The Road To Results:: Applying The Performance Improvement Diagnostic To Your Business

The Road to Results: SM

Applying the Performance Improvement Diagnostic to Your Business Mark Gottfredson Steve Schaubert Hernan Saenz

The Road to Results: SM

Applying the Performance Improvement Diagnostic to Your Business Mark Gottfredson Steve Schaubert Hernan Saenz

Mark Gottfredson is a partner at Bain & Company and leads the firm’s Global Performance Improvement Practice. Steve Schaubert is a partner in the firm’s Boston office. Both are the authors of The Breakthrough Imperative: How the Best Managers Get Outstanding Results (HarperCollins, March 2008), from which this article is adapted. Hernan Saenz is a partner in Bain’s Boston office and a leader in the firm’s North American Performance Improvement Practice.

Copyright © 2008 Bain & Company, Inc. All rights reserved.

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Introduction Today’s CEOs and general managers are under pressure to produce breakthrough results—and have less time to do so than ever before. Every corporate executive feels the pressure. It comes from top management, from the boardroom, and ultimately from shareholders. All are demanding a breakthrough into the rank of top performers, the elite group of companies that are able to distance themselves from the pack. Yet no CEO or general manager gets much time to bring about real performance improvement. Average CEO tenure has declined almost 20 percent since 1998. A study of U.S. CEOs who left their posts in 2006 revealed that 40 percent of them had been on the job an average of less than two years. A typical general manager gets only two or three years in a position before he or she is moved up or out. “The brutal reality,” said BusinessWeek, “is that executives have less time than ever to prove their worth.” Despite the pressure, many managers fail to attack performance improvement in the right way. Nearly every management team creates a plan for improvement, complete with ambitious goals and change initiatives. Why do so many fail to reach their objectives? Our research suggests three key reasons: •

The plan ignores one or more of four central laws of business. The four laws are as follows: (1) costs and prices always decline; (2) your competitive position determines your options; (3) customers and profit pools don’t stand still; and (4) simplicity gets results. A Bain & Company study of 85 CEOs who resigned or were terminated for performance-related reasons in 2006 concluded that 91 percent had failed to heed at least one of these four laws.

•

The plan is not grounded in a comprehensive, fact-based diagnosis of where the business is starting from, or what we call the “point of departure.” Many management teams fail to assess where they stand relative to competitors and customers along the dimensions specified by the four laws. They never gather the data that will show them exactly what needs improvement, so they never reach consensus on what the problem really is. When they

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The Road to Results: Applying the Performance Improvement Diagnostic to Your Business

set out on their change journey, they are flying blind. If you don’t know where you are, you are likely to set the wrong objectives, and you may not understand which objectives are in fact achievable. •

The plan fails to establish a compelling, realistic point of arrival and a clear, simple path to get there within the appropriate time frame. A management team has to spell out a simple set of interrelated objectives and no more than a handful of key action imperatives that will clearly lead to these objectives. At many companies, however, performance improvement programs are fragmented, with dozens of different objectives and change initiatives. People in the organization find it difficult to keep track of all the initiatives and may fail to grasp the critical priorities.

This document shows you how to avoid these traps. It shows you how to conduct a full-potential performance improvement diagnostic grounded in the four fundamental laws. It will help you set a compelling point of arrival—a point that is achievable during your tenure. It will get you started on your own road to results (figure 1). Figure 1: The Four Laws – and how to pick up speed on the road to results

POINT OF DEPARTURE

POINT OF ARRIVAL Law 1: Costs and prices always decline

Law 4: Simplicity gets results

Law 2: Competitive position determines your options

Law 3: Customers and profit pools don’t stand still

ROAD TO RESULTS

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A fullpotential performance improvement diagnostic A management team trying to assess a company’s point of departure often begins with a series of pressing questions. Team members ask themselves about pricing possibilities, and whether their costs are low enough. They ask whether their competitors, rather than their own company, will come up with the “next big thing.” They ask if they have the products or services that customers really want. But which are the right questions for your company? Are you covering all the ground that you need to cover? How do you know what data will be most important? This is where the four laws come in. As fundamental cornerstones of business, they help you structure your assessment. They show you what is likely to be most significant for your company’s situation. In what follows, we will briefly explain each law, then go on to consider three sets of questions under each one—the twelve “Must-Have Facts” (summarized in figure 2). These are the

Figure 2: Twelve “MustHave Facts” help define where your company is today and where it needs to go 12 MustHave Facts (MHFs)

Law 1: Costs and prices always decline

Law 2: Competitive position determines your options

•4

•1

Cost/price experience curve

•2

Relative cost position •5

•3

Productline profitability

•6

Law 3: Customers and profit pools don’t stand still

Law 4: Simplicity gets results

Market position on ROA/RMS chart

•7

Customer segments and needs

•10 Product and service complexity

Market size and share trends

•8

Customer loyalty

•9

Profit pool migrations

•11 Organization and decisionmaking complexity

Capability assets and gaps

•12 Process complexity

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heart of your diagnostic process, and they will point the way to a compelling, realistic point of arrival. To be sure, this is only a high-level overview, designed to orient the CEO or general manager to what is involved. We have provided some references that go deeper into many of the subjects, and we recommend consulting the book The Breakthrough Imperative: How the Best Managers Get Outstanding Results (HarperCollins, March 2008), by Mark Gottfredson and Steve Schaubert, for more detail on each tool and procedure involved in the diagnostic.

First Law: Costs and prices always decline The first law governing the diagnostic template is that inflation-adjusted costs and prices almost always decline. This may seem counterintuitive: inflation often clouds the view, and special circumstances (such as temporary shortages) may sometimes drive costs and prices upward. But it is a wellestablished fact that inflation-adjusted costs—and therefore inflationadjusted prices—decline over time in nearly every competitive industry. The analytic tool that best charts this law is the experience curve, a graph showing the decline in a company’s or industry’s costs or prices as a function of accumulated experience. For example, you might find that for every doubling of total units produced in your company, your per-unit cost in constant dollars drops by 20 percent. In this case your experience curve is said to have a slope of 80 percent. Because the same law holds true for your competitors—and thus for your industry—the curve allows you to estimate where costs and prices are likely to be in the future. By comparing your company’s cost curve with your industry’s price curve, you can determine whether your costs are declining at the rate necessary for your company to remain competitive. Note that the experience curve charts unit prices or costs against a measure of volume or experience; it is critical to get the unit of experience right. For

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MustHave Fact #1. How does your cost slope compare to those of your competitors? What is the slope of price changes in your industry right now, and how does your cost curve compare?

The relationship between prices and costs in any given business area will determine some of your top priorities. If prices are going down while your costs are going up or holding steady, for instance, cost improvement will likely be your single most urgent challenge. Your own costs need to be decreasing over the long term regardless of what prices are doing. An upward movement in prices will likely be only temporary. Understanding your overall cost trends, of course, is just the first step. You will need to drill down into the major segments of costs to determine where the central challenges and opportunities lie. Dig into the cost areas that are most important for your organization: manufacturing, supply chain, service operations, overhead, whatever they may be. Identify the key cost components and the trends in each one. Look for instances of failure to manage to the experience curve, such as rising unit costs for labor or rising procurement costs. This kind of detailed diagnosis will identify opportunities for improvement at the most granular level, and will provide the basis for a plan of action. Goal. The initial objectives here are to construct (1) an industry-wide price curve; (2) your own overall cost experience curve; and (3), if possible, cost experience curves for your key competitors. Figure 3 shows a generic example; it indicates one possible level of improvement from the point of departure to the point of arrival. With the overall curves in hand, you can create experience curves for every major cost element, including labor, overhead, and outsourced materials and services. Approach. To create an experience curve, first identify the appropriate unit of value (tire-miles, not tires). Collect the necessary price or cost data, then correct it for inflation. Next, run a regression. (You can do this easily in a program such as Excel.) The dependent variable is the natural log of inflation-adjusted costs or prices. The independent variable is the natural log of accumulated experience. Putting the variables into a log scale converts the 5

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The Road to Results: Applying the Performance Improvement Diagnostic to Your Business

Figure 3: How does your cost slope compare to those of your competitors? What is the slope of price changes in your industry right now, and how does your cost curve compare? Experience curves

Data needed

Real price/cost (log scale) • Definition of unit of experience (ideally, unit of customer value)

Price

Cost

• Cumulative annual unit production volume over time

90% slope

70% slope

• Constant currency unit industry prices over time

• Constant currency unit costs for your company and for competitors over time Point of departure

Point of arrival

Accumulated experience (log scale)

curve into a straight line, which makes analysis and interpretation easier (figure 4). Finally, calculate the slope of the curve, which in this case is defined as 100 percent minus the rate of price or cost decline for every doubling of accumulated experience. (The Breakthrough Imperative provides more detail on how to construct and interpret experience curves.) Great managers apply the experience curve correctly. They manage overall costs and prices carefully, with the aim of always staying ahead of the curve.

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Figure 4: The curve is converted to a natural log scale, enabling predictive calculations

Inflationadjusted prices and costs decline with accumulated experience

The curve is converted to a natural log scale so it’s a straight line

Price or costs

LN (prices or costs)

Curves down because reduction by unit of value diminishes with experience (unless there is a technological breakthrough or similar event)

Slope of standard regression line = change in Y over change in X [1Ecurve Slope] = percentage change in unit price or cost as accumulated experience doubles Y%

1x 2x

Accumulated experience

LN accumulated experience

MustHave Fact #2. What are your costs compared with competitors’? Who is most efficient and effective in priority areas? Where can you improve most relative to others?

