selling ‘bundled’ products. The ‘bundle’ provider is effectively competing against players in a series of markets, but also attempting to create a new market for the ‘bundle’ as a whole.
Tricks and tips
Example output
0
20
40
60
80
100%
Levels of market - Demand side
PercentUK population
Total Population
Penetrated market
Qualified available market
Available market
Potential market
Served market
Potential market
Available market
Qualified available market
Served market (target market) Penetrated market
Example - New Covent Garden Market
- Buyers who have a potential interest in flowers
-
Those who are willing and able to travel to NCG for 5am
-
Those who have a need to buy fresh flowers in bulk
- Those who are interested in the flowers in stock - The set of consumers who have already bought the product
Through this, you should end up with a definition based specifically on the key customer characteristics at play. Be aware of your process at all times - it will explain why you have defined the market as you did if you are questioned about it. And test your hypothesis with team members to check its robustness.
48
The threat of entry into an industry depends on a combination of barriers to entry and the expected incumbent reaction. The threat of entry is reduced if there are high barriers to entry or likely aggressive incumbent retaliation.
Exit barriers keep companies in business despite low or negative returns. They can be economic, strategic or emotional factors that keep companies competing in businesses even though they may be earning low or even negative returns on investment.
Understanding the size of barriers to entry and exit can help to estimate the likelihood of entrants to the industry/market, or of businesses leaving the industry, thereby helping an understanding of the industry’s structure and dynamics.
Taking data from the usual research resources - client data/interviews, conversations with experts, analyst and brokers’ reports, group analysis and supply chain analysis - try and determine: - the factors that make the industry accessible or inaccessible to new entrants; and - the factors that would restrict departure from an industry
Try and quantify each of these factors: including the resources, relationships or scale required to successfully overcome the barrier. Estimate both direct and residual costs associated with leaving the industry.
Compare the levels of skills, technology, etc. against those required to overcome the entry barriers; and any steps incumbents may take to raise entry barriers.
Compare the cost of exit against the benefit; and any steps that may lower exit barriers.
49
Market entry and exit
Typical application
Typical process
Description
Entry Barriers Exit Barriers
•Identify current entry barriers• to understand industry profitability• to understand how high prices
can be set without attracting new entrants
•Develop actions to change situation• Raise entry barriers to prevent
new entrants (as an incumbent)• Lower entry barriers (as a new
entrant)
•Identify exit barriers to understand industry profitability and attractiveness•Identify exit barriers when considering exit to allow for action to be taken to reduce them
Barriers to entry are either structural (a result of differences in the structure between companies under consideration - incumbents and new) or behavioral (a result of expected changes in competitive behavior of the incumbents that run counter to the interests of the new entrant).
Tricks and tips
Example output
This should enable you to form and robustly defend a view of: - the degree of industry vulnerability to new entrants; - the sustainability of the current competitive structure; - the drivers of current costs and margins; and - the existing profitability structure and how it may change
Source: Example
The most attractive segment- few new companies can enter and poorly performing players can exit easily
When both entry and exit barriers are high, profit potential is high, but is usually accompanied by more risk. Although entry is deterred, unsuccessful companies will stay and fight
The case of low entry and exit barriers is uncommon
Here entry is relatively easy and will be attracted by upturns in economic conditions or other temporary windfalls. However capacity will not leave the industry when conditions deteriorate
En
try
Bar
rier
s
Exit BarriersLow
Low
High
High
Major types of barriers to ENTRY Major types of barriers to EXIT
• Economies of scale• Product differentiation• Capital requirements• Switching costs• Access to distribution channels / property rights• Cost disadvantages independent of scale, e.g.
• favorable location• proprietary technology• access to raw materials
• Government policy, e.g. licensing
• Specialized assets• low liquidation values or high
transfer / conversion costs• Fixed costs of exit
• labor agreements• spare part capability
• Strategic interrelationships• image• financial markets• shared facilities, etc.
• Emotional barriers• Government / social restrictions
50
Market sizing techniques are used to understand the size of a market an entity is operating in or is interested in entering/leaving, once it has been accurately defined.
There are three main market sizing methodologies: - triangulation - taking the best estimates from a range of sources; - top down - taking an industry whose size you know and shaving off parts until you arrive at the required market; and - bottom up - building up segments to form the market you are interested in
It is recommended that you estimate market size using two or more of these methods at a time, typically top-down or bottom-up supported by triangulation.
The triangulation approach involves taking the best estimate from a range of sources providing slightly unequal estimates and applying the five sanity checks below: - Confidence ranging - narrowing a variety of estimates from different sources down to a range within which you are fairly confident the true answer is to be found (“confidence interval”); - Feel right test - Connecting data obtained on esoteric issues to more easily understandable dimensions and assessing credibility of implication; - Materiality test - Putting in perspective the differences between the various estimates obtained typically by expressing biggest delta as % of average value; - Impact criticality test - Establishing whether the different estimates obtained lead to the same outcome with regard to the question you are really addressing; and - Body doubling - Choosing one unique data point as the estimate you will go with pending further information
The top-down approach is a method that consists in shaving off parts of something you know until you are left with the rump (e.g. a segment size) that you were trying to estimate in the first place.
51
Market sizing
Typical process
Description
Pool of estimates
Sanity checks
Triangulated estimate=
To construct: - gather all the available data on the market you are trying to estimate as well as data on broader industry sets; - make a list of the cuts for which you have data; and - split the starting object into a sub-set by applying the cut for which you have the least data (e.g. split recorded music into digital/non-digital before type).
The example below illustrates the cuts you might undertake to arrive at one of the segments in question 3.
The bottom up approach involves building up segments to form the market you are interested in. For example:
This approach requires detailed, disaggregated data. Take care to obtain accurate definition of your data and avoid double counting.
Estimated size of the global archive footage market 2000
5. Less than 10% of the archive footage market is believed to be digitised at present.
4. Of this archive news footage represents around 40% - $80 million.
3. Archive footage represents approximately 10% of the secondary visual content market - $200 million.
2. The secondary visual content market accounts for approximately - $2bn.
1. The global market for visual content is estimated to be $6bn.
$6 billion
$2 billion
$200 million
$80 million
<$8 million
Cut
Source: TMC project, March 2001
Average Amount of Low Alcohol Beer Consumed/Annum
Market VolumeAge Group Population in Group(million persons)
65+ 9,0 m =X
X
X
X
X
X
5,6 m
7,1 m
7,6 m
9,1 m
3,8 m
3,5 m
55-64
45-54
35-44
25-34
20-24
15-19
X =
=
=
=
=
=
7 liter / yr / pers
14 liter / yr / pers
20 liter / yr / pers
5 liter / yr / pers
3 liter / yr / pers
2 liter / yr / pers
0,5 liter / yr / pers
358m liters
52
Model front panel
Every financial (Excel) model should have a control panel as its first page. This panel should display all the key variables (inputs) and all the key results (outputs) from the model calculations.
The model front panel plays a number of important functions:- facilitates identification of key parameters and their influence on
the critical outputs- allows you to ask “what if” questions when the model is “pressure
tested” by your manager/partner or client- allows ‘live’ sensitivity analysis and interaction- acts as a communication tool- facilitates buy-in from the client and other audiences when
presenting a model
Typical application
Typical process
Description
Typically, two types components constitute a model front panel. They are as follows:
- controls: features such as scroll bars, check boxes and option buttons in Excel. These are created by using the "Forms" toolbar. Hover the mouse pointer over the buttons contained on the Forms toolbar in order to determine the control that each one defines.
- gauges: Excel charts or simple tables
A third element that is sometimes introduced into a front panel is ‘model scenarios’, where lower, base and upper-case parameters and their impacts are displayed.
The process for constructing a front panel is more common sense than technique. However, a few pointers may be useful:
- understand business need for model how and by whom the model is going to be used.
- before going anywhere near a computer, structure the model and panel on paper.
- work out “the answer” on the back of an envelope. This is critical, both as a common sense check and as a very powerful demonstration to the client that you understand the key drivers
- poll client and/or manager/partner to identify likely key controls and gauges and scenarios that should be modeled.
- develop heart of model, and front panel prototype. Play with the model – get the feel of it.
