He explains that, under a differentiated strategy, the organization focuses on creating a point of difference in its service offering to an homogeneous niche market(s). Because customers perceive value in exchange, they are prepared to pay a slight price premium. Although costs are well managed, the differentiated player is not the lowest cost player in the industry (see diagram below).  Because the niche provider enjoys higher prices, they are able to deliver a high return on investment. In mature, commodity product companies, there may not be an opportunity to differentiate.  These organizations need to follow a cost leadership strategy.

Under a cost leadership strategy, maximizing capacity and throughput delivers efficiencies and  drives costs down. The player that follows this strategy will service mass markets that are price sensitive. A combination of high volumes and low prices maximizes revenue, profits and provides a high return on investment (see diagram below). All companies that are capital intensive with a high investment in plant and equipment, need to have high levels of throughput to spread these high costs over high volumes. New or emerging industries generally provide the opportunity to differentiate as the product has not yet been adopted by the mass market.

Porter asserts that, those companies that attempt to follow both strategies try to be everything to everybody, and in the process, become nothing to anybody. These enterprises become ‘stuck in the middle’ and have the lowest returns on investment in the industry.

Today, strategist generally disagree with Porter’s view and believe that it is possible to differentiate market offerings whilst simultaneously seeking economies of scale. So how can managers create economies of scale that promote efficiencies and drive average unit costs down? Some potential sources of scale are described below:

Procurement

Large organizations seek to achieve scale effects by centralizing the procurement (purchasing) function. By consolidating all purchases from different regions and/or divisions, the organization can negotiate better pricing, volume discounts, loyalty discounts etc. By centralizing procurement, management can potentially optimize inventory management by ensuring that excess stock in one location is distributed to another location where there is a high demand for that item. This philosophy is predicated upon having good systems and processes that ensure that stock is available whenever it is required. If not, inefficiencies will occur, negating lower prices.

Smaller organizations may not have the same opportunities to centralize procurement. These enterprises still have a number of options.

1. Partner with suppliers. In return for providing exclusivity, the supplier guarantees supply at a price below that which the enterprise was previously paying.
2. Create a buying cooperative in which competitors in different geographical areas, combine their purchasing power to negotiate lower prices and guaranteed supply
3. Guarantee minimum volumes to the supplier under a long-term supply contract  in exchange for lower prices

Technology

By applying new technology before it is adopted by the mass market, managers can achieve first mover advantages that provide a small window of opportunity to improve efficiencies and drive costs down before competitors.

This approach means that the organization is an early adopter of all technology that is relevant to its business model. For example, in manufacturing, new or improved technology for plant and equipment can improve production throughput with the same or less inputs. The internet and social media have ongoing improvements, enhancements and emerging applications for speeding up product to market, expanding markets and building brands.

Asset Utilization

In organizations that have a large number of expensive vehicles, plant and equipment, particularly if the assets are geographically widespread, economies of scale in maintenance can be achieved by either centralizing maintenance or partnering with a specialist to outsource the maintenance. Clearly, one would need to undertake a cost benefit analysis and develop a business case for outsourcing these tasks.

Implementing preventative maintenance programs will also ensure that equipment is optimally deployed.  When a piece of equipment has failed in the field due to a broken hose or some other minor issue, the opportunity cost to the company of more fully utilizing the asset will be lost. Keeping stock of mission critical spares will also ensure that catastrophe failures can either be preempted or  will compress the time needed to maintain that piece of equipment.

Finally, it is imperative to have a good system that tracks the utilization of each piece of equipment together with the cost of maintenance as the equipment gets old. Equipment that is being under-utilized, can be transferred to another location that has higher demand. Alternatively, management can brainstorm ways of increasing utilization through product bundling, longer-term contracts etc. Finally, if the equipment is no longer paying its way, sell it and invest the proceeds in equipment that will be better utilized.

Learning Curve Effect

Whenever one starts something new, such as learning to drive, we start out by being unconsciously incompetent. We don’t know what we don’t know. The more time that we put into learning how to drive, the better we become. As we start to learn how to drive, we move from being unconsciously incompetent to being consciously incompetent. As we become more familiar with the vehicle and the road, we gradually become consciously competent. We now know how to drive, but need to concentrate on what we are doing. As we gain more experience, we become unconsciously competent. Indeed, some people can do many things whilst driving, like talk on the telephone, read maps, listen to music etc. In his book Outliers, Malcolm Gladwell asserts that to become an expert in any field requires a minimum of 10,000 hours of application.

This concept that one becomes more productive, more efficient and works smarter is called the learning curve effect. The learning curve asserts that in any industry or task, one can calculate the percentage that costs will reduce every time output doubles. The predictable percentage that costs will reduce differs from industry to industry and is a function of relative complexity.

Industry Consolidation

There are frequently opportunities to build scale in fragmented industries. For example, in Australia, the furniture manufacturing industry comprises a large number of small manufacturers and is regarded as a ‘cottage industry’.  There are opportunities to acquire and combine a number of smaller manufacturers to achieve scale in production, procurement, administration, sales and marketing and branding.

Conclusion

No matter what industry you operate within and irrespective of the current size of your business, you can find ways to increase efficiency and reduce costs by thinking creatively and executing flawlessly.

EagleEllephant

Success breeds success. In a growing and buoyant market, business tends to come to you and profits tend to be solid and growing. Ultimately, success can breed failure. When organizations enjoy solid growth in vibrant markets, over time the company tends to become complacent. It stops listening to its customers and the market. It gets fat. It becomes inefficient.  It believes that the past success is proxy for future success. It believes that it is invincible.