The previous question dealt with overall cost trends as compared with price trends. This second question deals with your relative position in unit costs— how you stack up against others in your industry—right now. An analysis of relative cost position (RCP) quantifies cost differences between your business and that of your competitors; it shows which cost elements are different and what the magnitude of those differences is. You should drill down to the point where you understand where and how you differ. That, in turn, will help you understand exactly where you can close cost gaps and gain or regain competitive advantage (figure 5). The RCP tool will help identify where to focus.

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Figure 5: What are your costs compared with competitors’? Who is most efficient and effective in priority areas? Where can you improve most relative to others? Data needed

Relative cost position Cost per unit of experience

• Outline of product or service process flow for your business and major competitors

• Total cost per unit for your business by major cost components

• Total cost per unit for competitors

• Internal and external best demonstrated practices by activity or major cost element Point of departure

Competitor

Internal best practice

Point of arrival Competitor best practice

Understanding your cost position vis-à-vis competitors provides great insight, but the analysis is even more compelling when you develop a target based on best demonstrated practices. That is, you build up a hypothetical cost position based on the “best of the best” by taking the lowest-cost provider’s costs in each step of the value chain. The total will add up to lower costs than those of any one company in the industry but will represent an aspirational cost position. This helps you take into account the fact that while you improve, your competitors will be improving too—so your targets must be more aggressive than where your lowest-cost competitor is today. It isn’t enough to identify the gaps, however—the key is to carry the process through to its conclusion, by calculating your own full-potential cost position and determining the action imperatives necessary to get there. Goal. RCP analysis helps to answer both strategic and tactical questions. Strategically, it can help you understand where your competitors have their biggest cost advantage; what is driving their profitability; and how much

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flexibility they might have in a competitive battle. Tactically, it helps determine where to focus your cost-reduction efforts (on labor? on raw materials? on overhead costs?) and which cost elements might decrease significantly with an increase in scale. It also helps you understand which cost elements might benefit from different business practices. Approach. You can approach an RCP analysis in two ways, bottom-up or top-down; ideally, you would undertake both, so that you are confident of your data. A top-down approach compares competitors’ overall cost structures with your own at the macro level. Secondary data sources are a useful starting point here. A bottom-up approach, by contrast, begins with gathering primary data on each major cost element for yourself and your key competitors. You build up each competitor’s cost position by element and triangulate, using cost data from multiple sources to reinforce and confirm your hypotheses. To do this successfully, you must define key process and business practice differences for major cost elements, assess the impact of these differences on each competitor’s costs, and then test the conclusions against overall financial data (figure 6). Among the questions you will ask, for example, are these: •

Selling, general, and administrative expenses (SG&A): Are each company’s functions—including IT, product development, human resources, and finance—efficient and effective relative to those of other companies? Are the relevant functions shared to take advantage of economies of scale? Is the role of the center well defined, or are there duplicative functions within the organization? Understanding these differences can help you estimate differences in costs among the players. High costs in these areas can also contribute to slow, bureaucratic decision making, hence an inability to respond to competitors’ moves. (For more on SG&A, see “Make Your Back Office an Accelerator,” by Paul Rogers and Hernan Saenz, Harvard Business Review, March 2007.)

•

Manufacturing or service operations: Are you the low-cost provider? Do you have the right footprint and do you have processes that create competitive advantage? Do you have the right “make vs. buy” mix? How does this vary for competitors, and what are the implications for their costs? 9

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•

Procurement and sourcing: Do you have a world-class team and do you manage using a total-cost perspective? Are you buying from the lowestcost suppliers and locations anywhere in the world? Are you able to help your suppliers drive down their own experience curves? You should determine how this, too, varies for each competitor, and what the implications are for their costs. For many companies, sourced materials and services can account for 40 to 80 percent of total costs.

•

Supply chain management: Do you have optimal distribution and transportation? Do you and your suppliers and distributors have efficient operations that help you provide better service and delivery than the competition? Do you have a high-velocity demand-pull supply chain system operating? Again, compare competitors to one another and draw out the implications for the cost picture.

The most important insights come not only from identifying the key cost gaps and magnitudes but also from understanding the differences in practices that drive those cost gaps.

Figure 6: Relative cost position analysis involves five major steps:

Process steps

Map the business value chain

Identify cost elements and drivers

• Map the entire value chain from end to end (e.g., raw materials to finished product or delivery)

• Tie costs to operational activities, not accounting categories

Build, compare, and realitycheck cost bars

• Build up cost bars category by category • Realitycheck results against similar companies (e.g., similar industry, size, degree of vertical integration)

Calculate practical full potential cost position and savings

• Focus on areas with the greatest potential for cost savings • Account for differences visàvis competitors when considering full potential (e.g., product mix, plant locations, vertical integration)

Draw implications

10

Key success factors

• Prioritize potential actions based on both value and difficulty/cost of achieving

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Great managers understand exactly where they must improve relative to competitors. They know that competitors are on experience curves of their own, and they set their point-of-arrival targets to take competitors’ improvements into account.

MustHave Fact #3. Which of your products or services are making money (or not), and why?

Product-line-profitability (PLP) analysis allows you to calculate the true profitability of each product in a multi-product portfolio (figure 7). Goal. You can use a PLP analysis to address a variety of questions about product lines, all of which will inform your overall diagnosis and your eventual mapping of the point of arrival and the road to results. Where should we

Figure 7: Which of your products or services are making money (or not), and why? Productline profitability

Data needed

Cost per unit of experience • Direct costs for each product (materials, direct labor, packaging, etc.)

• Indirect costs for each product (logistics, selling, G&A, etc.) Decide Point of Arrival by product e.g., reduce costs, maintain as loss leader, or drop altogether

A

B

C

• Major activities performed and cost drivers for each activity to allocate costs

D

Products Bar width = revenue Bar area = profit

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focus our cost-reduction efforts? How can we optimize pricing? Which product lines should we drop? On which products should we focus our research-and-development efforts? How should we change sales incentives? Many managers think they know the profitability of each product line, but conventional accounting can be misleading. The PLP analysis helps reveal key cost and revenue insights: areas where COGS (cost of goods sold), for instance, is out of line, or where pricing is below benchmark levels. The analysis helps identify the primary drivers of underperformance in each product area or customer segment and allows you to determine your point of arrival by product line. Approach. PLP analysis requires going beyond conventional accounting, so you can’t always just assume that the data from existing financial reports will reveal true profitability (figure 8). There are three critical differences: •

Cost collection. Typical accounting systems collect costs by function, such as R&D or advertising. PLP analysis requires collecting costs by product.

•

Cost assigned to products. Accounting systems assign costs to product as cost of goods sold (COGS), which typically includes only direct labor and materials. PLP analysis includes all costs, including indirect.

•

Cost allocation method. Accounting systems allocate costs according to the rules and standards of accounting (standard costing). PLP analysis allocates costs based on the actual activity that goes into generating them—cubic feet for warehouse labor, for example, or person-hours for delivery labor. Of course, you must always be aware of, and take into account, fixed costs that would not go away if you eliminated some products. The key is to understand what the costs are and how they behave under different scenarios.

Great managers analyze profitability by product or service lines, and set their point of arrival accordingly. That allows them to make appropriate decisions about resource allocation across products.

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Figure 8: Productline profitability involves six major steps: Process steps Understand your current P&Ls and cost systems and collect data Determine the major activities performed Identify costs and cost drivers for each activity

Key success factors • Draw from all sources of financial data (there may be many); understand both linkages and differences among them • Map activities across the full value chain

• Focus on the largest cost elements • Tie costs/drivers to operational activities, not accounting categories (be thoughtful about overhead absorption) • Quantify the drivers identified for each product

Assign costs to each product • Crosscheck results: Analyze profitability by product or group of products

Draw implications

– Make sure absolute profit of product lines can be reconciled with the total business’ profits – Calculate over several periods to eliminate any seasonal or onetime effects

• Consider both strategic and operational alternatives to address product lines with low or negative profitability

Second Law: Your competitive position determines your options

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The next law is that your competitive position determines your options. Let us explain what we mean. Depending on your industry, there can be different drivers of profit leadership, including market share, customer loyalty, and “premiumness” of the product. But in most industries, one of the strongest predictors of a company’s performance is its relative market share (RMS). RMS is easy to calculate. If your company is a market leader, simply divide your share by the share held by your closest competitor (30 percent divided by 20 percent, say, equals an RMS of 1.5). If you’re a follower, divide your share by that of the market leader (20 percent divided by 30 percent equals 0.67 RMS). A plot of companies in your industry according to their RMS and their return on assets

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(ROA) is likely to show that many firms line up in a fairly narrow band, with higher RMS corresponding to higher ROA, and vice versa. The ROA/ RMS chart is an extraordinarily useful diagnostic tool because it helps you narrow down your options for performance improvement. In general, there are five generic positions on the ROA/RMS chart: in-band leaders, overperformers, in-band followers, below-band leaders, and distant or below-band followers (figure 9). Each position has its own imperatives. Typically, for instance, in-band leaders find that they can raise the bar for competitors by investing their greater profits in product or service improvements to achieve still greater market share (and, in turn, still greater profits). In-band followers usually need to work hard just to keep up; only occasionally can they jump into a leadership role through heavy investment in innovation and a laser-like focus on their core business. Overperformers—companies that earn returns well beyond what their relative market share would suggest —typically need to maintain high levels of investment in whatever has enabled them to escape the pull of the band (assuming they aren’t simply capitalizing on a temporary price umbrella). That might be a trusted or prestigious brand, an innovative or patented technology, exceptionally loyal customers, or some other asset. Below-band companies, of course, have probably not been managing their costs down the experience curve, which is likely to be a primary reason for their underperformance. (See The Breakthrough Imperative for a full discussion of the strategies available to companies in different positions on the band.)