- revisit each of the stakeholders, demonstrating prototype front end and explain intended functions.
- refine - then refine again throughout the project.
53
If you cant build a simple front panel you have not got to the heart of the problem. Ask yourself “what is really critical to the strategic outcome of the situation I am modelling?”
In most cases, an informal process is sufficient, but for large-scale models, building this methodology into the JAL and milestones.
The best way of learning how to use Excel controls is to design some yourself using a new workbook. Learn how to use scrolls bars, spinners, option buttons and group boxes, drop down boxes and check boxes.
When you have discovered a new (for you) trick to simplifying your front panel, pick up the phone ‘there and then’ and tell a colleague.
Source: FSI pricing project, Feb 2001
Tricks and tips
Example output
54
A Parfait chart is a simple way of displaying the absolute size of market segments and their relative growth over a given time period.
A Parfait chart is used when analyzing an industry or market to help understand historical growth and its drivers. It is also used to locate your client’s performance in relation to market growth, to understand its current position and future direction.
55
Parfait charts
Description
Typical process
Plotting a Parfait chart requires an Excel table and the Area function in the Chart menu.
Begin by defining the market you are assessing and obtain figures, typically of sales, for each competitor.
Gather your data from analyst, company or brokers’ reports. Take care to account for the reliability of the information - examine how the market was estimated, how it compares to other estimates, and so on. If no data is available you may need to infer from contiguous industries (suppliers or buyers).
Plot the chart with time on the horizontal axis and sales on the vertical. Reorder your chart to put the largest data group at the bottom and changes that only occur later in the period at the top.
In addition, calculate CAGRs for the period of examination.
Once you have completed the construction of a chart, take time to look and think about its meaning. You should be able to begin to make general assertions about the drivers of change - increasing revenues may be derived from growing volumes or rising prices, for example.
Typical application
56
Tricks and tips
Example output
0
2
4
6
8
10
12
14
16
18
1992 1993 1994 1995 1996
£m
CAGR (%)(1992-96)
6.1%
-0.8%
7.4%
-9.8%
Industry X sales, 1992-1996
213%
E
D
CB
A
Ensure you are assessing the market in ‘real’ terms (meaning that you are compensating for inflation). To do this, obtain indexed inflation rates (usually available from government resources), and divide your figures by the indexed inflation rate - you may need to rebase your figures if the index year is not the year in which your statistics begin.
Once a market estimate has been published by a reputable source, it is often drawn on widely. Always check the source of your data to see how carefully the researcher has assessed the marketplace and whether multiple sources of data have been employed. Take care to trace sources and evaluate their reliability. If you are uncertain about the reliability of a source, trace the analyst and ask them how the estimate was made.
When inferring market growth from contiguous industries, try and make reasonable inferences based on shared characteristics. For example, demand for car rental might be inferred from demand for business trips. However, always take care to specifically state your inferences and the limitations they may have (see forecasting techniques tools).
Use annotation and/or commentary to bring out the key messages of a particular chart in advance of discussion or presentation to the client. This will allow you to clarify your view on the behavior of the market. Use shading to pull out key messages you wish to present to your client.
Source: Example
Producing a partnering map is a way of simultaneously mapping out all the activities a particular company performs, and attaching a relative importance to each of those categories. By ranking each activity on two scales, a client can quickly see where the company falls short and how easy or difficult it would prove to rectify this.
Partnering maps are a very quick tool for business planning, negotiations or business restructuring exercises, that allows you to focus on which elements of a particular business are crucial to the company, and which are less important or damaging to overall performance.
Partnering maps can be used for: - planning for strategic acquisitions or divestments; - preparing for negotiations over mergers, alliances, partnerships or outsourcing agreements; - realigning corporate structure; - planning future strategic direction; and - build vs. buy decisions
As an exercise, it is most effective if it takes place in discussion with a group of representatives, where the Andersen personnel facilitate a discussion of relative performance. This way, the exercise reinforces the critical elements of a discussion that would have to take place anyway.
Well in advance, decide as a team what the critical value driver is. Typically, this might be ‘potential to generate customer intimacy’; an alternative axis may be ‘relative capacity to differentiate’, or something quantitative such as NPV.
Ensure you have a complete list of relevant activites.
Try to have a ‘dry-run’ of the exercise with the project team at least once before the actual client meeting. List all the key challenges that are likely to arrive when the exercise is repeated with the client.
In discussion with the client, place each activity on the map - with relative capability on the horizontal axis, and the key criteria on the vertical.
Remember, this is a rough and ready exercise, designed to separate activities into three broad categories. The exact position isn’t crucial.Challenge the client vigorously, but not dogmatically.
57
Partnering maps
Typical application
Typical process
Description
Tricks and tips
Example output
Analyze the results and draw conclusions.
Draw out the implications of the completed activity map: you should be able to isolate which activities are ‘walk-aways’, which are ‘points of true negotiation’, and which are ‘hostages to fortune’.
The biggest problem with this exercise is failure to articulate the elements which feed into the value and capability adequately. Make sure the client is total clear what you are referring to and is ‘on board’. (You may wish to ‘pre-wire’ the meeting with a friendly, junior member of the client team who is already on side for the project.)
Challenge your client hard, but don’t be too inflexible. Make sure you capture all the elements that are contentious so you can take them and do further analysis.
Do not always believe that capabilities can easily be altered, if the client confidently asserts they can.
Source: Vince ColvinCurrent capabilityHigh Low
“Must have” “Nice to have”
“Nice to have”
“Don’t w
ant”
Application integrator/ developer
Customer adviser
Customerproblemsolver
BillingData
mining
Banking productprovider
Standardsinfluencer
Highly innovativeapplication developer
Marketing(context building)
Sales
Customer datamanager
PDAprovider
Communitybuilder
Handsetmanufacturer
Channelprovider
Brand manager
CreditRisk
assessor
Underwriter
Binarytransactionprocessor
Bad debtmanager
Financialcontroller
Certifyingauthority
Marketanalysis
Other product/ service
provider
High
Low
Potential for building
customer intimacy
ePurchasing/payment provider
ISP
Content Packager
Channel license owner
58
PEST analysis is a simple framework to structure an informal analysis of the EXTERNAL forces acting on a market. It is universally applicable and simple and can provide insight early on in a project
PEST is an acronym for Political, Economic, Sociocultural and Technological. The tool is an aide memoir to ensure you cover all the external forces/risks that may have an impact on the company, market or industry under consideration. PEST analysis should be performed early on in an project as it helps identify and priorities research efforts.
PEST is essentially a framework to assist thinking and as such there is no process to work through. Below is a categorised list of the issues, that may be relevant to each case.
From the long list of issues prioritise the most important by size of impact on the client and probability of occurrence. (Consider both current and emerging issues). Assessing the size of the impact and probability of occurrence will relate to the type of risk identified.
Political FactorsThe political arena has a huge influence upon the regulation of businesses, and the spending power of consumers and other businesses. You must consider issues such as:
- the stability of the political environment - will government policy influence laws that regulate or tax your
business (Employment/Health & Safety/Environmental/Industry specific legislation)?
- potential changes in Government/Government policy
Economic FactorsYou will need to consider the state of a trading economy in the short and long-terms. This is especially true when performing analysis for clients with an international focus. You need to look at:Interest rates
- the level of inflation - employment/income/asset holding level per capita- long-term prospects for the economy: GDP per capita etc.
Sociocultural Factors The social and cultural influences on business vary by geography and must be accounted for. Factors include:
- attitudes to foreign products and services- changing consumer tastes/preferences/fashions - how much time consumers have for leisure? - socio-demographic profile of the customer base and its dynamics
59
PEST analysis
Typical application
Typical process
Description
Brainstorm all possible risk factors before analysing each in more detail. PEST analysis can never be complete, apply the 80:20 rule in deciding where to stop.
Do not spend too much time in the lower left quadrant.
Watching brief should be developed and
implications considered. Not immediately
necessary to formally included in strategic
planning process
Low priority, no action required
Key issues, the implications of which should be included in
strategic planning process
Tactically adjust strategic planning process if
required
Sc
ale
of
imp
ac
t
Probability
High
Low
Low High
PEST assessment
Technological FactorsTechnology is vital for competitive advantage, and is a major driver of globalization. Consider the following points:
- does technology allow for products and services to be made more cheaply and to a better standard of quality?
