Archive for May, 2012

Why Strategic Transformations Fail. And What CEO’s Can Do to Avoid it.

Thursday, May 31st, 2012

Strategic transformation or simply put – changing the company to deliver better financial performance through new ways of doing things and changed behaviors is a daunting task. In global discussions with CEO’s everyone knows the problems in the company but few can clearly state the cause of why it’s happening or how to steer it in the new direction and make it stick. The answer is: executives and employees are not making decisions using the same visible criteria – the result – a huge variability of outcomes and actions that – may feel good – but produces poor results.

When we work with companies one of the first things we do is establish a baseline of how strategic decisions are currently being made. In a recent survey we asked the top 20 executives what is used to determine what products to offer and markets to serve. These were their responses (with sanitized information):

  • “do not know”
  • “supply chain dictates”
  • “cost and demand”
  • “return on investment”
  • “gross profit”
  • “it seems we have inconsistent criteria”
  • “dollars”
  • “euros”
  • “I don’t feel comfortable answering this question”
  • “Total Revenue, not necessarily profitability”
  • “market size”
  • “product potential”
  • “who ever is the most senior person in the room wins”

Remember – these are the top 20 executive responses – from a team who are leading more than 5000 employees. So if you consider the cascade effect of answers and actions if the top team is not aligned ….you can see why “strategic transformation” is viewed as a daunting or unwinnable task. But it needn’t be.

As a CEO or executive who is leading a strategic change in the organization you will greatly improve your chances of succeeding by making clear and visible the vital few criteria the entire organization needs to be using to make strategic (and by natural link operational) decisions. Decisions are a series of actions implemented over time – and when the most critical strategic decisions (affecting the product to offer and markets to serve) are be made from a common reference point – the evasive “alignment” occurs and the actions that follow are directed at the known problems at hand.

One may challenge this solution – however, before you do I encourage you to ask your executive team to write out on a piece of paper – the top critera that is guiding their decision making first. And see if your responses are that aligned.

All cause comes from change – to strategically transform an organization you must address the root cause of not using the same criteria to guide decision making.

This blog post was authored by Tim Lewko, Partner, Thinking Dimensions

Tags: , , , , , , ,
Posted in Implementation, Strategy |

Incremental Profitability through Pricing

Friday, May 25th, 2012

A key question on the mind of every management team (and of course the shareholders) is:

How can we increase profitability?

A major emphasis is often placed on cost- however what about pricing (Revenue)?

Incremental profitability can be increased through a deliberate pricing process and program to target:

1) Customers who are very sensitive to price and do not require all the product/service attributes a company offers

2) Customers who require a specific product and services which generate significant added value to their end offering

3) Customers who require unique lead times

Almost all companies recognize at some level the different needs of their customers- what is often absent is an understanding of the value the customer generates with your products and services and how you can partner with them to increase their competitive positioning and thus earn a price premium.

Furthermore, in a number of companies pricing decisions- while being made hundreds and thousands of times a day- are not made visible and are not linked to the value generated for the customer. There are a few steps that can be made to change this deficiency:

1) Make pricing a priority- and an agenda item for management to discuss openly

2) Survey in detail your customers objectively to understand what is working- and what is not working for them

3) Verify your true competitive advantage as viewed through the eyes of the customer relative to the premium they are prepared to pay for your products and services

4) Conduct a trial pricing program as opposed to a “one size fits all” pricing solution

5) Work cross-functionally to understand where value is being generated not only for your customer but also internally within your business units

6) Roll out a new pricing program and adjust together with your strategy

A pricing program, in our experience, can increase EBITDA as much as 15% per year, when implemented in conjunction with a solid Strategy.


This post was authored by Scott Newton, Partner, Thinking Dimensions

Tags: , , , , , , , ,
Posted in Pricing |

Measuring Progress Throughout the Year

Wednesday, May 23rd, 2012

In my past life as a CEO, I sometimes felt a sense of panic when our annual goals went from being “right on target” mid-year, to suddenly being in danger as year-end approached. Not only was there a lack of time to address the issues to correct the situation, but there was also a sense that I was always seeing lagging indicators instead of leading indicators that would have given me a better sense of what was ahead.