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Figure 9: Positions on the ROA/RMS band Returns earned High 2

1

Overperformers (leaders or followers)

Inband leaders

3

Inband followers

4

Belowband leaders

5

Distant or belowband followers Low Weak

Strong

Competitive position

MustHave Fact #4. How do you and your competitors compare in terms of return on assets and relative market share? How are the leaders making money, and what is their approach? What is the full potential of your business position?

Goal. Whatever your company’s position, the band helps you understand the full potential of your business position because it shows both opportunities and constraints. An in-band follower, for example, can’t expect to earn the returns of a leader unless it gains enough share to move up the band and overtake the leader, or it escapes into the overperformer category through one of the strategies mentioned earlier. Your position on the chart can be used to diagnose operational underperformance and assess strategic opportunities and challenges (figure 10). It can also provide an estimate of potential synergies available from a merger, and it can highlight inaccurate or changing business definitions in ways that can help drive winning strategies.

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Figure 10: How do you and your competitors compare in terms of ROA and RMS? How are the leaders making money, and what is their approach? What is the full potential of your business position? “ROA/RMS” normative band

Data needed

ROA 30%

• Your company’s operating profit and total assets this and last year to determine average returns earned

Competitor B 20

Competitor D Competitor C

Competitor A

• As above for competitors

Potential to increase RMS and improve ROA to ~12%

10

• All competitors’ sales for this year to calculate relative market share

Current ROA 4%

Bubble size= sales

Your company 0 0.1

0.2

0.5

1

2

5

10

RMS

Approach. One of the keys to making the tool work is defining the business correctly—that is, identifying the appropriate competitors to include on the chart. Often, for example, you would want to use only the relevant division of a company that participates in multiple businesses. A good test of relevance is the extent to which the companies share costs and customers. (For more on defining business boundaries, see The Breakthrough Imperative; also Profit from the Core (Harvard Business School Press, March 2001) by our colleague Chris Zook.) Band analysis also requires extensive data gathering (figure 11). Some companies will want to chart their ROA/RMS performance over a complete business cycle, so managers in these cases will have to compile at least five years’ worth of data. Great managers know where they fall on the band. They use this knowledge to map out realistic improvement strategies, often involving an attempt to consolidate a leadership (or overperformer) position or move up into one.

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Figure 11: Plotting the ROA/RMS chart involves five major steps:

Process steps

Key success factors • Ensure that all the right competitors are included

Establish correct business definition

Measure return on assets

Calculate relative market share of your company and all competitors

Plot normative band

Draw implications

– Adjust for differences in business portfolio (e.g., exclude divisions that are not part of your business definition) – Validate through testing whether the competitor has same offerings/customers, costs, and capabilities as you do

• Use operating assets (fixed assets at replacement cost plus net working capital less excessive cash/ marketable securities, minus acquisition goodwill) • Be consistent with business definition as defined above • Market leader’s RMS = (Market leader’s revenue or units)/(No. 2 player’s revenue or units) • Any other player’s RMS = (That player’s revenue or units)/(Market leader’s revenue or units) • Use regression (and your judgment) to plot the normative band which best fits the data • Reconsider business definition (e.g., regional vs. national view) if normative band is not emerging as expected • Consider implications for both your business and for your competitors (where are they on the band and what does that imply for their actions?)

MustHave Fact #5. How big is your market? Which segments are growing fastest? Where are you gaining or losing share?

Most companies compete in multiple market segments. You need to analyze each segment to see how big it is, whether it is growing or shrinking, and how you stand relative to competitors. Goal. A market map is a good starting point for understanding market segments and your competitive position. It gives you a picture of the total size of the market, the size of each key market segment, and the share of each competitor in each segment. If you compare market maps for two periods of time, you will see what was happening in the past vs. what is happening today (figure 12). This will give you a good sense of market and segment growth rates and share trends, as well as how you may be underperforming or overperforming by segment. 17

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Figure 12: How big is your market? Which segments are growing fastest? Where are you gaining or losing share? Market size, growth, share

Data needed

Competitors 3−5 years ago

• Total market size last year and 35 years prior

• Sales by competitor last year and 35 years prior, by product or segment Market or products Competitors Identify sectors’ and competitors’ underlying market growth

This year

Market or products

Approach. In figure 12, the width of the segments is proportional to revenues, and the vertical dimensions represent the share held by each competitor. Depending on your situation, of course, you may need to customize the basic charts. A company selling telecommunications equipment in Asia might first map the Asian telecom market by country and by sector (wireline, wireless, and so on) and then break the sectors down into competitors’ market shares. Figure 13 highlights other points to watch as you gather and map the market data. Great managers understand market dynamics by segment. They have detailed quantitative data on each one. They use the data to assess areas of underperformance and overperformance as well as likely future trends in the market maps. They have a clear, actionable strategy for each segment.

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Figure 13: Market size, growth, and share analysis involves four major steps:

Process steps

Key success factors • Ensure that all the right competitors are included

Establish correct business definition

Gather topdown estimates for size of total market and each segment

Gather estimates for sales of top competitors by segment

Compare to market map from 35 years ago and draw implications

– Adjust for differences in business portfolio (e.g., exclude divisions that are not part of your business definition) – Validate through testing whether the competitor has same offerings/customers, costs, and capabilities as you do

• Make sure to map even those segments in your market where you are not currently participating

• Be consistent with business definition as defined above • Be creative where hard data is not available (e.g., using shelf space as proxy for share)

• Consider strategic and operational implications for both you and your competitors (e.g., which segments to focus resources, tactics vs. specific competitors to gain/protect share)

MustHave Fact #6. What are the few capabilities that are creating a competitive advantage for you? Which are missing, and which need to be strengthened or acquired?

Your company’s chances to achieve its full potential—to improve its position on the band chart—depend significantly on its capabilities. So you need to assess where you are strong and where you are relatively weak, and take action accordingly. Not every capability, of course, is equally important. Some are “key to win”: they are essential to achieving and maintaining competitive advantage. Others are simply necessary to do business. You will want to categorize capabilities by their relative importance and then evaluate them.

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You must also make decisions about which capabilities you want to develop or maintain in house and which you can obtain from suppliers. Today, companies can no longer afford to make such decisions on a piecemeal basis, nor can they be satisfied with a “good enough” approach to selecting and working with suppliers. You should analyze every step of your value chain, from design and engineering to product or service delivery. Compare yourself not only with competitors in your industry at every step of the chain but also with whatever companies are the best in the world at performing each particular step. If you are not the best—or if you do not have some capability that creates a competitive advantage in a given step—you should ask whether you can improve or acquire the relevant capability. If not, you may be better off sourcing that part of your value chain to the best supplier (see “Strategic Sourcing: From Periphery to the Core,” by Mark Gottfredson, Rudy Puryear, and Stephen Phillips, Harvard Business Review, February 2005). Goal. The goal of capabilities analysis is to develop a fact-based assessment of your capabilities as viewed by your customers, your suppliers, and your employees (figure 14). The analysis can be used to answer questions such as: Which capabilities truly differentiate us from the competition in the eyes of these stakeholders? Where do we have the biggest gaps in our capabilities? Combined with an analysis of profit pools and changing customer needs— to be examined in a moment—capabilities analysis allows you to determine which capabilities you need to invest in most aggressively to defend against possible shifts in the profit pool, or which can be leveraged to increase your share of your own profit pool. It helps you assess how you can meet the most important needs of your customers better than the competition. It also helps you determine which capabilities might need to be outsourced. The book Unstoppable, by Chris Zook, is a useful guide to finding and leveraging a company’s key assets, including those that may be hidden from view.

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Figure 14: What are the few capabilities that are creating a competitive advantage for you? Which are missing, and which need to be strengthened or acquired? Key capabilities “How do you rate the company’s capabilities in the following areas?”

Data needed • Customer and supplier interviews on key capabilities, strengths, and gaps

Total responses Identify capabilities to exploit today, or that you need to build, with actions e.g., increase salesforce experience levels

World class

Above average

• Competitor research – Analyst reports, industry surveys, interviews with exemployees, suppliers, etc.

• Employee feedback on best practices – Across businesses – Across geographies – Historically

Below average

Stategy

Products

Processes

Mgmt. experience

Decision making

Approach. Figure 14, of course, shows only a small sample of generic capabilities. You will need to determine which ones are most relevant to your organization. For example, you will want to supplement the chart with in-depth assessments of your capabilities on the following dimensions: R&D effectiveness, marketing mix effectiveness, strategic and tactical pricing, salesforce effectiveness, channel management, IT, and talent assessment. Figure 15 shows the steps involved in creating a capabilities rating chart. Great managers know exactly where their organizations are relatively strong and relatively weak. They develop a competitive advantage based on unique combinations of capabilities. They know exactly which capabilities are “key to win.” They take steps to ensure that their company is best in class at each key step of the value chain or relies on a supplier that is best in class.