- do the technologies offer consumers and businesses more innovative products and services such as Internet banking, new generation mobile telephones, etc?
- how is distribution changed by new technologies, e.g. books via the Internet, flight tickets, auctions, etc?
- does technology offer companies a new way to communicate with consumers, e.g. banners, Customer Relationship Management (CRM), etc?
Tricks and tips
Example output
60
Porter’s Five Forces model is probably the most famous and widely used strategic tool. It is a useful check list of issues that needs to be considered when analyzing and assessing a company’s competitive positioning. The five forces are: rivalry amongst competitors; threat of new entrants; power of suppliers; power of customers; and the threat of substitution
The underlying principal is the weaker the competitive forces, the greater an industry’s profitability. By implication, a company whose strategy and market position provides a good defense against the five forces can earn above-average profits.
At root, it is a great checklist for describing an industry. It helps you organise your research and provides a good framework in which to present your findings
Porter’s Five Forces is most useful:- when you are trying to understand a new industry or market- before building a hypothesis at the beginning of an assignment- structuring and communicating your existing industry knowledge- defining the boundaries of an industry and you client’s role within
it
61
Begin by reading widely (broad and shallow to begin), with the framework always in mind. Use analyst reports, annual reports; existing analysis and internal experts.
Carefully define your industry. Using this definition rigorously, list the main players in each of the five categories: competitors, suppliers, customers/ buyers, new entrants, and substitutes.
Continue by carrying out a search on the names you have compiled, and gather company and brokers’ reports. Pull the relevant articles together and get reading!
When you are reading the material, think about the themes listed below. Lift the most common comments into a structured Word document.
Organize your results into five boxes, summarize and conclude in the light of the purpose of the research as given to you by the client.
You should now have a much clearer picture of the market.
Where does the work you are doing fit into the picture of the industry you have developed through the model?
Porter’s five forces
Typical application
Typical Process
Description
Two limitations to Porter’s model are often encountered:- regulation can be a very real sixth force not explicitly addressed- the model is static and takes little account of the changes
occurring in a industry
Bear in mind that the model is extremely widely known, and will not impress a client by itself. This is just a starting point to strategic thinking.
Keep a good balance between words and data, but try to provide numerical indicators where possible (e.g. “cagr =14%” is far more informative than “growth is strong”)
Source: Example
Threat of new entrants
Porter’s Five Forces Map
Threat of substitution
Bargaining power of customers
Bargaining power of suppliers Rivalry among
competitors
The behavior and market strategies of competitors. Factors include industry growth, product and brand distinctiveness, and barriers to exit
The changing preferences and bargaining power of customers or buyers: the impact of volume, choice, information availability on behavior
The potential for new entrants and the likely level of disruption caused by their arrival
How products and technologies may replace current ones and the impact of this - how easy this will be, including the cost of changing product or technology
Tricks and tips
Example output
The bargaining power and pressures on suppliers - this category also includes questions over the ease of changing suppliers, the availability of substitute products and any economies of scale
62
Portfolio matrices enable businesses to underpin their choices with a clear, data-based framework. Businesses can choose which projects to undertake now, which projects to undertake in the medium term and which projects to put on hold because of insurmountable barriers. They also help businesses quantify the expected benefits from the projects they plan to undertake.
Helping clients prioritise strategic options in an environment of scarce resources is a key element of our work. The portfolio matrix - a simple bubble chart that plots the value of options against the ease with which they can be implemented - is designed to assist in this process.
Typically based on NPV and a pre-agreed set of prioritisation criteria, it allows the quick evaluation of which options are the most difficult to put in place and their potential value.
63
Explicitly define each opportunity. Then identify criteria which provide insight into the ease of implementation of each, based on the business context. Standard criteria might include project scale, systems requirements, skills availability and structural obstacles.
Review each of the options either through detailed market research or through brainstorming sessions, and score them against pre-agreed criteria.
Meanwhile, isolate the NPV impact of each option. If it is not possible to use NPV for this, you can use cash flow or profit, but accounting techniques and lack of market risk premium mean that these measures will not be as reliable.
Remember to use a standard NPV format, for example a five year timescale with nil terminal value.
Create the chart and annotate it with key assumptions and a scale bubble; and let the area of each bubble reflect the size of the NPV.
Research and brainstorm any softer issues that the options may present (such as the impact on employee’s morale of working away from home).
Document the major impacts and present these near the chart.
Portfolio matrix
Typical application
Typical process
Description
It is possible to segment the chart in many ways (e.g. quarters, waves, grouping or slices) depending on results and the key message. The most common way is in quarters, as shown above.
Tricks and tips
Example output
Ease of implementation
Financial attractivenessNPV 2002-2006
(£m)
Attractiveness vs. ease of implementation
Low
Smart order routing
Back-office outsourcing
Trade cost analytics
Corporate actions
NPV 2002-2006
£20m
20
0
High
10
15
Overallproposition
£56 million
5
OMS
Basicproposition
Inherently attractive
Inherently unattractive
Light blue shading indicates key elements of ‘core’ proposition
Source: FSI project, May 2001
64
RACI stands for Responsible-Accountable-Consulted-Informed. RACI analysis is a clear and simple way of mapping and assigning functions between departments or individuals to ensure all activities are managed optimally.
The four distinct roles are constructed on a grid allowing you to determine exactly who should be influencing and taking responsibility for each key step in a process – with no conflicting or unaccounted activities
RACI analysis often forms part of business process reengineering (BPR) or organisational change engagements. However, it can be used very effectively within capability gap assessment exercises, process mapping etc. (or even in constructing assignment roles).
65
The starting point for this analysis is typically a clearly defined set of processes for the business.
Form a value chain or process map. In discussion with the client, ensure your value chain is MECE and at a sufficient level to determine activities that may be separable in terms of people skills, technology, physical outputs etc.
List each activity along one axis (either vertical or horizontal)
Against the other axis list the personnel (or department) who are may be directly related to the process. You should consider existing staff, potentially new staff, and/or outsource agencies. It is also important at this stage to be aware of other processes that may share skills – so don’t look at each process in isolation.
It is helpful to place the most senior people on the left, proceeding to the most junior on the right. This will facilitate grouping of activities in the next step.
Taking each activity in turn, determine in discussion with your client which individual (only one) should take responsibility for each activity, which individuals are accountable for the deliverables, which should be consulted and which need to be informed. Place the relevant letter in the relevant box.
Use the resulting grid to identify clusters of activities, duplication of roles, lack of roles etc. In particular you should be looking for: simple demarcation; one person accountable for an activity; limited consulting; limited informing
Derive recommendations for your client.
RACI analysis
Typical application
Typical process
Description
Source: Example
Tricks and tips
Example output
Outsource provider interview process
AB PR SS TJ AD DC SD NN PW HC DC ED LY MC Dept RD PdV GR OS PF JH Dir. PY
A R C C R C C I I
A I R C C C C C C C C C C I I C I I
A I R C R I I
A R C C C C C C I I I I I I C C C I
A R I I I I I I I I I I I I R I R
A R I I I I I I
A R I I I I I C C I
A R R R I
Specify Resources
Build Acceptance Criteria
Identify Providers
Develop Provider Review Processes
Interview providers
Document Interviews
Cultivation relationship
Integrate
This analysis does not take the place of process design, but builds upon it. However, you should always look to simplify the process and the number of people involved.
This step is often highly contentious. Ensure that you have rigorously tested your ideas internally before taking them to the client. It is always better to co-develop a RACI chart with proactive client team members first.
RACI charts are often called RAID charts (Responsible – Accountable - Informed - Discuss)
66
Reverse costing compares a business’ cost position relative to key competitors, activity by activity, by inferring cost structures and their drivers. It involves estimating a competitor’s cost structure and comparing it to the client’s to understand areas of relative strength and weakness.
By comparing a client’s cost to its competitors’, insights can be found regarding the key drivers of competitiveness.
Reverse costing involves taking what you know about a client’s business and comparing to a competitor’s business to identify where competitive disparities lie.
