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Sunday, November 24, 2013

Part 3 - Forecasting market demand

For audiences reading this post: please note that I am summarizing a book I am reading and this is not my work. All the content is owned by the author Vaughan Evans. The name of the book is: "Key Strategy Tools". As title of my blog makes it clear these are my cheat sheets so that I can revisit the contents of the book in an easy online format.

Only when you fully appreciate the microeconomic context in which your firm operates and with which it interacts will you have the depth of understanding one which to build a robust strategy. There are two distinct but interrelated aspects of microeconomic behavior to grasp: market demand and industry supply.  The latter deals with the forces driving industry competition and their impart on market share, pricing and profitability in your industry.

The following are a few tools to forecasting:

Sizing and Market-crafting (Evans):
The Tool: Size matters: Without market size you won't know market share. Without market share, you'll find it hard to judge competitive position. The larger your company, the easier it is to find data on market size.  Industry association proliferate and many either compute market share themselves or contract out the job to specialist market research firms.

How to use it: First you must decide what you are looking for: your addressed market or your addressable market. The difference can be huge:

  • Adressed market - those to whom you currently offer your goods or services and who may or may not purchase them.
  • Addressable (or available) market - all those whom you could serve should you extend your offering.
There are six main ways of sizing a market:
  • Top-down market research - start with a known, researched market size and chop out inapplicable sections, or make appropriate assumptions on relevant proportions, to drill down to the target market.
  • Bottom-up market research - take disaggregated data from a market research report and assemble the relevant bits that make up your target market.
  • Bottom-up customer sizing - estimate how much each major customer spends in the target market and make an allowance for other, minor customers.
  • Bottom-up competitor sizing/marketcrafiting - estimate the scale of your competitors in the target market.
  • Related market triangulation - use two, three or more known sizes of related markets to gauge a rough estimate on the target market.
  • Final triangulation - juggle the estimates from the above sources and subject them to sanity checks; consider giving each estimate a reliability rating, work out relative probabilities and compute a weighted average estimate of target market size.
Market-crafting is one of the approaches mentioned above. There are seven main steps in market crafting:
  1. Select your main competitors - those you pitch regularly against, those you exhibit alongside at trade shows - and don't forget the foreign competitors, especially those from lower-cost countries.
  2. Take competitor A: do you think you are selling more or less than you into this market? if less, by how much less, very roughly? are they selling half as much you? three-quarters? if they sell more than you , by how much more, very roughly? 10 percent more? A third more? Is there any publicly available information which can guide you on this? - competitor A's sales to this market are unlikely to be available if it is a private company, but employment data can be indicative. What do customers tell you? And suppliers?
  3. Taking your current sales level as an index number of 100, assign the appropriate index number to competitor A; if you think they sell less than you in this market, but not that much less, say 10 percent less, give them an index number of 90.
  4. Repeat steps 2 and 3 each of the competitors named in step 1.
  5. Make an allowance for any other competitors you have not names, those who are small or those who only appear now and gain; this should also be an index number; if you think all these others together sell about half what you sell to the market, give this 'Other' category an index number of 50.
  6. Add up all the index numbers, divide the total by 100 and multiply by your level of sales - that is your preliminary estimate of market size. 
  7. Ask your staff and contacts to go talk to their friends and contacts who work with the competitors and get their input to refine your estimates.

When to use it Use market crafting or other maker sizing methods whenever you have no their party data source and need to create a market size from scratch.

When to be wary:  Treat the results with caution. Take another look at your numbers. Is there any way they may be right? Do they have access to information you don't? What would that imply for your share, or other competitors' shares?

The HOOF approach to demand forecasting
The Tool You have better chance of growing in a market that is prospering than in one thats shrinking. Market size is all very well, but what often matters more in strategy development is what the market is doing, where it is going - the dynamics, as opposed to the statics. Is market demand in your main business segments growing, shrinking, or flat-lining?

How to use it You need to apply these steps for each of your main business segments.
The four steps are:

  1. Historic growth - assess how market demand has grown in the past.
  2. Drivers past - identify what has been driving that past growth.
  3. Divers future - assess whether there will be any change in influence of these and other drivers in the future.
  4. Forecast growth - forecast market demand growth, based on the influence of future drivers.

Historic growth - This is where you need to get some facts and figures. If you have access to market research data, whether on a regular basis or with one-off purchase, all your needs should be in there. If not, you may have to do some marketcrafting. Get an average annual (compound) growth rate over a number of recent years, preferably the last three or four. If there have been ups and downs, you should smooth them out with three-year moving averages before calculating the percentage change.