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Figure 15: Capabilities analysis involves four major steps: Process steps Create a broad list of capabilities most relevant in your industry

Design and conduct surveys

Key success factors • Seek opinions of industry analysts, employees (across functions), key customers, and key suppliers • Prioritize those capabilities that provide a basis for differentiation in the industry

• Write specific—and different—surveys for customers, suppliers, and employees – Be realistic about which capabilities to include in each survey; not all groups should address all capabilities

• Guarantee confidentiality to ensure unbiased results

Analyze data

Draw implications

3

• Analyze capability strengths/gaps overall as well as by customer segment, supplier, and by employee level/function

• Remember that not every gap in capabilities needs to be addressed – Combine this analysis with profitpool and customer needs analysis to set correct priorities

Third Law: Customers and profit pools don’t stand still Markets undergo massive changes all the time. One major reason for these changes is that customers’ desires and needs evolve, and companies respond in turn. Customers decide they really like one set of products or services rather than another. They grow dissatisfied with what they’re getting from one company and decide to buy from someone else. They rush to companies that offer innovative products and services, and to those whose innovative business models or processes allow them to offer greater value at lower cost. Customers are the most important source of market changes, but there are other sources as well (figure 16). Power shifts occur along a value chain, as companies consolidate or enter new markets. Governments can reshape markets quickly, with the stroke of a pen, or slowly, by pursuing one set of long-term policies rather than another. Technology is often the enabler that shifts an industry boundary and thus the profit pool. But technology is often inextricably linked to—and guided by—unmet or evolving customer needs. 22

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Figure 16: Why profit pools shift

Changes in customer preferences and behavior

Innovations from within or outside your industry

Changes in bargaining power of customers and suppliers

• Power shifts between • Customer preferences • Innovations cut stages of the value costs and prices, change for many chain, such as reasons (dissatisfaction, permit new types of consolidation of distribution, or create fashion, lifestyle, customers or suppliers spending, etc.), thus new combinations of creating, shifting, or existing offerings draining, profit pools • Outside competitors offer substitute products or services

Changes in business environment • Government or regulatory actions change competitive environment • Broad economic, political, and social changes influence industry dynamics

• New competitors move into adjacent businesses

For many such reasons, companies repeatedly discover that the landscape they operate in has altered significantly, and that the plans and strategies that worked so well yesterday no longer work today. They find that the profit pool from which they were drawing their earnings has dried up or attracted new competitors, or that deep new pools of profit have appeared. (For more on profit pools, see “Profit Pools: A Fresh Look at Strategy,” by Orit Gadiesh and James L. Gilbert, Harvard Business Review, May 1998.) Companies that are closest to their customers are best positioned to face this kind of challenge. First, they can seize the remaining potential within their own profit pool; they better understand who their customers are, what influences the customers’ behavior, and how they can attract more of the customers’ business. Second, by capitalizing on these insights, they deny those same profits to their competitors and so can afford to outinvest them over time, widening the profit gap further. Third, they can often recognize changes that signal a shift in the profit pool far earlier than their competitors, giving them a head start on revising their strategy. If they act decisively, they can undermine market leaders and smash price umbrellas. Going back 23

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to the ROA/RMS analysis, they can move up the band or earn a place above the band, in the overperformer category. In effect, they can use customer insight to escape the gravitational pull of the ROA/RMS band.

MustHave Fact #7. Which are the biggest, fastestgrowing, and most profitable customer segments? How well do you meet customers’ needs relative to competitors and substitutes?

Correctly segmenting your customer base and developing proprietary insights into their purchasing behavior is one of the most powerful methods of building loyalty, increasing growth, gaining market share, and thus expanding your share of the profit pool. Goal. The goal of customer segmentation is to identify the most attractive segments of a company’s customer base (existing or potential) by comparing segments’ size, growth, and profitability. The analysis helps show you how you can increase your growth and position on the ROA/RMS chart. It also helps you answer the question, “Which segments should we be targeting?”—though to answer this question fully, you will need to take into account your capabilities as compared with competitors’ to meet the needs of the various segments. There are many different ways of segmenting a population. Segmentation can be based on demographics, behaviors, beliefs, needs, or the occasion of use of a product. What you are looking for is a segmentation that defines the way a customer chooses one product over another. Some segments are more attractive because they are growing faster, because they provide better returns, or both (figure 17). In general, the key to effective segmentation is to make it actionable. The segments must be identifiable, reachable, and differentiated. You must be able to create something different and valuable for each one and make it available as part of that segment’s purchasing and selection process. Approach. Analysis of customer segments is a four-step process (figure 18). Note that there are many different sources of data and statistical techniques that you can use to arrive at appropriate segmentations and to analyze behavior. 24

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Figure 17: Which are the biggest, fastestgrowing, and most profitable customer segments? How well do you meet customers’ needs relative to competitors and substitutes? Customer segments

Data needed

Segment profitability • Identification of customer segments (according to needs, behaviors, and key characteristics)

High

• Current size and value of each customer segment

• Forecasted growth rates for each customer segment

Low

$ millions segment spend Low

High

• Profitability of each customer segment

Segment growth

Figure 18: Customer segments analysis involves four major steps: Process steps

Identify customer segments

Identify each segment’s spending and forecasted growth

Key success factors • Base preliminary segmentation on needs, behaviors, or key characteristics • Use more advanced techniques to refine (e.g., conjoint analysis, cluster analysis, etc.)

• Use a range of sources to estimate and triangulate segment spend – Good sources include internal customer data, external reports and surveys, etc.

Estimate each segment’s profitability

• Use a range of sources to estimate profitability (see potential sources above) • Account for/allocate indirect costs appropriately in profitability estimates

Compare segments visàvis each other and draw implications

• Consider strategic and operational implications (which segments to address, how, in what way, with what resources)

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one with data from two or three years ago. The comparison will suggest where customer needs have been changing, and what these changes may signal about potential shifts in profit pools. Approach. To create a SNAP chart, carry out the five steps indicated in figure 20. You may also want to use a variety of other tools that are useful in analyzing customer segments, including analysis of lifetime customer value, conjoint and cluster analysis, CHAID (chi-square automatic interaction detector), and perceptual mapping. Still other tools, such as customer ethnographic research and “voice of the customer” qualitative surveys, can be used to determine customer needs. Great managers understand their customers, by segment. They know where their companies are strong and where they are weak in the eyes of the customer, and they know where they must strengthen the value propositions that they offer to their target customers.

Figure 20: SNAP analysis involves five major steps:

Process steps

Key success factors • Select the right segments

Identify customer segments to survey

Identify and pretest purchasing criteria being included in the survey

– Too broad a definition can lead to over or underinvestment in key areas – Segmentation becomes even more critical as markets mature

• Pretest through openended questions to a small group of customers (“What is important to you and why?”)

Design and conduct customer survey

• Use extreme statements (e.g., “How important is lowest possible price?” rather than “price”) to avoid getting 4s and 5s on all criteria

Analyze data

• Highlight areas where you are overinvesting in addition to areas where you are underperforming

Compare to SNAP chart from 2–3 years ago and draw implications

• Formulate action plans in product development, manufacturing, marketing, and sales activities

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MustHave Fact #8. What proportion of customers are you retaining? How does your Net Promoter Score track against competitors’ scores? ®

Customer loyalty can be a critical factor in the economics of a business, particularly when the cost of acquiring a customer is high, switching costs are relatively low, or both. For many companies, their customer base is like a leaky bucket. The sales force is bringing in customers, filling up the bucket —but some customers defect every year, draining the bucket. By increasing loyalty, you can, in effect, plug the leaks in the bucket, and that will lead to faster growth. Accordingly, you need to know retention rates for each segment. Doing so not only will help you determine the profitability of each segment, but will also help you make plans to boost retention rates where necessary. Goal. The objective of customer retention analysis is to establish a baseline: what proportion of your customers in each of your segments are you retaining (figure 21)? Then you can begin to assess the impact of retaining (or not retaining) specific segments, and you can analyze the root causes of customer defection. It is particularly important to analyze defectors. It turns out that satisfaction is usually built on a broad foundation of customer touch points and product attributes. But when a customer stops using your product, he or she can usually tell you exactly why with just one or two reasons. So it is much easier to determine why customers are leaving than why they are staying. If you can eliminate the reasons for defection, you will end up retaining more of your customers. The ideal, of course, is “zero defections.” Approach. There are four basic steps to assessing customer retention (figure 22; for more details, see the book The Loyalty Effect, by Fred Reichheld). You will also want to analyze retention based not only on numbers of customers, but by spending levels. Are you losing your highest-spending (and most profitable) customers? Are customers that you retain increasing their spending with you over time?

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Figure 21: What proportion of customers are you retaining? How does your ® Net Promoter Score track against competitors’ scores? Customer retention

Data needed

Number of customers

100

80

100 90

Customters who defected by year end (30)

New customers (20)

Retained customters (70)

Retained customters (70)

• Total number of customers at the beginning of Year 1 and Year 2

• New customers added during Year 1

60

40

Customer retention rate = 70%

20

0

Year 1

Year 2

Figure 22: Customer retention analysis involves four major steps: Process steps

Define “the customer”

Define “retention”

Calculate retention rate and perform root cause analysis

Draw implications

Key success factors • Choose definition of “the customer” that is actionable (and has available data) – e.g., for a bank “the customer” can be a single account, an individual, or a household

• Use easily measurable and interpreted metrics across the right time period: – For a supermarket, could be minimum $100 monthly spend for 12 consecutive months – For insurance, it could be annual policy renewal

• RR = (Customers in Year 1 – Customers in Year 2 – new customers)/Customers in Year 1 • Use interview/surveys of defectors to understand drivers of defection

• Consider strategic and operational ways to increase retention in most attractive segments