Start by taking the client company cost structure (based on activities) and begin to model differences in a competitor’s cost structure by taking into account known or estimated differences such as: - Number of people / shifts; - Specific equipment used; - Plant output volumes; - Product specifications; - Scrap / by-product volumes produced; - Plant size / layout; and - Distribution system
Where hard data is unavailable, estimate the effect on the competitor of, for example, scale factors, and by asking client company experts.
67
Reverse costing
Typical application
Typical process
Description
Tricks and tips
If the product is simple, with relatively few inputs, then reverse costing may work (e.g. cardboard boxes), if the process is complex (e.g. car) then think about trying another tool.
Reverse costing relies to some extent on guesswork. Make sure you document how you arrive at the final figures and what assumptions you make. Industry experts will have insights into cost structure, activity chains and cost allocation guidelines. In addition, carry out sensitivity analysis on your data so that you know the range of likely competitor costs.
68
Example output
Competitor ProductCompetitor TechnologyCompetitor Factor Costs
Competitor Scale
Labour
Materials
Labour
Materials
Labour
Materials
20
15
10
5
0
CostPer
Unit(£)
Client Costs Competitor Product DesignOur TechnologyOur Factor Costs
Our Scale
Competitor ProductCompetitor Technology
Our Factor CostsOur Scale
Competitor ProductCompetitor TechnologyCompetitor Factor Costs
Our Scale
Activity 3
Activity 2
Activity 1
Source: Example
Risk matrix
69
Typical application
Typical process
Description The risk matrix is a simple structure for identifying the key risks associated with an opportunity, and prioritising the actions necessary to mitigate those risks. There are many possible structures that could be used to achieve this end, however all share the common property of defining both scale and controllability of each risk.
The risk matrix is useful for clarifying decisions around complex, non-independent risks which arise from almost every business decision. Typically, any individual investment project or portfolio decision would benefit from such an analysis.
A very common situation in which this tool is used is when deciding whether to take part in an alliance venture. In this instance it helps answer the questions like:
- what is my greatest risk?- how costly will it be if I cannot mitigate it?- what shape of alliance would minimise my risk exposure.- for those risks outside my control (e.g. market risk), what is the
potential downside? etc.
Throughout any financial modeling exercise, identify those variables which most heavily effect the desired outcome (e.g. which elements have most influence on NPV). Determine the monetary value of the loss if the key variables change by (say) 5%. This is a hard measure of risk.
Additionally, identify non-financial risks, typically in the following classes: operational risk; brand risk; human capital risk; technology risk; and timing risk. Attempt to scale these risks comparatively. Many of these can only be scaled in discussion with your colleagues and the client. These are soft risks, but are equally real.
Use a two-by-two to plot all the risks by Significance (high, medium, low) and degree of controllability (manageable, mitigatable, non-controllable)
Use bubble size to accentuate the scale of risk (making area proportional to monetary impact). Additionally, shade bubbles where it adds clarity.
This exercise is best performed 2/3 of the way through a modelling exercise.
Test your findings with your team and share it with the client – ensuring consistency of logic (especially for soft risks).
Use common sense when identifying risks, consider only those with a realistic possibility of occurring or having impact. List only the issues that are at the root cause of the risk, rather than a number of knock-on effects entirely dependent upon it.
Do not be precious about the absolute location of the bubbles. The critical factor is whether the key risks (top right hand side on the above chart) can be borne by your client.
Do not stop when you have finished your risk chart. You must drive on to determine what actions must be taken to guarantee minimum risk and to determine the benefits case in this instance.
Source: FSI Project, April 2001
Internal risks Project risks Market risks
Note: The bubble size represents the potential financial impact
HIGHA. Level of inbound order flows from partners C. Exchange rate changes D. Tie in of OMFS affiliate companies to EA E. Trading role (Sell order-flow or agency)F. Handling of corporate actions K. Partner competence and fitP. DVP and intra-day cash exposure
MEDIUMB. Single currency cost transparencyG. Merrill Lynch competitive productH. Jiway competitive productI. E-Cortal competitive productJ. Market consolidation L. Lack of clearly defined exit scenariosM. Quality of research deliveredN. Technology competenceO. Custody systemsQ. Need to route all overseas business R. Potential failure of EA network
LOWS. Quality of research receivedT. Free riding on partner research and ordersU. Ability of EA to change feeV. Additional financeW. CLSA directors’ powerX. Marketing of EA
KeyRisks falling under the following categories:
Low
High
Medium
Manageable riskMitigation / Negotiation
Outside OMFS control
A
OJ
Q
DE
F
I
M
N
P
R
ST
U
VX
W
Sig
nific
ance
of
risk
Tricks and tips
Example output
B
C
D
GH
K
L
70
In exploring a company’s strategies, it is important to see how they used their asset base in making profits.
The RONA chart expands basic profitability/opportunity cost analysis and shows the various business models adopted by different companies in a segment. Some opt for high return on sales, typically on low relative sales volumes, whilst others concentrate on high volumes and a relatively low return on sales. This does, however, vary by industry and market.
The RONA chart’s two axes show the constituent parts of the return on net assets equation shown below: return on sales (how profitable a business is) multiplied by sales/asset turnover (how efficiently a business uses its assets).
Return on net assets (RONA) is a technique to explore how businesses make money from their asset base. Particularly if they are used in conjunction with sector charts, they can be used to assess the apparent strategies of competitors.
Begin with the usual data gathering process. Identify your market or industry, list the companies or business within this, and obtain company annual reports and any other relevant data over a minimum three year period.
Check the definition of net assets, profits and sales to be used. If in doubt, get expert advice.
For profits and sales, check for unusual or non-recurring items like disposal of investments or write downs. For net assets, check for unusual or non-recurring items such as acquisitions or treatment of goodwill.
Create a spreadsheet table with sales, profits and net assets over the selected timescale.
71
RONA chart
Typical application
Typical process
Description
Return on sales(Profit/Sales)
Asset turnover(Sales/net assets)
= Return on net assets(Profit/net assets)
When trying to understand why a business phenomenon occurs, it is not enough just to ask a few well chosen questions. Root Cause Analysis is a structured, logic-tree approach to asking the question “why?” It enables you to get to the heart of an issue, with a high degree of confidence that you have been MECE, and that your conclusions can be numerically supported.
Root Cause Analysis is most commonly used for structuring interview programmes to unearth the reason(s) why individuals display certain behaviors. For example: Why is our customer churn rate almost twice the industry average?; Why do my staff in Sidney lose fewer working days than those in Munich?
The utility of this technique is only realized when you reach a question that is actionable and you have asked a large enough population to get a measure of the scale/importance of the issue. Clearly there are other more detailed and statistically more rigorous methods for unearthing behavioral logic, but as a rapid tool for getting to the heart of an issue, Root Cause Analysis is hard to beat.
72
As ever, the first step is to contact colleagues to see what similar exercises have been done in the past, and to draw on expert opinion as to the cause of the issue at hand. Industry expertise is invaluable here.
Next, draw your own hypothesis (with numerical weightings) to help guide your questionnaire. Draft a questionnaire and try it on team members and manager/partner. Then test it with the client.
If you spend the time to make the questionnaire simple and clearly worded it may be possible to outsource the execution to a third party agency. However, always sit on the shoulder of a third-party agent for the first set of interviews. This is essential, as: you are closer to the issue; you can see which questions work better than others; you will be far more tenacious in getting a result. Then improve the questionnaire.
Typically, aim for logic to go 4-6 levels deep, and keep it simple. Use a grading scale of 1-5 for each question where applicable (or yes/no if necessary). Be sure to ask some open questions, as this captures responses you may not have anticipated and (nearly always) provides powerful quotes.
Preferably, use Microsoft Access to analyze the results, but use a hard copy questionnaire whilst interviewing
Finally, populate the tree and derive implications for your client.
Root cause analysis
Typical application
Typical process
Description
Poor quality staff
Too infrequent
contact
Don’t let your conclusion be overly colored by one or two impressive/influential interviewees. Remain objective.