That ended when we instituted quarterly checkpoint meetings with employees, specifically around our annual goals.

These checkpoint meetings were short and easy to manage. Simply put, each employee had objectives that tied to our annual goals. These objectives were revisited quarterly by a supervisor or manager in a meeting that lasted less than 30 minutes. The preparation was very simple. The managers simply said to their respective employees:

 

We’re going to meet next week to check on your objectives for the year. When we get together, I’ll want you to bring me up to date on three things.

1. Are you on track to hit each objective for the year?

2. Why or why not?

3. What resources do you need from me or what barriers do I need to break down in order for you to succeed?

Each employee brought a written status update that answered the three questions for each of their objectives.

You’ll note that all three questions deal with the future…not the present.

These checkpoints cascaded UP the organizational chart, so that any red flags to success on any goal were looked at repeatedly as they moved up the ladder and A.) were dealt with or B.) made their way up to the executive team.

Our discussions consistently centered around what needed to be done now in order to be successful at the end of the year….when something suddenly went awry, we focused on why it wasn’t foreseen in a prior checkpoint. The organization learned that missing an objective was bad, but not raising the issue and alerting the right people as early as possible was the far greater sin.

Over time, this future focus to how everyone viewed the business was the norm and the sudden surprises stopped. In effect, the entire organization became accustomed to being an early warning device and knew that they each had the chance to officially sound the alarm three times a year and unofficially sooner if something had the possibility of derailing all of us from success.

A lot of businesses suffer because everyone is so riveted on the present. It’s like driving a car and staring only at the hood ornament. Eventually you’re going to hit something when the road bends.

Empowering and expecting everyone to keep their eye on the road ahead is critical to avoid hitting a tree.

This blog post was authored by John Case, Partner, Thinking Dimensions

Tags: , , , , ,
Posted in Implementation, Strategy |

Simplify the Path to Process Performance Management

Saturday, May 19th, 2012

SAY the phrase “process improvement” and watch the eyes of a CEO roll back in their head. They recoil from conversations about the touted virtues of process improvement methods like Six Sigma, Lean Manufacturing or Business Process Re-engineering as they are inclined, and rightfully so, to talk about the results they want, not the methods to achieve them. Their demand – give me a process improvement method that is simple to apply, contributes to growth/profitability and ensures sustained results over time.

First Step – Determine which processes drive competitive value to warrant an improvement investment. The CEO and the executive team must have a common understanding and agreement of the company strategy and cost drivers impeding performance. This will focus the executives on the correct process improvement projects that drive competitive advantage and value.

Process concerns usually start with growth and profitability discussions. This translates to – What are the cost drivers negatively impacting our performance? Or, what opportunities exist to improve performance value and gain a competitive advantage? In either case, answers reside within the cost/performance elements of the company’s supply chain (ie, Porter’s value chain concept model).

Supply chains must promote the strategic profile of the organization relative to the products offered and markets served. Without a clear supply chain picture, there is a risk that process improvements projects will not advance the right processes activities critical to product/market growth and profitability.

Second Step – Apply a simple methodology that creates value and reduces costs by eliminating inefficiencies. Regardless of the improvement methodologies to be applied (Six Sigma, Lean, Business Process Re-engineering), they all strive to design visible, optimal, and valued performance. However, complex methodologies are simply not necessary 90% of the time. Applying a question-based approach (ie, Thinking Dimensions’ Design, Execute & Control – DEC methodology) along with the appropriate process design team – of suppliers, performers and customers – is sufficient, less costly and faster to accomplish. Why, the method is simple and the assembled team knows the strengths, weaknesses of the targeted process improvement and they have a vested interest in attaining the desired results.

The process team applying the improvement method must ensure all designed process activities are:

1) Value-Added (necessary action)

2) Redundancy Free (unnecessary tasks)

3) Continuously Flowing (smooth hand offs, no bottlenecks)

4) Performed in Parallel (where possible to reduce cost, cycle-time)

Third Step: Implement the newly designed process so people performance is linked to the desired results. People create value through the process activities they perform. Many process improvement methodologies/projects neglect to change the behaviour of those performing the work in relation to the new process design. People are creatures of habit, and change is not necessarily accepted. If performers do not adhere to the new process activities, the desired results are not attained and management correctly perceives the improvement investment as a waste. Aligning people/process performance is essential, but not always done.