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®

Net Promoter Score. A good indicator of loyalty and probable retention is the Net Promoter Score (NPS). This measures customers’ responses to the question “How likely is it that you would recommend this company (or product or service) to a friend or colleague?” Respondents answer on a zeroto-ten scale, where a ten means “Extremely likely” and a zero means “Not at all likely.” Those who give you a nine or a ten are your promoters. Research shows they spend more with you, are likely to increase their spending in the future, and sing your praises to their friends and colleagues. Those who give you a seven or eight are passives, while anyone ranking you zero to six is a detractor. Promoters are an engine of growth, but detractors are a dragline— they often cost your company more than they are worth, and they bad-mouth you to anybody who will listen. Your NPS is simply the percentage of promoters minus the percentage of detractors. It is a simple, powerful way to track your ability to retain customers (figure 23). Goal. There are many reasons to implement a regular measurement of NPS. It drives customer-centric decision making throughout the organization. It helps you understand which practices turn people into promoters and

Figure 23: How does your NPS rating track against competitors? Data needed

NPS: The customer metric Importance to customer

Point of arrival

Extremely likely

9−10

“Promoter” Point of depature

7−8

0−6

• Periodic evaluation of your NPS relative to key competitors

“Detractor”

Promoters

Extremely unlikely

Net Promoter Score = % promoters less % detractors

30

• Welldesigned, simple Net Promoter Score survey with high customer response rates to track data for your company

Detractors

Competitor

Company

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which create detractors. It enables you to empower frontline employees to meet customer needs, and it establishes clear accountability for improvement. NPS is most powerful when it is tracked over time by segment, and when it is compared with competitors’ scores. Done right, it inculcates a kind of “NPS discipline” within an organization—a set of processes that keeps everyone focused on increasing customer loyalty. The retention analysis mentioned earlier is a good first step for reducing detractors. NPS adds an additional dimension that focuses the organization on creating promoters. There is a big difference between eliminating the poor performance that is driving customers away and developing attributes of your products or services that truly delight customers. It is the latter that will lead them to promote your offerings to their friends and neighbors. If you can do this, you will greatly enhance your potential for gaining market share. Approach. Creating an NPS chart is a five-step process (figure 24). But this is only the beginning of creating an NPS discipline. For a detailed discussion, see the book The Ultimate Question (Harvard Business School Press, March 2006) by Fred Reichheld.

®

Figure 24: Net Promoter Score involves five major steps: Process steps

Identify primary objective

Identify key competitors

Conduct customer survey

Analyze data

Draw implications

Key success factors • Define the level at which you will measure and evaluate NPS results (company, business unit, product family, etc.) – More detail is generally more actionable, but it is harder to collect

• Use correct business definition; NPS is most powerful when compared to key competitors

• Include “why?” questions in addition to the “ultimate question” (and use separate questions for promoters versus detractors) • Compare NPS with competitors’ scores • If possible, correlate NPS to financial/product growth

• Use NPS chart to draw strategic and tactical insights (competitive position, bestinclass benchmarks, required improvements among target customers, etc.)

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Great managers know their retention rates by segment. They also know how to improve retention rates among profitable customers by creating more promoters and decreasing the number of detractors.

MustHave Fact #9. How much of the profit pool do you have today? How is the profit pool likely to change in the future? What are the opportunities and the threats?

CEOs and general managers naturally need to assess how much of their industry’s profit pools their firms own today. But they must also gauge how profit pools are likely to change in the future, and what opportunities or threats these shifts might create. One useful tool is a profit-pool map, which shows channels, products, or sequential value-chain activities in the profit pool and indicates the total profit available from them (figure 25). You can then

Figure 25: How much of the profit pool do you have today? How is the profit pool likely to change in the future? What are the opportunities and threats? Profit pools*

Data needed

Competitors 3−5 years ago

• List of channels, products, and sequential value chain activities in profit pool

• Estimated total profit from all channels, all products, and all value chain activities

Channels or products or activities Competitors Point of arrival: Share of profit pool from 20% to 50%

This year

• Point estimates of profit for your business and for competitors by channel, product, and value chain activity

Channels or products or activities *An alternative way to create a profit pool map is to show sales by segment on the X axis and operating margin on the Y axis.

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locate your business and its competitors on the map, showing how much each company takes from each part of the profit pool. It’s wise to do this for all customer segments and all sets of products. Goal. This kind of map answers the basic question about an industry: where and how are companies making money? The pattern of profit concentration is often very different from the pattern of revenue concentration. Mapping profit pools over time also helps to answer questions about the evolution of the industry: Why did profit pools form where they did? How have they changed over time? Are the forces that created or shifted the pools likely to change? A general manager who understands profit pools can often identify new sources of profits in low-margin industries; can chart acquisition and expansion strategies; can make good decisions about which customers to pursue and which channels to use; and can guide product, pricing, and operating decisions effectively. Approach. This chart can be compiled either as shown in figure 25, with a rectangular box indicating total dollars of profits, or else with the Y axis representing profit percentage. Both are useful, but they have slightly different implications. The latter version, showing profit percentage, can help you understand where you are likely to get a good return on investment by pursuing that particular pool. The chart here, showing total profits, will help you understand where you, your direct competitors, and all key players in the value chain participate. It makes it easier to see relative movement among competitors and to spot trends that represent either threats or opportunities. Creating a profit-pool map involves the four steps shown in figure 26. Great managers know how to anticipate—and sometimes precipitate—shifts in the profit pool. They understand the factors that drive changes in the profit pool, and they position their companies to take advantage of these changes.

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Figure 26: Creating profit pools involves four major steps: Process steps

Map your business’s value chain

Estimate the size of your profit pool

4

Key success factors • Map the entire value chain from end to end (e.g., raw materials to finished product or delivery) • Go beyond traditional definitions to look at your business from the perspective of your customers, suppliers, and competitors • Start by focusing on the largest pieces of the profit pool (such as the biggest companies or the companies that account for a large portion of industry profits) • Use operating profit (vs. net or gross)

Realitycheck your estimates

• Compare the estimates of total profit pool (topdown approach) with the estimates for each value chain activity (bottomup approach) • Triangulate with additional data if necessary

Draw implications

• Use profit pool map to draw strategic and tactical insights (e.g., new sources of profit, acquisition and expansion strategies, customer segments/channels to pursue, adjustments to product, pricing, and operating decisions)

Fourth Law: Simplicity gets results A couple of years ago, researchers from Bain & Company surveyed executives in 960 companies around the world, asking them about complexity in their organizations. Nearly 70 percent of the respondents told us that complexity was raising their companies’ costs and hindering growth. Another team of researchers studied the impact of complexity on the growth rates of 110 companies in 17 different industries. The researchers found that the leastcomplex companies grew 30 to 50 percent faster than companies with average levels of complexity, and 80 to 100 percent faster than the most complex companies. In one particularly dramatic example, a telecommunications company offered consumers only about one-fifth the number of options offered by a competitor but was growing almost 10 times as fast. Companies can simplify at three different levels: product and service lines; organization and decision making; and processes. Many companies try to simplify their processes without attacking complexity on the other two 34

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fronts. This is a mistake. Process simplification tends to be undermined by unnecessary complexity in product lines and in decision-making procedures. So gather the data to assess complexity on all three fronts and then determine the most fruitful points of attack.

MustHave Fact #10. How complex are your products or service offerings, and what is that degree of complexity costing you? Where is your innovation fulcrum? What are the “Killer ABCs” in your business?

A company’s innovation fulcrum is the point where products or services meet customer needs with the lowest possible level of complexity. To locate your innovation fulcrum, it will be helpful to construct what we call a Model T chart, showing the cost of one basic or average product or service and the additional costs incurred as you add additional products, services, features, or other forms of complexity (figure 27; for more information on conducting a Model T analysis, see the article “Innovation vs. Complexity: What Is Too Much of a Good Thing?” by Mark Gottfredson and Keith Aspinall, Harvard Business Review, November 2005). Another way of viewing product simplicity is through what the legendary automobile executive Hal Sperlich called the “Killer ABCs.” Sperlich liked to point out that car buyers could rarely give more than three reasons for choosing a particular vehicle, even right after making the purchase. He concluded that a great product should stand out dramatically from the competition on the three dimensions most important to its target segment of customers—and if it did so, it could merely be competitive on every other dimension. The three critical dimensions were the Killer ABCs, and Sperlich urged every executive to identify and focus on them for their particular product or service. Determining the Killer ABCs can help you assess which of your products or services are most important to your target customers.

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Figure 27: How complex are your products or service offerings, and what is that degree of complexity costing you? Where is your innovation fulcrum? What are the “Killer ABCs” in your business? Innovation Fulcrum analysis

Point of departure

Where are step changes in cost?

Reve

Point of arrival

Total revenue

nue incre ases

Cost per unit

Data needed Where are revenues maximized

When do revenues decline due to salesforce confusion or customers giving up?

• Estimates of costs and revenues at zero complexity

• Estimates of how costs and revenues change as complexity is layered back in

What would it cost to make one “average” product or service? Number of customer choices

Number of customer choices

Goal. Finding your innovation fulcrum can be a significant challenge, partly because conventional management accounting systems and analysis focus only on the incremental costs of complexity. The Model T approach, by contrast, addresses the total systems cost of complexity. It can be used to answer questions such as how many products or services you should have, which SKUs you might be able to eliminate, and which you might manage differently. It should also show you how much complexity is costing you. That is a good starting point for asking whether you understand the root causes of complexity, and whether you have the capabilities necessary to manage complexity effectively. Approach. The zero-based complexity analysis involves the four steps described in figure 28. Great managers simplify their product lines and offerings. They know their innovation fulcrum, and they tailor their products around the Killer ABCs. 36

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Figure 28: Innovation fulcrum (“Model T”) analysis involves four major steps:

Process steps Calculate revenues and costs of your equivalent of “Model T”

Understand customer needs

Quantify effect of adding complexity back in

Find your “innovation fulcrum” and draw implications

Key success factors • Estimate costs and revenues for the “one product” or service process and assess the impact on quality

• Rigorously analyze the Killer ABCs in order to decide which complexity elements should be added back in

• Consider how processes, revenues, costs, and quality change as complexity is layered back in • Use a systematic, stepbystep approach (what would our revenues and costs be with 2 product offerings? 3? 4?, etc.) • Remember that managing complexity doesn’t mean blindly reducing SKUs − Many SKUs may seem unprofitable because of high fixed costs allocation; use Productline Profitability analysis (MustHave Fact 3) to determine true profits − Make sure that surviving SKUs meet Killer ABCs for key segments

MustHave Fact #11. How complex is your decision making relative to competitors? What is the impact of this complexity?