There is always someone who will say “I’m not sure this is statistically significant”. Two comments:-
- this may be true if you have a small population of interviewees. But you will be surprised at how rapidly significance is reached for binomial processes (see any good statistics book)
- statistical significance is not always necessary, especially if your work forms the early part of a strategic direction setting exercise. Later, it may be desirable to combine this with related technical analyses such as multivariate regression, factor analysis, cluster analysis etc. Be aware of the use and limitation of your analysis.
Source: Example
“Why didn’t you purchase further products from us?”
“I considered you” “I didn’t consider you”
“I was aware of your products”
“I wasn’t aware of your products”
Poor product features
Not top of mind
Recommendation
Weak relation-
shipReputation
Conven- ience
Not top of mind
12 5 3
10
12 6 2
50%50%
80%20%
60% 25% 15% 50% 30% 17% 3%
40
Normalized to 100 customers
Insurance product provider root cause analysis
Tricks and tips
Example output
52%
Poor contact processes
Notproactive
29% 11% 8%
6 2 2
73
ROS/RMS analysis demonstrates the strength of relationship between relative size of companies in an industry and their profitability. It is a quick and visually clear way of demonstrating the significance or otherwise of scale economies.
The ROS/RMS chart itself plots average return on sales against relative market share for each competitor in the industry. The result shows whether there is any competitive advantage to be gained from economies of scale, and - more importantly - how significant those economies of scale are.
ROS/RMS charts are a useful tool to employ in any market analysis exercise, and relatively easy to create.
Begin by defining the industry you are examining and listing all the players. Check the definition of profits and sales you will be using for consistency.
Obtain annual reports for the last three to five years for each of the competitors you have identified. Strip down competitor sales to the relevant segments and estimate comparative profitability.
Make sure you are comparing like with like: watch out for profits on sale of investments, extraordinary write-offs or other unusual items.
Create a spreadsheet in Excel with sales and profits over time for each competitor.
Plot the table as a bubble chart with the relative market share (at the end of the period of analysis, relative to the largest player) on the horizontal axis and the return on sales on the vertical.
Use a log scale for the relative market share (small market shares should be towards the left.
You can use the bubbles to represent the size of company.
74
ROS/RMS analysis
Typical application
Typical process
Description
Tricks and tips
Example output
Add trend lines to draw out the general economy of scale tendency in the industry. The angle (steepness) of the trend lines indicates the relative economies of scale at work in the industry.
Identify any competitors that are significantly different and check your data. If you are confident you are comparing like with like, investigate what the competitor does differently.
Do not forget to use at least a three year average for return on sales.
Plot the data you have even if it is not complete: partial data is better than nothing.
Consider calling the competitor if no information is available (after discussion with the project’s manager) - to gain an idea of segment profitability (i.e. higher or lower than others).
The tool is best used comparatively - see diagram above.
Source: Example
1.00
ROS - RMSIndustry A
RMS (log)
ROS (last 3 years, %)
1.00
-20
-15
-10
-5
0
5
10
15
20
-25
25%
-20
-15
-10
-5
0
5
10
15
20
-25
25%
RMS (log)
ROS (last 3 years, %)
ROS - RMSIndustry B
75
Scenario development is a methodology to help “manage the future”. Where traditional analysis predicts the near future in terms of historic and current trends scenario planning considers large-scale forces that will push the future in different directions. The process is as much a part of the benefit as the outcome, allowing managers to generate and share ideas in a positive environment, leaving a company better placed to react to changing future events.
Scenario development suggests a number of distinctively different alternative futures, each of which are possible. These scenarios of the future focus less on predicting outcomes and more on understanding the forces that would eventually compel an outcome; less on figures and more on insight. They are more concerned with understanding the discontinuities in creating alternative futures by recognising that the structure of the environment may change.
There are many variants on how to run a full scenario planning engagement, but all begin with gaining an understanding of the industry via client interviews, industry experts, and micro and macro environment analysis
A “decision focused scenario” process will take the following form: - clarify strategic decisions the scenarios seek to address (ie.
what would you like to know about the future to improve your decisions?)
- agree key decision factors- determine environmental forces at two levels :market/industry
level (micro) and an economic/political/technical level (macro)- develop 3-6 scenarios - often called logics. (e.g. global giants
will dominate, industry will fragment, boundaries will blur, etc.)- describe the scenarios in enough detail to identify implications
on the strategic decisions- Identify strategic implications- feed back into the original strategic decisions
This process is done in teams and workshops with the client.
Scenario development
Typical application
Typical process
Description
Scenario planning can be applied to any changing environment, but is generally most successful in industries which face major change to underlying fundamentals of environment and competition. Most famously it has been adopted by Shell (oil), the NHS (health service), and ICL (telco supply).
76
This is a very interactive process but every client interaction should be well prepared. Typically this means approaching each interaction with an overtly open mind, but a straw-man in your back pocket.
Remember, this is not about predicting the future, it’s about being better prepared than anyone else to anticipate and react to change.
Help stretch your thinking further by applying parallel tools e.g: bridgehead mapping, ecosystem mapping, value migration, asset extension modeling, BCG growth-share matrix etc.
Source: Halo Group
Tricks and tips
Example output
• Technological rejection through possible technology failure
• Spiritual Renaissance
• Geographical boundaries become less relevant
• Change from “haves/ have nots” to “wants/ don’t want”
• High technology state control
• Universal surveillance
• Police states/blocks
• Global media giants
• Control of all content/ formats
• Increasingly politically and economically guided
Technology becomes less
popular
Power becomes more centralised
Power becomes less centralised
Big brotherTomorrow never dies
Virtual communitiesTechnophobia
Technology becomes more popular
Today
Individual focus
Non-individual focus
Technology push
Technology pull
77
The sector chart is a fairly simple, visually arresting demonstration of relative positions of competitors in a sector or industry.
The sector chart tool is similar to a BCG matrix, however the BCG matrix is from the point of view of a particular company rather than the market as a whole. By contrast, sector charts are calculated in reference to the largest market player at the end of a particular period.
This tool should be used to uncover the competitive dynamics with a market or industry. By understanding the relative performance of players by changing market share we can construct a number of strategic implications for the client.
(See also: Share Gain Line tool.)
As usual, begin by carefully defining the market you are looking at. Identify the main players in the market and, through the usual research methods, calculate their size in relation to the market.
Now calculate the growth rates for each player. Typically, the values for growth are calculated over a period of three to five years. Simply calculate the size at period start and end, and divide by the number of years.
Plot the different companies as bubbles on the graph with the relative market share at the end of the period as the horizontal axis and growth on the vertical.
The area (note: not the radius) of the bubbles can be used to represent the absolute size of each of the companies at the end of the period of examination. Always make sure to add a key which shows the scale for the bubbles.
Looking at the resulting values can tell you a great deal about the changing face of a particular market. For example, if the smaller players are grouped high up the chart, this suggests a process of market fragmentation is taking place, and by contrast if the growth is focused on the large players, the market is consolidating.
If you wish to use an ‘others’ category for a fragmented market, separate the bubble - it is not a large market player.
78
Sector charts
Typical application
Typical process
Description
For purposes of clarity when presenting the information, it is wise to calculate the relative market share on a logarithmic scale.
If comparing a number of charts, make sure you retain a consistent scale on both axes.
Adding a sector average growth line to the chart can be useful.
Tricks and tips
Example output
Copy and paste chart into Powerpoint, then ungroup the chart, deleting all but the stacked column.
Group the column, rotate (using flip function) so that largest segment lies on left hand side and adjust re-size to fit in area, ensuring that you have locked the aspect ratio.
For each segment follow the previous steps, but instead of flipping, fit the columns to the segment size.
= $1 billion revenue, 2000
Company E
Relative Market Share
Real Annual Growth (%)
-20%
-10%
0%
10%
20%
30%
40%
0.02X 0.03X 0.05X 0.1X 0.2X 0.3X 0.5X 1X 2X 0.01X 1.5X
Company F
Company C
Company B
Company K
Company A
Company G
Company H
Company I
Company J
Company D
SectorCAGR = 8.6%
ABC Sector, 1996 - 2000
Source: Example
79
80
Commercial models used to guide strategic decisions nearly always depend upon assumption - about the market, our client’s ability to capture share, the ability to implement etc. A sensitivity chart is a clear mechanism for displaying the impact of assumptions in your model. It achieves this through varying the most critical assumptions and then recording the change to the key outputs.