Three factors will ensure people adhere to the new process activities:

1) Clarify the Roles and Responsibilities of all performers
2) Link people’s performance reviews to results of the new process design
3) Dedicate management focus to the implementation

Fourth Step: Manage and sustain results through data, ask:
What would tell you the process improvement investment delivered the desired results? Feedback from your Supply Chain’s key performance indicators (KPI) — cost, quality or schedule performance. Ensure a direct linkage from your KPIs down to the process metrics that contribute to that KPI calculation.

What would tell you if the results are being sustained? Consistent data trends overtime. Company data is often poorly organized to intuitively and quickly assess performance over time, or there is data overload that is confusing. Data should be displayed in “trends over time” so the decision maker can see results and initiate the appropriate inquiry.

How do you manage future performance results? Use the trend data from Supply Chain KPIs to make decisions to manage business processes. Data linked to the processes creating value expedites the targeted resolution. By using data, you are managing process performance and sustaining results.

Recap – The Path to Process Performance management:
1) Determine which process drive competitive value
2) Apply a simple improvement methodology that creates value
3) Link people performance to the desired results of the process
4) Manage results through data

 

This blog topic was authored by Keith Pelkey, Partner, Thinking Dimensions

 

Tags: , , , , , , , , , ,
Posted in Implementation, Operations |

Improving Profitability through process

Friday, May 18th, 2012

Companies can have different definitions or views of profitability. Nevertheless, it is one of the most important metrics that a business should take care about.

Many companies measure their success on revenues and units sold, but these metrics are not always  helping the management in making decisions in the correct way. Some other companies include profit among the critical metrics, but still they can’t make sense of the huge amount of disordered data that the controlling department of the company provides them with. At the end management often decides based on its feelings and hoping for the best.

In order to make decisions that improve profitability, successful companies adopt a systematic process that gives management the tools to make data driven decisions that significantly impact margins.

You can impact profitability on 2 sides: from the cost side and from the sales side.

A detailed analysis of cost is for sure one of the processes that can be implemented in order to improve profitability. Nevertheless, what successful companies have focused on the most is the capability of making fruitful decisions on the combination of products and clients they have in their portfolio today and in a few years from now.

The assumption behind this approach is that different clients see different value in the same product due to many reasons (buying criteria, product life cycle stage, final application, etc.). This difference represents a big opportunity in  terms of price and, in turn, profit.

Process can leverage on this opportunity by helping management:

  1. Focusing on a small sets of reporting tools with company-specific key performance indicators (internal and external)
  2. Setting product/client/market priorities to focus on by understanding the profitability in the current situation (what are the combinations of products/clients that are more profitable, what are not and what are the causes) and making decisions on how to take action (cut costs, dismiss products, leave clients, price differently for specific combinations, etc.)
  3. Monitoring the impact of the different decisions on profitability

Process wants to give company management the possibility to decide in the best way by being aware of their different portfolio combinations performances. Having this visibility is something that can give a very different and impressive insight. Often companies discover that those clients, products or the combination of the two who they believed being their best ones, are actually more value destroyer than value creators.

Process can improve a company’s profitability by making management aware of those gaps between what they would think and what it is in reality, therefore making them able to choose in a thoughtful way ( it will be clear what are the good combinations of product and clients and what are the bad ones).

Management through process can improve responsiveness to unprofitable situations and increase the creation of profitable ones, all aimed at a better product/client mix.

 

This post was authored by Laura Rainati, Thinking Dimensions Italy

Tags: , , , , , , , , , , , ,
Posted in Pricing, Strategy |

Why Acquire at all?

Friday, May 18th, 2012

One area we are asked about frequently is acquisitions- yes or no?

Why to acquire?

The decision for an acquisition is not easy- it is one alternative to developing capabilities organically however can be costly and also difficult to integrate.

So what are the steps required to approve an acquisition?

1- Know your strategy and specifically your competitive advantage.