Decision-making procedures and organizations grow complex over time as well. You need to know how your company stacks up against competitors on these dimensions and what the effects of undue complexity may be. When sizing up your company’s decision making, turn to suppliers, distributors, customers, and employees for feedback. They are often good judges of how quickly and effectively you can make a decision compared with others in the industry. Employees in particular will often be quick to tell you whether they feel supported and empowered by the organization’s management structure, or whether it just gets in their way.

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RAPID. The best tool for assessing your organization’s decision-making ability is what our colleagues Paul Rogers and Marcia Blenko call a RAPID analysis. It allows managers to assess decision-making bottlenecks, assign clear decision roles to individuals in the organization, and hold them accountable. (RAPID is a loose acronym for the different roles people can take on: Recommend; Agree; give Input; Decide; and Perform, or implement the decision.) The analysis often reveals several common symptoms suggesting that an organization’s decision making may not be optimal (figure 29). Goal. The objective of RAPID analysis is to improve decision-making processes by codifying individuals’ roles in decisions (figure 30). Recommenders gather and assess the relevant facts and obtain input from the appropriate people. Those who provide the input can offer facts and judgment about the best course of action. Those who must agree must approve the recommendation; they have veto power. One and only one person should have the D—the ability to decide. And those who perform are responsible for carrying out the decision.

Figure 29: Decisionmaking complexity Symptoms that decision making may not be optimal • Unclear or incorrect decision roles − Too many people think they have authority to decide (or it’s not clear that anyone does) − Too many people have right of input (or too few people do) − Decisions are referred up the line when they shouldn’t be (or aren’t referred up when they should be) • Inadequate decision processes − Meetings become debating societies − Too much energy is spent building consensus, and not enough on obtaining and assessing the facts − Decisions people thought were made turn out not to be • Inappropriate decision behaviors − Roles are clear but individuals don’t exercise them appropriately

• Misaligned enablers − Structure, measures and incentives, performance management, etc., don’t support effective decisions

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Figure 30: How complex is your decision making relative to competitors? What is the impact of this complexity? Data needed

RAPID analysis

Recommend Agree (Veto) Perform Input

D• Decide

Se

Pr

Decisions

• List of top decisions

gm en od ts M u G ct M ana lo ba an ger Le l M ag s ga ar ers l ke C tin ha g nn Ex el ec s Te am

R• A• P• I•

• What new products

D

R

I

• What product launches

D

R

• What service model

R

• What positioning by segment

I

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A

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A

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• What pricing

R

I

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• Etc.

D

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• Opinions from different levels/departments on who holds various decision rights (RAPID)

• Evaluation of impact on organization of current decisionmaking processes

A

RAPID focuses attention on how critical decisions should be made; it provides a degree of analytical rigor in an area that most organizations never examine at all. Streamlining decision making reduces costs. It increases an organization’s nimbleness by reducing labor time, meeting time, and time spent revisiting decisions or determining who should be making them. It helps to encourage focused management behavior, to clarify distinct roles in the decision-making process, to eliminate redundant analyses, and to ensure accountability. Approach. Conducting a RAPID analysis involves the four steps enumerated in figure 31. (For more detail, see the article “Who Has the D?” by Paul Rogers and Marcia Blenko, Harvard Business Review, January 2006.)

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Figure 31: RAPID involves four major steps:

Process steps Establish key processes and decisions

Key success factors • Start with core business processes (e.g., develop products, manage brands, etc.), then determine key management decisions within each subprocess (e.g., manage brands: packaging, pricing, promotions, etc.)

Design the organization “superstructure”

• Define the basic “superstructure” of the organization (e.g., how many levels?, organized regionally/globally/by product?, etc.); RAPID should be applied within this context

Apply RAPID to understand current decision making and define “go forward” principles and accountabilities

• Define guiding principles (e.g., endtoend process should be visible in all top decisions) • For each decision, assign only one “D” and one “R”; can have multiple “I”s and “P”s; use “A” sparingly

Design the organization and the key jobs

• Determine the roles at various levels • Define the scope of each job • Identify the right person for each job (and tailor the job to the individual)

Spans and layers. Another useful tool is a spans-and-layers analysis, which shows the number of levels in an organization from the CEO to the frontline worker, and the number of people reporting up to each level (figure 32). If the spans—the number of people reporting to individual bosses—are too narrow, there are likely to be too many meetings and too much managerial oversight. If there are too many layers, frontline workers can be disconnected from the organization and will have trouble relating their tasks to the critical action imperatives. Both can lead to inefficiencies. Goal. Spans-and-layers analysis is a tool used to analyze overhead. It shows the number of direct reports per manager (spans) and the number of management levels between the CEO and frontline employees (layers). Applying the analysis enables a company to lower overhead costs, reduce complexity in the organization, simplify decision making, and increase the level of accountability and innovation. Approach. There are four steps involved, as shown in figure 33.

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Figure 32: How complex is your organization relative to competitors? What is the impact of this complexity? Spans and layers analysis

Data needed

Current organization

Current span

Target span of control

CEO

12.0

12

2

6.8

10

3

5.9

10

4

6.7

12

1

5

8.3

12

6

9.9

15

7

7.8

15

8

5.0

15

9

8.3

13.3

• Comprehensive organizational chart showing number of layers and departments/ divisions

• Organizational chart for each level showing total number of direct reports

Figure 33: Spans and layers involves four major steps: Process steps

Key success factors

Map current spans and layers

• Start with organizational data/charts, but may need to supplement with interviews

Identify target benchmarks

• Use a combination of external (competitor) and internal (other divisions) benchmarks

Analyze spans and layers against benchmarks

Draw implications

• Identify root causes for short spans/deep layers and compare to benchmarks, adjusting for job complexity differences

• Determine improvement actions and impact on decisionmaking processes and culture, quantify savings

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Great managers build an organization that is based on clear decision roles. They simplify the organizational structure, including spans and layers, thereby reducing both costs and complexity.

MustHave Fact #12. Where does complexity reside in your processes? What is that costing you?

Process complexity can show up in any number of areas: on the production floor, in distribution networks, in interactions with customers, in back-office procedures. The outcome or output of a process includes not only what it produces, but the time and expense it requires to do so. Process mapping is a tool commonly used here, but it can get very detailed. The first step should be to decide which processes you need to examine in more detail, then rank them in order of priority. This can be done by benchmarking the results of your processes against both competitors and customer expectation as shown in figure 34. That will show you where you most need improvement. Figure 34: Where does complexity reside in your processes? What is that costing you? Process Complexity Indicators (vs. external benchmarks or customer expectations) Process A

Process B

Process C

Process D

Key process metric

Key process metric

Key process metric

Key process metric

3

3

3

5

5 4

4

4

5

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8 4

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The key then is to figure out where complexity is unavoidable—and where, by contrast, you can put practices in place to reduce complexity while still delivering the products and services that customers want. Once you identify the key processes that are broken, the next step is to map these processes. In a process map, diagrams show the interactions among different steps in a process and the people or departments responsible for the steps (figure 35). Goal. Process mapping enables the management team to visualize and understand the whole process, spot problems and opportunities for improvement, and address them through root-cause analysis. You want to map activities, inputs, and outputs associated with each step, along with the wait times between steps. Addressing the issues uncovered by performance mapping can help reduce complexity; improve capacity utilization; lower customer response time; shorten time to market; and reduce errors, rework, and scrap rates.

Figure 35: Where does complexity reside in your processes? What is that costing you? Process mapping Process step 1

Data needed Process step 2

Process step 3

Time:

X days

Y days

Z days

Issues:

Poor ontime performance

Poor schedule adherence

Long backlogs

Yes

No Decision point 1

Process step 4a

Cont.

Process step 4b

Cont.

• Map of key processes, step by step • Estimate of time required for each process step and key issues involved • For whole process, estimate of how many people touch the process, and number of handoffs • Estimate of accuracy, timeliness, and usefulness of outputs produced • Comparison to benchmarks or customer requirements

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Figure 36: Process mapping involves three major steps:

Plan process map

Build process map and analyze data

Draw implications

• Clarify appropriate scope (entire organization vs. one division; level of detail, etc.) • Understand process elements before building the map (through a facility walkthrough, employee interviews, etc.)

• Outline activities at high level first before documenting each step • Go deeper where performance gaps arise, including detailed rootcause analysis

• Determine improvement actions and prioritize based on both value and difficulty/cost of achieving

Approach. Building a process map involves just three steps, as shown in figure 36. Great managers understand the cost of process complexity. They simplify their key processes—but only after taking steps to simplify product lines and the organization itself. Summary. Taken together, the twelve must-have facts create a clear view of your company’s point of departure. They show you where you are doing well and what needs improvement. Figure 37 illustrates what a company might find once it has performed the complete diagnostic. You are now ready to determine where you are going and how you will get there.