Sensitivity analysis is a fundamental part of the construction of any business model. It allows you to determine and communicate the key assumptions in your model in terms of the impact they have on the bottom line of the business.
Sensitivity analysis can also indicate any flaws in the functioning of the model - keep your eye out when conducting sensitivity analysis for erratic or unusual changes due to minor alterations in inputs.
Based upon your growing understanding of the issue, build an Excel model. As the model develops be aware of which factors are having most impact on your critical outputs, and question heavily the nature and scale of the assumptions you are making about these factors.
Ensure all key assumptions are isolated (typically 5-15), and ensure the model updates assumptions in real time.
Taking each key assumption in turn alter the value by +/- five percent. (For example, an assumption of 50% cagr would become 52.5% cagr NOT 55.0%). The sign of the alteration should be chosen to give a positive change in the observed output.
Note the new values and calculate the percentage change in the observed output. Reset the assumption then repeat the process. Continue until you have tested all key assumptions.
Rank assumptions in terms of significance to the observed output and plot. It is advisable to place the most sensitive assumptions in the ‘control panel’ on the front page of your model, so the client can change the values during interactive sessions.
Look carefully at the most sensitive values and make sure you are particularly confident of them in advance of presenting the model Significant time should be spent on this activity..
This will allow you to focus your time on those issues which are most pertinent (and potentially most contentious) for the client.
Sensitivity charts
Typical application
Typical process
Description
Sensitivity for Global Equity trader
Do not confuse the 5% changes you are making to assumptions with real-world events. This is simply a constant figure to demonstrate the impact (linear or non-linear) to selected outputs. The anticipated range of your assumptions should be reflected in a parallel upper/lower bound analysis.
5% is not cast in stone. Use a more appropriate (but constant) figure where applicable to your industry (e.g 50 basis points may be more appropriate if your model concerns insurance product margins).
Employing and understanding proxies and assumptions is at the heart of good strategic consulting, but at times you may feel that you have only limited confidence in your estimates. Three points on this:
- do not be afraid to express and discuss this concern. - use this tool to understanding its impact- you are not expected to know exact values for uncertain events,
but you are expected to know better than anyone else
Source: FSI project, April 2001
15.2%
13.3%
7.2%
7.1%
6.0%
5.5%
5.0%
3.9%
3.9%
2.4%
2.3%
2.2%
2.0%
1.0%
0% 2% 4% 6% 8% 10% 12% 14% 16%
Flat $5 fee from option
Inbound volume
Exchange rate $/£
Inbound growth rate
US % of total inbound
Pre tax cost of capital
HR overhead load factor
Investment cost of $9m
Market making
Exchange rate £/euro
Set fee
Dividend distribution
Outbound volume factor
US settlement fee
Tricks and tips
Example output
% change in 5 year NPV upon +/-5% in variable
81
Shareholder Value Analysis (SVA) demonstrates how decisions affect the net present value of cash to shareholders. It measures a company's ability to earn more than its total cost of capital and thus add value.
In recent years, tools for examining shareholder value have become widespread. This is because companies and individuals have increasingly realised that: - accounting measures can distort economic reality; - increasingly, analysts focus on cash flow; - fund managers have used SVA analysis for years; and - earnings per share (EPS) and other traditional measures tend to have a lower correlation to share price performance than SVA measures
Shareholder value can be split into market-based measures (the ultimate external tests is the success of a company in creating wealth for its shareholders) and internal measures (which act as proxies for market based measures).
This tool is used at two levels within a company: the operating business unit and the corporation as a whole. Within business units, SVA measures the value the unit has created by analysing cash flows over time. At the corporate level, SVA provides a framework to assess options for increasing value to shareholders: the framework measures trade-offs among reinvesting in existing businesses, investing in new businesses, and returning cash to stockholders.
82
Shareholder value analysis
Typical application
Description
Shareholder value performance measures
Internal measures
•Shareholder value analysis (Economic Value AddedTM): net operating profit after tax - capital financing charge. Note that there are many adjustments required to both these items.•Economic profit: invested capital multiplied by (return on invested capital - weighted average cost of capital).•CFROI (cash flow return on investment): is the IRR of current cash flows assumed to continue over the residual life of assets.•CFROI and TSR concepts can be combined to measure total business returns: at business unit level this leads to TBR = ((MV2 - MV1) + FCF) / MV1
Market based measures
•Market value added: the monetary premium (or discount) of the gross market value of a company to its total invested capital base.•Market to book ratio: market value of equity divided by the amount of shareholders’ capital invested and retained in the company.•Total shareholder return: dividend yield and capital gain (expressed as %)
SVA is used both as a tool to aid in one-time major decisions (such as acquisitions, large capital investments or division breakup values) and to guide everyday decision-making throughout the organisation. When used as an everyday tool by line managers, SVA can be applied in many ways to: - Assess the performance of the business or portfolio of businesses. Since SVA accounts for the cost of capital used to invest in businesses and the cash flows generated by the businesses, it provides a clear understanding of value creation or degradation over time within each business unit. This information also can be linked to management compensation plans. - Test the hypotheses behind business plans. By understanding the fundamental drivers of value in each business, management can test assumptions used in the business plans. This provides a common framework to discuss the commercial viability of each plan. - Determine priorities to meet each business's full potential. This analysis illustrates which options have the greatest impact on value creation, relative to the investments and risks associated with each option. With these options clearly understood and priorities set, management has a foundation for developing a practical plan to implement change.
Before embarking on shareholder value analysis, bear in mind that it requires a thorough understanding of the business in question in order to determine the amount of investment required and the expected cash flows that investments will yield in an accurate manner.
Begin by determining the actual costs of all investments in a given business, discounted to the present at the appropriate cost of capital for that business. You will need to agree this rate with the client.
After you have done this, estimate the economic value of your client’s business by discounting the expected cash flows to the present at the weighted average cost of capital.
The economic value added can then be worked out as the difference between the net present value of the investments and cash flows.
Typical process
83
Share momentum charts are a way of presenting dynamics in market share amongst competitors operating across different markets.
As a tool, they help you display relative market share performance of competitors across a particular market sector, or across sectors for a particular competitor.
See also: Sector Charts and Growth Share Matrix.
Begin by carefully defining the market or industry you are dealing with.
List the competitors you are analyzing, and gather historical data from general research, company and broker reports for each component, along with overall data on the market’s size and growth. Ensure the total market data corresponds to the competitors you are looking at.
Compile competitor sales data for between three and five years previously.
Create an Excel table with market/industry size at period start and end, and sizes for each competitor over the same period
Calculate the absolute growth between period end and start, then divide by the number of years. Plot the results on the chart so that the market or industry growth is on the horizontal, and competitor growth on the vertical axis.
Add a share gain line bisecting the two axes.
Players whose bubble appears above the gain line are performing relatively well, compared to competitors (i.e. they are gaining market share).
Take care how you interpret the results. It is important to think about the meaning of the chart and add clear notes to your slide. Is, for example, a poor position on the chart because of underperformance, or is a player is choosing to exit the market?
84
Share momentum charts
Typical application
Typical process
Description
Tricks and tips
Example output
Always write the meaning of the bisecting line on the chart: - Above the line = gaining share - Below the line = losing share
For multi-segments on one graph, all the bubbles in a given market should be on the same vertical line - this allows you to look at the relative performance of different markets as well as players within them.
The share momentum chart can be very insightful when used in tandem with the growth share matrix to examine the market.
Source: Example
-10%
0%
10%
20%
30%
40%
50%
60%
-10% 0% 10% 20% 30% 40% 50% 60%
Total Market Growth
Com
petit
or G
row
th (
% o
ver
4 ye
ars)
VideoCardsMusic
Competitorsgaining share
Competitorslosing share
WH Smith
Blockbuster
Disney Store
Woolworths
J. Menzies
Disney Store
Paperchase
BootsWH Smith
J. MenziesWoolworths
Our Price
WH Smith
Share movements by competitor, Music, Cards & Video retail, UK, 1995-1999
85
The sources of value waterfall is used to identify and highlight individual sources of value within a company.
Value waterfalls often add value to the client by presenting data in a simplified way. The process forces you to identify key areas of value creation and/or destruction and thus focus on the big issues that determine a client’s competitive position.
