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.
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
No comments:
Post a Comment