A great example of success breeding failure is IBM in the 70s and early 80s. In spite of the market telling IBM that it wanted software and hardware solutions in smaller computers, IBM doggedly pursued a strategic path that relied on selling large mainframe computers. Its inability to see the market signals and the fact that the market rules were changing, wiped $46b off IBM’s shareholder value.

Another example of IBM being out of touch with its operating environment was when Bill Gates did his defining deal with IBM to sell his operating system MSDOS, on all IBM personal computers. Notwithstanding that IBM had started manufacturing personal computers, it nevertheless believed that it should not own the operating system. This one decision destroyed value for IBM shareholders in perpetuity and made Bill Gates one of the richest men in the world.

The above examples occurred at a time when markets were relatively stable and changed slowly over time. With the advent of the internet, information is available in real time and virtually everyone has access to this knowledge. As a consequence, both individuals and companies are becoming smarter and more sophisticated. Furthermore, as the world globalizes, the world is becoming a smaller place where trade borders and barriers are being eroded. Because of the internet, events, discoveries and incidents become known  instantly they occur. People power is becoming persuasive. Individuals operating from home are competing with multinational conglomerates. Social media can build or destroy organizations, brands, products and people very quickly. In short, traditional business rules have and are rapidly changing.

Today, organizations need to be nimble and agile if they are to be sustainable and thrive over time.  Yet, how many of our large, well known companies are nimble and agile? Regrettably, most of the organizations that we have worked with across over 50 industries suffer from corporate inertia. Indeed, many suffer from what we call, strategic drift. Strategic drift occurs when there is a substantial time lag between changes in the market and concomitant changes within the company. Accordingly, the organization becomes unaligned with its served markets and lose market relevance. For further information, see the Concept of Strategic FIT.

Overcoming inertia  and strategic drift are necessary conditions for achieving operating agility.

Overcoming Inertia

Inertia arises out of inaction. And inaction is grounded in organizational culture. Many organizations build silos in which departments and functions operate independently rather than interdependently. Management create performance reward structures that encourage individuality and independence. Each department and function across the organization attempts to optimize, and in the process sub-optimizes the performance of the organization as a whole.

In addition, executives feel disempowered and unable to make decisions without getting approval from management . Red tape and bureaucracy plague organizations and weigh them down.

Furthermore, corporate politics frequently leads to individuals making conservative decisions to cover their backside rather than putting themselves ‘out there’ by going on risk.  Fear of being ostracized, making mistakes and self-preservation are all drivers of inertia.

Finally, inertia arises because people are not passionate enthusiastic about the company. They subordinate company interest in favor of personal interest. The principal cause of this, is a lack of emotional investment in the vision. Establishing a compelling vision that gets people out of bed in the mornings and one in which every employee knows and understands what they need to do to make the vision a reality is, perhaps, the most difficult leadership task that executives encounter. When employees become emotionally invested in the vision, they develop a motivation, passion and enthusiasm that is enduring because they have their eyes on the prize and not the price.

The good news is that silos, lack of empowerment and politics are all the result of leadership and company policy. These issues can therefore be overcome relatively easily. Getting people invested in a compelling company vision has proven to be much more difficult. See our Strategic FIT Leadership Module for further information

Overcoming Strategic Drift

There are four necessary conditions, all of which must be present to overcome strategic drift:

1. Strong leadership;

2. The ability to identify soft signals of a changing environment;

3. Have strategy in the heads and hearts of every level of leadership; and

4. The capacity for change

1.    Strong leadership

Leaders at every level in organizations generally do not appreciate how much their followers see them as role models and attempt to emulate their behavior and actions. This means that the leader’s behavior and actions duplicate – both good and bad.

Also, leaders often do not fully understand the impact that they have on their direct and indirect reports.  Excellent leaders ensure that their company is capable of quickly refocusing its efforts to be better positioned to respond to changes in demand and prevent unnecessary profit swings. See our Strategic FITS Leadership Module for more details.

2.    The ability to identify soft signals of a changing environment

Not many companies regularly engage in environmental scanning. The process of environmental scanning reviews all the potential political, economic, social, technological and global forces and trends that are likely to drive future market changes.

The trick is to identify the prime independent variables that will cause change. All other variables tend to be the effect of changes to independent variables. There are only likely to be three (3) to five (5) independent variables in play at any one point in time. Once you have identified the trends or forces that will cause change, the trick is to set up a mechanism to monitor each of these variables so that you identify soft signals of change that can trigger a change of direction, strategy, or  tactics.

3.    Have strategy in the heads and hearts of every level of leadership

In the 50s, 60s and 70s, strategy was generally the domain of the strategy department. Strategies were developed that remained stable over time. Today, because we operate in an environment that is volatile, turbulent and changes extremely quickly, every level of leadership needs to have the strategy in their heads and hearts so that they can make decisions and act quickly.

One way to give executives a sense of how they might act when the rules change overnight, is to engage in the process of scenario planning. During this process, executives evaluate the robustness of the company’s capabilities and strategies under any scenario.

In 1998, we were working with the executive of a global hotel group in Australia. As part of the strategy development process, we posed the question “What happens if China goes to war with Taiwan?” The executives laughed because they could not see the relevance between the question and their business. We rephrased the question by asking “What happens if your Asian business dries up overnight?” This question got their attention as the Australian portfolio was heavily dependent upon it custom from Asian business and leisure travelers. A few months later, the Asian Crisis appeared out of left field that rapidly decimated hotels that relied on Asian travelers. The following January, the writer met the CEO of the hotel chain who said “Thank goodness  we thought about the consequences of an Asian shock. We were able to move more quickly, more purposefully and more deliberately than our competitors. We have mitigated the risks and the potential downside to our business.”