2- Understand how the target will assist you in meeting your highest priority strategic emphasis goals

3- Test and validate the real NPV of the acquisition and measure its sustainability

4- Calculate the costs of integration in terms of not only money but also the internal resources required to achieve objectives

5- Recheck steps one through four

Once an acquisition has been approved- still be prepared to say no and walk away.  Your decision was based on a series of assumptions relative to the corporate strategy you have developed- if those assumptions cannot be verified it is always an alternative to close down the negotiation.  The costly acquisitions we have observed which do not work are typically due to a desire to proceed forward even though the DD was not validated- a perfect example of sunk costs considered as going concerns.

This post was authored by Scott Newton, Partner, Thinking Dimensions

 

Tags: , , , , , , ,
Posted in M&A |

Pricing strategy for B2B – getting the data you need to make effective decisions

Wednesday, May 9th, 2012

Managers or CEOs seeking to improve the way the company makes pricing decisions need to implement changes starting from the way  the organization collects, sorts and uses data as an input in selecting the best performing alternatives.

As an example, one of our clients is a leading company that designs, manufactures and installs automated industrial equipment systems principally for the automotive industry.

As you probably know, the selling process for this type of product and service offering can be complex to manage for several reasons including:

  • Several stakeholders are involved in the selling process from the client side (i.e. the Production Manager, the  Business unit directors etc..)
  • The average price for a system is several million dollars, and one system may require a total investment of more than twenty million dollars
  • Every sales opportunity has specific characteristics in term of client need and urgency
  • Decision making criteria adopted by customers can change in time and depend on the specific situation
  • There is a bid or negotiation process per each sales opportunity

3 years ago, it was clear to the CEO that the decision making process for pricing was a capability that needed to be improved. The main reasons for this were not only the complexity of the selling process but also the impact that pricing decisions have on the company EBITDA.

In the case of this company, the impact on the EBITDA related to an improvement of 1% on the price is almost 5% improvement on total company EBITDA.

Figure 1- Pricing Impact Example for a B2B solutions provider

The CEO understood this impact, and worked to design and implement a better process to support pricing decisions. The initiative started with 2 simple questions:

1- what data do we need to make effective pricing decisions?

2- What data are we actually collecting to make pricing decisions?

If you are also asking these questions, we recommend to focus on 4 areas:

1. Competitive positioning:  What is the relative competitive positioning of the proposed solution compared to the main competitors?

2. Customer need: What is the real customer need? What is the relative level of urgency and importance? Why  is the customer buying?

3. Investment level for the client: What is the total cost of ownership of the system or solution provided compared to the total product costs?

4. Customer sensitivity: at what extent is the system we  provide critical for the overall performances of the manufacturing process?

Concurrently to answering the four questions, complete an assessment that to understand what percentage of the required data to make a decision is being collected by the sales force.   In our experiences, typically >20 % of the required data has been collected or used by the sales force for decision making.

This initial phase will have a duration of a few weeks and the implementation of the new way to make decisions involving >10 divisional or business unit managers in different functions (not only sales) normally has a duration of 8-10 months.  There is a significant amount of work and leadership involved- the payoff for an initiative of this type has demonstrated to grow EBITDA  by as much as 20 % (CAGR).

This blog was authored by Diego Miglioranzi, Partner, Thinking Dimensions

Feel free to contact the author directly for questions about this subject.

Tags: , , , , , , , , , , , , ,
Posted in Implementation, Pricing |

You know your strategy is working when your company can say NO to things and know WHY?

Monday, May 7th, 2012

At a recent client meeting you could sense the slow burn of frustration on the supply chain executives face – despite an excellent pedigree to deliver high performance, extensive cross industry success  – his forehead lines were visible – when he asked – how do you “TURN the BEAST” around when we have so many projects and versions of priorities that it seems impossible.  The BEAST was his company. AROUND was the financial performance.  I asked – “what criteria do you use to say YES or NO to strategic projects now?”

There was a collective moment of silence around the table –meaning – there really were no common criteria being applied.

This is one of the most common issues we observe as a point of frustration for CEO’s and executives – too many projects or initiatives going on.  The never-ending requests for “more resources”, more money, more time grind on a CEO’s ear and are symptoms rather than causes of “not being able to say no.”  Funny – it’s a simple two letter word that when used in the strategic context is significantly important and has a more powerful impact to the EBITDA line than being able to say yes. …so why do many organizations fail to say no?