One word of caution: market demand growth is generally measured, analyzed and forecast in real terms.
  • In nominal terms: with goods or services priced in the money of the day.
  • In real terms: the growth rate in nominal prices deflated by the growth rate in the average prices of goods in that market; as long as correct deflators are used, this growth rate should be a measure of volume growth.
Should you need to business planning and financial forecasting you must bring average price forecast back into mix. Then your revenue forecast, as well as the whole P&L, will be able to be compared directly with market growth-rate forecasts in nominal prices.

Drivers past - Once you have uncovered some information on recent market demand growth, find out what has been influencing that growth. Typical factors that influence demand in many markets are:

  • Per capita income growth
  • Population groth in general
  • Population growth specific to a market
  • Some aspect of government policy or purchasing
  • Changing awareness, perhaps from high levels of promotion by competing providers
  • Business structural shifts
  • Price change
  • Fashion, even a craze
  • Weather - seasonal variations, but maybe even the longer-term effects of climate change
Drivers future - Now you need to assess how each of these drivers is likely to develop over the next few years. Are things going to carry on more or less as before a driver? Or are things going to change significantly. What are the prospects for growth in vertical or complementary sectors? The most important driver is, of course, the economic cycle. If it seems the economy is poised for a nosedive, that could have a serious impact on demand in your business over the next year or two - assuming your business is relatively sensitive to the economic cycle or maybe is relatively inelastic.

Forecast growth - Make sure all drivers are taken into account, irrespective of whether hard data can be found on them. The HOOF process encourages you to seek out all relevant drivers and assess their influence in a structured, combined quantitative and qualitative context.

When to use it: Whenever you need to forecast market demand.

When to be wary: Take care to identify all relevant drivers. Use whatever evidence you can muster dashed by a strong dose of reasoned judgement, in assessing their influence on demand growth, past, present and future. And be wary when computing historic growth rates.

Smoothing the moving averages
The Tool:  Where markets have been up and down, showing no consistent trend, take care. Approach to demand forecasting. The best way to deal with the market volatility is to plot a graph on logarithmic paper and draw a line of best fit through the points. Plotting data on logarithmic scale can be challenging for some.

A simple non graphical alternative is to translate the data into moving averages. This enables annual fluctuations to be smoothed out, making it easier to decipher and calculate trend growth rates.

How to use it: Take the set of market data and apply these steps:

  • Observe the length of the cycle and select an appropriate time period for smoothing, often a three-year period.
  • Take the annual average of values during that time period around any given year.
  • Calculate compound growth rates between appropriate start and end points to establish the trend.
Or simply put, the sum of each year's plus the previous year's number plus the following year's number, divided by three.

When to use it: Use it when historic market size data show ups and downs or an irregular pattern.

When to be wary: Don't just compute the numbers blindly. Try to understand what was happening in each of the years to produce such irregular numbers. That will help you avoid the trap of selecting a boom year as the starting point and a bust year as the end-point. Taking boom to boom, bust to bust, average to average period should give you similar answers, but mixing them up can be severely misleading (and is much-loved reuse of the politician! :) )

Income elasticity of demand
The Tool: Income elasticity of demand ('IED'). It is a measure of how demand for good (or service) changes in relation to change in the income of customers. It is defined as the percentage change in demand divided by the percentage change in income.

If your business, or one of your product/market segments, addresses a market which is large and generic, you may be able to use IED in your market demand forecasting.

Different types of goods have different IEDs
  • Normal good have positive IED
  • If an IED is less than 1, the good is a necessity - demand doesn't rise much in good times, nor does it fall back too much in bad times; examples are fresh fruit and vegetables, even tobacco
  • If an IED is greater than 1, the good is a superior good - people buy it aplenty in good times, but cut back in bad times; examples are books, meals out.
  • If an IED is greater than 2, the good is a luxury - demand fluctuates widely between good and bad times; examples are sports cars, haute couture, holidays in Seychelles.
  • If an IED is around 0, the good is inelastic or sticky - demand doesn't change much in relation to changes in income; examples are bread, baked beans
  • If an IED is less than 0, the good is an inferior good - demand drops during the good times and returns in bad times: the classic examples are margarine and bus travel.

How to use it: If your market is a whole sector or sub-sector, you may well find an estimate of IED for that sector on the web. To forecast market demand you:

  • extract economic forecasts from a reputable source
  • multiply by the income elasticity of demand.