4.    The capacity for change

Leading change has proven to be extremely difficult and frequently does not deliver the results that were initially envisioned. To ensure that change ‘sticks’ and that it is well managed, leaders need to ensure that they have four elements in place all at the same time. These elements are:

a. Pressure for change. Without pressure for change, there is no sense of urgency. Accordingly, without pressure for change, the result is denial.

b. Having a shared vision. Without a compelling shared vision, people do not see ‘why’ change is necessary.  Resistance to the change is the result.

c. Capacity for change. Our personalities, past experiences, role models, culture and environment all frame the way in which we approach change. Being able to understand individuals’ readiness for change and how different people react to change is a leadership imperative. Leaders need to meet people where they are, which means that you can only implement change at the rate of the slowest people in the team.  Without capacity for change, leaders will explore around the fringes but will not go far enough.

d. Actionable first steps. Finally, if we don’t DO anything, nothing will change. Without consistent and persistent action, there can be no commitment. See our Framework for Leading Change  in the store for more information.

Conclusion

Leaders are responsible for overcoming corporate inertia and ensuring that their organizations retain market relevance. To do this, they need to ensure that they inculcate operating agility into the corporate culture.

Operating agility necessitates that organizations have the strength and memory  of an elephant and the eyesight, speed and hunting ability of the eagle. As a leader, it is your responsibility to breed this hybrid animal.

There are two type of costs in a business. Those costs that are incurred with time, such as property, vehicle or plant rental, leases, insurance etc. and those costs that are incurred with output, such as direct or variable costs.

The greater the level of output, the lower the cost per unit produced are in respect of fixed costs.  This is because the total fixed costs are spread over more units produced. Conversely, variable costs remain fixed per unit and increase in total with each additional unit produced. The greater the level of output, the higher the total variable costs. Therefore, fixed costs have an inverse relationship with increasing output, whilst direct or variable costs have a direct increasing relationship with increases in output.

Industries with high levels of fixed costs, such as mining, manufacturing, heavy industrial engineering, construction etc. can capitalize on maximizing operating leverage. The break-even chart below graphically illustrates how small increases in volume above break-even point, generate a leverage of profits. (see green are of graph below).

The vertical axis represents sales and costs. The horizontal axis represents unit volume of output sold. Both axis start at zero (0).

The straight horizontal axis intersecting the sales and cost axis at $20K represents the fixed costs that the business need to incur even if it doesn’t produce one unit of product. Fixed costs are valid for a given volume of output. In the above example, it is 2,000 units. Above 2,000 units, this enterprise may need to invest in more space, more people and more plant etc. to increase its production and sales. Therefore, above an output of 2,000 units, fixed costs would increase as a step function, say to $25k or $30k. The new level of fixed costs will enable the company to produce to a higher level until production becomes constrained, at which time, the company will have to invest in another ‘step’ of fixed costs.

If the organization does not sell one unit, it will incur a loss of $20,000 as shown by the bracket marked ‘Loss’ (representing the fixed costs.  If it sells one unit, the total fixed cost of $20,000 will be absorbed by the single unit produced. As volume increases, so the $20,000 is apportioned over the increased volume and the cost per unit produced decreases. In the above example, the fixed cost per unit will be $10,000/2,000 = $5 per unit.

In addition to the fixed costs, every organisation incurs variable or direct costs. In the above chart, the variable costs are $5 per unit (At an output of 2,000 units, the variable costs are $10,000 i.e. $30,000 minus the fixed costs of $20,000. Therefore, the cost per unit is total variable costs/output produced i.e. $10,000/2,000=$5). The variable costs is static per unit produced and increases with volume.

The total cost is determined by adding the fixed costs to the total variable costs at any level of output.  Mathematically, the total cost at an output of 2,000 units is fixed cost per unit plus variable cost per unit i.e. $10+$5=$15 per unit. The total cost will be $15×2,000=$30,000.  (See above example).

The sales line starts at the origin (i.e. the intersection of the Sales and Cost axis with the Volume axis). In the above example, total sales is calculated by multiplying the volume sold by the sales price 2,000 x $25.00 = $50,000.

All sales below the break-even point will incur a loss. When the sales hit break-even point, neither a loss is incurred, nor a profit is made. Above break-even volume, profits are earned at a multiple of the increased volume. The break-even point is calculated as follows:

Fixed Costs/Contribution %

= Fixed Costs/(Sales per unit – Variable costs per unit/Sales per unit X100)

= $20,000/(($25.00 – $5.00)/25,00 X100))

= $20,000/80.0% = $25,000 (See above graph)

Sales of $25,000/unit selling price of $25.00 each = break-even volume of 1,000 units

The Multiplier Effect (TME) = Contribution (C)/Profit (P)

At a volume of 100 units above break-even, TME=11.0 times

TME reduces as volume increase. So at a volume of 2,00 units, TME= 2.1 times

How to Boost Profits Above Break-Even

The objective is to increase the outputs with the same or less effort on the inputs and without compromising the quality of the outputs. We can do this in several ways:

1. In a relatively price inelastic market, increase your selling price without entertaining any increase on material or labor inputs. In the above example, a 1% increase in selling price, whilst holding all other variables constant, will result in a multiplier effect of 2.5 times

2. Increase productivity and efficiency so that the volume of production increases for the same total cost. This can be achieved by applying any one od several proven continuous improvement methodologies. For example, you can re-engineer all your processes or you might apply the Theory Of Constraints (TOC).   . In the above example, a 1% increase in volume, whilst holding all other variables constant, will result in a multiplier effect of 2.0 times.