The cause of not being able to “say NO” (which is a conscious chosen alternative) is due to not making a common set of strategic criteria visible, measurable, and quantified. You may think you have made strategic criteria visible but unless the criteria can be readily recited by the executive team your chance of any real focused effort and cohesion within the ranks is close to nil.

The result of invisible strategic criteria is as one would expect:

  • debating alternatives ( launch this product anyway, start this initiative as well, or bring on more resources to finally get it done –all well intended by not focusing on the cause)
  • creating criteria that skews priorities for a particular function or region
  • thickening walls between functions as they compete for resources
  • developing inertia creeps up and becomes a norm before anyone is aware

These points of non-performance are all damaging and are the result of not having criteria to guide your organization’s strategic and operational decision making. The good news?

There is a simple fix- which does require discipline– starting with the CEO and executive team – but one that pays significant value the first time it is applied:

  • Make your criteria visible and allow all strategic projects or priorities to be equally evaluated against the same criteria.
  • Encourage those in your company to test their “burning priorities or projects” against the company-wide criteria and you will in fact be surprised that many projects melt away.

To improve your organization’s use of strategy to guide decision making and remove the effects on your organization consider making your strategic criteria visible.   Below are a standard starter set that will initiate within your company the ability to say no (or YES) and which you can TEST and SCORE alternative projects against.

Criteria Metric Target Range
Does it Maximize EBITDA Absolute $ X to X
Does it Maximizes Competitive Advantage – what activities your company performs that deliver superior margins relative to your competition through the eyes of the customer $ change in margin X to X
Does it Maximize Revenue Absolute $ X to X
Does it Maximize Revenue Growth (Share) % CAGR X to X

By making this issue visible as well as the strategic criteria to guide decision making you will be surprised at how quickly you can turn the beast around. High performance is a decision making discipline.

This blog post was authored by Tim Lewko, Partner, Thinking Dimensions

Tags: , , , , , , , ,
Posted in Strategy |

The Key Importance of making Strategic Assumptions visible early in the M&A process

Thursday, May 3rd, 2012

One of the areas of business which rarely gets much press coverage is “Failed Mergers”.  The time and effort spent however on discussions and negotiations which then do not lead to a partnership, joint venture, or outright acquisition consume considerable resources of the Firm.  Why do the negotiations break down?

A frequent reason for the failure in the negotation stage is that Strategic Assumptions were not clearly communicated- that is, made visible, early in the discussion stage of the process.  The way a company looks toward the future determines who the potential “right” partner will be- as every organization does not see Assumptions in the same way, we recommend the following:

1) Communicate clearly the 4 or 5 (not more) Strategic assumptions which will have the biggest impact on the industry and the company.

2) Share the assumptions with the potential partner, and agree on a combined list (if you want to know how to generate Strategic Assumptions, please read the excellent blog post of May 2nd  from my colleague Tim Lewko).

3) Jointly with your acquistion teams- review and agree on the financial impact the assumptions will have on the “New” merged company.  This is the time to be blunt and honest- not over optomistic or enthusiastic- realistic.

4) Compare the financial impact to the budgeted synergies- what is the new outcome?

5) Review the updated business case and decide if there is still a valid logic to the acquisition, merger, or partnership.

The entire process will take a maximum of one working day- and the value received provides an immediate ROI- there is no need to proceed if the business case is no longer valid.  A number of companies have also- unfortunately- decided to proceed with their M&A plans even after realizing the synergies would not create the initial projected return.  The question is why a company would do that- the root cause typically due to thinking along the lines of “we have already come this far in the process and cannot stop now or the market will punish us”.  This easy first step serves as a protection against such thinking.

This blog post was authored by Scott Newton, Partner Thinking Dimensions



Tags: , , , , , , , , ,
Posted in M&A, Strategy |

The Truth about Strategic Assumptions – How they Forge a Stronger Strategy

Wednesday, May 2nd, 2012

Every strategy sits on a bed of strategic assumptions. It is impossible for any CEO or executive team to make decisions that are not based on some point of view, gut feelling, or data of how they believe the “world will unfold” in relation to their industry.