These could include: - reasons for change in revenue or profitability; - sources of cost savings; - sources of capital expenditure spend or savings; - description of full potential sources of value; and - aspirational description of what is achievable
Two sources of value waterfalls next to each other can be used to show comparative performance over time - such as between two departments, products or competitors.
Begin by obtaining the necessary data from financial statements, accounts, or market research. If data is not available, use estimates or proxy data.
Decide what measure you wish to have on the vertical axis, but remember that this axis always describes the value being created or destroyed. This could be any financial or non-financial measure (such as ROI, capex, working capital, headcount, number of customers).
Then decide on the elements of the horizontal axis. These represent the disaggregated categories which are causing the change. Such categories could also be time or some other incremental measure.
Ensure you choose the right categories to reflect all sources of value creation and/or destruction.
Where value is destroyed, stack the boxes in a downwards direction.
When creating the chart in Excel, you will need to use “invisible” boxes to get the output to line up correctly.
Annotate your chart, including explanatory notes, and detail of key assumptions, outputs and sensitivities.
86
Sources of value waterfall
Typical application
Typical process
Description
Be careful not to overcomplicate the horizontal axis by having too many categories, or by making the categories too complex. Remember, you are trying to describe the big issues to senior managers. Leave the detailed analysis to the appendix.
The sources of value waterfall often provokes many questions. Be prepared to discuss all the assumptions, inputs and workings of the model with the client.
Be careful to define your categories so that there is no double counting.
Tricks and tips
Example output
0
50
100
c.£2m
c.£12m
c.£27m
c.£8m
c.£30m
c.£10m
Corporate actions
Connectivity and standardisation(Basic ABCD)
‘Smart’ order
routing system
Trade cost analytics
Cumulative net contribution to
ABCD2001-2006 (£
million)
Back-office outsourcing
Core element of ABCD
Related element of ABCD
Potentially independent of ABCD
Total net contribution (2002-2006) =c.£89 million
OMS
Source: FSI project, May 2001
87
Ideally, the strategy articulation map is a tool used at the beginning of any project.
The strategy articulation map is built in close discussion with senior management in the client company, and can be a useful exercise on its own in getting senior staff members to think about the relationship between the company’s stated intent and a potentially divergent reality before communicating this across to the company.
One of the key challenges in any strategy project is articulating strategic criteria in a clear and consistent manner. It is necessarily complex and multi-faceted and cannot be reduced to a glib phrase or mission statement without exploring what these criteria mean, in practical terms, for a business.
The strategy articulation map is a tool designed to document and analyze a company’s strategic intent in a structured manner. However, it can also function as a quick and easy tool to quickly gather ideas from the client about where the company is and where they see it going, and demonstrate the linkage between a company’s vision, mission and values.
88
In discussion with the project team, formulate a hypothesis to take to the key client contacts for discussion.
Once you have done this, arrange interviews with the main senior members of the client staff. Use these to conduct interviews on the strategic direction of the company, based around the hypothesis you have formed, following the logical flow of questions from the top to the bottom of the pyramid.
Take care to challenge and evaluate the client contacts’ statements robustly, especially when they come directly from mission or vision statements. Bear in mind that competitive advantages are generally few and far between; whereas competencies may be broader. Initiatives and competencies usually flow fairly easily from the statements at the top of the pyramid, although ‘corporate politics’ may find you returning to the original statements many times.Make sure you track agreement and the reasoning behind any disagreements.
Strategy articulation map
Typical application
Typical process
Description
During interviews, make sure you push to the logical end of any line of questioning, even if that involves asking hard questions. Not asking enough is worse than asking too much - provided you are polite and have a clear and well reasoned logic to your argument.
Always be prepared to defend your assertions to the CEO.
Tricks and tips
Example output
The results of your information should be organized in a pyramid structure. The information should be clear, and organized so as to prove the conclusions you have reached through the course of the interview programme.
Source: client project, June 2001
Battlegrounds
Key initiatives
Necessary competitive advantages
Vision
Develop high quality management information on customer profitability, sales effectiveness, etc.
Winning the hearts and minds of intermediaries and end-customers on the use of the advanced active product as a component of a balanced portfolio
Establishing company as top 10 UK provider of retail investment products, while retaining profitable offshore business, rapidly followed by entry into European markets
Employing best customer relationship managers and best managers of customer relationship management systems to sell proposition
Implementing leading-edge management
information systems which facilitate
understanding and management of the
drivers of profitability at customer and product levels
Developing the capability for faultless administration to meet intermediaries’ requirements and manage the risks to which BGI is exposed by the new business
History and pedigree which may have thepotential to be leveraged in intermediary retail markets
To be a
profitable manufacturer of
branded, core, low-riskinvestment products for
pre-eminent intermediaries in chosen advice-led retail markets
Leadingasset
manager, leveraging
economies of scale to provide
out-performance to clients, and share
value with intermediaries
Underway
Create operational infrastructure to support retail business, including automated service offering
Design and implement sales and customer service processes and infrastructure
Develop a brand and marketing strategy to build retail and active reputation
Rationalize product set by
reviewing profitability and
mapping to needs of target customer
segments
Focus product development capability on controlled product innovation aimed at meeting intermediaries’ demand for new retail products
Develop a channel strategy for customer acquisition
World-class, proven researchand investment processes, core to differentiated products
Ability to build and access leading intermediaries in the retail market
89
SWOT analysis is typically used to generate a list of factors affecting a company’s position within a market or industry. It is a simple framework to guide more detailed formal analysis.
It is best performed towards the beginning of a project but may also be useful in client interviews or workshops by letting the participants brainstorm and priorities within each category. The key issues identified by the SWOT analysis can feed into a project’s research programme and contribute to a hypothesis tree
SWOT analysis is a tool for auditing an organisation within the challenges of its environment.
SWOT is an acronym for Strengths, Weaknesses, Opportunities and Threats. The tool is a simple aid for structuring thoughts about a company and the environment in which it operates, and helps answer questions, such as:
- what strengths does the firm have to build a strategy upon?- which weaknesses preclude certain strategic moves?- what are the primary opportunities the firm can pursue?- which threats need most careful management?
Any good strategy for a company should capture the best growth opportunities, mitigate against the most significant threats, leverage the company’s strengths, and act to decrease or avoid their weaknesses.
90
Define the market the client company is competing in and list the key players in the market.
Gather exiting analyst reports, expert interviews, annual reports, players analysis, strategic group analysis
Draw out what seems to be the most important themes in the research you have gathered
Fit each item into the relevant section of the SWOT model and add any additional conclusions you may have drawn
Try to be MECE. Issues cannot be both opportunities and threats or strengths and weaknesses.
After completing your SWOT analysis, ask yourself these questions:- How can the client leverage strengths to capitalize on the
opportunities?- How can the threats identified be overcome?- What does the client need to do to overcome its weaknesses?- How will the client overcome the identified threats?
SWOT analysis
Typical application
Typical process
Description
Brainstorm all possible risk factors before analysing each in more detail. SWOT analysis can never be complete, apply the 80:20 rule in deciding where to stop
A word of caution, SWOT analysis can be very subjective. Do not rely on it too much. Two people rarely come-up with the same final version of SWOT. So use it as guide and not a prescription. Adding and weighting criteria to each factor increase validity
Think about the implications of your conclusions carefully: how can strengths be built into corporate strategy; how can weaknesses be avoided or minimized; how can opportunities be exploited; how can threats be prepared for?
Opp
ortu
nitie
s
Threats
SWOT analysis of Chelsea FC, 2000
• Experienced players• Key real estate location• “Cultured” football methods
shared across the squad• Midfield play
• Little development opportunities for the youth teams
• Old players more accident prone
• Low scoring• Inexperienced manager
• Attract further key international names
• Umbrella branding (internationally recognized name)
• Still backed by private investors• MUFC and Arsenal keep getting
bigger• Leeds, Liverpool, back in
contention for N° 3 spot
Strength• Skill, knowledge/experience• Organizational resource or
competitive capability• Market advantage• Competitive assets
Opportunity:• External chrematistics that
provide potential competitive advantage or growth
Weakness• Missing asset needed to compete
Condition that places a firm at a disadvantage
• Competitive liabilities or unproven abilities
Threats:• Factors that may undermine
existing business model – HR, technology, new products, regulation, politics, demographics
Source: Example
Tricks and tips
Example output
Weaknesses
Str
engt
hs
91
Traffic light charts are simple mechanism for capturing and displaying performance against a number of different criteria.