3. Reduce your fixed costs to lower your break-even point. This can be accomplished by reviewing each fixed cost line item by line item to explore ways in which to reduce, eliminate or contain that cost. During the continuous improvement process, other possibilities for removing costs from the system or containing them may be highlighted.  In the above example, a 1% reduction in fixed costs, whilst holding all other variables constant, will result in a 1% increase in profits. This shows the relative futility of focusing on cost reduction to the exclusion of everything else. Rather, focus on increasing revenue.

 4 Reduce variable costs to increase your contribution percentage. This can be accomplished by critically evaluating everything you do to add value to your inputs. See Business process re-engineering and TOC above. In the above example, a 1% reduction in variable costs, whilst holding all other variables constant, will result in a 1/2% increase in profits. This is because the variable costs are already very low relative to the selling price. Any further reduction in variable costs will create a marginal profit improvement. Again, rather focus on increasing revenue.

Students of the Victorian University in New Zealand undertook a study of over 100 organizations across several different industries that had applied the Theory of Constraints (TOC) to their businesses. The results were astounding. No failures were reported.  Here are the top line findings:

1. The mean revenue to throughput increase was 68% (after removing outliers)
2. The mean reduction in inventory levels to service the increased volumes was 50%
3. The mean reduction in lead times was 69%
4. The mean increase in due date performance was 60%
5. Profits were boosted by 82% around the mean

The Operating Leverage lessons are that any company can Boost its Profits by focusing on the areas that will deliver the greatest multiplier effect. Management needs to undertake the analysis before jumping into initiatives that will, at best, deliver mediocre results

Identifying Profit Multipliers

The first step is to undertake sensitivity analysis of the Income Statement to identify potential profit multipliers. There are cost-effective software packages that can assist you to easily change one variable and examine the impact on bottom line profitability. In the absence of having a software package, it is possible to create an Excel Spreadsheet template in which you create a base case Income Statement that is populated with current figures. To be absolutely thorough, you should take each line item in turn and change each variable by one percent (1%). Using double entry bookkeeping practices, follow the impact of a one percent change on each variable upon profits. If a one percent change in a variable results in a far greater percentage change in the bottom line (profits), then you have identified a potential Profit Booster.

When making your one percent change, it is important to decide whether you are adding or deducting one percent.  The table below will provide a guide on whether you should add or deduct one percent.

Align Your Strategy with the Business Model

Once you have identified the variables that make the biggest impact on profits, review your strategy to ensure that you are capitalizing on the multipliers that can Boost your Profits.

The following case study illustrates the application of this approach.  We were working with a wholesale hardware distributor that supplied all the major hardware retailers across the country. The Chief Executive believed that the investment in inventories was too high. The Senior Leadership Team (SLT) decided to reduce this investment in all of its Distribution Centers (DCs) across the country.

As prudent business people, they had undertaken an intensive analysis of their inventory holdings. They had turned all obsolete and slow moving stock into cash by selling these items off in a fire sale.

They had also undertaken a Pareto Analysis to highlight the twenty percent of their inventories that accounted for eighty percent of their sales. They were focusing on these slow moving stock keeping units (SKUs) i.e. the eighty percent.

There were some unintended consequences of this strategy.

1. The cost of moving some of these items around the country to outlets that had higher unit sales of these items outweighed the benefits of the sale; and
2. The level of discounting required to move some items frequently was at a price below cost; and
3. Ultimately, they were unable to support some products as they no longer carried these spare parts. This impacted negatively upon their brand and total sales declined.

We undertook the analysis described above to identify Profit Boosters. We discovered that a one percent (1%) change in inventories created a three (3%) change in profits. A one percent (1%) change in price would likely result in a ten percent (10%) change in profits, provided that the quantity demanded was unaffected by the change in price.

We therefore examined the price elasticity of demand, which is a measure that  shows the responsiveness of the quantity demanded of a good or service to a change in its price. If a one percent (1%) increase in price results in a fall in the quantity demanded of more than one percent, then we conclude that the item is price elastic. If a one percent (1%) increase in price does not impact the quantity demanded, we conclude that the item is price inelastic. Our research indicated that the ultimate consumer would not change their buying behavior if prices were increased by up to five percent.

Armed with this information, we presented what was considered a radical idea at that time.  We suggested that the company test market the following strategy before rolling it out country-wide:

1. Instead of focusing all of management’s efforts in reducing inventories, we recommended that the company do what was, at that time, considered to be counter intuitive. We proposed that the company buy back all unsold inventory in the retail pipeline.
2. All inventories would be supplied on a consignment basis until sold, at which time, the company would invoice the customer
3. The company would take full responsibility for merchandising product in store. This means that company staff would work in the retail store to ensure that shelves are always fully stocked, properly marked and priced and looking good
4. Company representatives in store would all be fully trained to sell all products, trade customer up and cross-sell their products. This would result in a win-win outcome for the supplier, the retailer and the consumer.  The supplier would create constant stock pressure and support all retail advertising with a ‘push’ strategy in store. The retailer would simplify its business, reduce costs, improve cash flow, maintain margins and improve customer loyalty. The consumer would be the recipient of better and more informed service, thereby increasing perceived value in exchange
5. In this way, the company would better understand consumer needs and expectations and align the product mix in each store with local consumer demographics and psychographics.
6. This knowledge would also assist the wholesaler with new product development and refreshing existing products.
7. Being in store, company representatives would see and hear competitor activity, thereby improving competitive intelligence

As this was an innovative retail strategy, the wholesaler would derive all the benefits of first mover advantages in the industry.