When to use it: Use it when your market (or segment) is sufficiently large and homogenous to merit the calculation by some public or academic institution of its income elasticity of demand.

When to be wary: Are you sure your from addresses that whole sector market? After the process of product/market segmentation. The resultant segments tend to emerge as rather specific, both to a product or product type and to customer/end-user group, not to a whole sector market. You may need to revisit your segmentation.

Survey methods of demand forecasting
The Tool: There are a number of survey based methods for forecasting demand which you may find pertinent to your strategy development process:

  • Survey of customers' intents
  • The salesforce estimation method
  • The Delphi method
  • Pilot test marketing

How to use it

  1. Survey of customers' intentions: This is where you chose a representative sample of customers from each major product/market segment and call them up. You ask them what volumes of product they are intending to buy over the next 12,24 months, not from you, but from all competitive suppliers. This can be part of the same survey you will be carrying out to colic it customer views on purchasing criteria and their rating of your firms performance and those of your rivals against those criteria.  But you should not expect spectacular results. Better to accept limited expectations from the outset and tack these questions on to your survey of purchasing people at your customers - which is a necessary, not an optional, component of your strategy development process.
  2. Salesforce estimation method: Arrange a debate of participants who are a group of key sales people and debate where they believe market demand is heading. You act as orchestrator and assemble the accumulated opinion of the group. Salespeople get close to their customers and can often be prescient in forecasting a sales stream from their customers. But find it difficult to step back and see the market as a whole - all customers to all suppliers. They spend so much of their lives with each of a handful of trees that wood can become a blur to some.
  3. The Delphi method: It is a structured analysis of independent, informed, 'Apollonian' opinion. You reach out to a bunch of reputable, even 'expert' industry observers and ask them a few carefully worded questions on market demand prospects. You collate the replies, but anonymously, and return a summary of the findings to the observers. They look at what others are saying and have the option of sticking to their initial answers or modifying them, with appropriate justification. You amend this summary accordingly and there is your demand forecast, a balanced assessment of the combined wisdom of a handful of Delphic oracles.
  4. This is most appropriate where you are introducing a new product or venturing into a new product/market segment. Yours may be a new product or service designed to convey a customer benefit not previously realizable. Write down the key segment needs or product solution that address the market needs in couple of bullet points. Imagine there were many suppliers of your product or service and that the whole country is aware of its existence. What would the market size be? How does that compare with the market size for products or services not a million miles different from what you'll be offering? Does your estimate make sense?

When to use it: Use them when you feel that canvassing of others' views would improve the ragout of demand forecasting.

When to be wary: All forecasting is based on quality of data collection and sources of data. Thus it cannot be relied on completely.

Statistical methods of demand forecasting
The Tool: 'There are lies, damned lies and statistics' where the famously damning words of Mark Twain. Perhaps, but basic statistical tools may be of help in your market demand forecasting. The main and simplest ones are:

  • Trend Projection
  • Regression analysis
  • Barometric method (complex to summarize - better look up a good source)

How to use it:
Trend Projection: This involves the placing of a line of best fit through points on a chart. The process is as follows:

  • Set out market demand data for each year.
  • Plot on logarithmic graph paper, with time on the x-axis and demand on the y-axis.
  • Visually place a line of best fit through the points.
  • Measure the gradient of the line and that will equate to the average annual rate of growth (percentage per annum).
Continuing the line and seeing where it crosses future years on the x-axis will give you a set of market demand numbers for future years, but they may well be meaningless as forecast. They assume that future demand will be subject to exactly the same influences as in the past.

Regression Analysis: This is a statistical tool which can help you understand how market demand, a dependent variable, will vary in relation to variation in an independent variables, such as GDP or engineering output. The process is as follows:
  • Set out market demand data for year.
  • Set out the independent variable: for example, GDP, for each year.
  • Plot on graph paper, with GSP on the x-axis and demand on the y-axis.
  • Visually place a line of best fit through the points (for linear regressions).
  • Measure the gradient of the line(m) and the intersect(c) with the y-axis when x=0 and the relationship between demand and GDP will be that of the standard equation, y=mx+c.
Again you need to take great care in using regression analysis for forecasting. The relationship that was evident in the past may not hold firm for the future. An other drivers may play a greater role n the future.

When to use it: Use statistical methods when you suspect that the market crafting approach to demand forecasting would benefit from greater rigor, especially in the computation of pas growth rates.