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Figure 37: The 12 MustHave Facts create a clear view of the point of departure Law 1: Costs and prices always decline 1 Costs declining in line with industry prices, but slower than main competitor’s 2 Opportunity to lower total costs by $XM. Main gaps in G&A 3 Products A and B bring in 80% of profits. Products C and D are losing money

Law 2: Competitive position determines your options

Law 3: Customers and profit pools don’t stand still

Law 3: Simplicity gets results

4 “Below the band” position; top competitors focus on cost and differentiation based on customer advocacy

7 Meet customer needs better than competitors on most dimensions. Low share of most profitable customers

10 80% of revenue and 85% of profits comes from 20% of products. Opportunity to reduce complexity

5

Two segments growing fast in a stable market are X and Y

8 Subpar customer retention. Average NPS score of X

6

Worldclass capabilities in X, Y, and Z. Key capability gaps in A, B, and C

9 Largest profit pools in X and Y. Profit pool expected to shift towards Z in next 4 years

11 Lack of clarity in decision roles. Shorter spans compared to benchmarks 12 Low process complexity

From point of departure to point of arrival and action plan The performance improvement diagnostic process allows you to map out a point of arrival: a set of carefully defined, numerically specific goals that can be accomplished in two years or three years or five years, whatever your time horizon may be. It also lays the foundation for a plan to reach the point of arrival. The plan should consist of no more than a handful of critical action imperatives, each one leading to detailed initiatives or plans of action.

Identifying the point of arrival To map out the point of arrival, you need to create a set of initial hypotheses, modify them through discussion, and thereby build consensus around them.

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Initial hypotheses. The first set of hypotheses about a point of arrival will likely emerge from the assessment of the point of departure itself—from the must-have facts you have examined and the detailed performance improvement diagnosis you have conducted. The new general manager may discover that the company needs to drive down procurement costs to improve its profitability. It may need to drive down prices to improve its competitive position in certain key products. Perhaps it needs to simplify its product line or acquire capabilities that it doesn’t have. Figure 38 shows some generic objectives and criticalaction imperatives that could emerge from a full-potential performance improvement diagnostic—the kind of thing the general manager might use for a first set of hypotheses. These hypotheses are the basis for another round of listening conversations with key executives, employees, customers, and others, for another review of internal reports and outside reports, and potentially for another round of fact gathering. The ultimate goal is to build consensus with stakeholders and to set the appropriate expectations.

Figure 38: Deriving critical action imperatives from the point of departure

Vision: Regain market leadership to become the most profitable company in our industry by aggressive cost management and superior value propositions in highmargin and growth segments Goal: Increase business profits by 70% and ROA by 3 percentage points in 3 years Costs and prices • Reduce costs by $200 million to move relative cost position from 110% of the best competitor to 90% − 90% cost experience curve slope to 70%

Competitive position • Move from below the ROA/RMS band into the band − Increase relative market share from 0.9 to 1.2

*SG&A is selling, general and administrative expenses

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Customers and profit pools • Move share of high profit segment X from 40% to 60% with retention increase of three percentage points: − Improve service − Cut price selectively • Move share of profit pool from 40% of $2 billion to 50% of 2.8 billion

Complexity management • Cut SKU complexity from 100K to 2K with reduction of organization layers in SG&A* from 5 to 3 and outsource 20% of all G&A costs

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A few key variables. You should take what you learn in each of the four areas and identify the two to four variables for each critical action imperative that will drive and define the performance that you are looking for. Note we said just two, three, or four in each area! Remember that simplicity gets results. Just as you don’t want an indiscriminate laundry list of questions to identify your point of departure, you can’t use an indiscriminate laundry list of improvements or metrics to characterize your point of arrival. A compelling point of arrival should be simple and memorable. Every manager in the company should be able to describe it in no more time than it takes to ride a few floors on an elevator. Where costs and prices are concerned, for instance, you will want to set future targets for both, along with a projection for the slope of the experience curve. You may also want to target your cost position relative to that of your chief competitors. Where market position is concerned, you can set a future target for absolute and relative market share by segment. You have to project where your competitors will be as well—after all, you can’t realistically project a growth in share without having an idea where it will come from. You will have to determine which few organizational capabilities you most need to strengthen. You will also want to project where profit pools are moving, how large they are likely to be, and who will be competing for them. You will need to set targets for the complexity of your product line and business processes, as well as for the future structure and decision-making processes of your organization. Discussion and detailed analysis. The general manager formulates ideas and homes in on the key variables that will determine the point of arrival. The manager puts those variables together and develops a working hypothesis of where he or she wants to take the business. This is a preliminary hypothesis, sometimes called a “straw man.” For the moment, it’s no more than a plausible picture of the future. Then comes the hard part. What does the rest of the team think? What does the corporate office or the board think? How about middle managers, employees, customers, suppliers? The general manager has to forge a consensus, and we use the word “forge” deliberately. It’s like the process of tempering steel—it 47

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usually involves a good deal of heat, but the end product will be stronger than it was before. When there are differences of opinion, a critical step is often to ask the question, “What would have to be true for hypothesis A to be correct?” Then, “What analysis would demonstrate that the preliminary goals for the point of arrival are correct or not?” A couple of rounds of this kind of analytic questioning will often bring the group to consensus and set expectations correctly. Once the manager has established a consensus, the point of arrival should be clear. So, too, should the critical action imperatives. Internal stakeholders can begin to relate their individual jobs to the agreed-upon point of arrival. External stakeholders can begin to form realistic expectations of future performance and actions the organization will be taking. The company will know where it is going.

Creating a performance improvement action plan Your diagnosis of the point of departure identifies where you can create new value. Your point of arrival sets the target—the vision of where your business will be a few years from now. Your next step is to define a roadmap—a plan —for getting from where you are now to where you want to be. The basics of an effective plan. We have already mentioned one essential characteristic of a plan that will work: it has a realistic time frame, a time frame that corresponds to the likely tenure of the general manager. In addition, an effective plan always has two seemingly contradictory characteristics. On the one hand, it is simple. Like the point of arrival itself, the fundamentals of a plan are easily understandable. It contains a small number of action imperatives. The specific initiatives you will create from these imperatives obviously depend on your company’s situation. As a rule of thumb, though, many leaders set a handful of initiatives relating to costs and a few relating to customers, organizational capabilities, and structure. The action imperatives can then be rolled up into a set of overall financial goals.

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On the other hand, the plan is highly detailed. As general manager, you have applied the full performance improvement diagnostic. You know not only that costs need to come down 15 percent a year over the next three years, say, but also exactly which costs are out of line and which you will be able to reduce. You understand the levers you can pull to achieve the goals you have set, whatever they may be. You can now create a performance improvement action plan that cascades the broad initiatives downward and outward all through the organization, so that managers and employees on the front lines know what they must do to contribute. Figure 39 shows an example. Other key elements of a plan. General managers often map out the targets they’re setting in a simple chart like that in figure 40. The chart summarizes the anticipated impact of the major areas of potential and their priority, and allows managers to build their action plans accordingly.

Figure 39: Action Plan Example (Refer to “Costs and prices” section in figure 38.)

Initiatives

Resource alloaction and capability acquisition

• Resources required: • Reduce costs of – Two 80% dedicated goods sold by $XM initiative leaders: a) Manufacturing: Nicolas Smith for Outsource manufacturing manufacturing of and Angela Chou product line X to for purchasing third party in China • New capabilities b) Purchasing: required: Consolidate – Assessment of suppliers of raw thirdparty materials X and manufacturers in Y and negotiate China—new hire volume discounts to set up and oversee all thirdparty manufacturers

Metrics and interim milestones • Top metric: total COGS • Additional metrics: – COGS as % of sales – % of manufacturing capacity outsourced – Raw materials costs – Average volume discounts – Number of suppliers • Additional metrics: – By 3/30: create list of 35 thirdparty manufacturers – By 6/30: select partner – By 8/30: agree on detailed plan of production outsourcing – By 12/30: move all production to China • Milestones: Purchasing – By 3/30: Evaluate all current suppliers, select top 10 – By 8/30: Negotiate volume discounts – By 10/30: Finalize supplier consolidation

Contingency plan triggers and details • Manufacturing: – Thirdparty provider’s quality deteriorates: establish conditional contracts with #2 and #3 potential providers – Distribution disruptions from China increase: safety stock for first 90 days of program implementation – Etc. • Purchasing: – One of suppliers goes out of business: incorporate financial monitoring of suppliers into ongoing partnership evaluation – Etc.

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Figure 40: Performance improvement diagnostic creates targets for full potential Double profitability in the next 3 years Potential profit increase from performance improvement

3 Pro ye fit ar s s in

ni Pric za in tio g n ef Ma fe r ct ke iv ti en ng es s

ga or

om pl m exi gm ty t. M an uf a fo ctur ot in pr g in t S pr al od es uc for tiv ce ity Pu rc h sa asi vi ng ng s

C

Pr to ofit da s y

Priority As Bs Cs

Whatever the specifics of a company’s plan may be, there are at least three elements that it must always include: •

Resource allocation and capability acquisition that fit with the action imperatives. A company that sets out to gain pricing flexibility through product differentiation can’t then stint on R&D or brand development. Indeed, many sources of value targeted in the diagnostic process are likely to require both investment dollars and the development of one or more capabilities. If a company doesn’t already possess the required capabilities, it will have to develop or acquire them.

•

Metrics and interim milestones. The small number of action imperatives should create a small number of key metrics, the very few operating variables that absolutely must be on target if the plan is to succeed. The plan should contain targets for these variables, not just for the point of arrival but for interim milestones along the way. Metrics, too, will cascade down to lower levels of the organization as each one sets its own specific initiatives.