In exchange for all of these benefits, the company would ask the retailer for a three percent increase in price to cover the increased cost of holding the inventories and the cost of having retail service assistants in store. We anticipated that the retailer would want to preserve its margins and would therefore mark up products by more than the three percent to maintain its profitability. We felt that this price increase to the consumer would be less that the threshold at which volumes demanded would decrease.

One of the objections that we felt that retailers may raise would be the fear of losing control of the customer. We pointed out that the retailer would still ‘own’ the customer as most retail sales were cash or credit card sales and the trade retained merchant accounts with the retailer. Therefore, the company would not be building a database of customers that they could communicate with directly.

The client rejected the strategy on the basis that it wasn’t industry conventional wisdom. They felt that, even in a test market,  it would be too difficult to reverse the strategy.

In today’s retail environment, it has become common practice in some departmental stores to allow manufacturing brands to fully manage branded kiosks within their stores, thereby reaffirming that the strategy was sound but was ahead of its time for a conservative leadership team.

Identifying your Profit Boosters is likely to spurn new and different thinking that could reinvent your strategy and deliver a much healthier bottom line.

1. Have flexible and adaptable goals
2. Act quickly and decisively
3. Focus on what really matters
4. Ensure you have reliable and timely information
5. Take all stakeholders with you

To assist you in developing strategies that are relevant and appropriate for your business at this time, we have compiled a brief list of critical questions in each area of focus that may be helpful to you and your team.

1. Have flexible and adaptable goals

a. How do you know that everyone understands where you are going and is committed to how you plan to get there?

b. Is what you are currently doing making, saving or losing you money?

c. Have you identified what would ‘trigger’ a change in direction?

d. Are you ‘going with the crowd’ or charting your own course?

e. Are you challenging everything – current assumptions, biases, conventional wisdom, sacred cows?

2. Act quickly and decisively

a. Do you have the right people in the right roles?

b. Do you have a decision making framework that prevents inertia?

c. How quickly are you identifying and acting on critical issues?

d. How frequently are you monitoring the impact of your decisions?

e. Are you prepared to change previously taken decisions quickly and in mid-stream?

3. Focus on what really matters

a. Have you identified the real drivers of performance and cost in the business?

b. Are you focusing on the 20% of customers that account for 80% of the revenue, and the 20% of inventories that account   for 80% of sales?

c. Have you agreed no more than 5 top priorities that are both important and urgent? Do these priorities focus on root cause not symptoms?

d. Are you managing all elements of working capital effectively to maximise generation of cash?

e. Have you reviewed current work practices and eliminated or reduced processes that only add cost or marginal value? Have you identified and alleviated process chain bottle necks?

 4. Ensure you have reliable and timely information

a. Do you have confidence in the integrity of the information you receive?

b. Can you interrogate your database beyond standard reporting formats?

c. Have you decided what information is ‘mission critical’? ‘Nice to have’?

d. Have you identified, and are you managing or mitigating all key risk areas?

e. Are you turning qualitative information into intelligence and insights?

5. Take all stakeholders with you

a. Do you have a plan to manage conflicting stakeholder objectives?

b. Are you communicating frequently and effectively with all stakeholders, (including your people and customers)? How do you know that your ‘high flyers’ and key customers know how much you value them and why?

c. If you have been forced to downsize your workforce, have you responded appropriately to and managed the ‘survivors’ emotional reactions of surprise, denial, and anger?

d. Have you considered deploying the skills of your people differently to reflect changing priorities and revenue streams?

e. When last did you have large group, small group and one-on-one ‘coffee’ chats with your people?

1. Your business model;
2. Where your business sits on the industry growth (evolution) curve; and
3. The dynamics in your current operating environment

The first step, is therefore to subjectively review each of the Profit Boosters within your context and decide on whether the potential impact on your bottom line is likely to be high, moderate or low. Once this decision has been made, you then rank order each Profit Booster relative to each other starting with the high impact Boosters and migrating to the moderate Boosters. In this way, your will focus your time, effort and resources on the Profit Booster that is likely to deliver the highest profit leverage.  Low Boosters should be ignored as the cost:benefit is likely to be too small.

Each Profit Booster can be linked to a generic strategy^[2]. A generic strategy(ies) is/are selected because it is believed that the strategic platform will add disproportionate value to the business and create competitive advantage. Generic strategies are intuitively selected based on the same three criteria described above. There is therefore a correlation between generic strategies and Profit Boosters.

The Profit Boosters and their Generic Strategies appear in the table below.

In each of the articles that follow in this series, we will address one of the Profit Boosters in some detail and provide you with a template for developing a logical approach towards implementation.

a. the current position on a map (current state),
b. the ultimate destination (desired state),
c. the route (how management intend getting there),
d. the estimated time it should take to navigate to the intended destination.

It also allows the driver to monitor his or her progress towards the destination. If the driver meets an unexpected obstacle, such as an accident, road closures or a traffic jam, then the GPS can calculate an alternative route (contingency or scenario planning).

The business plan provides the organization with a road map for the future. If it is well crafted, it will inspire and unite everyone, engage and involve them.

How detailed should it be?