When to be wary: Take care not to assume, without specified justification, that the trends, regressions or barometers observed in the past will hold true in the future.

Monday, November 18, 2013

Part 2: Tools for setting goals and objectives

For audiences reading this post: please note that I am summarizing a book I am reading and this is not my work. All the content is owned by the author Vaughan Evans. The name of the book is: "Key Strategy Tools". As title of my blog makes it clear these are my cheat sheets so that I can revisit the contents of the book in an easy online format.

A goal is something your business aims to be, as described in words. An objective is a target that helps to measure whether that goal is achieved, and is typically set out in numbers. The following are the tools that help in building goals and objectives as part of your strategy.

1) Setting long-term goals
The Tool: Goal setting is the cornerstone of business strategy. Goals should underpin each of your company's main strategic initiatives over the next five years or so. Goal setting should also prove motivational. Goals can enhance employee performance in four ways:
  • They focus attention towards goal-relevant activities
  • They have an energizing effect
  • They encourage persistence
  • They help staff cope with task to hand.
How to use it: A goal is something your business aims to be, as described in words. An objective is a target that helps to measure whether that goal is achieved, and is typically set out in numbers. Second, think of short-term goals as what lies within and behind this year's budget. These may be important in short term. Third, there are various types of goal. Market - or customer-oriented goals are often the most motivational and easy enough to monitor. The fourth issue concerns financial goals. If the goals (or objectives) relate to segment prices or margins, whether gross margin or contribution they can be treated in the same way as market-related goals.

When to use it: Always

When to wary: Don't have too many goals.

2) Setting SMART objectives:

The Tool: Objectives are intimately linked to goals. Your firm aims towards a goal, a destination typically articulated in words. Objectives are targets, whether along the route or at the final destination, and are typically set out in numbers.

How to use it: You should set objectives that are:
  • Specific - a precise number against a particular parameter
  • Measureable - that parameter must be quantifiable - for example, a market-share percentage in a segment rather than a woolly target such as 'best supplier'
  • Attainable - there is no point in aiming for the improbable - disappointment will be the inevitable outcome.
  • Relevant - the objective should relate to the goal.
  • Time-limited - you should specify the deadline for the objective to be achieved.
When to use it: In strategy development. Objectives are also very important in strategy implementation. Gaining buy-in from key managers and staff can be the key to successful implementation of strategy.

When to wary: As with goal setting, keep it simple.

3) Maximizing shareholder value
The Tool: A firm's purpose is to maximize shareholder value and that, since only people can have social responsibilities, firms are responsible solely to their shareholders and not to society as a whole.

How to use it: This tool references shareholder value maximization and not profit. Value and profit are not the same thing. The value of an enterprise is defined strictly as the value of the equity plus the value of the long-term debt. Value is a measure not of profit but of cash. And its a measure of future cash flow.

The goal of shareholder value maximization, as opposed to profit maximization, forces the strategist to give priority to:
  • The medium to long term, rather than the short term.
  • The building of sustainable competitive position, rather than temporary profit.
  • Cash flow, rather than profit.
When to use it: Always

When to wary: There is an omnipresent trade-off between this goal and the next balancing stakeholder interest.

4) Balancing stakeholder interests
The Tool: The goal of balancing stakeholder interests need to be treated with care. If you give too much weight to the interests of those other than shareholders, you wont remain in business too long.

How to use it: The goal of balancing stakeholder interests has become more formalized in the past two decades through the promotion of corporate social responsibility, sometimes referred to as 'corporate conscience', and the advent of 'social accounting'

Three of the most common qualifier to a simple goal of maximizing shareholder value come in the areas of employment, sourcing and the environment.

When to use it: Always

When to wary: A firm's prime goal might be to maximizing shareholder value, albeit balanced, as appropriate to your firm's culture and circumstances, by the interests of specified stakeholders. But should the latter interests gain precedence over those of shareholders, your firm may be destined for trouble.

5) Creating shared value (Porter and Kramer)
The Tool: "The concept of shared value... recognizes the societal needs, not just conventional economic needs, define markets. It also recognizes that social harms or weaknesses frequently create internal cost for firms - such as wasted energy or raw materials, costly accidents, and the need for remedial training to compensate for inadequacies in education. And addressing societal harms and constraints does not necessarily raise costs for firms, because they can innovate through using new technologies, operating methods, and management approaches - and as a result, increase their productivity and expand their markets." - Porter and Kramer, 'Creating shared value', Harvard Business Review, Jan-Feb 2011

How to use it: The companies have been aiming at maximizing shareholder value, albeit by cleverly targeting innovative niche opportunities which also happen to improve the public good.