Think of the different versions of reality the executives of Boeing’s Dreamliner 787 vs. Airbus A380 rest on.  Update on the development of Boeing and Airbus here .   Because they have different “versions of how the world will unfold “ they have naturally made contrasting investments in the product, market, and capabilities choices on the SUPPLY and DEMAND of the air travel industry.  Who’s right – as measured by sustainable profitability – time will only tell – but you can see clear choices based on strategic assumptions very evident here.

The trouble we see with executive thinking is not in the “strategic assumption itself” but the inability to leverage their vast expertise, experience, and insight that drifts in the ether around the conference room table.  The result – strategic plans whose creators have no way to test the soundness of their thinking during execution or erroneous assumptions defended because there was never any visibility or executive alignment to start with. Rather than “Wait and React” why not proactively make assumptions visible and test their soundness along they way thereby giving your company a better approach to make mid-course corrections.

Misuse or non-use of strategic assumptions is a recipe for disaster in setting effective corporate strategies. If this sounds like your organization – or maybe not your organization but one that you know– use this simple 5 step checklist to assess how well your company is applying strategic assumption to guide its decision making.

1. Understand what strategic assumptions are / are not

  • Assumptions are short statements that display what you believe will unfold in the external environment during your strategic time frame.  They affect you and everyone else in the environment (note: they never should be only about your company e.g. China will be our number 1 growth market). It is very beneficial to even draw a small graph to visually “see the prediction” you are making. This alone – spurs constructive strategic debate among senior executives and importantly surfaces gaps in thinking.

2. Quantify and Assign a Probability to Assumptions

  • Given that assumptions are an expectation of the future that can’t be 100% predicted – many organizations say, “why guess at it?” We don’t recommend you guess but rather make visible the thinking and quantify your assumptions within some peer-agreed range. You are looking for Order of Magnitude here – not academic precision. Later – deeper analysis or supporting data needs may be researched that support or invalidate your assumption(s). Once you have set Order of Magnitude, assign each assumptions either an:
    • H=75% will happen,
    • M=50-75% likely to happen or
    • L=50% below won’t happen as the calibration.

From our experience executives are more right than wrong in the assumptions they make.  Upon a strategic review even they are surprised about how much they really know about their industry. Don’t allow “we don’t know” or “we don’t have the data” to get in the way of this first iteration.

3. Link them to internal Revenue, Margin Implications

  • With each assumption – the key question to ask is “SO WHAT?” – what does this mean to the strategic product, market and capabilities choices for our business – What alternatives exist to exploit or mitigate this trend. Keep in mind implications only apply to your company (in comparison to assumptions which are external) and are really alternative actions your company needs to decide on given the assumption.  Because strategic assumptions fundamentally impact your product, market (read: customer), capabilities (read; expertise and processes to invest in) choices your CFO can effectively draw a link from the assumptions to the P& L impact scenarios that may unfold – which gives you real insight into the future.

4. Don’t have More that 5 Strategic assumptions

  • More than 5 assumptions means you are given points for quantity rather than quality of thought. Distilled – assumptions are really about the SUPPLY and DEMAND of your industry with TECHNOLOGY as the fulcrum for rate of change.  This means you need to distill the 5 or “things” that really drive and affect the certainty of your industry’s supply and demand.

5. Build Your Strategy Upon the Assumptions

  • With assumptions now visible, quantified and a probability assigned along with the impact to product, market, and capabilities choices – you now can leverage these to develop alternative strategies that will allow you to win in the market place. This is not a robotic step – far from it – but with this data visible you will highlight areas of opportunity and areas of risk to be mitigated much more readily than not.  Because assumptions are just that – forecasts of the future – your company needs to test the validity of your assumptions and associated actions to offer mid-point corrections based on how the world has actually unfolded each quarter and at the very least annually.

These five steps will give you and your executives more control over the future than anyone would have predicted.  In my next update – I will share with you a simple tool to gather, sort, assess and select the relevant information needed to develop your strategic assumptions .

This blog update was authored by Tim Lewko, Thinking Dimensions Global

Tags: , , , , , , , , ,
Posted in Strategy |