The business plan should contain enough information to provide a basis for action and for monitoring progress but not too detailed that it becomes a ‘paper weight’ that is never referred to.

What information does it contain?

1. Vision statement (What we ultimately want to become)

The vision provides a vivid mental picture of our desired state. It is perhaps one of the most challenging and difficult leadership tasks because it needs to be short, imaginative and aspirational. It is a statement of what the business will look like, feel like and be like once the vision is achieved. It needs to unite and inspire every person such that they understand what they need to do day-by-day to move towards achieving the vision. People need to become emotionally invested in the vision such that they are motivated to focused action.

Regrettably, many companies spend millions of dollars creating visions that have no meaning to its people.

An example of an inspirational vision is “We Make Unique Places in Sydney that the World Talks About.”

An example of an unimaginative vision statement is “We will be the Best Property Manager in Sydney”

2. Mission Statement (What we do and where we do it)

Our mission is a clear statement of our business boundaries. It clearly articulates what we do and the markets in which we operate – both now and in the future.

3. The Context within which the Business Operates

This is a summary of the current state of the marketplace and how it is likely to unfold in the future. Businesses undertake an ‘environmental scan’ that analyses and evaluates the relative attractiveness of the macro-environment and the business’s marketplace.

Analysis of the macro-environment includes the political, economic, social, ecological, technological, and international or global environments.

The marketplace will include an analysis of our customer groups and the competitive landscape.

Because this can be a really detailed analysis, you will want to have a summary of the key points in the business plan and place the detail in an appendix.

4. Our Key Objectives

This section talks to the desired future state in the short, medium and longer-terms. In order to ensure that we have focus, there should be no more than 3 – 7 key objectives. To qualify as an objective, each must comply with the SMARTE acronym so that management can effectively navigate from the current state to the desired state by measuring and managing performance to the objective. A SMARTE objective is:

- Specific
– Measurable
– Achievable
– Realistic
– Timely
– Ecological

5. Our Strategies and Action Plans

How management will move from the current state to the desired state is covered by our strategies and action plans. A precursor to developing strategies and action plans is to identify the Critical Strategic Issues. These are the issues that are preventing you from achieving more of your objectives.

We use the critical strategic issues as a point of reference to develop our strategies and action plans.

When developing strategies, management should consider every potential undesirable outcome or unintended consequence of their initiatives. These take the form of what is called contingency planning or scenario planning.

Strategies should contain:

-  Critical issues (why)
-  The assumptions we have made (what)
– The steps we will take (how)
-  Those responsible (who)
-  The timing of each strategy and action step (when)
-  Resources required, including capital expenditure, people, materials etc. (what)
-  Key performance indicators – KPIs (what)
-  Contingency plans (what if)

6. Financial Information Including Budgets

This section shows how the strategies and action plans will translate month-by-month into cash flow, profit or loss and a balance sheet for the business. Budgets showing income, costs and expenses and capital expenditure are prepared by function or division.

What’s Next?

Once you have developed your business plan, it is important to realise that “the map is not the territory”. It just helps you navigate the territory. To get to the desired destination, we must flawlessly execute, execute, execute.

No organisation can achieve excellence in all areas. Attempting to do this will result in trying to be all things to all people and nothing to anybody. Therefore, to achieve sustainable competitive advantage, every organisation needs to choose a few (2 to 4) areas that are important to its customers that it can focus on and achieve excellence in these areas.

So what happens to all the other areas? The figure below assists us to determine when partnering is appropriate and when it is not.

By mapping all the key processes that create value for customers in each product/service area, we can make a distinction between processes that are core or distinctive and processes that are non-core. Core processes that are unimportant to customers probably need to be re-engineered to minimise cost or increase customer value. Non-core processes that are unimportant to customers should be discontinued as they add cost to the business and no value to customers.

We distinguish between core and distinctive processes that are important to customers because they may be core (everyone must have them just to play the game) or they may be distinctive to us, providing us with some competitive differentiation. We need to maintain parity on the core capabilities and build excellence in areas that are distinctive.

Areas that are non-core but critical, such as the logistics of collecting milk from farms for milk production, need to be outsourced to organisations who can do these activities more efficiently and cheaper than you can. Once non-core but critical activities have been identified, we then seek to identify potential organisations to partner with that are cost-effective, reliable, financially stable and are aligned with our culture and philosophy.

Adding Value Through Strategic Partnering

1. Strategic partnering can potentially add value for you in one or more of the following areas:
2. Shorten time frames
3. Create new or improved performance
4. Lower costs and risks
5. Provide more value-in-use
6. Offer a stronger product line
7. Increase product appeal
8. Leverage complementary technology, knowledge or competence
9. Shape or influence industry forces

Case Study: A Management Consultant and a Publisher/Distributor

A Management Consultant in Australia wanted to commercialise some of its proprietary intellectual property (IP) for distribution to large organisations, government and other consultants both domestically and abroad. Its business model was to provide bespoke business-to-business (B2B) turnkey solutions to individual clients with a high level of personal service. It did not possess the capabilities to package standard products for distribution into mass markets.