When to use it: Consider using it as an alternative to the tools set out above maximizing shareholder value.

When to wary: Conflicts will arise and decisions will need to be taken on sharing the value created. Should the value accrue to the public, in social or environmental benefits, or to shareholders? Trade-offs will be no less difficult to resolve whether the goal is creating shared value or a blend of goals of maximizing shareholder value and balancing stakeholder interests.

6) Economic value added (Stern Stewart)
The Tool: Evaluating the health of the company based on return on capital depends on two factors:
  • The element of risk in investing in the company
  • The extent of long-term debt carried by the company.
Each company has its own cost of capital which reflects both those factors, called the weighted average cost of capital. The WACC consists of two parts: the cost of long-term debt times the share of debt in capital employed plus the cost of equity time share of equity in capital employed. The cost of long-term debt is easy enough to assess - it's the rate you need to pay the bank on. When an investor backs your firm, he expects a return equivalent to your WACC.

How to use it: A ranking based on EVA return is a better indicator. It tells you how companies are performing relative to the sector risk and financial risk each is exposed to. The top-ranking companies will be outperforming investor expectations and 'creating shareholder value'. The lowest, where EVA returns are negative, falling below WACC, are underperforming against investor expectations and are 'destroying shareholder value'

EVA is also useful in ranking divisional or business unit performance in your firm.

Detailed EVA:

When to use it: Us it when you feel comfortable about the theory and calculations and where you want to set a challenging objective for investor returns over and above the usual.

When to wary: Take care if you find the concept and mathematics difficult.

7) Balanced scorecard and strategy map (Kaplan and Norton)
The Tool: The balanced scorecard is a means of translating corporate goals and strategy into a series of define, measurable objectives, spanning key departmental functions, has become the most commonly used framework od management by objectives.

How to use it: It is essentially putting information about resources available and how to use them to reach to the goal. The following are few of the areas which generally used in building a balanced scorecard:
  • Financial perspective: revenues, gross and operating margins, return on capital employed, cash flow.
  • Customer perspective: market share, customer satisfaction, quality performance, delivery performance, customer retention
  • Internal business processes perspective: productivity, process measures such as bottlenecks.
  • Learning and growth perspective: job satisfaction, training as a share of operating costs, employee turnover.
The strategy maps, which can be taken as the second generation of the balanced scorecard, sets out to show how a firm can create value by connecting strategic objectives in cause and effect relationships, displayed by arrows in the map. It highlights the route needed to ensure organizational alignment with the strategy.

When to use it: When used effectively in strategy implementation, a balance scorecard should help in streamlining processes, information and motivating employees, begetting greater customer satisfaction and demonstrably improving financial results emanating from the strategy.

When to wary: The danger is self-evident: too many objectives with too little prioritization in the balanced scorecard, and too much information with too many boxes and arrows on one strategic mapping page, can blue the landscape and hinder coherent strategy development.

8) Core ideology (Collin and Porras)
The Tool: "Successful companies set 'big, hairy, audacious goals. They also possess a core ideology and create cult-like cultures" - Jim Collins.

How to use it: Break core ideology down into core purpose and core values. Core purpose is your firm's  'fundamental reason for being'.  Core values are your firm's 'essential and enduring tenets - timeless guiding principles that require no external justification.

Set highly challenging big, hairy, audacious goals ('BHAG') to align ambition and enhance team spirit. Besides the goals a focused leader is key to long-term success.

When to use it: The concept of BHAG is memorable, stimulating and can motivate the complete organization.

When to wary: Core ideology as the cornerstone of success may seem a stretch to many firms. They may see purpose and values as less crucial to successful strategy development than goals and objectives.

9) Business as a community (Handy)
The Tool: "I think many people assume, wrongly, that a company exists simply to make money. While this is an important result of a company's existence, we have to go deeper and find the real reasons for our being. As we investigate this, we inevitably come to the conclusion that a group of people get together and exist as an institution that we call a company so that they are able to accomplish separately - they make a contribution to society, a phrase which sounds trite but its fundamental" - David Packard.

How to use it: You should see your business as a community. Neglecting the environment may drive away customer but neglecting your workforce may drive away employees. You should see yourself as a community, of people striving for the betterment of that community, including its wealth, welfare and the environment.