Frequently used alternative names for traffic light charts are “Harvey ball charts” or Moon charts.
They consist of a grid, where performance against key criteria are demonstrated as high/medium/low - displayed as colors (red, green, yellow) or shaded as new/half/full moon images.
Overall performance is usually summarized across all criteria, but other strategic conclusions can be drawn from the clustering of criteria.
Traffic light charts are a very versatile tool, and can be useful wherever a rigorous comparison between market players has to be made.
They are often used to summaries business opportunities or competitor behavior.
Do not begin to construct your traffic light chart until you are sure that you have agreement on the key criteria under assessment. Also, be sure to define the criteria very clearly.
Next, set up a template for each criteria which captures the sub-elements and commentary that will eventually lie behind each colored circle.
Complete the templates “in detail” and make sure you have tracked and logged all of your logic.
Summarize all thinking into the final traffic light chart.
Sanity check the answers coming out: is this sensible overall, not just as a summation of individual elements.
Look at the shape, shading, and patterns that may lie in the chart. Use these observations to draw strategic assessments.
92
Traffic light charts
Typical application
Typical process
Description
Example output
Source: UBS, March 2001
CSPB
Goldm
an S
achs
Mer
rill L
ynch
JP M
orga
n/Cha
seCitig
roup
-SSB
Bra
nd
Fin
anci
al s
tre
ng
th
Sca
le/d
istr
ibu
tion
cap
aci
ty
Cro
ss s
ale
s le
vera
ge
Ma
na
gem
en
t ca
pa
bilit
y
Ope
n p
latf
orm
pro
gre
ss
Ado
ptio
n o
f te
chn
olo
gy
Str
uct
ure
d p
rodu
ct c
apa
bili
ty
Seg
me
nt f
ocu
s
Ser
vice
cap
ab
ility
Eur
op
ea
n w
ide
inte
nt
Eur
op
ea
n u
nd
erst
an
din
g
Ove
rall
Deutsc
he P
B
HSBC
ABN Am
ro Juliu
s Bär
Vonto
bel Lo
mba
rd O
dier
Pictet
Str
on
gW
eak
Ave
rag
e
European market entry - competitor review
93
To understand the dynamics of an industry, it is helpful to analyse the entire value chain and the positioning and strengths of competitors within the same context.
The value chain analysis tool shows the level of market concentration at each stage of the value chain, and the value companies create within it.
A company may dominate its own market/segment of the industry value chain but be in a relatively weak position because of players further up or down the value chain.
Value chain analysis assists understanding of an industry’s characteristics: the linkages between suppliers and customers, the share of value generated at each stage in a value chain, as well as the degree of vertical integration and the structures and level of company concentration.
Value chain analysis also enables a greater understanding of monopoly and/or monopsony conditions.
Begin by identifying the key activities in the value chain. To do this, isolate the end product you are examining, and list the “raw materials” required to produce this. Then, simply record each of the intermediate steps required to transform the raw materials into the final product.
Determine the value added by each step of the chain. This can be determined by taking the selling price, less retail margin, minus the input price.
Determine costs and margins within each segment for each player.
After this, begin to identify the key players at each stage of the chain. Group together the players that produce equivalent or substitute products, and determine the concentration of competitors at each step.
Finally, identify the relationships within or across stages of the value chain. Analyze specific relationships among players and assess the degree of vertical integration among players in the various steps.
94
Value chain analysis
Typical application
Typical process
Description
Analysis of share of value generated is very time consuming and resource intensive. The tool should only be used where the market structure is such that it will yield insight. Typically, these will be industries with high degrees of vertical integration or where competition, or lack of it, in one segment of the value chain affects preceding or subsequent segments.
Tricks and tips
Example output
Completing this process in a structured manner gives you a clear picture of: - the linkages between suppliers and customers; - where the value resides in the value chain; - the degree of vertical integration in the industry; - where threats of substitution may lie; - where barriers to entry and exit are located; and - the drivers of key costs and profit margins
Suppliers Manu-facturers
Distrib-utors
Wholesalers Retailers
Concentration and vertical integration by value added of players in a value chain
% s
hare
of
tota
l val
ue c
reat
ed
0
20
40
60
80
100
0 20 40 60 80 100
Player 1
Player 2
Player 3
Player 5
Player 6
Player 7
Player 5Player 6
Player 7
Player 8
Player 9
Player 10
Player 4
Player 5
Player 7
Player 8
Player 9
Player 10
Player 7
Player 10
Player 11
Player 7
Player 10
Player 11
Player 12
% share of total value created in Industry
Source: Example
95
The value discipline model helps you position competitors or industries against one another according to three generic capabilities: product leadership, operational excellence, and customer intimacy.
Use the value disciplines chart to demonstrate key competitive differentiators.
It is a tool designed to aid discussion and thought, whether internally or with the client, rather than in final analysis or in presentations or packs, and usually works better at a high level than in a data rich environment.
Begin by carefully defining the market or industry you are assessing and identifying the competitors.
Try to be open and imaginative about potential competitors: think about companies that address the same audience, or require consumers to act in a similar way (e.g. bars vs. gyms as places where only a finite and competitive period of time can be spent).
Gather data on each of your competitors, in both qualitative and quantitative forms.
Organize your information against the three predefined capabilities: if your information is quantitative rank against each capability; if qualitative, rank in discussion with your client.
Plot the resulting data on a chart in Excel according to the rankings you have identified. You can do this using the Radar function in the Chart menu.
Always remember that this is an indicative tool, not a proof of a right answer. However, it can illustrate a point, or highlight a lack of focus in certain areas.
96
Value disciplines
Typical application
Typical process
Description
Tricks and tips
Example output
One major drawback of the value discipline diagram is that it implies a counter-relationship between capabilities: if a company performs particularly well on one axis, it undermines the comparative performance on others due to the shape of the diagram. Be aware of this when you are discussing your results with your client.
Make sure you think in advance about the scale you use - these should be relative and meaningful in application.
Try to shade and annotate the chart to bring out your main conclusions.
Source: Example
Product Leadership
Rolls
Daewoo
Operational Excellence
Customer Intimacy
BMW
Lada
Vauxhall
Value disciplines, Car industry, UK, 1999
97
The weighted column chart is a bar chart in which the width of the columns shows a second dimension. It helps display, for example, competitor profitability and competitor share.
The weighted column chart has many uses, the most common of which is to analyze the profit performance of competitors or book value and value generated relative to their market share. If the data is available, the chart can equally be used to examine: - business units within a company; or - departments within a particular business unit
Begin by carefully defining the market you are looking at. List the competitors to be included in your assessment, and obtain data reports for each.
The weighted column chart always takes the same format, and there is an Excel-based tool to automate its creation. Create an Excel table for last year’s sales and the profits for the last three years, and plot the results on the chart. Place the share of market along the horizontal axis and the return on sales on the vertical.
Annotate competitors carefully if there is incomplete and/or misleading data. This might be due to: - less than three years of financial figures; - year of sales is not last year’s; - data does not compare like with like; or - figures include activities not directly related to the market you are looking at
98
Weighted column chart
Typical application
Typical process
Description
Don’t forget to average over at least three years of data when calculating ROS. If your data is incomplete, be aware of what is missing, but start plotting your information anyway. Partial data is better than nothing at all.
Don’t be afraid to call the competitor directly - after getting clearance from the manager on your project - to gain an idea of the segment profitability, but remember client confidentiality issues at all times.
Plot the weighted average industry profitability line based on the information you have, but indicate what total percentage of industry sales you have profitability data for.
Tricks and tips
Example output
Source: Example
Share of market, by competitor
ROS(last 3 years,%)
Industry profitability, Industry X, 1995-98
Industry average = 10.0%
-10%
-5
0
5
10
15
20%
0 20 40 60 80 100%
Comp 1 Comp 2 Etc
99