The Publisher/Distributor believed that the IP was leading edge and world class, provided synergy with its existing product range and could easily be repackaged in standardised form for distribution through its broad marketing channels. Both parties believed that there was significant potential synergy and leverage. The Strategic Partnership could add value in several ways. It could potentially:

• Create new or improved performance
• Lower costs and spread risks
• Provide more value-in-use
• Offer a stronger product line
• Increase product appeal
• Enhance both parties through complementary technology, knowledge or competence

Choosing the right strategic partner is fundamental to a successful alliance

Four conditions are necessary to develop a successful alliance. Each, in and of itself is necessary but insufficient to sustain a strategic partnership. It requires the presence of all four necessary conditions for any chance of success. The four necessary conditions are:

1. Having a shared Vision and common objectives
2. Mutual commitment
3. Willingness to share risk
4. Willingness to build a a forgiving long-term interdependent relationship

A Framework for Strategic Partnering

Present/Future Internal/External Analysis

It is assumed that both parties to the partnership have done their homework and undertaken significant and rigorous analysis of both the external and internal operating environments. The parties will have concluded that the Strategic Partnership is necessary to strengthen their relative competitive positions and keep both parties relevant to their customers.

Building a Shared Vision

As a carefully constructed vision will unite, inspire and motivate both parties, it is one of the fundamental underpinnings necessary for a sustainable partnership that can withstand the storms of a dynamic environment over time. The joint vision statement must support and reinforce each party’s corporate vision yet be subservient to each.

The joint vision presents a dynamic picture of the future state of the partnership and venture, a description of what it will feel like, look like and be like in a numbers from now. It is a statement of destination. It will need to be developed collaboratively to ensure that it is ‘owned’ by all parties.

Critical Issues Management

When both parties are heavily dependent on the success of a partnership, the Critical Issues will be driven by each party’s needs and fears. Needs will be driven by the requirements and rules of the market place and financial targets. Needs motivate through inspiration and hope of potential gain. We want to move towards achieving our needs.

Fears will arise from the perception of vulnerability and will be driven by each party’s culture. Fears motivate us to move away from perceived pain or loss and are an example of motivation through desperation.

When the avoidance of fear is greater than the potential gains from satisfying the needs, then the strategic partnership is likely to dissolve in the near-term. When the potential upside (gain) exceeds the maximum downside (fear), the parties have a solid basis upon which to build a partnership.

In the above case study, the needs and fears of each party were articulated as follows:

Protecting each Party’s Interests

There are 8 areas that the parties must work on to protect their interests and nurture the partnership.

1. Protect key product features and values
2. Retain control of key relationships
3. Hold on to vital operating strengths
4. Safeguard critical technology
5. Preserve growth options
6. Maintain a strong organisation
7. Sustain financial strengths
8. Plan for unreliable relationships

Conclusion

Notwithstanding the difficulties associated with cultivating Strategic Partnerships, if managed diligently and in accordance with the above framework, both parties will benefit long-term. They will each be able to better leverage their own distinctive competences to sustain competitive advantage, unlock many synergies from collaborating, better manage and mitigate joint risk and deliver better returns for the shareholders of both companies.

Learn how you can obtain the benefits of Strategic FIT for your company and/or your alliances

Review by Robert Morris of Dallas Texas

This is an especially thought-provoking book which, as have so many others, evolved from an article published in the Harvard Business Review. According to Kim and Mauborgne, “[in italics] Blue ocean strategy [end italics] challenges companies to break out of the red ocean of bloody competition by creating uncontested market space that makes the competition irrelevant…This book not only challenges companies but also shows them how to achieve this. We first introduce a set of analytical tools and frameworks that show you how to systematically act on this challenge, and, second, we elaborate the principles that define and separate blue ocean strategy from competition-based strategic thought.” There are six principles which are introduced and then discussed on pages 49, 82, 102, 117, 143, and 172, respectively.

Frankly, I was somewhat skeptical that this book could deliver on the promises made in its subtitle. In fact, the material provided by Kim and Mauborgne is essentially worthless unless and until decision-makers in a given organization accept the challenge, are guided and informed by the six principles, and effectively use the tools within appropriate frameworks. The responsibility is theirs, not Kim and Mauborgne’s. To assist their efforts, Kim and Mauborgne focus on several exemplary companies which have dominated (if not rendered irrelevant) their competition by penetrating previously neglected market space. They include the Body Shop, Callaway Golf, Cirque du Soleil, Dell, NetJets, the SONY Walkman, Southwest Airlines, Starbucks, the Swatch watch, and Yellow Tail wine.

Of greatest interest to me is Kim and Mauborgne’s assertion that the innovations which enabled these companies to succeed with a Blue Ocean strategy did NOT depend upon a new technology. Rather, each company pursued a strategy which enabled it to free itself from industry boundaries. For Dell, that meant mass production of computers sold directly to consumers per each customer’s specifications. Quite literally, each sale is “customized.” For Callaway, creating an enlarged sweet spot to increase the frequency of solid contact for new or infrequent golfers just as, years ago, the enlarged Head racquet did so for new or infrequent tennis players. For Starbucks, creating a congenial environment within which to socialize, go online, or read while consuming coffee. All of these Blue Ocean strategies created new or much greater value for customers. Their emphasis is on the quality of experience, not on the benefits of a new technology.

According to Kim and Mauborgne, their research indicates that “the strategic move, and not the company or the industry, is the right unit of analysis for explaining the creation of blue oceans and sustained high performance. A strategic move is the set of managerial actions and decisions involved in making a major market-creating business offering.” The cornerstone of a Blue Ocean strategy is value innovation which occurs “only when companies align innovation with utility, price, and cost positions. If they fail to anchor innovation with value in this way, technology innovators and market pioneers often lay the eggs that other companies hatch.” For Kim and Mauborgne, value innovation is about strategy that embraces the entire system of a company’s activities. It requires companies to orient the whole system toward achieving a “leap” in value for both buyers and themselves. Kim and Mauborgne explain HOW to create uncontested market space wherein competition is essentially irrelevant.