Companies become imperiled when managers focus too much on producing goods and services and forget that they are a community, a company of people. He shows that long-living companies possess that sense of community, as we as a distinct identity, a learning culture and an appreciation of the society and environment in which they operate.

Wednesday, November 13, 2013

Part 1: Tools for identifying key business segments

First, you need to know your business. You need to clarify the major business segments you compete in and which contribute most to the bottom line. Only when you have a clear perspective on which business segments are material to your firm's strategy should you proceed.

Then think about what are the main question you will need answers to during the process to arrive at a winning strategy. And to answer those main questions, what other questions need answering? And so on. Setting on a structured waterfall of questions will help guide you through the research and analysis needed to draw up your strategy - and hopefully  leave no major stones unturned.

Tools in this post are:
1) Identifying key segments
2) Issue analysis (Minto)
3) The 80/20 principle (Pareto)
4) The segmentation mincer (Koch)
5) 5C situation analysis
6) SWOT (Andrews)

1) Identifying key segments
The Tool:  Answer the following two questions:
1) Which business segments does your firm compete in - which products do you sell to which sets of customers? (Products or services, henceforth to be referred to in this section as just 'products')
2) Which of these segments delivers the most profit?

Only once this segmentation process is complete should you embark on developing your strategy. There is no point devoting hours of research, whether in analyzing competitor data or gathering customer feedback, in a segment which contributes to just 1 per cent of your operating profit - and which offers little prospect of growing that contribution over the next five years.

You need to devote your time and effort to strengthening your firm's presence in those segments that contribute, or will contribute, to 80 percent or more of your business.

How to use it:
In an established business -  1) Sales by product/market segment - that is, sales of a specific product line to a specific customer group. 2) That same information over time, say over three years.

The contribution of key segments to operating profit will differ from that for sales. Some segments will be more profitable than others. More profitable segments will have a higher share of operating profit than of sales.

But that doesn't mean that the breakdown by operating profit is necessary more useful than that by sales. The latter can be most useful in highlighting where profitability in certain segments is lagging behind others and potentially how that gap can be narrowed.

Both sets of data  are important. They may be structural factors influencing the disparity of profitability.

In a start-up venture -  Try categorizing your products. And your customers. Is further segmentation meaningful? If so, use it. If not, don't waste time just for the sake of seeming serious. Stick to the one product for the one customer group. i.e. one business segment.

But there is one big difference. No matter how you segment, no matter how many custome groups you identify, that are all, at present, gleams in the eye. You have no customers. Yet.

Your product must be couched in terms of its benefits to the customer. That is the business proposition.

Segmentation may lie at the very heart of your business proposition. It may have been in the very act of segmentation that you unearthed a niche where only your offering can yield the customer benefit. And you have since tailored your offering to address that very niche, that customer benefit.

An understanding of customer benefit will help you to clarify segmentation.

When to use it  - Use it always. Segmentation is critical to the strategy development process.

When to be wary -   Be careful of paralysis through analysis. Don't end up with dozens of segments. Concentrate on the half-dozen or so product/market segments that truly drive your firm's profit.

2) Issue analysis (Minto)
The Tool - What is the key question you are trying to answer in your strategy development process? And to answer that, what other questions need answering, especially those relating to certain rather worrying risks or exciting opportunities?

These risks and opportunities may be external to your firm or they may be internal to your firm. These issues need to be taken into account in drawing up your strategy.

How to use it - The issue analysis is work of Barbara Minto and her Pyramid Principle.

Her issue analysis always starts with the S-C-Q framework, adapted below for purposed of strategy development:

  • Situation - What is the situation of the firm, in a paragraph - which markets is it in, how well is it doing, now and in the recent past?
  • Complication - What are the major constraints on further profit growth for the firm, again in paragraph?
  • Key question - What is the key question this strategy development process should set out the address?
Once you have formulated the single key question, you draw up a set of 3,4,5 questions which need answering before you can answer that key question. Then you draw up a set of second-level question you need to answer before you can answer each of the first-level question. And so on, down to perhaps a third or fourth level in some cases.
  • Each question follows a logical order, arranged, for example, by time, structure or rank.
  • Each question should be independent and non-overlapping with others, but together exhaustive.
  • Each question can only have a yes or no answer; questions starting with 'why' or 'how' are not permissible.
  • The number of sub-issues under any issue should not exceed seven and should be more than one - otherwise the pyramid should be reformulated.