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•

Contingency plan triggers and actions. If things do go off track, you need to know what you are going to do. You need triggers that tell you when the plan has gone awry, and contingency plans that you can then put into effect. And if something appears that was wholly unexpected— an unanticipated move by a new competitor, for instance—you have to be sure that your information gathering and decision-making capabilities will enable you to respond effectively. The four laws will continue to be the essential guide to the options you have available for response.

Implementing the performance improvement action plan Many companies have foundered because they couldn’t accomplish the objectives laid out in a plan. Many otherwise insightful managers have accurately diagnosed their point of departure, have carefully mapped out their point of arrival—and then have gotten lost on the journey. How can you avoid taking a wrong turn? At Bain & Company we like to say that successful managers “plot” change. It turns out that PLOT is a useful acronym for the steps involved. The P in PLOT stands for Plan, which we have already discussed. Lead means getting people fired up and building a culture that supports change. Operate involves driving initiatives and holding people accountable—it’s the day-to-day execution of the strategy. Track includes measuring performance and acting on the results (figure 41). Master each of these and you will increase your odds of successfully navigating the road to results. Lead. The fundamental task of leading change is to get people on your side, joining you in pursuit of your goal with the required sense of urgency. You need the active support and engagement of your boss or your board, your senior team, your middle managers, and your employees—often even your customers and suppliers. You need to align everyone around the mission and the critical few action imperatives you developed in the planning stage. You want people to care as much as you do about reaching the point of arrival. You want them to develop a passion for the mission ahead.

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Figure 41: Some of the best managers PLOT their own story for successful change PLAN

LEAD

• Define point of departure and arrival • Spell out the key action imperatives and key initiatives

• Fire up the troops • Find your champions • Build a culture that supports change

TRACK

OPERATE

• Measure performance • Act on the results • Raise the bar

• Launch initiatives, rack up quick wins, celebrate • Hold people accountable, make tough decisions • Put explicit cues in place

To fire up the troops, you need to define the burning platform—an urgent set of messages, backed by the hard data from your diagnosis of the point of departure. Don’t mince words: show people exactly why they can’t continue with business as usual. We are uncompetitive, and here are the numbers. We will be facing new competition, and here’s where it will be coming from. Our customer needs are changing, and here’s how we can respond. You can spell out the point of arrival with data as well. We will be a top-quartile company. We will overtake competitor X. You and the rest of your team need to be almost obsessive about achieving your goals and about getting others on board. Ultimately, every manager in the organization should be able to remember and repeat the three, four, or five major action imperatives in the plan and understand why they make sense. You also need to find champions. They’re the people who will lead performance improvement throughout the organization. You will have a core change team, the senior leaders entrusted with directing and overseeing the road to results. You’ll have many other teams responsible for carrying out the critical

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initiatives in business units and functional departments. Teams need to operate without any sacred cows and with a commitment to reliance on facts. They should have explicit objectives with clearly assigned responsibilities and clear deadlines. They also should have whatever resources they need to get the job done. Leaders build a culture that supports performance improvement. People in the organization should be thinking like business owners, assessing risks and assuming responsibilities without being asked. They should be motivated by the mission, proud of what they are achieving—and never fully satisfied with their progress. Operate. We have suggested that you launch just a handful of action imperatives—no more. A limited number of initiatives allows you to focus your investments on your primary objectives, rather than spreading funds like peanut butter on toast throughout the organization. Differential resource allocation shows that you are putting your money where your mouth is. It reinforces the message that these priorities are what really matter right now. Every plan needs to include “quick wins”—visible actions that are achievable within a year or eighteen months, and that will build support for longer-term performance improvement. Quick wins have an immediate financial impact. They boost credibility and generate momentum. They give you something to celebrate. Successes foster a sense of accomplishment, signal that the organization can really achieve ambitious new objectives, and help dissolve resistance. They can be used as case studies, showing people how to achieve results. Individuals who have led successes and those who have contributed should be singled out for recognition and reward. You also need to hold people accountable for doing what they say they will do. Establish a non-negotiable process for overseeing the process of change. It should include clear plans of action linked to the critical imperatives, with frequent review and immediate escalation when necessary to the team in charge. If something doesn’t happen, the team confronts it directly—no avoiding reality or hoping for miracles. Then the approach should be one

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of problem solving, not punishing. A rigorous, fact-based assessment can identify the reasons for failure. The team can then develop a plan of action to recover the lost ground. Over time, you will inevitably encounter opposition. The best thing is to confront opponents with open dialogue, once again using facts and data rather than emotion to make your case. Be sure the organizational structure isn’t somehow facilitating opposition, for example, by keeping one department siloed and away from the field of play. And be sure that the incentives are aligned properly so that people are rewarded for the right actions. Even in the best of circumstances, though, not everyone will be putting their shoulders to the wheel. Some of the laggards can be coached and developed. Others may have to be let go. Managers and employees who are trying to change need to see that unsupportive or destructive colleagues will face stark consequences. Nothing is so demoralizing, after the healthy debate has taken place and the course has been set, as breaking your back to make an initiative happen, then seeing that someone who has been working at cross purposes gets off scot-free. Remember, as general manager, you give off hundreds of cues to your managers and employees every day, and not just by what you say, but by what you do. Track. What’s measured is managed. It’s a cliché, but it’s true. You, of course, want to measure the handful of key indicators that will lead you to your point of arrival. These are your Killer ABC metrics, and a dashboard on every executive’s desk should show them. To be sure, it’s always tempting to add more metrics. But doing so is almost always counterproductive. Instead, structure a cascade of metrics so that everything the organization measures flows into the critical few that show up on your dashboard. With this approach, a single page can tell you everything you need to know about your performance. If performance is not where you want it to be, you will be able to drill down and uncover the problem areas.

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If done well, metrics will cascade through the organization and will be linked to an individual owner to ensure accountability. That person may be a senior executive, the head of a business unit or functional department, an operations manager, the worker on the line, or the rep in front of the customer. Success by each accountable owner will lead to the overall success of the enterprise. It should go without saying: the purpose of measurement is to facilitate appropriate action. If your interim goals are being achieved and the numbers are on track, you need to make sure that you are consolidating and institutionalizing the gains. And you should update the budgets and the short-term targets with the newly achieved performance levels as the new baseline. If your organization doesn’t hit its performance milestones, you should know when to trigger your contingency plans.

Getting started Here are some answers to the most common questions we encounter when we discuss the performance improvement diagnostic with chief executives and other business leaders. When should I do it? General managers should undertake and complete a performance improvement diagnosis within the first 90 to 120 days after taking on a new role as head of an organization. You may also want to perform one whenever you feel the urgency to get ahead of deteriorating performance, economic downturn, or competitive threat—all times when you are likely to launch a broad turnaround or major change initiative. Or when you feel your team is pulling in different directions and its time to reset and get the team pulling together. Significant performance improvement never comes easily, but it is far more likely to occur when it begins with a solid base of facts that everyone can see, understand, and agree on. The diagnostic, in effect, lays the groundwork for the difficult process of change.

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Who else needs to be involved? Depending on the nature of your organization, you should involve all your direct reports, heads of functional departments, or both. You want to include all the key players for two reasons. One is to ensure that you get the right data—that no significant category is inadvertently overlooked or omitted. The other is to begin the process of building consensus on the need for change. People who are themselves involved in collecting the data that shows the need for improvement are more likely to buy in to the process. Building consensus on the data also provides the foundation for determining your point of arrival and the handful of critical action imperatives that will get you there. It’s easier for everyone to see where you might want to go when they understand where the organization is starting from. And the diagnostic, by highlighting critical performance gaps, is likely to help everyone understand where the most important levers for improvement can be found. What data will I need, and where should I look for it? Broadly speaking, you will need five categories of data: •

Revenue and cost data from your internal financial reporting systems.

•

Industry data, including market size, growth, profitability, customer segments, and so on, culled from analyst reports, trade publications, and the like.

•

Competitor data, including sales, costs, strategies, and so on, from competitors’ annual reports, analyst reports, and industry experts.

•

Customer data, including customer segments, the needs and preferences of each segment, customer retention, ratings of your company’s performance vs. competitors on key dimensions, and Net Promoter Scores (NPS). This information can come from your own marketing research and customer surveys as well as from third-party research.

•

Organization data, including the structure of the organization, spans and layers, decision-making processes, and capabilities, from your direct reports and functional department heads.

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As this list suggests, you will need to gather a lot of data quickly. Ask your senior leaders to head up teams that take on as many questions relevant to their areas of responsibility as they can handle. Ask for short, focused presentations to facilitate discussions about the main threats and opportunities. That should enable you and your teams to make quick, accurate decisions about the few areas on which to concentrate your efforts. Should I involve a third party? We have found several reasons for hiring some outside support in the development of a full-potential diagnostic. First, the process is quite resource intensive. You probably won’t want to develop a permanent department for this task, as it will be done only every few years. Bringing in consultants with significant experience can make the process faster, more targeted, and more cost effective. Second, it is often helpful to have a new perspective on the business, from people who are not wedded to historical limitations or the way things have been done in the past. A third party can help challenge the management team’s assumptions and focus the analysis on the most important points of difference. Third, a third party can often bring knowledge both from inside and from outside the industry to highlight strategies, tactics, and best practices used by others to gain advantage. This knowledge, combined with the company managers’ deep understanding of their business, can produce powerful new ideas to leapfrog the company forward. Bain & Company has worked with more than 3,000 companies on this kind of performance improvement process. We have helped clients outperform the competition by more than five to one (based on share price). Our firm’s experience and capabilities will augment the skills of your management team and put you more quickly on your “Road to Results.”

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NOTES

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