To paraphrase Henry Ford, whether decision-makers think they can or think they can’t do that, they’re right.

To achieve sustainable superior performance a business must attract more loyal customers than its competitors. Every business attempts to achieve this but not many succeed.

Many organisations focus on attracting new customers whilst under-servicing their current customers. The result – customer defection. The cost of customer ‘churn’ can be crippling. This reminds me of a story.

One night a man dreamed that he had past away. He found himself standing in front of a lift and was considering whether to push up or down. He had been told so many stories about hell that he said to himself. “This is only a dream, why don’t I go down and see what hell is like”. So he pushed ‘down’.

When the elevator doors opened, he was greeted by voluptuous young women in grass skirts with bare tummies. Hawaiian necklaces were placed around his neck and a drink was put into his hands. He was wined and dined, played golf on terrific courses and had never been so well looked after in his entire life. He was brought back to reality by his wife shaking him and calling his name. She was telling him that he would be late for work if he didn’t get up immediately.

A few days later he really died and found himself in front of the same lifts that he had dreamed about a few days earlier. So naturally, he pushed the ‘down’ button. When the doors opened, he was greeted by the Devil. It was unbearably hot and he was given a large hammer and immediately put to work in atrocious conditions. He turned to the Devil and said, “what’s going on? A few nights ago, I came down here in a dream and was treated like a king. Now I come down here forever and you are treating me like a criminal. What happened?” The Devil replied “that was when you were a prospect. Now you are a customer”.

There are many reasons as to why customers defect:

1. Their patronage may not be valued

2. The company may be too internally focused

3. The product is seen as a commodity

4. Customers’ have no emotional attachment to the supplier

5. The value proposition may not be appealing to customers

6. The price that they pay may be perceived to be too high in relation to what they receive in exchange for their money

7. Competitors are better at some or all of the above

To achieve sustainable superior performance any company must consistently present win-win outcomes. See the figure below.

If customers feel that they are giving more than they are getting from the supplier, this results in a win-lose outcome from the perspective of the customer and is not sustainable. The customer feels ‘ripped off”.

If the supplier feels that it is giving more than it is getting, this is a lose-win outcome from the perspective of the supplier. This too, is not sustainable as the supplier feels it is not worthwhile.

The worst case is where both parties feel that they are giving more than they are getting, resulting in a lose-lose scenario. That is definitely not sustainable.

The only sustainable position is where both parties feel that they are receiving value for money.

The Strategic FIT Program will guide you to achieving a consistent win-win outcome. It will help you to build a large, strong and loyal customer franchise.  Loyal customers may even be prepared to pay a small premium for the real or perceived value that they receive. Loyal customers also help the supplier reduce its costs because it does not have to incur huge marketing expenditure to entice its customers. Furthermore, loyal customers will tell their friends, providing word of mouth advertising for the supplier. Not only is this free, but it is more powerful than traditional advertising approaches.

Furthermore, one of the cultural traits of superior performing businesses is that they continuously look for ways to reach more and more customers with the same or less infrastructure, time, effort energy and cost. They are also continuously seeking new or different ways to add value to the people that they reach.

We assist you to achieve a state of Strategic FIT walking and guiding you step-by-step through a process that starts with the customer, aligns the company’s service delivery to meet or exceed expectations and keeps the organisation relevant to its customers over time.

The Customer Module helps you to align service delivery to meet customer needs. It is our experience that over 80% of organisations get this wrong. They think that they understand customers’ needs and “talk passed their customers”. In this module we show you how to uncover current needs and how to elicit latent or unknown needs.

The Operating Environment Module recognises that no organisation operates within a vacuum – that it depends upon and is dependent upon its environment to succeed.  To deal with turbulence and uncertainty, we need to understand the forces driving and shaping our markets and how these are most likely to unfold over time. We walk and guide you through a process to scan your environment, understand your competitors and build potential scenarios.

Most companies today operate in slow growth, mature markets. Yet all players want to achieve growth that exceeds that of the market. The only way to achieve this, is to “take lunch away from the competition”. The Strategy Module assists you to develop  strategy to win in a competitive environment. We want to develop an offer that ‘customers cannot say no to’,  motivate and unite our people with an inspirational vision and position the business to achieve a sustainable competitive advantage. Most executives find this very challenging. We show you how it can be accomplished.

Unless the business powerfully engages its customers by mirroring their requirements and ‘speaks’ to them in a language that they understand, the company is unlikely to succeed long-term in winning and keeping customers. The organisation’s culture reflects its current capability to deliver customer and shareholder value. Accordingly,  The Culture Module helps leaders create and manage appropriate organisational change.

Leadership shapes the organisation’s future capabilities. The Leadership Module helps you build and nurture powerful and effective leadership coalitions at all levels within the business to shape, guide and lead the business to its desired or preferred future.

It is relatively easy to formulate strategy. It is far more difficult to execute well. The final Taking Action Module provides ongoing processes for keeping activity on track, deploying scarce resources effectively, and navigating towards the future – turning vision into reality.

“To know but not to do, is not yet to know“. Knowledge in and of iteself is useless! It is the effective application of that knowledge that makes the difference. Strategic FIT is the difference that makes the difference. We provide the knowledge and the support to give effect to the knowledge that you acquire on the Strategic FIT Program.

You can buy these Modules individually for US$395 each.

Or for a limited time we have an exclusive offer – All six Modules for US$1580. That is a saving of US$790.

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