When to use it -  This tool serves three main purposes:

  • Brainstorming - your team will be stimulated to think about markets, industries, customers, competitors, price, trends, etc. at an early stage in the process.
  • Highlighting data gaps - the tool should make clear where further research and analysis is needed.
  • Structuring your thoughts - by building pyramid of questions, to be answered with a yes or no, but not too many questions, or too few, you will be converging on a strategy solution, not diverging into an unstructured array of ideas and observations.

When to be wary - Do not be too rigid with issue analysis. This is good for brainstorming, not everything is discovered in the first iteration and thus the exercise can be repeated after a certain time to discover new constraints.

3) The 80/20 principle (Pareto)
The Tool - The tool encourages people to think the 80/20 way', recognizing that there is an inbuilt imbalance in three broad areas of business and life:

  • 20 per cent of inputs lead to 80 per cents of outputs.
  • 20 per cent of causes lead to 80 percent of consequences.
  • 20 per cent of effort leads to 80 per cents of results.

How to use it -  The 80/20 principle can be especially useful in segmenting you business for purposes of strategy development. Here are two potentially revealing business applications of the principle:

  • 80 percent of your profits may come from 20 per cent of your product/market segments - so concentrate your research and analysis on the latter.
  • 80 per cent of the value created by your new strategy may come from 20 percent of the insights - the challenge is to identify those value-enhancing insights.
It is stimulating tool. On the one hand it is encouraging, since we know that we can gain 80 percent of the benefit by just putting in 20 per cent of the effort on the other hand which 20%!?

When to use it - Bear in mind when drawing up your business mix. Don't spend too much efforts research and analyzing those segments that contribute to just 20 percent of the value of your firm.

When to be wary - It is the lop-sidedness of effects and cause, outputs and inputs that is important, be it 80/20, 65/35 or 99/1. Be cognizant of the innate imbalance more than the numbers.

4) The segmentation mincer (Koch)
The Tool - This was developed by Richard Koch and colleagues at L.E.K. consulting in the 1980's. It asks a structured series of questions designed to discover if two segments are genuinely distinct or whether they should be treated for strategy development purposes as being one and the same.

How to use it - The questions shown below compare one product/market segment with another to investigate whether they are genuinely distinct segments.

After answering all these penetrating questions and totaling the scores, you should treat the two segments as distinct if the total emerges positive. If the score is native, the two are best treated as one and the same segment.

When to use it - Use it if you are uncertain of your segmentation and a structured approach will help you in solving the confusion.

When to be wary - Some questions are difficult to answer at the stage of market definition and its is recommended to try and attempt to answer it with the available knowledge.

5) 5C situation analysis
The Tool - Situation analysis is a tool used primarily in marketing strategy, but it overlaps with strategy in general. It is defined by marketers as the process of identifying the environment the firm is working in, and how the firm slots into that environment, to improve its capabilities and better meet customer needs. 5C is a common situation analysis and the 5 areas are as follows:

  • Company - your goals, culture, product line, strengths, weaknesses, unique selling point, price positioning, image in market.
  • Collaborations - suppliers, alliances, distributors
  • Customers - customer groups, mark size, growth, segments, benefits, channels, customer buying decisions, customer behavior.
  • Competitors - direct/indirect, new entrants, substitutes, market shares, barriers to entry, relative positioning, strengths, weaknesses.
  • Context - the political, economic, social, technological, environmental and legal environment.

How to use it - Through a series of workshops.

When to use it - If you are familiar with tool, you may choose it instead of issue analysis.

When to be wary - The tool is rather unfocused and lacking in structure so its difficult to define the specific output unlike issue analysis.

6) SWOT (Andrews)
The Tool - It was designed by Kenneth R. Andrews of Harvard Business School to aid strategists in distinguishing between factors they could influence (the internal ones) and those they could not (the external ones).

It is popular because it is easy to understand and apply. And it encourages brainstorming of issues.

How to use it - SWOT analysis is a 2x2 matrix, with factors internal to the firms (Strengths and Weaknesses) along one row and external factors (Opportunities and Threats) along the other.

The optimal strategy is seen as one where there is strategic fit between the firm's internal resources or competences and the external market opportunities.

When to use it - SWOT analysis is combined with situation analysis. It helps in brainstorming over an issue.

When to be wary -

  • Internal observations on strengths and weakness gives little help to strategy formulation.
  • There is no assessment of the importance or relevance of the SWOT issues identified - no weighting of the SW issues and no ranking by probability or impact of the OT issues.
The main problem with SWOT analysis is this; great, but so what? What conclusion can be drawn from the matrix.

Most companies have people who can fill up W and T and can talk about their own S's but then only the optimistic, enthusiastic and can-do type of people can use the S using WT as constraints to capitalize on Os

Tuesday, November 12, 2013

Notes on strategy building tools for managers

I am reading the book: "Key Strategy Tools: The 80+ tools for every manager to build a winning strategy" by Vaughan Evans

The following are notes that I made out of the book. Please keep in mind that my notes are not own content by a summarization of my understanding of the authors content. So I claim no rights to content, also my notes are not a replacement to the book in any which way.
 What is strategy? Strategy is how a company achieves its goals by deploying its scarce resources to gain a sustainable competitive advantage.

Important steps in building a strategy plan:
Lay the foundation: Know your business. Set strategy in a micro-economic context or a context of demand and supply. View strategy as the output of competitive analysis both as is and to be. Strategy has two components: business and corporate. Strategy development is wrapped in uncertainty.

First you need to know your business. Where exactly do the sources of profit lie in the business? In other words, which are the product/market segments you serve and which make the greatest contribution towards operating profit?

The single most important factor in strategy development is to root it firmly within the context of the micro-economy in which your firm operates. Key assumption areas could be: product development, pricing, service enhancement or cost reduction.

Your strategy must reflect the reality of market demand and industry supply, today and tomorrow in your micro-economy.

Competitive analysis is best undertaken in two steps . The first is the current reality of how your firm stacks up to its peers in today's marketplace. And the second is how you envisage your firm rating against its competitors in the future - your target competitiveness.

Ask questions like - What are your goals and objectives? To make a reasonable existence, to maximize profit, growth, to keep employees in the jobs, to satisfy a range of stakeholders?

Business strategy is concerned with maximizing the competitiveness of a single strategic business unit. Corporate strategy is how you optimize your portfolio of business, whether through investment, acquisition or disposal, and how you add value to each through exploitation of your firm's overall resources and capabilities.

Finally the analysis of market demand, industry supply and your firms competitiveness will encounter risk at every turn, likewise opportunity. Uncertainty is unavoidable and will be ever-present. It must be addressed systematically in the strategy development process.

So when you put the building blocks of strategy together the look as follows:

This blog entry is part 1 of 10 entries that I will write. Next 9 will summarize tools to build each building block of the strategy pyramid.

I am already impressed with the way the author has put a structured way for learning this process. Kudos to Vaughan for that!

Saturday, November 2, 2013

Brand advertising analytics

I recently worked on a study that tried to understand how much is too much money on brand advertising efforts.

Performing too much analytics on brand advertising and using the numbers as is to determine effectiveness is not a good strategy because of the following reasons:
a) Brand advertising is to create a perception and may not always lead to conversion. 
b) Pure analytics numbers will tell the number of click throughs and frequency of return but it gives no idea about the subconscious brand attachment. Its just not measurable using technology.
c) Campaign analytics is good for validating delivery as per your intent.

So this study involved a brand campaign that was run for a day on Youtube masthead. 
Quick facts:
1) Roughly 6 Million impressions were served to 580,000 browsers in 1 day.
2) So that means each browser saw over 10 impressions! I believe that the reach of the campaign can be increased if there is a way to throttle the ads on Youtube.
3) Only 2.21% people clicked through on the masthead ad and went to the site. I cannot give you the conversion rates for this specific site but standard conversion rates are around 3-4%. A tiny number of browsers may convert, but then chances are they know all about your brand before, your brand campaign just motivated them to finally get to something that they were trying to do later.
4) Final thing that I noticed is none of the 2.21% browsers came back to the site. So which means that brand campaigns may have initial traffic acquisition effect but then have very less frequency.

Now, readers may comment that this is very specific study and I do agree. So please don't start posting comments criticizing my post yet. This is a very specific study and data points are just not enough to conclude anything. I would imagine a proper study would classify their campaigns in following areas: Industry, campaign frequency, time period of study, copy of the campaign,  site flow and merchandizing on the site, reach, frequency and finally spending.

My intent was to make the general reader aware about the possibility of running such a study if they are trying to know how much money is too much spending on brand advertising. The study can be performed if your analytics platform allows mixing two data sources together and you have a way of collecting exposure data with your web analytics data.